Nordson Corporation (NDSN) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Nordson Corporation webcast for Fourth Quarter and Fiscal Year 2016. 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. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Jim Jaye, Director of Investor Relations, sir you may begin.

Thank you Kelly, and happy holidays to everybody listening. I am here today with Mike Hilton, our President and CEO and Greg Thaxton, our Senior Vice President and CFO. We welcome you to our conference call today, Wednesday, December 14, 2016 Nordson’s FY16 Fourth quarter results and our FY17 first 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 December 21, 2016, which can be accessed by calling 44-537-3406. You will need to reference ID number 25973581. 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 filing with the Securities and Exchange Commission that could cause actual results to differ. After our remarks, we’ll have a question and answer session. Now I’ll turn the call over to Mike for an overview of our FY16 fourth quarter results and a bit about the first quarter outlook. Mike, please go ahead.

Thank you, Jim. Good morning, everyone. First I would like to thank our global team for their outstanding work not just in the fourth quarter but for the whole year for sales, operating profit and earnings per share were all full year records for Nordson. Looking at the fourth quarter, our record sales were driven by organic growth of 13% compared to the same period a year ago. All three segments in most geographies contributed to this growth. Our team did a great job leveraging this increased volume and focusing on continuous improvement initiatives to improve our operating margin by five percentage points compared to last year’s fourth quarter. Diluted earnings per share increased 56% over the same period. Other highlights in the quarter include the acquisition of LinkTech Quick Couplings, which adds to our medical offering and an increased our annual dividend for the 53rd consecutive year. Overall, our fourth quarter performance was a great way to end the year and one of the very strong year for Nordson. Nordson’s momentum continues as we began the New Year. Our backlog is up significantly from the same time a year ago and our 12-week order rates are positive in all geographies and segments. In a few moments, I’ll offer some additional perspective on our performance, the macroeconomic environment and our outlook for the first quarter of fiscal year 2017. But first, I’ll turn the call over to Greg who will provide more detailed commentary on the fourth quarter and our first quarter guidance. Greg.

