Nordson Corp (NDSN) 2018 Q1 法說會逐字稿

Good morning, and welcome to Nordson Corporation conference call today, Friday, February 23, 2018, to report fiscal year 2018 first quarter results and fiscal year 2018 second quarter outlook. Today's conference call is being broadcast live on Nordson's webpage at nordson.com/investors and will be available for 14 days. There will be a telephone replay of the conference call available until March 9, 2018, which can be accessed by dialing (404) 537-3406. You will need to reference ID number 418-6237.

During this conference call, forward-looking statements may be made regarding 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 remarks on the quarter, there will be a question-and-answer session.

With that being said, I would like to introduce Mike Hilton, President and Chief Executive Officer of Nordson Corporation. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining Nordson's 2018 First Quarter Conference Call. I'm joined by Greg Thaxton, our Senior Vice President and Chief Financial Officer.

I'm very pleased to report that Nordson's outstanding global team has, once again, delivered record results. We successfully leveraged increased sales volume to drive improvement in operating margin, diluted earnings per share and EBITDA as compared to the first quarter a year ago. Our technology leadership, excellence in customer service and diversification efforts have helped drive this growth.

During the quarter, we also completed the acquisition of Sonoscan as well as certain assets from Infiniti Dosing. I'd like to extend a warm welcome to these employees that have recently joined Nordson, and we're looking to expanding our capabilities with these great additions to the portfolio in the coming months.

I'll now provide some highlights on our financial performance, and Greg will offer more detailed commentary in a few moments.

Looking at the first quarter, sales, operating profit, diluted earnings per share and EBITDA were all first quarter records. We generated strong top line against a very challenging prior year comparison where total company organic growth was 10%. Demand was robust in most -- all of our product lines and was largely driven by continued strong demand within electronics and medical end markets. We remain committed to delivering the best technology solutions while employing continuous improvement initiatives to drive bottom line results.

Excluding onetime charges of $2 million and the incremental $6 million of intangible asset amortization expense in the current year's first quarter, adjusted operating margin was 23% in the current quarter, up 420 basis points over the prior year.

EBITDA increased 49% in the quarter, and EBITDA margin improved 250 basis points, both as compared to the same period a year ago, representing very strong first quarter performance.

Looking ahead to the second quarter, we're expecting organic sales growth to be more modest, as we're up against challenging comparisons to the prior year where organic sales growth was 9%.

I'll speak more about the outlook in a few moments. But first, I'll turn the call over to Greg to provide more details respective on the first quarter and our second quarter guidance.

Thank you, Mike, and good morning to everyone. I'll first provide some comments on our first quarter results before moving on to our outlook for the second quarter of fiscal 2018.

First quarter sales were $550 million, an increase of 35% over the prior year's first quarter. This change in sales included approximately 19% growth in organic volume, approximately 12% increase related to the first year effective acquisitions and approximately 5% increase related to the favorable effects of currency translation compared to the prior year's first quarter. Organic sales growth was at the high end of our guidance, driven primarily by strong demand in electronics and medical end markets.

Within the Adhesive Dispensing segment, general product assembly, rigid packaging and nonwovens product lines drove this segment's growth in the quarter, offset by softness in the polymer processing product lines. Japan and Asia were strongest regionally.

Within the Advanced Technology Systems segment, the 83% sales volume growth over the prior year first quarter included 50% organic volume growth and 33% growth related to the first year effective acquisitions. This is very strong performance, particularly considering the difficult comparisons to the prior year first quarter where organic growth for this segment was 23%.

Although, electronic end markets where the strongest, all product lines and geographies generated organic growth in the quarter. This segment's acquisitive growth includes the fiscal 2017 acquisitions of ACE, InterSelect, Plas-Pak and Vention and 1 month of the fiscal 2018 acquisition of Sonoscan, which, as Mike noted, we added to the portfolio in January.

Within the Industrial Coating segment, powder container and liquid finishing product lines drove this quarter's organic sales growth. Geographically, Europe, Japan and Asia were the strongest.

