Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for second quarter fiscal 2014 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 follow at that time. If you should require operator assistance, please press star then zero on your touch tone telephone. As a reminder, this conference is being recorded. I would now like to introduce the host, Mr. Jim Jaye, Director of Investor Relations. Sir, you may begin.
Thank you, Amanda, and good morning to all who are listening. 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, Friday, May 23, 2014, on Nordson's second quarter results. Our conference call is being broadcast live on our webpage at www.nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until June 6 by calling 404-537-3406. You will need to reference ID number 41277438. 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 Hilton for an overview of our second quarter 2014 results and a bit about our 2014 third quarter outlook. Please go ahead, Mike.
Thank you, Jim, and good morning, everyone, and thank you for attending Nordson's second quarter 2014 conference call. Nordson delivered strong performance in the quarter with sales at the top end of our guidance and earnings per share a few cents above our top end. I wanna thank our global team for delivering both the top line and bottom line while continuing to execute on strategic initiatives, continuous improvement projects, acquisition integration, and targeted cost reductions. Given the soft macroeconomic environment, I'm pleased with the solid organic growth of 4% in the quarter. This growth was broad-based and included the majority of our product lines and regions. On a sequential basis, sales increased by 16% over the first quarter, which we leveraged to generate incremental operating margin of 67% in the second quarter.
We also executed on our strategy of returning value to our shareholders by investing $53 million for the repurchase of shares and by distributing approximately $12 million in dividends during the quarter. Looking ahead, based on our current backlog, order rates, and customer projects, we're anticipating continued strong performance in our third quarter. In a few moments, I'll share additional comments about current business trends and our near-term outlook. First, I'll turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our second quarter financial results and our third quarter guidance. Greg?
Thank you and good morning to everyone. Sales in the second quarter were $417 million, an increase of 9% over the prior year's second quarter. The sales improvement included a 4% increase in organic volume and a 5% increase related to the first year effect of acquisitions. The effect of currency translation compared to the same period a year ago was not material. Looking at sales performance for the quarter by segment, Adhesive Dispensing sales volume increased 18% as compared to the prior year's second quarter. Organic growth was 8% and the first year effect of the Kreyenborg acquisition added growth of 10%. Organic growth was driven by rigid packaging, general product assembly, disposable hygiene, and polymer processing end markets, and we saw strength in every geography with the exception of Japan.
Sales volume in the Advanced Technology segment decreased 3% from the prior year's second quarter. Solid organic growth in products for electronics test and inspection, fluid management, and surface treatment end markets was offset by softness in demand for automated dispensing equipment in selected mobile electronic device end markets. As noted in our press release, we have begun to see an increase in orders and projects for these automated systems in recent weeks, which will benefit the second half of the year. Geographically, organic growth in the U.S. and Europe during the second quarter was offset by softness in other regions. Industrial Coating Systems' sales volume increased 4% compared to the second quarter a year ago. This organic growth was driven by demand in consumer durable and industrial end markets, food and beverage end markets, and UV curing systems for industrial and electronics end markets.
The growth was broad-based, with increases in all regions except the Americas as compared to the same period a year ago. Overall gross margin in the second quarter was 56.4%, an increase of more than 200 basis points from the level we delivered in the first quarter of 2014, driven by better absorption and product mix. Moving down the income statement, operating profit was $93 million and operating margin was 22% in the second quarter, or 23% on a normalized basis that excludes the non-recurring charge related to targeted restructuring activities. This normalized margin is an improvement of 100 basis points over the same period a year ago, inclusive of a dilutive effect of the Kreinberg acquisition, and an improvement of 700 basis points on a sequential basis, reflecting the leverage we generate on additional sales volume.
Looking at operating performance on a segment basis, Adhesive Dispensing delivered operating margin of 27% in the quarter, up 100 basis points over the second quarter a year ago, and up 400 basis points on a sequential basis. Within the Advanced Technology segment, operating margin was 24% in the quarter, or 25% excluding non-recurring restructuring charges. This normalized margin of 25% represents an increase of 14 percentage points compared to the first quarter of fiscal 2014. In the Industrial Coating segment, operating margin was 16% in the second quarter, an increase of 100 basis points over the prior year's second quarter and 700 basis points over the first quarter of fiscal 2014.
As Mike noted previously, on a total company basis, we were able to leverage strong sequential sales growth to generate incremental operating margin of 67% or 69% excluding the one-time restructuring costs incurred in the quarter. Continuing down the income statement, reported net income for the quarter was $62 million, and GAAP diluted earnings per share were $0.96, an increase of 14% over the second quarter a year ago. The current quarter's earnings per share include a $0.01 charge related to restructuring costs. As in previous quarters, we've included an earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain items. On a normalized basis, to exclude one-time items in both years, second quarter earnings per share increased 15% over the prior year's second quarter.