Thank you Mike, and good morning to everyone. I’ll first provide some comments on our fourth quarter and full year results before moving onto our outlook for the first quarter of fiscal 2017. Sales in the fourth quarter were $509 million, a 14% increase from the prior year’s fourth quarter. This change in sales included organic volume growth of 13% and a 1% increase related to the first year affect of acquisitions. Looking at sales performance for the quarter by segment, adhesive dispensing segment sales volume increased 3% as compared to the prior year fourth quarter. Our general product assembly, rigid packaging and non-woven product lines led the growth in the current quarter. Asia Pacific, Europe and the United States were the strongest regions. Sales volume in the advanced technology segment increased 32% from the prior year fourth quarter including a 30% increase in organic volume and a 2% increase related to the first year affect of the LinkTech acquisition. Organic growth was robust across the segments electronic systems and fluid management portfolios led by a demand for our automated and semi automated dispensing product lines. The growth was positive in nearly all geographies and was strongest in Asia Pacific and Japan. Organic sales volume in the industrial coatings segment increased 12% compared to the fourth quarter a year ago. Demand for our cold material dispensing in automotive and other durable goods end markets drove the growth. Growth was strongest in the Americas, the United States and Japan. Gross margin for the total company in the fourth quarter was 54%, a 1% improvement over the prior year driven primarily to favorable mix. As part of our previously discussed margin enhancement initiatives, we incurred onetime cost during the fourth quarter of approximately $6.4 million, mostly related to restructuring and severance as we worked through rationalizing our footprint within the adhesive segment. Restructuring cost associated with our margin enhancement initiatives are largely behind us at this point. We also incurred $211,000 of short-term purchase accounting charges in the quarter related to acquired inventory within the advanced technology segment. Operating profit in the quarter including these onetime charges was $111 million and operating margin was 22% or 23% on a normalized basis to exclude onetime charges. Reported operating margin in the quarter improved by five percentage points compared to the prior year through the combination of volume leverage, mix and the net effect of continuous improvement initiatives. Looking at operating performance on a segment basis, adhesive dispensing delivered operating margin of 24% in the fourth quarter inclusive of approximately $5.6 million of restructuring charges. Normalized operating margin within the segment to exclude these onetime charges was 26%. Within the advanced technology segment, reported operating margin was 26% including the $211,000 short-term purchase accounting adjustments for acquired inventory and $373,000 of onetime restructuring charges. The industrial coating segment delivered operating margin of 23% in the fourth quarter including $468,000 of onetime restructuring charges. Net income for the quarter was $76 million, fourth quarter GAAP diluted earnings per share increased 56% compared to the prior year to $1.31 or $1.39 on a normalized basis to exclude onetime items. We have included an earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain onetime items. The fourth quarter’s EBITDA was $128 million and cash flow from operations was $136 million. Free cash flow before dividends was $121 million reflecting strong cash conversion of 160% of net income. We have included a table with our press release reconciling net income to free cash flow before dividends. Capital deployment during the quarter included acquiring LinkTech to add to our advanced technology segments medical offering, increasing our annual dividend for the 53rd consecutive year and reducing notes payable and debt by $59 million. I’ll now provide a few comments on our full year results. Sales for fiscal 2016 were $1.8 billion, organic growth for the year was a robust 7% compared to the prior year, this is outstanding growth given the challenging macroeconomic environment of 2016. Full year gross margin was 55%. Full year operating profit was $388 million and reported operating margin was 22%. This operating margin is an improvement of three percentage points compared to the prior year, with full year incremental operating margin of 59%. Net income for the full year was $272 million and GAAP diluted earnings per share was $4.73, a 37% improvement over fiscal year 2015. Full year EBITDA was $459 million and free cash flow before dividends was $272 million or 100% of net income again reflecting strong cash conversion. In addition to funding organic and acquisitive growth initiatives during the year, Nordson invested $32 million to repurchase shares all during our first fiscal quarter, paid $56 million in dividends for a full year payout ratio of 21% and reduced leverage on the balance sheet from approximately 2.8 times trailing 12-month EBITDA at the start of the year to approximately two times at the end of the year. I’ll now move on to comments regarding our outlook for the first quarter of fiscal 2017. As we typically do, we provided our most recent order data both on a segment and geographic basis with our press release. These orders are for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis and with acquisitions included in both years. For the 12-weeks, ending December 4, 2016 order rates were up 17% as compared to the same 12-weeks in the prior year. Within the adhesive dispensing segment, the latest 12-week orders are up 8% as compared to the same period in the prior year. Orders were up in all product lines and were led by polymer processing and rigid packaging. Asia Pacific, Japan and the U.S. were strongest geographically. In the advanced technology segment, order rates for the latest 12-weeks are up 34% as compared to the same period in the prior year. Order rates were up in all product lines in all geographies most by double digits. Within the industrial coating segment, the latest 12-week orders are up 11% as compared to the same period in the prior year. Cold material dispensing equipment for automotive and industrial applications and powder coating equipment for consumer durable end markets drove this growth. The U.S., Europe and the Americas were strong geographically. Backlog at October 31, 2016 was approximately $274 million, an increase of 20% compared to the prior year with less than 1% of the increase due to the LinkTech acquisition. Backlog amounts were calculated at October 31, 2016 exchange rates. Let me now turn to the outlook for the first quarter of fiscal 2017. We are forecasting sales to be in the range of up 4% to up 8% as compared to the first quarter a year ago. This range is inclusive of organic volume of up 6% to up 10%, offset by negative 2% unfavorable currency translation effects based on the current exchange rate environment. Relative to current order rates, the sales outlook reflects expected moderation in order rates as we move through the quarter and some of the recent orders will benefit our second quarter. At the midpoint of our sales forecast, we expect the first quarter gross margin to be above 55% and operating margin to be approximately 18%. We are estimating first quarter interest expense of about $5 million and an effective tax rate of approximately 29% resulting in first quarter forecasted GAAP diluted earnings per share in the range of $0.74 to $0.84. In addition to this first quarter outlook, the following full year data points may be helpful for modeling purposes. For our effective tax rate, we are forecasting the full year rate to be about 29% based on current tax law. And finally, for capital spending in fiscal 2017 we are forecasting normal maintenance capital spending to be approximately $50 million. This capital-spending forecast does not include spending associated with our previously announced U.S. Polymer product line footprint consolidation where we will be exiting two loans and one leased facility and consolidating into one newly leased facility in Ohio.

