Good day, ladies and gentlemen. Welcome to the Nordson Corporation webcast for second quarter fiscal year 2016 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. If anyone requires operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to James R. Jaye, Director of Investor Relations. You may begin.
Thank you, Nicole, and good morning. I am here with Mike Hilton , our President and CEO, and Greg Thaxton, Senior Vice President and CFO. We welcome you to our conference call today, Tuesday, May 24th, 2016, to report on Nordson's FY 2016 second quarter results and our third quarter outlook. Our conference call is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until June 7th, 2016, which can be accessed by calling 404-537-3406. You will need to reference ID number 5351714. 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. Now I will turn the call over to Mike Hilton for an overview of our FY 2016 second quarter results and a bit about our third quarter outlook. Mike, please go ahead.
Thank you, Jim, and good morning, everyone. Thank you for joining Nordson's second quarter conference call. I'm very pleased to report that the global Nordson team delivered record second quarter performance with revenue, operating profit and diluted earnings per share significantly higher than the levels we generated a year ago. This performance came against a continued backdrop of modest macroeconomic growth. Total company organic sales growth in the quarter was more than 8% compared to the prior year and follows the momentum in order rates and project activity we reported last quarter. This performance exceeded the top end of our guidance by 300 basis points. To be clear, we did have some order activity pull into the second quarter from the third quarter.
Growth was especially robust in the Advanced Technology Solutions segment as demand in electronics end markets, combined with continued strong growth in medical and industrial end markets, drove strong double-digit improvement from the prior year. The Adhesive Dispensing Systems segment delivered excellent performance as well, with broad-based growth across the portfolio, driven largely by consumer nondurable end markets. We did see some softness in the Industrial Coating segment during the quarter against a very challenging prior year comparison, where sales volume was up 23% at this time a year ago. Revenue did increase sequentially from the first quarter of this year at a more typical pace compared to the accelerated rate of a year ago.
We leveraged the strong top line growth and our continuous improvement efforts to drive significant improvement in total company operating profit and operating margin compared to prior year's second quarter. And this performance generated earnings per share growth of 54% compared to the prior year's second quarter, with incremental margin of 69% in the quarter. Looking ahead to our third quarter, we're forecasting modest organic growth at the midpoint of our guidance. This guidance is a comparison to a robust period of growth a year ago and in a macroeconomic environment that remains fairly weak.
This guidance also reflects timing, where, as I noted previously, some orders were pulled in the second quarter. Overall, recent customer project activity has remained steady. As the rest of the year plays out, we also stay focused on our initiatives we have previously discussed that will improve normalized operating margin over the prior year. I'll speak more about our outlook and current business trends in a few moments, but first I'll turn the call over to Greg Thaxton, our Chief Financial Officer, to provide more detailed commentary on the current results and our third quarter guidance. Greg?
Thank you, and good morning to everyone. Second quarter sales of $438 million is an increase of more than 9% from the prior year's second quarter. This change in sales included an 8% increase in organic volume, a 2% increase related to the first year effect of acquisitions, and a 1% decrease related to the unfavorable effects of currency translation as compared to the prior year's second quarter. Looking at sales performance for the quarter by segment, nearly all of the Adhesive Dispensing segment's 9% sales volume growth was organic, with the first year effect of the Wahlco acquisition accounting for less than 1% of the increase. Unfavorable currency translation as compared to the prior year reduced this segment's sales by less than 1%.
This segment's 9% organic growth is an outstanding level and was driven by strong systems demand and the underlying strength in consumer nondurable end markets. In terms of end markets, growth, organic growth was strong in nonwovens, rigid packaging, general product assembly, injection molding and pelletizing. On a geographic basis, the volume growth was led by Europe, the U.S. and Japan. Sales volume in the Advanced Technology segment increased 23% over the prior year's second quarter. Inclusive of a 20% increase in organic volume and a 3% increase related to the first year effect of the Liquidyn and MatriX acquisitions. The 20% increase in organic volume follows the momentum in order rates and strong project activity we talked about during last quarter's conference call.
The increase was driven by significant growth in automated dispensing and test and inspection solutions in electronics end markets, and by continued strength in fluid management components for medical and industrial end markets. Customers in Asia Pacific, Europe and the Americas drove the growth. Sales volume in the industrial coating segment decreased 13% compared to the second quarter a year ago, and currency reduced sales by about 1% as compared to the prior year. As Mike noted, sales in most product lines were impacted by very challenging comparisons to the prior year. Softness in the U.S. and Japan offset growth in other regions. Moving down the income statement. Gross margin for the total company in the second quarter was about 57%.
