Nordson Corporation (NDSN) Q3 2018 Earnings Conference Call Transcript

Nordson Corporation (NDSN -1.45%)
Q3 2018 Earnings Conference Call
Aug. 21, 2018, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Nordson Corporation webcast for third quarter fiscal year 2018 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 should require assistance during the conference, you may press * then 0 on your touchtone phone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Lara Mahoney, Vice President of Corporate Communications and Investor Relations. You may begin.

Lara Mahoney -- Vice President, Investor Relations & Corporate Communications

Thank you, Norma. I'm here with Mike with Mike Hilton, our President and CEO, and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, August 21, 2018, to report Nordson's fiscal year 2018 third quarter results and our fiscal year 2018 fourth quarter outlook.

Our conference call is being broadcast live on our web page at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until September 4, 2018, which can be accessed by dialing (404) 537-3406. You will need to reference ID number 9285137.

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 on the quarter, we will be happy to take your questions. With that, I'll turn the call over to Mike.

Michael F. Hilton -- President and Chief Executive Officer

Thank you, Lara, and good morning, everyone. Thank you for joining Nordson's 2018 third quarter conference call. Nordson delivered solid results despite challenging comparisons to our prior year's third quarter, where total company sales increased 20%, inclusive of 11% organic sales growth. Strong organic growth during the quarter within two of our segments was offset by challenging comparison of the advanced technology segment. Our prior year organic growth was 18%. Our commitment to delivering the best technology solutions while employing continuous improvement initiatives drove bottom line performance, generating operating margin of 23%.

Free cash flow before dividends was $118 million, which reflects strong cash conversion of 124% of net income. Our base business is strong and we remain focused on bringing value to our customer in the divers end markets that we serve. Looking ahead to the fourth quarter, our guidance reflects strength in adhesives and medical product lines, offset primarily by lower demand for advanced technology dispense product lines that serve the electronics end markets and automotive cold material product lines.

For the full year, we are on pace to deliver another consecutive year of organic sales growth, which is a reflection of the stability of the end markets we serve and our ability to drive initiatives that lead to organic volume growth. I'll speak more about our outlook in a few moments, but first I'll turn the call over to Greg to provide a more detailed perspective on the third quarter, as well as our guidance for the fourth quarter and the full year.

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning to everyone. I'll first provide some comments on our third quarter results before moving on to our outlook for the fourth quarter of fiscal 2018. Third quarter sales decreased 1% from the prior year's third quarter, inclusive of a decrease of approximately 3% in organic volume, 1% growth related to first year effective acquisitions, and 1% growth related to the favorable effects of currency translation as compared to the prior year's third quarter.

Organic sales volume was in line with our guidance, as we expected moderation against last year's results, where all segments demonstrated strong organic sales growth. Within the adhesive dispensing segment, organic volume increased 3% on top of 6% organic growth in last year's third quarter. We are pleased with the place of the end market demand across all product lines. Within the advanced technology systems segment, organic volume was down 11% as compared to the prior year's third quarter organic growth of 18%.

With the exception of those product lines facing the most challenging comparisons to the prior year, namely dispense and surface treatment product lines serving electronics end markets, demand was robust during the quarter for tests, inspection, and fluid management product lines, including medical components. Within the industrial coatings segment, outer painting and container coating product lines drove this quarter's organic sales growth of 6% compared to the prior year.

Moving down the income statement, gross margin for the total company was 55% in the quarter, operating profit was $136 million, with reported operating margin of 23% in the current quarter. As discussed in previous earnings releases, we have been incurring incremental costs associated with the consolidation of certain adhesive facilities. The impact of this effort is approximately $7 million year-to-date. Specific to the third quarter, incremental costs were approximately $2 million. In the fourth quarter, we're estimating the incremental costs will be about $1 million.

On a segment basis, adhesive dispensing delivered strong operating margin of 28% in the quarter, or 29% to exclude one-time restructuring charges of approximately $1 million related to the facility consolidation effort. Within the advanced technology systems segment, reported operating margin was 25% in the third quarter. The industrial coatings segment reported operating margin was 22%, which is up 160 basis points compared to the prior year, primarily related to improved sales mix and our deployment of tools from the Nordson Business System.

On a total company basis, net income for the quarter was $95 million, and GAAP diluted earnings were $1.61 per share. EPS was reduced by $0.02 per diluted share from the $1 million non-recurring restructuring charge mentioned previously. EPS benefited by approximately $2 million, or $0.03 per diluted share from discrete tax benefits. A reconciliation of GAAP earnings per share to non-GAAP adjusted earnings per share is included in the financial exhibits of our press release.

We delivered strong third quarter EBITDA of $163 million, or 28% of sales. From a balance sheet perspective, net debt to trailing 12-month EBITDA was 2x at the end of the third quarter, as we have successfully de-levered from the Vention acquisition. Our press release includes financial exhibits, reconciling net income to free cash flow before dividends, and adjusted free cash flow before dividends, as well as EBITDA and adjusted EBITDA.