Thank you, Greg. Our strong fourth quarter capped an excellent year where we outperformed relevant industries and most of our industrial peers. We are clearly seeing the benefits of prior investments in growth and margin enhancement initiatives and we continue to focus on these in fiscal 2017. As our performance against our 200 basis point operating margin initiative, I believe we’ve captured the majority of this in fiscal 2016, but we will continue to utilize the Nordson business system to further widen our operating margins. Our team deserves credit for serving our customers at the highest level and for continuing to optimize our business. Our first quarter outlook reflects our improved backlog, current 12-week order rates, typically seasonality and comparisons to prior year or organic growth was modest. We are very encouraged by our order rates we are seeing in all three segments particularly in the advanced technology segment where demand for our solutions is strong across electronic and medical end markets. Of course, our comps get more challenging as we move through the year and we remain cautious with regards to the overall macroeconomic environment. Longer term, we continue to feel good about the multiple opportunities we have to drive growth in all of our segments. Overall, our strategic priorities for the year remain pretty straightforward. We are focused on driving organic growth above global GDP. From an M&A perspective, we continue to target high quality companies in the spaces we have identified and we’ll continue to use the tools within the Nordson business system to drive operating improvement across the enterprise. At this time, we’ll be glad to take your questions.

[Operator instructions] And our first question comes from the line of Charlie Brady with SunTrust. Your line is open.

Hi guys, this is actually Patrick Wu standing in for Charlie. Thanks for taking my question.

Good morning, Patrick.

Good morning. I just wanted to -- just to take a quick look at operating margin. I think excluding one-time items it was around 200 basis points above last year. Can you guys maybe parse out what the contribution is for mix, pricing volume, and even NBS? I just want to get a better sense of that.

Patrick, you are talking for the year or just for the quarter?

Just for the quarter.

Well for the quarter, we are up about five full percentage points and if you look at that certainly, the volume leverage is a significant contributor. You know we do have better mix as associated with say more of the high-end dispensed products and particularly in the electronic systems business. And then you know I would say as it relates to our initiative to move our operating margins up a couple of 100 points, basis points structurally you know and now for the whole year I think we are probably well above 80% of the way there, so that obviously contributed. So if you look at it, it may be equal amounts across that mix of comments.

Right. And to be fair I do see the five points, but I was just speaking strictly to excluding restructuring. I think…

And it’s about -- if we excluded onetime items in both years it’s about a 400 basis point improvement.

Okay. And another question I had was, and can you remind us whether or not there is any seasonality involved in terms of order intake and I know 17% or 70% [ph] and that’s a great number, but I just looking back a couple of years, I don’t think that is the case but I do want to see whether or not seasonality played an issue there, and if it did, how much of that was part of the seasonality?

No, I would say no that is not a seasonality effect. I mean from order perspective seasonality typically would suggest that you know this time of the year we would be trending down with the holiday period coming I’d say down relative to the other three -- to the rest of the year. So peak is typically in the tail end of the third into the fourth quarter and it trails down. We are seeing that same kind of seasonal pattern, but I would say just much more robust orders right now based on really the things that we have been talking about all year and that is around growth, it’s the new product that we have introduced with some new applications and quite frankly its recapitalization based on technology improvement that is driving that, but there is not a I’d say year-on-year seasonal change that we are seeing this year.

Perfect. Thank you.

Thank you. And our next question comes from the line of Peter Warendorf with Wunderlich. Your line is open.

Hi guys, thanks for taking my question.

Good morning.