The current quarter's EBITDA was $107 million, up 13% as compared to the same period a year ago. Cash flow from operations in the second quarter was $55 million, and free cash flow before dividends was $46 million. We have included a table with our press release reconciling net income to free cash flow before dividends. Mike previously commented on our execution during the quarter of returning value directly to shareholders, whereby we invested $53 million for the repurchase of shares and distributed $12 million in dividends. We have approximately $141 million remaining on our current share repurchase authorization at the end of the second quarter and do expect to remain active in the market as the year progresses.
From a balance sheet perspective, we remain very liquid with net debt to EBITDA at 1.6x trailing twelve-month EBITDA as of the end of our second quarter, and we have approximately $280 million available from cash and our current revolving credit facility for strategic investment opportunities. I'll move on now to comments regarding our outlook for the third quarter, and I'll note that we begin the quarter with strong order trends. As we typically do, we have 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 the Kreinberg acquisition included in both years.
For the 12 weeks ending May 18, 2014, order rates are up 9% as compared to the same 12 weeks in the prior year. Order rates were robust in all segments and most all geographies, with the exception of Europe, which was impacted primarily by slower demand in electronics and durable goods end markets. Within the Adhesive Dispensing segment, order rates over the last 12 weeks increased 7% compared to the same period in the prior year. Order rates increased in all regions and nearly every product line. Strength in rigid packaging, disposable hygiene, and general product assembly end markets was offset by softness in certain polymer processing end markets. In the Advanced Technology segment, order rates over the latest 12 weeks are up 14% compared to the same period in the prior year.
Order rates increased for every product line and included the return of solid demand for automated dispensing systems related to mobile electronic device applications. Within the Industrial Coating segment, the latest twelve-week order rates are up 4% as compared to the prior year. This order growth was driven by strong demand for cold material dispensing and liquid painting product lines. Order growth was strongest in the U.S. and Asia Pacific within this segment. Backlog as of April 30, 2014 was approximately $247 million, an increase of 25% compared to April 30, 2013, and inclusive of 10% organic growth and 15% growth due to the Kreinberg acquisition. Backlog as of April 30, 2014 increased 7% compared to January 31, 2014.
The backlog amounts are calculated at April 30, 2014 exchange rates. Let me now turn to the outlook for the third quarter of fiscal 2014. We're forecasting sales growth to be in the range of 9%-13% as compared to the third quarter a year ago. This range is inclusive of organic growth of 3%-7%, 5% growth from the first year effect of acquisitions and a positive 1% currency translation effect based on the current exchange rate environment. At the midpoint of our sales forecast, we expect third quarter gross margin to be between 56% and 57%, and operating margin is forecasted to be approximately 24% or 100 basis points higher than the same period a year ago.
We're estimating third quarter interest expense of about $3.5 million and an effective tax rate of approximately 30.5%, resulting in third quarter forecasted GAAP diluted earnings in the range of $1.06-$1.16 per share. The midpoint of this range for diluted earnings per share represents an increase of 10% over the prior year's third quarter reported earnings per share or 12% excluding certain non-recurring items reported in the prior year. In summary, our global team delivered solid second quarter results. Based on our current backlog and order rates, our outlook represents strong performance in the third quarter. In addition to this third quarter outlook, the following fiscal 2014 full year data points may be helpful for modeling.
We are forecasting a full year tax rate of approximately 30.5% based on current tax law. For capital spending in 2014, we are forecasting normal maintenance capital spending to be about $40 million. In addition to this maintenance capital spending, we will be making a capital investment over the next several quarters as part of our global footprint optimization activities. Specifically, we have begun the construction of a manufacturing facility to support growing demand in our advanced technology fluid management product line supporting medical end markets. The new facility will be built in Loveland, Colorado, and we will exit a leased facility in nearby Fort Collins, Colorado. This investment supports our strategy of owning our critical manufacturing facilities and will provide us with configurable space to minimize expense and disruption as business needs may change.
We anticipate total capital investment for the project to be $26 million, with approximately one half of this investment to be incurred during fiscal 2014, and the remainder during the first half of fiscal 2015, and full year operations are anticipated to begin in the first half of 2015. With that, I'll turn the call back over to you, Mike.
Thank you, Greg. Before taking your questions, I'd like to provide some additional comments on our recent performance and outlook. Again, I wanna thank the global team for the value they provide our customers and a high level of execution. The midpoint of our sales guidance represents organic growth of 5% over the prior year third quarter and 7% total sales growth over the second quarter of 2014. We expect to leverage this growth with both a year-over-year and sequential improvement in operating margin and strong growth in earnings per share. As we mentioned in our last conference call, swings in the external environment can and do occur from quarter to quarter.
At the same time, we do not intend to alter our basic objectives, and we remain confident that the Nordson business model is intact and will continue to create value over the long term. The model rests on a global team that can be counted on to continue executing at a high level and their passion for providing our customers with differentiated technology and superior global support. In the near term, the team will remain focused on driving top line growth from targeted initiatives, continuing the integration activities of recent acquisitions, and using continuous improvement initiatives to enhance operating performance. At this time, let's turn to your questions.
Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch-tone 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 the line of Christopher Glynn with Oppenheimer. Your line is open.
Thanks. Good morning.
Good morning.
Good morning.
I was just looking for some initial color on how you're seeing the engagement by customers around your Suzhou efforts, how that's going.
Yeah. We're just in the process of continuing to transfer products there. We don't have everything transferred yet, but we've sort of completed our first round of development on our sort of mid-tier product, and we'll be launching that very shortly in the marketplace. We've had some interesting engagement with a number of the mobile players in the Chinese market and had some of our first sales come through. At this point, we're trying to assess their needs to sort of fine-tune our offerings there out of the Suzhou facility. We still have a little work to do to transfer some other capability there.
On the polymer processing markets, would you characterize that as largely over the hump of capacity absorption, or still a little ambiguity hanging around?
I would say it's not too much different than what we said last quarter. You know, if you recall, it's really been the extrusion part of that market and the biaxial film that had the overcapacity. We expected to see orders come in towards the tail end of this year as OEM projects evolve. We expected really tail end of this year to see some orders come through and a step up in the next couple of orders. That's still what we expect. In the interim, as we mentioned last time, we've been pursuing other markets like blown film, cast films, and have had some good success with our new offerings in those spaces.
We've gotten some traction as we've built out our facilities in Asia and improved lead times in a number of our product lines there. I'd say it's encouraging based on what we see today, but the capacity issue in the biax film is not cleared yet, and we kind of expect that as something that starts to clear up at the tail end of this year.
Great. Thanks for the help.
Our next question comes from the line of John Franzreb with Sidoti & Company. Your line is open.
Good morning, Mike and Greg.
Good morning, John.
I would like to talk a little bit about AT, the order rebound you saw in the quarter. You mentioned that you're seeing some traction in the mobile side of the market. How much of that year-over-year rebound can you attribute to the mobile side coming back?
Well, if you go back to some of our comments last quarter, and they continue here, when we look across the whole technology space so far this year, medical has been very strong. Our general fluid management markets have been solid. Our other electronics areas, like the surface treatment and test business, have been solid. It really was the, you know, more sophisticated dispense piece that was struggling a little bit out of the gate.
Right.
As we said last quarter, typically we see orders come in second quarter, third quarter, maybe even into the fourth quarter. I'd say what we've seen here is really the tail end of the second quarter, significant orders start to come through, and we expect that to continue in the third quarter. A significant improvement in the step-up on the order trends has come from these the high-end, high-speed dispense in the mobile space.
What's the sustainability of that kind of order trend, Mike? Do you think it's just a one or two quarter trend? Do you think after a couple of years of being down, we might have a little bit more legs to it?
Yeah. What I tried to paint a picture of last time was what we see as sort of the long-term situation here in the mobile space. You know, one, the penetration of smartphones in general has moved, you know, from a relatively low number, I think we threw out 15%, 20% if you went back a number of years, to a pretty high number, you know, 80%, say 80%. We see that trend slowing a bit and moving ultimately more towards, you know, just smartphone overall growth. By the same token, we see some players today who are upgrading their capability and moving from, say, less smartphones to the smartphone space. We saw an opportunity for our mid-tier products, which is what we're really trying to do out of Suzhou. That hasn't changed.
The question really is, what's the timing of those two things, and do they match up and line up? Not 100% clear yet. I mentioned a minute ago that we've got some orders now with some of these folks, and we're trying to feel out both the sophistication of their end product and the processes that they'll use. We'll have to see how that plays out over time.
Okay.
I would say there will be continued growth. It might be a little lumpy from time to time. I'd say within the year, you know, we clearly have a seasonal pattern within the year where things start to pick up in the second quarter and third quarter and slow down in the fourth and are pretty soft in the first. That, you know, varies from time to time. This year, it seems to be fairly concentrated.
Okay. The expansion in the medical side, can you give us a little bit more color on what business line that is or what's driving the expansion?
Yeah, we're seeing very good growth, both in the, you know, Value Plastics business that we bought, you know, sustained double-digit growth in that business, as well as solid growth in the, you know, dispense syringe-related business of Micromedics. We added product lines last year in the stopcock arena that is also growing. That business is growing nicely. As we continue to expand the product line, both organically and with sort of these tuck-in acquisitions, we see really good growth opportunity there. We also took a holistic look at all of our other fluid management facilities, and we do think we can serve some of their expansion needs as well through this investment.
It's sort of an overall supply chain look beyond just the medical piece to support growth over, say, the next 3-5 years in those areas as well.
Okay. One last question. In Europe, orders are flat year-over-year. A lot of lumpiness in the order patterns if you look backwards. The electronics had good orders. Can you kind of reconcile what's going on in Europe that we're having good orders in electronics, but flat in the overall book in Europe as a region?