Operating profit in the second quarter was $102 million, and operating margin was 23%, an improvement of four percentage points from the second quarter a year ago. This performance includes one-time charges of approximately $1.6 million for restructuring initiatives and approximately $400 thousand of short-term purchase accounting charges related to the step-up in value of acquired inventory. Excluding these one-time charges, normalized operating margin for the quarter was 24%, with very strong incremental margin year over year. Though volume leverage is helping, this margin improvement is also the result of our performance enhancement initiatives, where, for example, year-over-year spending in the quarter, excluding acquisitions and one-time charges, is down 3% from the prior year, and our segmentation and sourcing efforts are benefiting gross margin.
Looking at operating performance on a segment basis, reported operating margin in Adhesive Dispensing improved 3 percentage points from the prior year to 28% in the quarter, or 29% excluding approximately $1 million in charges related to continuous improvement restructuring initiatives. Within the Advanced Technology segment, reported operating margin was 24% in the second quarter, an improvement of 5 percentage points from the second quarter a year ago. Normalized operating margin in the current quarter was 25%, excluding approximately $500,000 in charges related to restructuring and short-term purchase accounting charges for acquired inventory. In the Industrial Coating segment, second quarter operating margin was 18%, or 19% on a normalized basis to exclude approximately $500,000 in non-recurring charges related to restructuring activities.
This is outstanding performance for this segment, especially given the lower level of volume in the current quarter as compared to the same quarter a year ago, where sales mix is benefiting gross margin in the quarter as compared to the prior year. For the total company, net income for the quarter was $71 million, and GAAP diluted earnings per share were $1.23, or 54% higher than last year's second quarter. Excluding one-time items, normalized diluted earnings per share were $1.19. We've included an earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share. Second quarter's EBITDA was $122 million, and cash flow from operations was $78 million. Free cash flow before dividends was $65 million, reflecting cash conversion of 92% of net income.
We have included a table with our press release reconciling net income to free cash flow before dividends. During the quarter, we distributed approximately $14 million in dividends. From a balance sheet perspective, we remain liquid with net debt to EBITDA at 2.5 x trailing 12-month EBITDA as of the end of the second quarter. I'll now move on to comments regarding our outlook for the third quarter of FY 2016. We have provided our most recent order data, both on a segment and geographic basis, with our press release. These orders for the latest 12 weeks, as compared to the same 12 weeks of the prior year on a currency-neutral basis and with acquisitions included in both years. For the 12 weeks ending May 15, 2016, order rates are up 4%.
Within the Adhesive Dispensing segment, the latest 12-week orders are up 7%. Order rates were strong in most product lines, driven by the strength in consumer non-durable end markets. Geographically, orders were strong in Asia Pacific, Europe and the U.S., flat in Japan, and softer in the Americas. In the Advanced Technology segment, order rates for the latest 12 weeks are up 4%. These order rates reflect strong demand for automated dispensing and test and inspection solutions for electronics end markets, partially offset by slower demand for surface treatment systems, where comparisons for this product line are very challenging. Demand for fluid management components for medical and industrial end markets was robust. Order rates are up in all regions except Japan.
Within the Industrial Coating segment, the latest 12-week order rates are down 3%, again impacted by tough comps, where order rates at this time last year were up 21% and prior year segment sales volume for the third quarter increased 23%. Growth in cold material dispensing systems, powder and liquid coating systems was offset by softness in other product lines. Order rates were positive in Japan, Europe and the U.S. Current customer project activity is steady, though it is difficult to forecast the rate at which these projects become orders. Total company backlog at April 30th, 2016 was approximately $302 million, an increase of 5% compared to the prior year, and inclusive of 3% organic growth and 2% growth due to acquisitions. Backlog amounts are calculated at April 30th, 2016 exchange rates.
Let me now turn to the outlook for the third quarter of FY 2016. We're forecasting sales to increase in the range of 1%-5% as compared to the third quarter a year ago. This range is inclusive of organic volume down 1% to up 3% and 3% growth from the first-year effect of acquisitions. The effect of currency translation based on current exchange rates is expected to reduce sales by 1% as compared to the prior year. At the midpoint of our sales forecast, we expect third quarter gross margin to be approximately 56% and operating margin to be approximately 24%. This outlook excludes any one-time nonrecurring charges associated with our margin enhancement initiatives.