I just had a few quick questions on the segments. In the adhesive segment, how specifically was the polymer business in the fourth quarter and then in ATS segment, how did the Nordson Medical do?

Okay, I’d say in the fourth quarter, the polymer business was off a little bit, but it tends to be lumpy particularly with some of the larger projects that we do for the year. It was up but off a little bit in the fourth quarter, but as you saw from the commentary on order rates, really solid order rates in the first quarter there. And as it relates to the medical business, another strong year in medical business of solid and strong fourth quarter in the medical business, you know a function of continuing to add to the breadth of our product lines as well as globalizing some of the businesses that were primarily North America focus, so very strong growth in that segment across the year.

Great. Thank you.

Thank you. And our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.

Thanks, good morning and congratulations on a great year.

Thank you, Chris.

So you know even with the strong first quarter outlook, the revenue guide indicates a relatively slow backlog conversion multiples, so wondering if there is anything to understand there about backlog composition trends and bearing in mind that you have been beating on revenues for several quarters here now.

Yes, I would say a couple of things. As it relates to the backlog, we do have projects that we know are not going to be delivered in the quarter. And you know sometimes our customers will place large orders with stage deliveries and we’re seeing some of that, so we factor that in. As I was mentioning earlier, we do have this sort of seasonal period where we get through closer to the holidays things, slow down a fair bit from an order entry perspective and so we are factored in sort of our historical view on that. So I’d say nothing unusual there, just fairly typical other I’d say you know given the relatively strong systems orders for the year and solidly in the fourth quarter some of those we know are not going to be delivered in the first quarter.

Okay. And you know ATS has had pretty killer year, better mobile cycle, but also you are clearly expanding your markets there, so there is some new favorable dynamics I would think. So could you help us conceptualize how to think about the comparisons as the year goes on in terms of modeling?

Yes, so the primary driver for the electronics part of ATS over the last number of years that we have talked about has been mobile, and that continues to be the biggest driver. But as we talked about in the last couple of quarters, we’ve sort of spread the customer base there to take advantage of the initial automation of the Chinese mobile customers. And we’re seeing that on the dispense side and we are starting to see some traction on the inspection side, which is encouraging. And in addition we’ve done some things through technology to create some opportunities for on wafer dispense and inspection and we’re continuing to see traction there. So from our perspective, the diversification efforts are continuing to play out well here for us in the near term. We still potentially have the wavering effect from how much change year-over-year has gone into the mobile segment and at this point of time, it is really hard to access that. You know as we’ve talked about in the past we do a lot of development work with end customers on this during the period of time but through I’d say February or so and then really it’s towards that second quarter that we’re getting a real sense of how many of those are going to go forward. So I’d say we are still in that development period, the development is fairly robust but we don’t have a clear crystal ball on which projects are going to hit. Now outside of the electronics piece, as we talked about just a moment ago, medical is doing well, we continue to broaden and diversify that business including this last acquisition that broadens our quickens [ph] our product line. And in a general industry area, we are seeing an uptick in improvement in things like 2K products for construction, the acquisition of Liquidyn last year filled in a nice gap in our prior client where we are really seeing significant global growth with that business and some of the other new developments from a product standpoint. So the areas outside the electronic system we are trying to continue to diversify and see good traction. The electronics piece, we’re diversifying but we still have the impact of the mobile piece and it’s hard to say beyond the next quarter where we are at there.

Okay, that’s a really helpful explanation on the mobile piece. I guess within mobile are adjacent to it, you know we’ve seen the pattern in years past, but the Chinese piece is clearly gaining some scale I think, is that a more dramatic factor for you?

That’s certainly becoming more relevant as we start to see more adoption of automation and there sort of our tiered offering approach has really gotten some good traction. So, we do think that the key suppliers that are going to be around from a China perspective will continue to automate and we still there are opportunities there to sell critical equipment to allow them to do that.

Okay and maybe the same answer, my last one I promise. Any view to the sustainability and mix?

You’re talking about across the company or….

ATS, sticking with ATS here.