Moving down the income statement. Gross margin for the total company was 55% in the quarter, and operating profit improved 55% to $118 million as compared to the prior year's first quarter with reported operating margin of 21% in the current quarter. As Mike noted, the quarter's results include approximately $6 million of incremental intangible asset amortization expense as compared to the prior year, which dilutes operating margin by more than 100 basis points. Excluding the $2 million of onetime charges in the quarter and a $6 million of the incremental amortization expense, adjusted operating margin for the quarter was 23%, which compares to 19% from the prior year's first quarter.

On a segment basis, Adhesive Dispensing delivered operating margin of 24% in the quarter or 25% when excluding onetime restructuring charges in the quarter of $1 million related to U.S. facility consolidation efforts. The dilution from the prior year's first quarter's 26% operating margin primarily relates to the inefficiencies of working through the U.S. facility consolidation.

Within the Advanced Technology Systems segment, reported operating margin was 25% in the first quarter or 27% when excluding the $6 million of incremental intangible asset amortization expense and $1 million of short-term purchase accounting charges related to the step-up in value of Sonoscan acquired inventory. This 900 basis point improvement over prior year's first quarter margin of 18% is driven primarily by volume leverage.

Industrial Coating segment reported operating margin of 18% in the first quarter, is up 450 basis points from the prior year due to product mix and volume leverage.

On a total company basis, net income for the quarter was $105 million and GAAP diluted earnings per share were $1.78, a 107% increase over the prior year GAAP diluted earnings per share. The $6 million of incremental intangible asset amortization charges reduced EPS by $0.08 per diluted share. And previously mentioned charges of $1 million for short-term purchase accounting related to the step-up in value of acquired inventory and the $1 million of nonrecurring restructuring charges reduced EPS by $0.02 per diluted share.

As a result of U.S. federal income tax reform legislation passed in 2017, a onetime discrete tax benefit of $22 million or $0.37 per diluted share was recognized in the quarter. This includes an estimated benefit of $45 million related to the revaluation of net deferred tax liabilities and an estimated charge of $23 million for the transition tax on deemed unrepatriated foreign earnings.

Additionally, a tax benefit of $5 million or $0.08 per diluted share was recognized in the quarter related to the adoption of new accounting standards requiring excess tax benefits related to share-based payment transactions to be credited to income tax expense rather than equity.

A reconciliation of GAAP earnings per share to non-GAAP adjusted earnings per share is included in the financial exhibits of our press release.

We delivered strong first quarter EBITDA of $141 million, a 49% increase over the prior year first quarter, and EBITDA margin improved 250 basis points to 26% as compared to prior year's first quarter.

From a balance sheet perspective, net debt to trailing 12-month EBITDA, inclusive of acquired EBITDA, was 2.2x at the end of the first quarter. Our press release includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.

I'll now turn to the outlook for the second quarter of fiscal 2018. Prior year's second quarter organic growth was 9%, so we're up against challenging comparisons again. We are forecasting sales to increase in the range of 9% to 13% as compared to the second quarter a year ago. This outlook includes organic volume to be in the range of down 3% to up 1%; 7% growth from the first year effective acquisitions and a positive currency effect of 5%, based on the current exchange rate environment as compared to the prior year. At the midpoint of this outlook, we expect second quarter gross margin to be about 55% and operating margin to be approximately 22% or 23%, excluding $6 million of incremental asset intangible amortization expense as compared to the prior year.

We're estimating second quarter interest expense of about $11 million and an effective tax rate of 25% for second quarter forecasted GAAP diluted earnings per share in the range of $1.33 to $1.47 per diluted share. This earnings per share range is inclusive of $0.08 per diluted share of incremental intangible asset amortization expense as compared to the prior year.

With forecasted depreciation and amortization expense of about $28 million in the quarter, we expect EBITDA to be in the range of $143 million to $154 million, up 21% at the midpoint over the prior year.

I'll add a few additional comments relative to our forecasted tax rate that may be helpful for modeling purposes. Our forecasted effective tax rate for the second quarter and full year, based on lower U.S. corporate tax rate and our jurisdictional mix of income, is 25%. At this time, we estimate our fiscal 2019 effective tax rate to be between 22% and 23%, based on current tax laws.