Yeah. I think Europe kind of parallels in general what you see going on in the economy. If you think back last year, we're still in a recession in Europe. Over the last couple of quarters, things have gotten, you know, considerably better. By the same token, if you look at the latest data coming out of Europe, it's stepped backwards again. We're seeing a little bit of that fits and starts, I think, overall, you know, from an order perspective, particularly for the larger engineered systems that tend to be capital related.
Mm-hmm.
With electronics specifically, it really is linked into what's going on in the auto industry and the penetration in the auto industry more than anything else in Europe. That's what we're seeing, you know, continued penetration there, which is an encouraging sign. I would say our sort of core adhesives business is finally coming back in Europe, and that looks encouraging. Even though the orders in this quarter are softer, we do have good prospect list there. I think it really comes down to what's the macro environment that we see. With continued mixed signals that we could be up and down a little bit here, just depending on how the economy plays out.
Okay. Thank you, Mike. I appreciate it.
All right.
Our next question comes from the line of Kevin Maczka with BB&T Capital Markets. Your line is now open.
Thanks. Good morning.
Morning, Kevin.
Morning, Kevin.
Mike, did adhesives order rates accelerate as the quarter progressed or even beyond the quarter as well? This may be kind of an apples and oranges comparison, but we're seeing better organic growth there and to the extent that that's the pent-up demand finally being released, it sounds like your demand was fairly broad-based, but lots of other industrials are just not seeing that. They're seeing continued pushouts and delays. I'm just trying to understand maybe where you're different and if it's maybe a function of you being shorter cycle and seeing acceleration more recently.
Yeah. If you look at the business, Kevin, I think the consumer nondurable-related piece is what has been the strongest. You know, the packaging side of the business in particular and nonwovens, as well. I'd say the product assembly, which tends to be more durable construction related, has been up, but not nearly to the same extent as the other two. As you recall, we had kind of, as you kind of alluded to here, we had kind of a softer year last year in the sort of consumer nondurables, and I think we are seeing, you know, that pent-up demand come through. We're trying to drive new opportunities through technology and applications, and we're seeing some traction there.
I'd say the one that's not as robust is the product assembly piece that goes into, you know, those two areas, construction and durable goods, although it was up.
How much of the strength in the order book there is related to new products like the Freedom product versus just the demand, the tone of demand in the end markets being better?
It's primarily driven by, you know, the end markets. I'd say we're on track with where we thought we'd be on Freedom, and in fact, we just introduced in May a next tier down version of Freedom we call Liberty to address a little bit broader aspect of the market. I think, as you know, we mentioned we target Freedom at the high end, and the customers at the high end really appreciate that. But where there's some opportunity for some sort of tiering structure, we've come out with another offering there. I'd say we're generally on track with the new initiatives. The biggest driver is really a pickup in the market, and quite frankly, us winning in the marketplace and taking advantage of that.
You know, we also, as you know, have a large installed base, so we're continuing to push to using technology to help improve and update our customers' capability.
Okay. Just finally from me, we had a small restructuring charge this quarter. Now you've got the tech expansion coming in Colorado. I think in terms of your footprint, you're usually able to cycle up and down pretty easily, given the assembly nature.
Yeah.
How are we doing in terms of capacity elsewhere? Should we expect other additions will be required here as we go forward and grow?
No, we're in pretty good shape elsewhere. I think, you know, we've talked over the last couple of years about the physical expansion in places like Suzhou and the build-out of the product line there. You know, with some of the acquisitions, we've got additional capability in China and Thailand and, you know, we've built up capability there. Here, you know, we had a leased facility that we, quite frankly, just outgrew given the significant growth that we've had in that business. It and some of the discussions we had around some of the newer facilities and capability that have come with acquisitions, there's some opportunity to optimize. I'd say we're in pretty good shape here.
This was something that, you know, from day one, we knew if we hit the growth rate targets in the business, we would need to expand. As Greg said, wherever we can, we prefer to own the manufacturing facilities as opposed to lease, and particularly for businesses where we see the long-term future looking bright.
Okay. Thank you.
All right.
Our next question comes from the line of Charlie Brady with BMO Capital Markets. Your line is open.
Hey, thanks. Morning, guys.
Morning, Charlie.
Can you just give us the breakdown of the parts percentage by the individual segments, in particular Adhesive Dispensing in the quarter?
Yes. Overall, I think the parts, we're just looking for a number here, Charlie. In the quarter, overall parts were about 41%. You know, adhesives generally tends to be higher than that. You know, I think with the significant step up in systems orders that we've seen really in that business all year, it's not too different from that 41%.
That's really true across the segments. They're not too far off from that total company average.
You know, clearly more system sales in the second quarter versus first quarter. The mix has moved a couple three points from the first quarter.
Right. Can you discuss, were there any large, nonwovens, big large systems, lumpy, the lumpy stuff in the quarter?
Well, I think we've had a steady inflow of new orders in the nonwovens side. I'd say nothing that we would call out in that regard. Typically, in the adhesives segment, the product assembly is the area where we could have some bigger systems. In the first quarter, we had some comparisons that were tough versus last year because we had some big solar orders last year that didn't recur yet this year. They may well come later in the year.