Yes, well I’d say in the long run we still think things like medical are going to grow faster than other elements of the business. We do think that we’ll see growth in the electronic systems piece but it’s going to come more from our efforts to broaden and diversify and less from smartphone, things like smartphone penetration. As we’ve talked about in the past, as we look at year-over-year this year and that particular segment having more of the dispense type business where we provide more of the value add had helped our margins. And so I would say that could continue to help if we see dispense continuing to be as high as it has been, but quite frankly we like our margins in the test inspection business and we are looking to drive that businesses well. So I’d say there are opportunities for continued improvement in the mix, but again the mobile piece will determine if we have fluctuations quarter-to-quarter and year-to-year.

And Chris, I would just add that this is Greg. We do see continued good growth rates in medical and from an inorganic perspective; we’d like to see that become a bigger mix of the portfolio as well to help with some of the cyclicality aspect of that segment.

Okay, thanks for the understanding guys.

Thank you. And our next question comes from the line of Jeff Hammond with KeyBanc. Your line is open.

Hey guys, this is James Picariello on for Jeff.

Good morning.

Can you talk about in what businesses particularly you expect this moderation and orders during this seasonal low that you talked about. So, what business is there? And then also in terms of the backlog timing, you said that you expect some business to flow through in the second quarter, can you also just provide color around what segments are positioned to benefit there?

Yes. So I would say, all of the businesses see this seasonal sort of slowdown from an order intake, just because of the holiday, I mean we think about our -- where we are right now. We’re in the middle of December, a lot of our customers shutdown. I would say, it’s probably more impactful on our coatings businesses and potentially some of the other businesses where we have bigger systems, order is because people tend to wrap up the year and then it’s usually well in the January before they’re through their budgeting for [ph] the next year, many of our customers are on the calendar basis for their capital improvement. So I’d say, those are the areas that tend to slow down. And then I’d say, on the businesses that has sort of bigger orders, we can have some of those in coatings, but it’s more likely it will be in the electronics area where customers has staged orders at polymer area or we can have some bigger projects. And then within our adhesive area some of products assembly business which tend to be bigger systems order could also stretch out in time, because of the nature of the project. So it varies across. I would say, a lot of our core packaging kinds of activities at nonwovens is tend to be delivered in the quarter and some of our more standard products and the other businesses tend to be deliver in a quarter, and of course the other part side of the business is generally all the quarter. So it’s basically the larger systems orders and those orders that are placed 50 at a time, 100 at a time with staged deliveries and those are the areas that I mentioned.

Okay. And then, regarding restructuring, the benefits are clearly -- clearly have shown throughout this year. You did make the comment that restructuring actions are largely behind the company now in terms of the costs. Are there any additional actions that could be taken in FY 2017? And how you are thinking about emphasizing the savings bucket, incremental savings bucket for this upcoming year?

Yes. I would say, the primary activity that we see going that’s significant in the next year is really this consolidation in the U.S. of three polymer facilities into one and that will be going throughout the year. As far as sort of charges, I think we’re largely beyond the charges. As far as the benefits, some of the benefits may stretch out into the first quarter of 2018 and as we build out and then transfer to that facility. But I don’t see any substantial charges related to the programs that we’ve talked about in the specifics sort of structural margin improvement. At that said, we have an ongoing robust program in our Nordson business system to drive year-on-year continuous improvements and we have strong plans in place there, kind of our minimum goal there is offset any cost portion and over and above that we’re looking for some benefits.

Okay. And just last one on capital allocation. The bias this year has been on debt repayment, so how does the M&A pipeline look and how are you balancing your debt repayment versus acquisitions and even buyback at this point, how you’re thinking about those three?