And with that, I'll turn the call back over to you, Mike.

Thank you, Greg. Again, I'd like to thank our global team for delivering these strong results.

Our second quarter guidance reflects more modest sales growth as compared to the prior year's challenging second quarter growth. Our strategic priorities and capital deployment objectives remain consistent, and we'll continue to focus our efforts on technology leadership, product tiering, new applications and market penetration to drive growth over the long term. We will continue to leverage the tools within the Nordson's business system to drive operating efficiencies across the organization, and we'll continue to seek high-quality companies that fit our targeted spaces to help us achieve long-term growth and profitability.

With that, we'll pause and take your questions.

(Operator Instructions) Our first question comes from Charlie Brady from SunTrust.

Can you just talk about the commentary about -- in Adhesive Dispensing, the efficiencies from that facility consolidation? Can you comment on, kind of, the impact in that quarter? Is that done now at the end of the first quarter, or is that continuing in 2Q?

Yes. So as you recall, we've laid out a plan to consolidate 3 facilities into 1 and to finish that consolidation by the end of this fiscal year. At the moment, we have 4 facilities running, because we are transitioning equipment and capability between those 3 and the new facility. So I'd say, the biggest impact is probably in this quarter, but we'll see some continued impact as we systematically close those remaining 3 facilities, but it's not all going to happen at once. But it is happening according to plan, and we'll be through that by the end of this fiscal year.

Would you expect the EBIT margin impact in Q2 to be at a similar impact to Q1?

Charlie, this is Greg. I would say, it'll be a similar impact in Q2. Generally, we expect that impact to kind of scale down as we get into the back half of the year. But if we're looking at Q2, it's probably going to be a similar impact.

Okay. And can you remind us...

Here -- let me just make one more comment. As we look to next year, obviously, we'll have the facilities consolidated. We won't have the duplication of cost. And as part of this facility consolidation, we've also invested in new equipments, which should add some efficiencies. So we should see some benefits into '19.

That's helpful. On advanced tech, can you remind us what the current mix of the nonelectronic piece is right now, and kind of how you think that shakes up for the year?

Yes. If you look at it for the year, we're probably looking at about 30% that falls into the medical category, about 20% that falls into nonelectronics sort of general industries. And the rest falls into electronics with, typically, around 15%, 20%, that would be, sort of, mobile phone; another 15% or 20% or so that would be kind of the automotive electronics; and then the rest would be across semiconductor and a variety of other applications.

So we're looking about half of that being nonelectronic -- half of that segment being nonelectronics related.

Our next question comes from Mike Halloran from Baird.

Could you just talk about the backlog trend by segment, as you work through the quarter, and what the thought process is when you look at the second quarter? How growth should track across the 3 businesses?

Yes. At a high level, we had a pretty nice backlog, I think, up about 9%. Order rates were positive as well. What we look at, though, is what equipment's going to be delivered in the quarter. And so some of the backlog is not going to be delivered in the quarter. And then when we look at year-on-year comparisons, second quarter and third quarter, very strong for us. So we're in that period of time where the order rate comparisons get a little bit more challenging. So our guidance really reflects what we think is going to be delivered in the quarter in general, and then what we think the outlook is against the comparison. I'd say, at high level, if we look at the expectations for the businesses, and maybe I'll give you a little bit better feel for the years as opposed to just quarter-to-quarter, because as you know, we have projects that can go in and out, and we have the seasonality. But if we look at what we expect for the year, we expect this to be another growth year for the company. We expect, virtually, all of the product lines to be up. The one challenge there will be our -- particularly our dispense systems in the electronics area, which are most linked to the mobile phone kind of business. And having such a tremendous year, last year, that's going to be a challenge. Our hope is that the other general industries' activities and the medical business will offset that.

So when I think about on a forward basis here, obviously, really impressive electrical onboarding this quarter. What's the thought process, moving forward, in terms of how does the pipeline look, what are the customers are saying out there? I mean, is there a pause against these really difficult comparisons? Or is the thought process you're going to able to maintain this high level even if there's not a lot of growth, but at least maintain the pace of revenue as it sits here today?