As we indicated last quarter, the size and timing of these nonrecurring charges for the remainder of the year is difficult to estimate precisely, though we expect these charges to be well below the amount incurred in FY 2015. We're estimating third quarter interest expense of about $6 million and an effective tax rate of approximately 30%, resulting in third quarter forecasted GAAP diluted earnings per share in the range of $1.25-$1.37. The midpoint of this guidance would generate EPS growth of 15% over the prior year third quarter.
In addition to the third quarter outlook, the following updates on FY 2016 full year may be helpful for modeling purposes. For our effective tax rate, we're forecasting the full year rate to be about 30% based on current tax law and excluding discrete items. For capital spending in 2016, we're still forecasting normal maintenance capital spending to be approximately $50 million. With that, I'll turn the call back to you, Mike.
Thank you, Greg . Before taking your questions, I'd like to provide some additional comments on our recent performance and outlook. First, and as always, a big thanks to our global team. They continued to perform at a high level and delivered record second quarter performance. The 8% organic growth on the top line was outstanding, which we leveraged to drive significant improvement in operating margin and earnings per share compared to the same quarter a year ago. As we look at current backlog, recent order rates and timing of shipments, we're forecasting modest organic growth at the midpoint of our third quarter guidance. As I mentioned in my opening remarks, we are comparing to a period of strong organic growth in the third quarter last year. And certainly, the current macroeconomic environment remains relatively weak. We're not prepared to offer a forecast beyond the third quarter.
Current project activity remains solid in all three segments, which could provide benefit in the latter part of the year. Beyond this near-term view, we're continuing to execute on activities we expect will drive value for shareholders over the long term. Specifically, we continue to focus on innovative products, tiering, new applications and emerging market penetration to drive growth. I'm also pleased to report that we're making solid progress on our margin enhancement initiative using tools within the Nordson Business System. During the quarter, we continued to execute on integration and footprint optimization activities within the Adhesive Dispensing segment, including next steps in streamlining operations in the U.S. and Europe.
We also took selected actions within the Advanced Technology and Industrial Coating segments to drive greater efficiencies. In summary, we look to deliver a solid third quarter given the current global economic environment. Overall, we remain well positioned to capture growth opportunities when and where they occur, and we remain focused on continuous improvement throughout the organization. We also continue to generate strong levels of cash, which provide us with the ability to fund multiple priorities. At this point, we'd be happy to take your questions.
Ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is now open.
Hey, good morning, guys.
Good morning.
So the incremental margins, you know, pretty impressive in both adhesives and advanced, and that seems to be carrying over into your guidance. Is there mix in there, or is that just a function of the combination of volume first and some of the internal initiatives?
Well, I'd say there's three factors. Certainly, the volume helps, and so we get significant incremental contributions from that. You know, there are some mixed benefits in parts of the segment, particularly in, say, the advanced technology area, where we had a strong quarter from the dispense side in that business, and medical was very solid as well. I do see us making progress against our overall goal of improving normalized margins 200 basis points by the end of next year, and we've seen significant improvement in the quarter coming from that.
Okay. And then I think you talked about, you know, 300 basis points ahead of, you know, the top end of your guidance. So can you maybe try to quantify the pull forward what you saw was pulled forward in that upside surprise and where else, you know, either product line or geography was surprising you versus, you know, your internal forecast?
Yeah. There's probably 200 basis points that were orders we expected to come in in the second quarter, but to be completed and go out in the third quarter. So 200 basis points of that 300 basis points that we exceeded the top end. And I'd say, certainly we saw some of that come through in the advanced technology area, as well as a little bit on the adhesives side. Those are probably the two areas where we saw some specific projects that we expected to get in, but we expected the order timing to be such that it would be sales in the third quarter.
And then you know, other product lines where you were surprised at the upside?
Well, I think those are the two main segment areas, and in some cases, it's specific project related. So we did anticipate those orders. It's just we felt that they would come in perhaps later in the quarter, and then therefore ship out in the third quarter.
Okay. Thanks, guys.
Okay.
Thank you. Our next question comes from the line of John Franzreb of Sidoti. Your line is now open.