Yes. So I would say, as we typically thought about primary number one is to support organic growth and I think Greg talk a little bit that including the activities we have going on for restructuring. Second is our dividend piece, that’s pretty modest. So then when you get back to that, M&A is a key priority. We still have the four areas that we’re interested in along with anything that we could to tuck into our core business, the area that has probably the deepest pipeline is still in the medical area. We made one small acquisition this year. There is small acquisitions and some larger ones out there that would be opportunities. And I’d say also in other areas where we continue to have interest is in the coal material space. I think then Greg talk little bit about how that’s doing from an order and performance perspective. So, I’d say, the pipeline is pretty robust. I’d say the market is relatively full price kind of opportunities here and we’ve got pretty clear views on what we’re interested in and what we’re willing to pay, but I would say, we’ve got a pretty robust pipeline. I’d say on the share buybacks, we still have an open share buyback authority from our board. As Greg mentioned, we haven’t done anything since the first quarter and we’ll continue to opportunistic there.

Thanks guys.

Thank you. And our next question comes from the line of Matt Summerville with Alembic. Your line is open.

Hey, morning. Thanks. Mike, if we just taken into account kind of conversations you’re having with your customers at this point, and you sort of touched on this a little bit, but what does that suggest you about the prospect for advanced technology to generate organic growth in the mid single-digit or better range again in 2017 relative to how you performed in 2016? And I guess, do you get the sense that you have the opportunity to break this sort of every other year kind of where you get high single to low double-digit organic growth that it flatten out. Can you just sort of talk about that in a little more granularity?

Yes. What I would say, at a high level as Greg mentioned earlier, there is still some cyclicality to that business, and as long as it sort of going to driven, and I’ll talk about half of the advanced tech piece that’s focused on the electronic business. As long as that is kind to be linked strongly to the mobile piece you’re going to have some of that, and quite frankly we’ve taken advantage of all advances in the mobile segment, but it does provide some fluctuation. So, as we’ve talked on that particular piece it comes down to how much change you’re going to see year on years, for long time it was about penetration smartphone. We’re pretty much there in terms of the overall market penetration, I think that with the perhaps with the exception of large market like China and maybe in the future growing market like India. But we’re pretty close to being there from a penetration standpoint. So it comes down to change and that we’ve talk in the past it not just sort of form factor change or feature change, it can also be process change like water proofing which drove some activities this year. So, I’d say, all the projects that we’re working on with our critical customers are around change elements. And it’s hard for us to predict what they are going to launch on going forward. So that’s still unknown. I think the things that can counterbalance that are couple of fold. One, new products can help from giving our customers greater value and benefit and potentially allowing us to increase our wallet share. Two, we have some new application, so we talked a lot about wafer side of things where we’re going into that through dispense for three dimensional, 3D type shifts and as well as inspection for that. And then, the tiering piece is really being focus – as a focus for the company across all markets, but in particular in this end, we’ve really seem traction as we mentioned last quarter with three of the four Chinese mobile guys and what we see from them is more interest in doing more automation, more interest in doing more sophisticated types of processing, so that certainly encouraging. Obviously, you have to pull the trigger on it and place the orders throughout the year, but that’s encouraging. So those are the kind of things we’re trying to do to counterbalance that sort of on/off cycle that we’re seeing for the last years in the mobile side. What that balance in the end looks like is I’d say it’s still hard to tell right here. In the long run we do think we’re going to grow above the market because of the things like new products, new applications tiering to give us growth more robust than what you’ll see in the industry. In the short run its little harder to predict. Obviously, we’re off to a good start here on that business, but the critical timeframe on the mobile phone piece is really as we get close to the end of the second quarter. And then when you look at the other part of the business, the fluid management part of the business, medical, it’s all about new products and increasing the breath of our product offering. And then in the general industry area it’s driving our offerings there. We’ve done a complete head to toe refresh of all of our dispense products. We’ve upgraded our tabletop automation products. We’ve added things like Liquidyn and they’re getting good traction and allowing us to globalize, and we’ve introduced some really new technology that both the electronics organization and the fluid management organization using on these very high, small volume dispense applications that we’re getting traction on. So those are all of things that we’re trying to do to buffer it. I can’t say that that’s going to be -- we’re not going to see some year on year up and down depending on how the mix works out there.