So if you look across the total segments, as I said, I think we are expecting that the other parts of the business, the nonelectronic parts of the business, and particularly the non-dispense part of the businesses will help offset which will be -- what is a challenge year-on-year. That said, if you look at the particular parts of the business, our inspection business is strong, our surface treatment business is strong, the new acquisitions are doing well. The dispense business have a strong first quarter, but it's going be challenged through rest of the year, just because of this significant business we did last year and the change. On the long -- on long run, we still expect things to be strong in the electronic segment. Now this is a time of the year that we typically meet with all of the potential innovators in the business, and we have lots of projects going with them. The challenge is, we don't know which ones of those are going to go forward, and what the impact is going to be. But our focus has been to take advantage of whatever growth comes out of that to be flexible, but also to continue to drive the diversification of the business so -- to drive medical, to drive the nonelectronics piece. And we're seeing good traction there.

And then just on the price cost side and the inflationary side. It seems like you guys are in a good spot, but just want to hear how you guys are -- what you're seeing from an inflationary perspective within your portfolio or the supply chain? And how you're feeling about it relative to your own financials?

So I'll tell you, we are -- you're seeing some movement in some commodity materials. I think we do pretty good job in our global sourcing activity of mitigating that impact. And as we continue to innovate with new products, we're able to offset any push there. So we don't see that as a big concern for us.

Anything on the labor side?

I think we're seeing the typical kind of increases year-to-year, most of those hit in the first quarter. At the end of the day, our focus is to take all the skilled people that we have and leverage that through our business systems to increase and drive productivity. I think we're doing a good job there as well.

Our next question comes from Matt Trusz from Gabelli & Company.

Can you provide some additional granularity on how the nonpolymers pieces of ATS performed from end market perspective? And just overall, how do you see customer spending levels in 2018? And from the tax act, do you think that there'll be any impact on their CapEx plans?

Yes. If you look at our sort of nonpolymer part of the business, packaging tends to be largely linked to the consumer product side of things. It continues to grow. Many of our customers are challenged with growth. But there's a lot of focus on productivity and improvement, which helps us, plus we continue to drive new applications and recapitalization through technology. So that's been solid. I would say, our nonwovens business, the diaper and other related products, has been solid. Product assembly can be a little here, but we expect that over the year to be solid. And if you look at the underlying drivers of growth, a lot of that links to middle-class -- improvement in middle-class consumption-related activities, we'd expect to see that continue to be strong. I'd say, as a direct effect of the tax act, I think people are still trying to sort that out and figure out what that means. To the extent that we would see an uptick in investment in the U.S., that would be encouraging for us. And as I mentioned, a lot of our businesses where customers are looking at productivity improvements fall into our sweet part. And I'd say, on a broader note, talking just about the polymer part of the business, we're seeing nice improvement on order entry across all those product lines. So that's encouraging as well.

Great. And then turning to polymers, are you seeing elements of softness in the end markets facing that business? Or are you encountering company-specific type of challenges? It would be great to have more color either way.

It's really neither. We have parts of the business that are bigger order intake, particularly the pelletizing part of the business. And that can be lumpy. And so we're really just looking at a year-on-year comparison where we had a big order in the first quarter of last year and didn't have a similar big order this year. Yet if I look at order rates, they're up nicely across all of the product lines there. So not a concern that we have. It's just timing in that like product assembly, and some of our electronics business can be lumpy at times, and year-over-year doesn't always line up. But if we look at year-to-year, we expect to see improvement.

And our next question comes from Jeff Hammond from KeyBanc Capital Markets.

So just back on the mobile phone customer base, you said, this is the time of the year you're starting to see projects. So are they coming in with fewer projects? Or are they indicating to you that they're going to do less this year, or is it still pretty robust?