I'd say nothing that we would point out significantly, just a nice steady improvement in the packaging area, which tends to be smaller systems and improvement nicely in the nonwovens that tend to be bigger systems, but nothing that I would call out as, you know, a notable difference.
Right. Okay. Just when you look at the value of plastics business for a second, can you just give us maybe an update on the non-medical part of that business? You know, it's a smaller piece, obviously, but that was an area I think when you bought that company, you thought that maybe you could leverage that up and accelerate that because it was kind of underinvested by the prior owner.
Yeah, I would say, that's an area probably that hasn't grown as fast as we would have expected. We've had some additional traction on the industrial space. We've segmented it into certain markets we think are most attractive to the level of sophistication in the components. That's not moving as fast as we would have anticipated. On the other hand, the broadening of the product, the product line organically and take advantage of geographic penetration has probably moved faster than we thought. Overall, I think, we're probably on track, but the industrial piece has not grown as fast as we would have anticipated.
The segments that are high end are doing better than some of the others that maybe don't buy the sophistication that we have to offer there. That's an area where not as good as we would have thought.
All right. Just one more from me then. Any update on the LED market? Any acceleration kind of investment activity going into that space for you guys?
We haven't really seen that step up in a big way. As I mentioned last quarter, we started to see orders increase in that space from a lighting perspective, but nothing that would say, "Hey, the wave has hit." I think that's still where we're at.
Okay, great. Thanks a lot.
Our next question comes from the line of Jason Ursaner with CJS Securities. Your line is open.
Good morning. Congrats on a strong quarter.
Thank you.
Just following up on some of the questions you got for the tech segment. One of the big challenges you talked about in mobile had been the issue of form factor, and that there really
Yeah.
Hadn't been any change with some of the major flagship models for some time. We're obviously seeing a lot written about changes coming in terms of form factor. Do you think that's driving some of the strength in mobile, or is it simply the industry working through the installed capacity for the high speed, you know, high dispense underfill that you put in in the years prior?
I would say that there's a little bit of both. You know, the element that tends to be consistent and steady are sort of the components. Things like camera modules, speakers, microphones, gyroscopes, accelerometers, those kinds of things. Everybody kind of does that the same way and tends to use the same set of vendors that we're well positioned with. Beyond that, it's the sort of the features of the phone. You know, one manufacturer came out last year with the here's an example of the sort of fingerprint sensor. You know, others are following suit. That is an example of sort of features that tend to drive new applications.
I'd say what we're starting to see here is kind of a work through, maybe some sluggishness in the first quarter around the supply versus capacity, and then some additional features coming through and still some potential for form factor changes. It's not just things like screen size. Thickness is also something that plays a part here and helps with the level of sophistication needed.
Okay. Appreciate that commentary. Margin in adhesive, you know, is back to 27%. Just, I guess, when you look at the polymer and plastics businesses, are those starting to pull up closer to kind of the segment average? You know, how big a gap do you see still relative to the traditional core, packaging and adhesive systems and modules?
Yeah, they're improving, but not where we need them to be at this point. You know, I think we said that it was gonna take us a while, you know, 3-5 years to get it to that sort of mid-20s% kind of margin. We're on that path. The big item is that we need, obviously, more robust revenue to start in the short term. We're starting to see that improve. You know, I think when the biax piece comes back, we'll see that improve more significantly. We've got good improvement from continuous extrusion standpoint. There are some things around supply chain optimization that will take a little bit longer term to optimize.
I think we're on the right path there, but we're not where we need to be yet.
Okay. Is incremental margin on kind of the overall business for polymers good enough to kind of get you there or you really need biaxial to start coming back? Is that higher margin part of it?
No, so the incremental margin is good in that business like it is in all of the businesses. We just need, you know, the revenue to come back at a reasonable level, and it's not where we anticipated. Quite frankly, as we mentioned last year, it fell off instead of moving up because of the biax piece. You know, at the end of the day, it's really just the leverage, the volume leverage that you typically get on the infrastructure combined with what we're doing from a continued improvement standpoint, a lot of the benefits of which we'll see when the volume comes back through. You'll see incremental margins improve as a result of that on that incremental volume.
It's sort of a double whammy there as the volume come back. In the short term, you don't see some of the improvements that we've made because the volume has not been as strong as we'd like.
Okay. Just last question from me. Looking at the parts sales, how high a market share of the aftermarket spend of your customers do you think you're capturing? Obviously, I know you guys do a great job there, but just wondering, you know, is there sort of a big opportunity to increase share, you know, not necessarily in H2, but next year and beyond, in addition to just natural growth on the installed base?
Yeah. I think we've said in the past, we don't have 100% of the aftermarket parts for the business, you know, particularly because we've got, you know, a huge installed base out there, and many of the items have been out there for a long time. Part of our focus from a technology standpoint has been to upgrade the technology and retrofit, and the retrofit can take a number of approaches. You know, we talked in the past about things like our MiniBlue and SureBead dispensing offerings and adhesives, which are a relatively simple upgrade for customers that give them more efficient use of an adhesive dispensing, but also the potential to stitch and dot.