Good morning, guys.
Good morning.
Could you talk a little bit about the order trends? Are we seeing a change maybe in seasonality, in demand, specifically in advanced technology that we're seeing some pull forward in some of those orders?
I'd say what we are seeing in advanced technology, particularly for the electronic segment, is a concentration within the year on orders. Our customers have asked us to reduce our lead times, and so the concentration of orders tends to be in second and third quarter. I'm not sure there's a typical pattern because it really depends on, you know, what they're doing from new sort of launch perspective. I would say, though, that we've made some progress on new applications related to new technology we've introduced. As an example, we came out with new dispensing technology, you know, from our ASYMTEK business that it's allowed us to do on-wafer dispensing. And so we've made some progress on the semiconductor side that we haven't historically done.
As customers have gone to stacking chips, there's now potentially an opportunity to do that on the wafer so. You know, that's been good progress. With that, we've also seen an uptick on the X-ray side. So I'd say the general sort of mobile-related cycle is getting more concentrated. You know, part of our effort is to diversify applications, and we're getting some traction there in terms of different types of applications.
Okay. So how do I reconcile maybe a more concentrated order front than in AT with also record backlog? Is there also a component of that that's elongated? Can you talk about that record backlog, you know, company-wide?
Well, that's not just an AT, you know, activity t hat's across the, you know, the mix of businesses. But I would say the you know, if you look at our business, the order patterns typically decelerate through the fourth quarter and through sort of January, and then start to pick up and typically reach a peak at the end of the third quarter or early fourth quarter. We're seeing that same type of pattern. It can vary a little bit between where the peak is in the third quarter. It could be early, it could be late. So that's the challenge based on timing of some of these orders. We're following a pretty typical pattern. I'd say this year, we saw a nice progression in order rates throughout the quarter, stepping up the way we would expect from a seasonality perspective.
Okay. One last question regarding mix. Given the improvement, I don't recall hearing you mention anything about replacement parts and how that changed in the mix profile. Was that a meaningful number, or was it within norms?
I'd say it's generally within norms. I'd say the mix is more within segments than across the segments. So you know, we had, you know, very strong performance across our adhesives business, including our sort of core adhesives, packaging and nonwovens. We also, in our advanced tech, had those, you know, solid performance in our EFD business, strong performance in medical. In our dispensing and the ASYMTEK business, you know, we had a really strong quarter. It's more sort of a mix within the product lines with and across the segments. It's not really been much of a parts systems kind of issue in this quarter.
Okay. All right. Thank you for taking my question. I'll get back into queue.
Okay.
Thank you. Our next question comes from the line of Walter Liptak of Seaport Global. Your line is now open.
Hi. Thanks. Good morning, everyone.
Good morning, Walter.
Let me ask a follow-on on the electronics business. You know, you know, we saw orders picking up at the end of, or, you know, I guess in February of this year. And then, you know, it sounds like you're able to turn the business pretty quick when you get, you know, a block of orders that come in or, you know, a more concentrated cycle. You know, I wonder what you're thinking about for the back half of this year and in 2017. Is there enough new product development that's going on with some of the mobile manufacturers and China customers to, you know, sustain a positive level of orders.
Yeah. So a couple of comments. We did see within the quarter some nice orders from our tiered product structure that's aimed really at the Chinese OEM. So we made some good progress with the tiered orders there. As I mentioned also, we in broadening applications like the semiconductor dispense application with our NexJet technology was important. And then on the X-ray side, you know, the acquisition of MatriX has really helped us from an automated X-ray standpoint, and we've had real nice penetration in Asia with that automated X-ray platform, combining that with our leading tube and detector technology. So we saw nice orders there. We started to see the typical upside, the general mobile side as well, and we would expect to see that continuing through the next quarter.
Okay, great. In your guidance, you talk about gross margin sequentially down a little bit. I wonder if you can provide some more color on, you know, where you see the mix being lighter, is it advanced tech or just conservatism on the outlook?
Yeah. Walt, this is Greg. That gross margin dilution in the third quarter is pretty typical with the volume growth where we have a heavier mix of systems versus parts. So it isn't necessarily a big shift in segment per se, but it's more a mix of systems versus parts.
Okay, great.
Yeah, we're talking about a fraction of a percent here, so.
Right. Right. I'm sure.