I would say, kind of, from November through now is when that project activity is underway. I'd say, the activity is pretty robust. We're not clear though, in any one year, which ones are going to go forward. I think it's prudent to be a little bit cautious, just given the magnitude of sort of phone changes that occurred in our customer base last year. But I'd say, it'll be clear in the next couple of months, which ones of these going -- are going to go forward and have an impact. At this point, it's going to be tough to offset the really, really strong year we had last year, even if a reasonable amount of those projects go forward. And that's kind of the expectation we have. But outside of the phone business, if you look at auto electronics, some of the other markets, some of the new technologies, like flexible circuits, which are going into a lot of different things, we're seeing nice demand there. And we continue to introduce new products that are getting traction. But last year was a particularly strong year because of all the innovation around the new phones introduced.

And what are you seeing from the China handset OEMs?

We're seeing good -- I'd say, good activity. We're working again with them on projects as well. I'd say, we'll -- we're in that period of time where we expect to see orders come in. It will be interesting to see what degree of innovation comes through in their new phone offerings, which will probably a little bit later this year.

Okay. And then in the guidance, you mentioned project timing, I guess, stuff in the backlog that's pushing out into future quarters. Is that -- are you seeing a greater component of backlog that's pushing out the normal? Or is that just kind of normal timing and you have some longer-cycle projects?

Yes. I don't think it's anything unusual. I mean, if you look at the projects that tend to be longer, they're in our polymer area, they're in our product assembly. Some of our orders in other parts of the businesses are released in tranches. And so it's -- I'd say, it's nothing particularly unusual. We're just trying to give you the best commentary we can here and give you the best transparency we can.

Our next question comes from Allison Poliniak from Wells Fargo.

Just going back to the ATS, my guess is it's more than the mobile handset. Nordson has been fairly successful, obviously, with diversifying the customer base, gaining some share. I know, you mentioned the model numbers, model changes might not be as significant this year. But is there opportunity outside of that for you guys to maybe further diversify that customer base, gain greater share, just any thoughts on that?

Yes, absolutely. So I mean, what -- there are certain end markets that are growing nicely that become sizable, so we talk about auto electronics as one that will continue to grow, not just this year, but in the long run. And we have specific offerings that are getting traction there. We've talked about in the past on the semiconductor side, doing both dispense and inspection at there, and we're starting to see more customers interested in both the more sophisticated dispense application that relates to some of their process changes as well as the inspection, both on the x-ray side of things as well as more sophisticated bond testing equipment. And so those are applications, I'd say -- and opportunities within the electronics space that really, not necessarily tie to the phone systems that are encouraging for us. And then we would talk about sort of the Chinese suppliers on the phone side that we're continuing to make good traction there. So the diversification effort within electronics continues, both on a customer and application basis, and we continue to introduce new technology that is getting good traction. But beyond that, we're also trying to drive growth. So for example, we acquired Plas-Pak last year. They had a segment that we didn't participate in, which was animal health, and we're seeing some nice growth there. And then, of course, in the medical, we largely expanded that. We're seeing good growth in the medical side of the business. So within and outside the electronics piece, we're trying to continue to drive that diversification.

And Allison, this is Greg. I'd add, beyond that, some of the other acquisitions that we've done in the electronics space, some of the flux coating, dispensing acquisition, the Sonoscan acquisition, those, also, will allow us to gain share in spaces that we hadn't participated in before.

That's great. And then just going back to the commentary around, potential acceleration from the tax reform in terms of investment. I understand, obviously, folks are still kind of working through all that. But if we do get a sense of, I guess, sort of the spicket turns on in terms of that investment maybe in the next 3 months, how quickly, I guess, going back to historicals, would you recognize that? Would this be more of a '19 event for you, potentially?

It depends a little bit in terms of what part of the business that's related to. So if it's consumer product-related businesses, that could be quicker because, likely, those will be line upgrades and things like that, that could happen sooner. If it's something like platform investment in the automobile side, that's probably going to be a longer-term kind of activity. So it depends on the nature of what that investment would look like. If it's a whole new facilities that folks are starting up, they're probably not going to make that happen in the next 6 to 9 months. So it depends a little bit on the nature of what that investment is. If it's ramp-up, because consumers are benefiting from tax relief as well and looking to spend some of that additional money in that sort of capacity, that can be quicker.

Yes. I'd suggest that it's -- as Mike mentioned, it's really about the scope of the project on our customers' end as opposed to our ability to deliver our product within a short time frame. We could do that, it's how big is the scope of the project for the customer.