There's more extensive things that from an upgrade standpoint, which would be things like, you know, the new Liberty product line or the new Freedom product line as an example in adhesives. I'd say there is opportunity there. We're focused on that. You know, it's not like we've got, you know, a huge opportunity in the short term there, but we think it's a nice complement. We're trying to reintroduce where we can on these older systems, proprietary technology to give our customers the performance benefit, but also have intellectual property protection as well as challenges in the manufacturing that limit the ability to copy.
Okay, great. Appreciate all that. Thanks.
Our next question comes from the line of Walter Liptak with Global Hunter Securities. Your line is open.
Hi. Thanks. Good morning, everyone, and nice quarter.
Thanks, Walt.
I think you started answering this question or maybe you didn't. I just didn't get it. Just the trend in orders throughout the quarter, you know, your orders are up 9%, but your revenue guidance is a little bit higher than that. You know, was your exit rate for orders stronger, as you know, at the end of the quarter?
It certainly picked up. You know, if you look at sort of our normal pattern, I'd say it's in line in general with our normal pattern, which tends to grow from sort of the late January standpoint and continue to grow to peak sometime in the third or maybe early fourth quarter. We saw it mirror the trend. I would say in a couple areas, in particular the mobile space, we saw more of the orders come in towards the tail end of the quarter. I think as we said last quarter, we weren't sure how much would come through in the second quarter versus the third quarter, and we saw orders step up significantly there.
Certainly in that space, it was towards the tail end, and the rest, I'd say, we followed pretty closely our normal pattern.
Okay. Yeah, I guess, you know, what I'm trying to get to, and maybe everybody else is too, is just, you know, the orders have been pretty choppy, you know, for the last year or so.
Yeah.
Where they you know pick up and then they slow again. You know, is this something where we think that kind of a lot of your end markets are beginning to improve and the regions are improving, we get to more sustainable, less volatile, you know, order trends?
Yeah. I'd say, if you look at it, there is not necessarily a common theme across each business in each region. Some of the volatility that we've seen is a function of one particular business or one particular region. You know, the good news, when you aggregate it all up, it's generally less volatile than if we were focused just on one segment in one region. I think part of it comes back to what do you see from a macroeconomic perspective. I think we've always said that we'll outperform the macro economy, but we're not immune to it, so we kind of float on top of that.
I think if you look at the last couple of years, you've seen a lot of variability in the macroeconomy relative to expectations. Even this year, as you look to where we are right now, you know, you'll hear two pieces of good news and one piece of bad news. Everybody expects the second half of the year to be stronger than what we've seen so far in the first half of the year. The most recent data in the major areas around the globe has not been, you know, particularly strong.
I think where that impacts us the most, we talked about a little bit earlier here, is in the bigger investments, the bigger systems, orders, the things that are more construction and consumer durable related, where people, you'll step back when they see this kind of uncertainty. We can have, I think, some volatility is just a function of what's going on in the global economy right now.
Okay.
I'd say, in each of our businesses, the markets are a little bit different. You know, last year, the consumer nondurable part in our adhesives business, the overall consumption in that marketplace was pretty weak. You know, this year it's improved nicely, and we're seeing the benefit of that, and we're very well positioned everywhere to take advantage of it, and we are.
Okay. Okay, great. Yeah, thanks for that answer. Kind of along those lines, you mentioned again that the polymers business was gonna, you know, should get a pickup in the fourth quarter. Was it your fiscal quarter or the December year, and why was that, or why is that expected to pick up then?
Yeah. I would say we're seeing some improvement in orders now based on introducing new technology, based on building out facilities in emerging markets. We've got enhanced capability and lead time. What we're particularly referring to is the biggest impact on that business is in what they call a biaxially oriented film. Think about that as the multilayer film that is used in all of these plastic packages that you see in the grocery store for everything from you know drinks to detergent to motor oil. That's an area where there was substantial investment in 2011 and 2012 you know I think based on a projection of a more robust economy at the time globally and they overshot the mark.
We really expect to see that business be strong in the next couple of years. We'll start to see some orders this year. We're basing that on what we're hearing from the OEM channel, which tends to give us some insight into orders that would come to us based on projects that they're starting to work on. That's really what's given us some encouragement. Overall consumption on the plastic side has remained in sort of the 5%-6%, even in the up and down short-term macro environment. The projections from the folks in the industry that follow this are for pretty robust 2015 and 2016. That's why, you know, we're making the commentary, and I'd say our customer base would support that.
Okay, got it. Okay, thank you.
Our next question comes from the line of Greg Halter with Great Lakes Review. Your line is open.
Thank you and good morning.
Good morning. Good morning.
I wondered if you could discuss the current M&A environment and what you guys may be looking at there, if it's more focused on the dividend and the share repurchase, or if you're still looking for additional companies?