A little bit.
Okay. You know, I've asked you this in the past too, the adhesives business continues to be, you know, as a core part of your business, you know, growing very nicely at that, you know, mid- to high-single-digit rate. You know, I wonder if you could talk a little bit about just the programs and projects and, you know, health of new product development among those consumer durable customers.
Yeah. So maybe just a couple of comments. Obviously some of the end markets on the non-durable side, like food, have been pretty solid. You know, we've seen a strong quarter in terms of, you know, the diaper side of the business. You know, some of this is the sort of new products our customers are coming out with, but some of this is new technology on our part, giving them the opportunity to recapitalize existing infrastructure. We're seeing that recapitalization approach based on our new technology taking off while supporting the new sort of clothing-like materials there.
And then if you look at our sort of product assembly area, we're seeing some traction on the furniture market with some new applications around laminates and things like that. There's a couple of new applications there, plus the recap that are helping to drive beyond, you know, some of the solid market performance and things like, you know, more typical food and other packaging opportunities.
Okay, great. All right. Thank you.
Thank you. Our next question comes from Kevin Maczka of BB&T. Your line is now open.
Thanks. Good morning.
Morning, Kevin.
Can I just piggyback on the advanced tech and the 20% organic growth? Because that was such a strong number when we look back at the order rates in the past five quarters, which haven't been greater than 8% in any quarter. Can you just help explain that a little bit more? I understand the pull ahead, but if that's only a couple hundred basis points, how do we go from this anywhere from -16% to +8% order rate into a +20% organic this quarter when there's only a couple hundred basis points of pull ahead?
Yeah. A couple of things. I mean, one comment again. You know, our customers are compressing sort of the lead times as I talked about, so we can get some lumpiness just as a result of when they're placing their orders, because when they place, they place large quantities at a time. But that said, I made a couple of comments earlier where we've made progress in a couple of areas. So one, when you look at the new dispensing technology that we launched in the fall, that allows us to provide many more dots at a much smaller size, it's really enabled us to get into dispensing actually on the wafer as opposed to on the package.
As customers have gone to three-dimensional chips, they're now looking at least the leading edge guys are looking at doing it on the wafer, and we saw significant orders come in based on that new technology on the dispensing side. It's very sophisticated technology. You know, with that, we've also seen some pull along from an inspection standpoint onto the front-end wafer side of things. And then you know, one of the benefits of acquiring MatriX is to get a world-class automation platform. What we did is combine that with our latest tube and detector technology, and we've got really good traction, particularly in Asia, with that combination of our technology and what the MatriX team brought to us, and the direct strategy we have in Asia.
I'd say there's quite a bit of new product contribution coming in to the business within the quarter, and it's really based on products that we launched sort of late in the fall that are getting real traction now and helping us diversify. And you know, on top of that, you know, the medical business continues to grow dramatically. Again, that's also around a new product story. So those combinations, I think have really helped it in the quarter and should continue to get traction going forward. You know, we're not gonna get out of the lumpiness, though, because we have to do what our customers need, and it's linked to their cycles that we've got very good at ramping up and ramping down to support that. There's still a lumpiness related, particularly to the mobile side of the electronics business.
Yeah. Kevin, this is Greg. Just to add, you know, a couple comments to that. I'd say what we also did see in the quarter above and beyond what we characterize as project activity that we anticipated to come in but ship during the third quarter, so that well, clearly benefited the second quarter. What we also saw during the quarter, and this would affect, within the advanced tech segment, both the electronic systems as well as fluid management product lines, is a good pace of order activity that came in in the quarter and got out during the quarter. And I think that highlights what we've seen from our customers' behavior over the last couple years is this demand to shorten lead times.
And you know, we're really good at reacting to those kind of demands. It was a good pace of order volume that came in during the quarter, so it wasn't in our order rates or backlog leading into the quarter that we're able to turn around and get out during the quarter as well.
Got it. That's all very helpful. Greg, on that point, you have 4% order growth in tech in the quarter. Do you expect that to still hold positive if maybe there was some pull ahead there as well? Or is it just the compressed cycle time where you'll see that every quarter now?
I think to Mike's point, you know, we'll see some lumpiness in those order rates. And you know, in terms of what that demand looks like on a going-forward basis, we're at that point in time as we mentioned, where we tend to get stronger order activity in the cycle over this time period, our second, third quarter, that leads to volume shipping in third and fourth a bit stronger than the first half of the year.