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

First, in adhesive, just back to some of the questions that were asked earlier. Can you get a little bit more specific, Greg, in terms of what the absolute impact will be from these inefficiencies this year? Is it a $3 million impact, a $10 million impact, somewhere in between? Can you just help quantify that?

Yes. Matt, I would say, as I provided in my comments, if you look excluding the onetime charge at the dilution, you'd get back to prior year without those inefficiencies. And so that helps you quantify that. And as we mentioned, we'll probably have that similar drag in Q2. And then as we get in the back half, that dissipates somewhat, and then we're past that by the end of fiscal '18.

So as you think about this business, is there anything you're seeing demand or otherwise that leads you to think, once you get beyond this facility rationalization consolidation, you start to see those efficiencies? Is there any reason that this cannot get back to a 30% plus operating margin business over the next 12 to -- maybe 24 months is a better number than 12?

Yes. If you look at the total segment, yes, I think that's certainly, as we've talked, that's our overall goal to get back to 30%. So we'd say, just to tell you what we're doing. Yes, we're going from 3 facilities to 1. But in that, we've incorporated new technology that will allow us to get more efficiencies, but also, additional capacity. And we're also working, in parallel, a consolidation in Europe from 2 facilities to 1, which will also be done by the end of this year. So we'll have, around the globe, the most -- the latest technology, the most efficient facility. So that will help in this area. Then when you look at the total segment, our aspiration would be to get to that 30% level. As you said, it may not be next year, but our aspiration would be to get there. We think that we see a path to do that.

And then just back to the advanced tech business up 50% organic in the quarter, can you help parse that or give a bit more granularity with mobile? Half of that increase or all of the increase was medical, a quarter of it? I mean, can you give some sort of weighting to how you would chop up that 50%?

Yes. I would say, if you look at all of this stuff other than the key dispense parts of the business, it was up nicely double digits. The dispense is really linked to -- we had some big orders come in, linked to particularly flex circuit technologies. So this is a new application in flex circuits that's getting traction across all of the mobile platforms and then some others, and we're very well positioned with our technology to take advantage of that. And we had some sizable orders come in. And that was the biggest single driver. Now beyond that, we also saw nice growth in all of our inspection business as well. But we had some -- a couple of big projects that came in that are really linked to technology moving from rigid to flex circuits and us being well positioned within our capability around the globe and our product performance take advantage of that.

Longer term, Mike, if you look, maybe beyond the next couple of quarters in the funnel, the conversations you're having with customers, whether it be things like 3D stacking, whether it be things like moving from rigid to flexible circuitry? Are there other opportunities in the funnel, if you want to call it a funnel, that can be substantial, like what you saw in fiscal Q1?

I'd say, in 1 quarter, that was -- that's a pretty big increase. I wouldn't put things in that. I'd say, high-level trends. Number one, auto electronics is just going to continue to grow. I mean, we're not to self-driving vehicles yet, and that's continuing to grow. And to get to there, if you believe you're going to get there, it's even more. I'd say, number two, trying to do more on wafers prior to dicing is likely to continue to grow as other customers look to adopt that kind of technology because of the benefits that come with it. And that's both a dispense and inspection opportunity for us. And then in our inspection business, as Greg talked about a little bit, we've bought some smaller companies that have regional positions, and we've had a lot of success with things like MatriX and now Select. And we expect with Sonoscan as well, globalizing those businesses more effectively, so that we're, in fact, growing our global position. So those are some of the things that make sense. I mean, we have wafer-level offerings and bond testing now based on where customers are going that we haven't had before, and these are significantly larger high-priced items. So I think there's some growth opportunities there, based on where the technology is heading. There are other projects that folks are working on. We really can't talk about the nature of those, but the ones I've highlighted, I think, are good trends for us.

And Matt, this is Greg. I'd add, kind of, high level with that topic is -- and this is been a good driver for us for several years now, is the demands for those end markets continue to require more precision, tighter spaces for dispense, faster demands for both dispense or the [T&I]. And those trends and those changes that take place in those end markets are good for us. And often times, we're in a limited group or, perhaps, the only supplier that can deliver the needs that they have from a manufacturing perspective. So high level, the trends in those end markets continue to be in our favor.