Got it. That’s helpful. And just as a follow-up, within just thinking about advance tech, can you talk a little bit about what you saw from a mix standpoint on a sequential basis from Q3 to Q4? And then sort of works that into, as we think about how to model Q1, how would suggest we look at advanced tech in the sense that if you just can go back the last couple years, your operating margins in Q1 have varied from say, 7% to 20%. So there’s a pretty big gap there. I guess how would you suggest to we consider modelling Q1 in that regard?

Yes. I’d say, the things that have created the volatility in Q1 have been number one volume. So, in some cases where volume has been soft, I think you know we’ve got strong incremental margins in the business and in the very short term you know this is a business where we can move resources up, down pretty quickly. It’s hard to offset. So volume is the number one piece. And then two, mix in the business as I mentioned earlier, more dispense is better only because we have more value add on dispense side than we do on the inspection -- on the inspection side. So those two things tend to drive more than anything else what we see in the quarter. And so, like I said, we’re off to a good start with the order pace that we have and the backlog that we have right now. And the other question on the third to fourth quarter, are you specifically talking about margins or what you…

Yes. I mean, I’m just looking at a $10 million round number, sequential revenue decline in the $14 million, $15 million sequential operating profit decline. I’m just trying to understand what some of the current pluses and minuses are on that from a mix standpoint if you will?

Yes, Matt. This is Greg. That’s going to largely be within that segment product line mix whereas Mike alluded to, we’ve got different margin profile on different product lines than others and then there is going to be some volume leverage as well.

Okay, great. Thanks guys.

Thank you. [Operator Instructions] Our next question comes from the line of Matthew Trusz with Gabelli. Your line is open.

Good morning, gentlemen. Thank you for taking my question.

Good morning.

So, you’ve spoken to the trend of recapitalization driving growth. Can you speak to the extent to which this is concentrated in that sort of traditional ADS North America area versus a more board opportunity for you?

Yes. I mean, certainly one the key areas for us is the core adhesive business where we have such a large installed base. But we’ve seen that in our fluid management business as an example, with this whole new launch of new products and refresh and augmentation to our valve line and the addition of product portfolio we’ve seen a very strong value proposition to encourage our customers to upgrade to the latest technology, so that’s another area that where we see that. I think when you look at even parts of our electronics area, it’s around the performance of new products and what they can do to meet the challenges of the customers are looking at. But I’d say, it certainly been in those two areas that I’ve highlighted.

And Matt, it’s a global opportunities for us as well in the adhesive segment as well is that recap opportunity not just in the U.S. but globally.

Great. Thank you. And then second from me, at a high level how do you think about the political dynamics that you might faced next year on this customer confidence changed at all over the last couple of months? And how you’re thinking about the early possibility of repatriating some foreign cash or any changes to tax policy?

Yes. So I would say, let me try and address a couple of those , from a for us from a repatriation of cash its’ not a big issue either way, because we have very small cash balance and we don’t really have anything of substance trapped outside the U.S. So for us that’s not necessarily an issue. What I would say though is a couple of things that are being talked about would be helpful for our customers but from an investment standpoint, so certainly overall our corporate tax rate would help some of our customers in the U.S. and we have 70% of our business outside the U.S. so we are taking advantage of growth in all of those areas, but it would certainly help some of the U.S. customers. And I’d say some of the areas around de-regulation would be helpful as well to customers in the U.S. and potentially increase their thoughts around investment. I do think there were some areas like our powder business this year where we saw customer’s kind of delaying. They tend to be bigger system orders delaying investment to see how the election play is played out and we’ve seen a near term uptick in that business, but I’d say too early to tell, certainly anything that drives growth more is going to lead to more investment which is going to be a good thing for us. So if it increases our customers confidence and leads the investment that will be a plus and we are really everywhere with all the critical customers to take advantage of that. But it’s pretty early out in the process.

Thank you.

Thank you. And I’m showing no further questions at this time. I would like to turn the call back to Mr. Jaye for closing remarks.

Thank you Kelly and thanks everybody for joining us on the call today. I am available remainder of the week if you have any follow up questions and thank you again. Appreciate your interest. Thank you.

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