You know, one other comment I would make is, and at least in our electronics systems business area, one of the things that's moderating sort of the growth is. If you recall, last year, we had very significant growth in our surface treatment business related to a new application. So we're seeing, you know, some new opportunities in that business with other customers that haven't come forward yet, so we're up against some pretty tough comps there. So the dispense piece and the test and inspection piece look very robust. The surface treatment piece is a bit weaker off really, based on a tough comp in the prior year, but we do have good prospects to spread that technology more broadly. You know, may hit this year, may not hit till next year.
Okay. Got it. And just, finally from me on margin. How much of the strong margin upside we saw this quarter would you attribute to your restructuring savings that you realized versus other continuous improvements and volume leverage? And how much of the, same question on the 200 basis points you expect over the couple years, how much of that is just pure restructuring savings?
Yeah. If I look at this quarter, I would say that probably three-quarters of the improvement is a function of the volume leverage and mix, and probably one-quarter is a function of the sort of restructuring activity. I'd say year to date, we're probably half restructuring, half volume and mix in terms of the margin improvement. You know, I think going forward, the significant driver of that margin improvement is restructuring, some of which we've already completed, some of which is yet to complete. So we're. You know, we suggested that we'll get there by the end of next year. You know, this year is continuing to play out, but we're making good progress.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Liam Burke of Wunderlich. Your line is now open.
Thank you. Good morning, Mike. Good morning, Greg.
Hey, guys. Good morning, Liam.
Mike, in your prepared comments on the adhesive side, you talked about a couple of polymer applications that were doing well. Just overall, you've got some revenue growth there, but how's the business performing?
Liam, it's improving from where we were last year, but it's not where we want it to be yet. I'd say the volume is certainly helping, but as you know, we have plans to transform that business, and we're in the middle of that. You know, that's going well to date. We have some more things that we need to do that we'll continue to work on in that business. It's encouraging to see some volume growth across the different product lines. I would say we're starting to get some indications, at least on the more complex films, that our sort of OEM channels are starting to see activity there. That's probably still a 2017 kind of activity, but we've seen specialty applications in this quarter.
We've seen you know, some good growth across most of the product lines in this quarter, so that's encouraging. Year-on-year, it'll be nice improvement, but we still have a ways to go.
Okay. On ATS, medical continues to be strong. Are those growth rates continuing to ramp for you?
Yeah. We're seeing real good progress on the medical business. You know, it's really linked to broadening the product lines that we have, getting placed well with the new applications. You know, we've got the capacity in place between Colorado and Mexico now to support the growth very effectively. So we're in a good position there, and we continue to broaden our portfolio.
Great. Thank you, Mike.
Yeah.
Thank you. Our next question comes from the line of Christopher Glynn of Oppenheimer. Your line is now open.
Thanks. Good morning.
Good morning.
Congratulations on the varied success across a number of initiatives there. In the ATS, you mentioned you're not gonna get rid of the lumpiness. I'm gonna take that comment a bit weighted to a quarter-to-quarter dynamic. But in the ATS, as you've built out the adjacencies and the new product platforms over the past few years and capacity, et cetera, would you anticipate a moderation of the impact of the sort of two-year mobile cycles that we've seen, where you've had the strong kind of even number years and then sort of a pause in the odd numbered years?
I would say in the longer run, as things like medical or general applications and sort of our focus to broaden the customer base, I'd say yes. In the short term, you know, meaning in the next year or two, we still could see some swings there because of just the market structure of the key players out there. I like the progress we're making with the Chinese OEMs. As I've talked about in the past, they're still coming up the learning curve from an automation standpoint, but we're building some momentum there.
I like the diversification efforts that we have going on, like I talked about with the new dispensing technology that we just put out there, and then, of course, medical and general applications. So you know, over the long run, it should be less of a factor. I'd say in the next year or two, it still could be more of a factor. Certainly within the year, we have it kind of affects some quarter-to-quarter movement.
Okay. In terms of mix impacts and things, would you say the, you know, last year to this year was maybe more at an extreme end?