I wouldn't want to lose focus that across all of our businesses, technology plays a critical role. We're introducing new technology everywhere to drive growth. We haven't talked about core adhesives all that much. But we talked a little bit last year about some of our newer nonwoven technologies targeting completely new set of customers through our tiering approach. We have some new applications that get into supporting makers of the athletic wear that look like there's some promise. So across all of our businesses, we're looking for either applications or product opportunities, really, to create -- and as we've kind of monitored over the last couple of years, is how we create our own growth. I think, should the economies continue to improve, like they have last year and hopefully, this year then, obviously, we will float on top of that.

Our next question comes from Walter Liptak from Seaport Global.

Wanted to ask about the acquisitions, Infiniti Dosing and Sonoscan. I wonder if we can get some details. Looks like they're small but if we can get an idea of how much cash outflow, how much the price is on, and then the revenue contribution?

Yes. So Infiniti was pretty modest, Walt, that's, I'd say, a capability in a particular pumping operation that we add to our portfolio will be part of our SimTech business. That's relatively modest in terms of a few million dollars. The Sonoscan is a little bit more significant than that, probably similar in size to previous acquisitions, like MatriX, where we expect that business to grow nicely and be tens of millions of dollars of revenue for us, going forward.

Okay, great. And with these 2 deals happening at the beginning of the year, was it just coincident timing, or was it, once the tax reform went through, you were able to get the deals going? And any thoughts on M&A for the rest of the year, now that tax reform's done.

So Walt, I would say, these particular ones are ones that were in the pipeline that we've been working on. We have a nice pipeline of opportunities that we continue to work. These 2 just happen to come forward in the first quarter. I would say, our priority is -- maybe a higher-level question, our priority is on capital deployment remain the same, support organic growth and that includes some of these initiatives, we talked about. We'd like to keep up our dividend strategy, as we've discussed. We have modest offsets for share dilution although we didn't do much last year. And then M&A would be a priority. We have a good pipeline of M&A opportunities and our focus last year and continuing through the first part of this year has been to reduce our leverage, so that we have capacity to move quickly, should opportunities come forward in our -- and so that's probably going to continue for, certainly, the next couple of quarters, as we continue to delever the capacity, going forward.

Okay. With that comment about the good pipeline, is it -- is the activity M&A, picking up? Like, you're seeing more businesses come to the marketplace? Or is it fairly steady with what you saw in the last couple of years?

I'd say, it's fairly steady. I mean, these things, you never can time. Sometimes you're working years on projects to get them to come to fruition. So you can never really time them. I'd say, we probably still see the most activity in the medical space. But there's smaller properties, like these tuck-ins that we've done to support our advanced tech or our EFD business as well. So we see, I'd say, a similar type of pipeline as we had before. And we just want to be prepared, should something of significance come forward we need to act on.

Our next question comes from Liam Burke from B. Riley FBR.

Mike, you touched on it briefly on one of the previous questions on the tiering being one of the contributors of the growth there. How is that -- is it continuing to develop the way you want? And are you seeing any competitive responses there?

I'd say, it is continuing the way we want. The one reference, specific reference I was making had to do with some new products that we developed in China for emerging markets outside of China. So a lower tier nonwovens side of customers. I think last year, we had about 60 or 70 new customers that we've never had before. So going a little further down on the pyramid, still, with good profitability. And we're continuing to see traction there. And then I'd say, another area where we're seeing good -- some good traction is in the electronic space, particularly a lot of the automotive conformal coating type applications, or a tiered product. And we have tiered products as well for the mobile side of the house. So yes, I'd say, it's playing out the way we've expected. I think we've been pretty successful. We do have competitors. So -- but I don't see any significant change there. I think it's the commission of having the right offering and then having the full team from the applications team through to supply chain to just secure it and then the service after the sale in all of these businesses is critical. So I think that model continues to work and we continue to look for opportunities, where we can further tier our various businesses.

Great. And Greg, on the consumables, was the percentage contribution of revenue within the normal range?