Yeah. I would say we always want to have a robust pipeline. We do. I would say we have a goal to have a significant amount of that activity be proprietary, and we're working on a number of things that fall into that category. As we said really last quarter and coming into the year, we kind of expected this year to be a year focused on completing the integration of the latest acquisitions, delivering on the synergies, getting ourselves positioned to take advantage of this growth we expect coming back, as I just mentioned, in the plastics space.
That we'd probably be looking at more sort of bolt-on kinds of things like we did with the product line addition in the medical space last towards the tail end of last year. We have a robust pipeline. From a priority standpoint in the near term, it's more likely to be share repurchase, which we talked about in this quarter, and we indicated last quarter that we expected to this year to be largely through our board commitment, which was around $200 million. We still have about $140 million left on that, but we're active through the whole quarter, in the second quarter.
When we have a strong dividend policy, we've mentioned in the past that we like to get that payout ratio up into the low- to mid-20s, and we're probably hovering around the high teens. We'd expect going forward to continue to see strong dividend increases like we've done the last three years. I'd say the priority short term is probably more around, you know, obviously, number one, to support our organic growth of our business. But it'll be more around the, probably the share repurchase and dividends. The M&A activity is likely to be more bolt-ons in the short term.
All right. Of that $53 million spent on the repurchase, how many shares were bought, and what's the, do you have the share count at the end of the quarter?
Yeah. The share repurchase activity, I believe, was about 700,000. In terms of the share count at the end of the quarter, we've got average shares and common share equivalents at the end of the second quarter of just under of about 64.5 million. That compares to close to 65 million at the end of the second quarter of the prior year.
All right. Relative to the four larger acquisitions, Kreyenborg, Xaloy, EDI, and Value Plastics, I wonder if you could run through each of those in regards to where you think you are in the integration of those companies.
Yeah. If you look at the, you know, Value Plastics is done. You know, we're running that in accordance with the strategy that we developed to run the product line, globalize the business, add some tuck-ins to it. As we mentioned earlier, we need to expand capacity to support the growth in that business. In the sort of polymer processing or plastics area, you know, over sort of a period of 18 months, we made four significant acquisitions, the latest of which is the Kreyenborg BKG acquisition. I would say we are through all of the critical sort of integration steps from a back office standpoint, from a run the business standpoint to make them part of Nordson.
I'd say we still, as we talked about, in the past, there's some things that are longer term. Optimizing our sales channels, you know, we prefer to go direct as much as we can. Some of those companies had direct in certain places and agents or distributors in others. We're going through a thoughtful process of doing that. We also wanna optimize the total offerings that we have now across that full melt stream concept. You know, that takes some time because we have to cross-train, align engineering organizations, you know, things like that.
Then on the supply chain, optimizing the supply chain, I think we're making good progress on things like our sourcing initiatives, but there's other things that we need to do to further optimize that, and it'll take some time, as well. I'd say we're good with all of these sort of critical run the business kind of activities and done the formal integration with the latest acquisition and now it's really moving that total capability to the vision that we had when we made these four acquisitions. That's a multiyear activity that we've talked about in the past.
Great. Thank you very much.
Our next question comes from the line of Liam Burke with Janney Capital Markets. Your line is open.
Thank you. Good morning, Mike. Good morning, Greg.
Good morning, Liam.
Morning.
Mike, can you give us a profit profile of both as you introduce or as the Freedom and Liberty products ramp up? Do you anticipate having profit margins similar to what the traditional adhesive products were?
We do. You know, I think our overall strategy as we've talked about in that business is continue to be the technology leader to introduce the, you know, latest, greatest, best capability and to price that in a way that we get paid for the capability, you know, but at the same time, are conscious of the position we have in the industry. Yes, we would expect those products to be, you know, equally profitable or maybe a little bit more profitable than our current product line based on the fact that they're newest, greatest technology with the most to offer.
Okay. On staying with adhesives, the numbers were strong on the revenue side. Orders were healthy. Are you seeing any change in the competitive front there?
No, not really. I mean, we've got, you know, good competitors in that space. I think, as you know, it kind of varies. You know, packaging is a little bit different than nonwovens. It's a little bit different than product assembly, and it varies by geography. We haven't seen any significant change in the competitive landscape. We've got good competitors, and, you know, our goal is to continue to enhance our business model, which means, you know, both investing in technology but also trying to be the best out there from applications, sales, and support and service offering. I think we do a very good job of that. Our team does a great job of that. You know, we're conscious that we've got good competitors, and we wanna stay ahead of them.
Great. Thank you, Mike.
Okay.
Our next question comes from the line of Matt Summerville with Jefferies. Your line is open.
Hey, good morning, guys. This is Joe Radigan on for Matt.
Hey, Joe.
Good morning. Maybe, can you give some more color on what you're seeing in China? You've called out softness there in recent quarters. Orders rebounded in Asia Pacific pretty nicely, although that was against a weak comp. Maybe what are your folks on the ground saying there about the tone of project activity and visibility? 'Cause I know it's been pretty choppy.