Yeah. I would say so because, you know, while we had a tougher year from a dispensing standpoint, it was actually down, say, in the electronics side, you know, we filled in with solid products, but not at the same kind of margin profile. That's fairly extreme. I would expect, as we continue to broaden the base, for that to moderate a bit. That's a key focus. I mean, obviously we wanna take advantage of the growth that's there and the good customer relationships we have and the benefit the technology can play in delivering sort of leading-edge products, so we don't wanna give up on that. We do have a strong focus to diversify both markets, applications, and customers.
Okay. Wondering if did FX help margins at all in terms of favorable movements in production currencies?
No, Chris, this is Greg. FX would have had a slight dilutive effect on both gross margin and operating margin.
Got it. Thanks, guys.
We're talking, you know, we're in the 30-40 basis points kind of range.
Okay. I'll mark it down as 35. Thanks.
Thank you. Our next question comes from the line of Matt McConnell of RBC Capital Markets. Your line is now open.
Thank you. Good morning, and congratulations on a good quarter.
Thank you. Good morning.
Could we talk about capital allocation and what you're seeing in the M&A pipeline, what the priorities are and seller expectations and whether there's anything that you think could be actionable in the next couple quarters?
Yeah. I'd say overall, our priorities at the highest level are the same. You know, support organic growth first. You know, keep our dividend stream going, you know, second. Offset solutions third. Those are relatively modest. It comes down to the M&A activity that you're pointing out and then what else we might do opportunistically from the share side. I would say a couple things. We did say we were gonna take a little bit of a breather here in the first part of the year to continue to complete the latest integrations and to kind of work down our leverage a little bit, and we're doing that.
I would say the pipeline out there still tends to be, you know, smaller opportunities in some of our businesses, with the exception of medical, where there are smaller opportunities and potentially a couple of larger ones. So I'd say that's the area probably where there's more opportunities. Timing's always, you know, questionable. You know, I'd say pricing is still, you know, fairly robust. You know, it's still relatively a seller's market at the moment.
Now that varies in terms of the kind of opportunities that you're looking at, whether it's a product tuck-in versus something more substantial. We see a pretty robust pipeline in general, typically smaller deals with the potential of some larger ones in the medical side. It's hard to predict when they might come forward or come to market. You know, a lot of them tend to be private owners, and that's always tough to judge.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Matt Summerville of Alembic Global Advisors. Your line is now open.
Hey, morning. Just a couple questions.
Morning.
That might have been answered. Within the adhesive dispensing business, I went back. I mean, I have to go back to 2012 to find a margin as high as it was here in Q2 at around, rounded, I think, to 29%. Is this sort of a signal that, you know, you can get this thing back to the 30+ where it used to be for these flexible packaging businesses, and I'll just aggregate them into one kind of lump. Have all of those businesses now systematically improved their profitability such that the magnitude of dilution has come in meaningfully?
So I would say, directionally, you're correct. We're improving. I mean, you know, we've taken action across all the segments in terms of some restructuring, and we're seeing some of that improvement come through. As I mentioned a little while ago, we still have some work to do in terms of realizing all the benefits on the plastics side from improvements in some of the restructuring that we have underway. And of course, then there's volume leverage as that comes back. As we've said, I think in the past, our goal is to get that segment up to the 30% margin plus point. You know, the specific timing, you know, is still probably a couple years out when you think about it on an annual basis.
You know, we can have quarters, I think where we'll be approaching that. On an annual basis, it's probably still a couple of years out when we complete all of the efforts that we have ongoing in our plastics business. Directionally, we're moving with improvements across all elements of the business.
As I think about your restructuring, you mentioned the progress you're making. Maybe can you get a little more specific in terms of what kind, the magnitude of headcount reductions that have been completed, what needs to be done? If you've exited rooftops, how many, and how many more are there? Then just lastly, you know, what can make that 200 basis points, 300 or 400 as you've gotten in and rolled up the sleeves a little bit more here?
Yeah. Just a couple of high-level comments. You know, overall, we talked about getting out of one facility in the Netherlands. We talked about consolidating multiple German facilities into a single facility. We're in process to do that. We've talked about other consolidation in our dies business in the U.S. we're in process to do that. You know, we still have some additional consolidation to do as well. Some of that's dependent on expansions in other places. In other words, there's an expansion in one site and consolidation in others. We've got a very thoughtful plan on how to do that. So we have multiple phases here.