Yes. Liam, I'd say, it's up closer to the high-40% now, as you think about some of the acquisitions we've completed, particularly the Vention acquisition, which is a consumable product. So running total company more in that 47%, 48% range.

Our next question comes from David Stratton from Great Lakes Review.

When looking at your balance sheet, I know that the majority is variable rate debt. And given the recent rise in interest rates that we're seeing, can you just kind of give us your thoughts on how you see your capital structure going forward? And if there's a plan to maybe shift to more fixed rate? Or just -- what are your thoughts on that?

Yes. Generally, David, we -- we're always looking at the appropriate mix of that capital structure. We'll be taking a look to that coming up as our revolver is coming to maturity. But we tend to keep a pretty balanced, kind of, across the cycle level of both fixed and floating to kind of allow us to be prepared to manage the business appropriately. So we'll focus on that. But it will be a balance, probably similar to historical trends.

And our next question comes from Charlie Brady from SunTrust.

Just wanted to follow up on Industrial Coating Systems, and the margin performance there, pretty strong performance for a first quarter, which tends to be the lowest quarter and you generally have a pretty big step-up into Q2. Is there some timeliness going on there that would have changed that normal seasonality? Or what's driving the strong margin performance in Q1?

Well for a long time, we've had a continued focus on that business in improving the profitability, and the team has done a nice job of doing that. I'd say, year-over-year comparisons are probably a little bit more of mix of business than anything else. We did have -- revenue was up, which is helpful for a buying leverage standpoint. And then we probably had a little bit better for beneficial mix of business year-over-year, but the trends continues to improve in that business. And the team is very focused on that, but they're at a very nice level given the scope of what they supply.

Would you expect the typical revenue seasonality, I guess, throughout the year as you've seen typically?

You're talking about that business or in total?

About IC. I mean, I guess, what I'm trying to get to is, was there some pull-forward that would just skew the 1Q results higher than the normal seasonality would indicate and therefore, we've got some pull-forward from the rest of the year? Or it was just a great quarter and the rest of the year kind of continues with the same pattern you'd normally see?

Yes. I wouldn't say, there was a significant pull-forward there. And we'd expect similar pattern, where the second half of the year is typically stronger than the first half of the year from a volume perspective. In that business, we've got a variety of different product lines, so the mix can have effect year-over-year. And I think, most of what you're seeing here is a little bit of volume leverage and the mix effect year-over-year.

But Charlie, I back a comment Mike made earlier. This segment as well as the other segments, we continue to focus on those continuous improvement initiatives and believe that, generally across the board, we can continue to raise margins, everything else being equal from period to period, There's improvement opportunity across the business.

So just on the -- Greg, because this is a business that, at one point, if you've got a 12% EBIT margin, it was going to be a home run a few years back. And we're high teens now. I guess, our thinking kind of have been, what kind of the top end of the range, kind of 17%, 18% EBIT margin, not much more there, it sounds like that's not really the correct way to look at it, and maybe you guys see a little more upside over the next 2 or 3 years beyond that level. Is that correct?

Yes. I think, what -- our goal, going back 5 or 6 years ago, was at the high end of the cyclical business, right? So at the high end of the cycle, we got to be approaching 20%. And obviously, it will be lower than that, if we were at the low end of the cycle. But our -- still our aspiration is still get to that 20% level. And I think the team is doing a great job. It's not easy to get there, when you think about the scope of what we do, because of all of things that we buy in as being largely the OEM in that particular space. But we're very focused on improving that. And I'd say, from a company level, we talked about moving to a global, sort of, shared service approach to help us scale and grow more effectively and integrate things more effectively. And we're in the beginning of that process as well. We're looking to stand up our North American service center in the May, June time frame this year. And then move to Europe and then move to Asia. So we're doing some other things to help leverage going forward. In the short term, that probably adds some additional cost, but in the long run that will be a benefit.

And I am showing no further questions from our phone lines. I would now like to turn the conference call back over to Mike Hilton for any closing remarks.

So thanks, everyone to -- for all of the questions and interest this quarter. I'd also like to put a big thank you out to our global team, who continues to exceed my expectations. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.