Yeah, I would say it's not too different than what we've been saying the last couple of quarters. That we do see good activity. I'd say in certain businesses, those things have come through. We've seen nice, you know, nice business come through on the adhesives front, particularly in packaging and nonwovens. You know, I'd say, you know, with the step-up in the mobile thing, we've seen orders come through on the technology space. I'd say on some of the consumer durable side, it's a little softer, and I think that's just a function of trying to, you know, understand where the government's going within China, what level of support they will provide or won't provide, the availability of credit.
You know, I still think there's a fair bit of uncertainty there. We have a good, robust project list. I think the bigger ticket items are a little slower to come through from an investment standpoint, but we still expect it to be a solid year in China. I'd say it is choppy still.
Okay. Maybe one more on the mobile piece of the business in advanced tech. More of a clarification, really. You know, the last product cycle in 2012, you saw very strong double-digit order and revenue growth for a couple quarters. You know, based on what you talked about and seeing this pickup of momentum here very recently, you know, could you see a similar type ramp based on that? Or is this more of a steady improvement given some of the saturation and you know, other stuff you talked about?
Yeah, I would say in a longer term, it's more of a steady improvement. I'd say it seems like we're sort of getting orders concentrated into a more narrow period of time than maybe we have in the past. It may be that the sort of cycles of when product offerings are coming out are coinciding a little bit more. I'd say it's more of a steady improvement along the lines of the comments that I made earlier around what we see as long-term trends. It does appear to get more concentrated from an order perspective in terms of timing within a year.
Okay. Thanks, Mike. I appreciate it.
Okay.
Our next question comes from the line of Mark Douglass with Longbow Research. Your line is open.
Hi. Good morning, gentlemen.
Morning, Mark.
Morning, Mark.
Can you discuss the dilutive impact of Kreyenborg to ADS margins, just to get a better idea of how the legacy business was doing, year over year on incremental margins?
Yeah. I'd say, you know, overall what we said is most of the businesses that we bought in that space had sort of mid-teen or so EBITDA margins, and we really needed to get those to sort of operating margins mid-twenties, and that was gonna take some time. I think Kreyenborg was in a similar place. They're, you know, having a good year. We're ahead of where we thought we'd be when we bought them. So that's certainly encouraging.
We have the opportunity over time to improve them just in the way that we have with other businesses by introducing the things that we're good at, you know, the continuous improvement, you know, some of the discipline around the marketing and product management and pricing. Then really using them as a nice fit in the portfolio in terms of product capability to leverage the melt stream piece. End of the day, they have the impact like the other businesses did, and over time, you know, our goal is to get them to that sort of mid-twenties sort of corporate average as we go forward.
Okay. In tech, why the restructuring charge in tech? What are you doing there? I mean, you invested more in tech last year.
We did and in different places, okay? What we're really trying to do is a couple things. Respond to the cycles more quickly and figure out how to do that in a better way. Two, as we optimize our overall global footprint, you know, in terms of building up places like Suzhou to support sort of the tiering structure there, we need to look at our global organization and optimize where we have resources and capability. That's part of what we've been doing.
Finally, in the tech ecosystem, you know, good to see the growth in your test platform and plasma. Does that look like it's pretty stable for a while? Should be pretty firm for multiple quarters?
I'd say, you know, the test piece, you know, has come back, particularly as we talked about last time with bond testers as a good indicator, and that continues to be solid. In the X-ray inspection, we're at a good position in terms of the capability that we have there. So our expectation is for that business to be solid. We haven't yet seen a big step up in some of the more traditional applications, although some of the things that we're seeing in the test side would give us some encouragement to that. So we're hopeful that's gonna continue to improve. There's some new applications on the surface treatment that we're engaged in that are helping drive that business, and we've got a nice set of product offerings there that support that.
Great. Thank you.
Okay.
Amanda, we have time maybe for one last question.
I'm showing we have a follow-up question from the line of John Franzreb with Sidoti & Company. Your line is open.
Yeah, just in industrial coatings. We haven't touched on it much. It seems to me like the margin profile was substantially stronger than a year ago at similar revenue levels. Is there something in the mix or structurally different that drove that margin gains year over year?
Yeah, Charlie, this is Greg. There was-
John.
Oh, I'm sorry, John.
That's okay.
This is Greg. It is a mixed story within Industrial Coating, not particularly significant difference in parts versus systems, but the types of systems were more of a standard system, if you will, than a fully engineered system. Product mix was a big driver there. What I would say is that we continue to improve the profitability of the business, so we've got a very robust effort on many fronts in that business, and we've made really good progress to date, but our goal is still further improvement there.
Great, guys. Thanks for the color.
Okay. That's gonna wrap up our Q&A period for now. This is Jim. I'll be around the rest of the day. If you wanna email me or call me, we can get some time together if you have follow-ups. Thanks for listening in, and everyone have a good holiday weekend.
Thank you.
Bye-bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.