I would say we're, you know, well into, you know, probably almost complete on the first phase, and we have some other things that we're working on. Really not gonna comment any more specifically on that until those plans are more fully fleshed out and communicated. But we're making good progress there. We've seen the benefits that we expected to see from the actions that we've taken. We've taken actions across the business, not just in the plastics area reflecting sort of the softer environment we're seeing from a macro standpoint and our desire to make that structural improvement in margins. It's not just a plastics activity, it's across multiple businesses.
If you recall last year in our EFD business, we consolidated in Europe, exited a facility, and in the medical business we expanded in Colorado, got out of manufacturing in Minnesota. We're expanding in Mexico to support our assembly operations. There's other supply chain moves we're making outside of just the plastics area.
Got it. Thanks, Mike.
Thank you. Our next question comes from the line of Charles Brady of SunTrust. Your line is now open.
Hey, thanks. Good morning, guys.
Good morning.
Morning.
Hey, so on the orders again, not to beat a dead horse, but I'm going to anyway. The plus 4% in the quarter, I wanna go back to your comment about kind of the velocity of the incoming order and exit order rate. Because, you know, if you do the math on the backlog and the sales numbers, it sounds like in the quarter itself ending April, of course you're 12 weeks on a two-week lag, but for the quarter, it sounds like you're close to 7.5% order growth in the actual quarter ending April, and then for the 12 weeks on that two-week lag, you drop to 4%.
Just to understand, is that's the function of your velocity of the orders coming in and exiting in the quarter because you're having compressed time cycles with the customers on advanced tech?
Yeah, yeah, Charles, this is Greg. I think you've got it. To suggest that, kind of during the quarter, you know, as we entered the quarter, order rates had been up 1%.
Coming into the second quarter, we saw good demand activity during the quarter, clearly that helped drive this performance, sales performance in the second quarter. It's a snapshot. You get variability from week to week. As we looked at where those order rates were, the latest 12 weeks, we're up 4%. That would suggest that we had some strong pace during the quarter that moderated a bit toward the end of the quarter. Now, the other thing as you look out, you know, you're comparing against a pretty strong quarter in the Q3 of last year, and so the comparable is maybe a little bit tougher as well.
Yeah. No, fair points. I mean, I wasn't trying to downplay the order growth. I guess my point is a lot of that stuff tends to be very short cycle. You know, you may get an order tomorrow, and it's gonna go out in a week, so you don't even know the order's coming in today.
Correct.
That 4% may actually be understating some of the underlying growth you're seeing in your businesses just from your commentary you've been making.
Yeah. I mean, I think we're trying to give you the best snapshot that we have. I mean, as Greg said, if you went into last quarter, our backlog was pretty solid at 8%. The order rate was a little softer. We, you know, we had some guidance that was kind of in the middle and the order rate picked up. Here we are, you know, a quarter later. The backlog's a little softer. The order rate's pretty solid. We're giving you our best estimate.
As you just said, we got a lot of business that comes in and out in a relatively short period of time in a matter of weeks. We have a good view of the project activity and the list associated with it. You know, our customers aren't always as clear on their expectations, both in the placement of the order and the delivery, and so that can move around. You know, we are good at dealing with that. It does make it a little more challenging to forecast.
Yeah, sure. Just switching gears on adhesive dispensing for a second. I thought I heard you say in your commentary that the nonwovens was one of the areas of strength in the quarter, and that tends to be your lower margin business, and yet that segment had phenomenal margins. I'm just trying to. Can you comment on what the mix of that nonwovens is? And is the underlying margin in that particular piece of the business gotten meaningfully better?
So just first comment, the nonwovens business is a good business for us, so I wouldn't categorize it as low margin business, so first of all. You know, secondly, what I would say is there's a lot of change there that's driving nice growth. From an overall mix standpoint, I think what we've talked about in the past, we have sort of three areas in that sort of more traditional adhesives business. The packaging piece, which tends to be our highest, and then the nonwovens and the product assembly in that sort of order. The product assembly takes more of an integrated systems approach, and so the margins tend to be a little bit lower. They're all good margins, though.
Yeah, no, didn't mean to suggest that. I guess, my point was historically it's been a lumpier business. And ometimes when the mix of nonwovens is higher, the overall margin is a little softer than otherwise would be if the mix had been lower. It sounds like that's not really having that kind of impact right now.
Because the other two components are also pretty strong.
Gotcha. Okay, thanks.
Thank you. I'm showing no further questions at this time.
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