I'll now turn to the outlook for the fourth quarter of fiscal 2018. We're forecasting sales to be in the range of flat to down 4% as compared to the fourth quarter a year ago. This outlook includes organic volume to be in the range of up 1% to down 3%, 1% growth from the first year effective acquisitions, and an unfavorable currency translation effect of 2% based on the current exchange rate environment as compared to the prior year. Our guidance reflects strength in adhesive and medical product lines, offset primarily by lower demand against very challenging comparisons for advanced technology dispense product lines serving electronics end markets, as well as automotive cold material product lines within the industrial coatings segment.

At the midpoint of this outlook, we expect fourth quarter gross margin to be about 54%, and operating margin to be approximately 22%. We're estimating fourth quarter interest expense of about $8 million, and depreciation and amortization expense of about $27 million, resulting in fourth quarter forecasted GAAP diluted earnings in the range of $1.38 to $1.54 per diluted share. We expect EBITDA to be in the range of $143 million to $155 million.

Consistent with our comments in the February earnings call, our estimated effective tax rate for the fourth quarter and full year based on current tax laws and our jurisdictional mix of income is approximately 25%. With that, I'll turn the call back over to you, Mike.

Michael F. Hilton -- President and Chief Executive Officer

Thank you, Greg. Again, I'd like to express my appreciation to our outstanding global team. We knew we were facing challenging comparisons this year and the team continues to deliver growth. I'm particularly pleased with the growth we've generated in our medical products lines, which has been a primary area of focus for our corporate development team, helping to drive top line growth and offset the cyclicality of the electronics systems product line within our advanced technology segment.

For the full fiscal year of 2018, at the midpoint of our guidance, we expect to generate total company organic sales growth of about 2%. This is growth on top of 8% organic growth in fiscal 2017 and 7% organic growth in fiscal 2016. Our ability to deliver organic growth again this year highlights the attractiveness of the end markets we serve, our ability to capture growth initiatives, and our ability to continue to meet our customers' expectations.

We also remain focused on delivering value to our shareholders. Earlier this month, we announced a dividend increase of 17%. This marks the 55th consecutive year of annual dividend increases, ranking us 14th among publicly traded companies for the longest running record of annual dividend increases. We take pride in returning a portion of our cash flow to our shareholders and we appreciate your continued support.

Complementing our dividend increase, our other capital deployment objectives remain consistent. We'll continue to prioritize acquisition opportunities in our targeted markets that will help drive our strategic vision for long-term growth. We're focused on finishing strong with another good year of organic sales growth, enhancing bottom line results through continuous improvements using the Nordson Business System, and providing superior service and technology to our customers. With that, we'll pause now and take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, if you have a question, please press the * then 1 on your touchtone phone. If your question has been answered or you would like to remove yourself from the queue, you may press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Christopher Glynn of Oppenheimer. Your line is open.

Christopher Glynn -- Oppenheimer -- Analyst

Good morning. Just wondering at ADS, as you had the period of the lower mobile demand, as that plays out, how would you describe the pipeline of your field testing activity across various applications within those markets as informing your expectations for waves of future innovation to drive demand for you guys?

Michael F. Hilton -- President and Chief Executive Officer

At a high level, I think as we talked about in the beginning of the year, we said this is likely to be a more challenging year, particularly in the mobile segment and that's sort of the way it played out with modest volume growth and not a lot of innovation. That's kind of the way it played out. If I look at the various segments that we're involved with, I think the things that will drive mobile in the future will be the move to 5G. That has some impacts on what goes into mobile devices, particularly phones. There's some other areas around RFI shielding and so forth that we see as opportunities going forward in addition to any other innovation that our customer would put into the phones.

We continue to see strong growth in the auto and electronics side of things, as our customers are putting more cameras and more sensors into the cars. And, ultimately, we think long-term as you move closer to autonomous driving, there's going to be more input to the cars and that'll play well for us. Then, as we mentioned a couple of times here over the last year, we're doing more on the tail end of the semiconductor side, with both dispense and inspection, and we think that'll continue to grow over time.

So, we knew coming into the year this was going to be a challenging year. If you look at our guidance through the fourth quarter, we're likely to be flat to modestly down in that electronics portion of the segment. So, our diversification efforts have helped us mitigate a pretty significant decline in the dispense business. We're not going to be quite there, but it's helping to do that. Then, obviously, the other parts of that segment, the medical business, in particular, is growing very nicely and meeting our expectations there.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Then on the geographies, can you help us understand the magnitude that Japan declined in the quarter versus overall Asia Pac or Asia Pac extra Pan, much more moderate softness. What differentiates Japan in terms of the higher volatility there?

Michael F. Hilton -- President and Chief Executive Officer

Yeah, I think it's related again to the electronics side of the business. If you think about a lot of final assembling going together in China, but a lot of component manufacturing being outside China, Japan is one of the key areas where we see a lot of component manufacture. That's really related to the component manufacture going into the phone lines.

Christopher Glynn -- Oppenheimer -- Analyst

Great. Thanks for that.

Operator

Thank you. Our next question comes from Charlie Bradley of SunTrust Robinson Humphrey. Your line is open.

Charles Brady -- SunTrust Robinson Humphrey -- Analyst

Good morning, guys. Charlie Brady. Mike, some more thoughts on the Nordson medical business. You touched a little bit on the growth rate you're seeing there. It sounds like that business positioning today relative to where it's been over the past couple years and some of these new acquisitions, but it sounds like the growth path of that business has picked up a pretty decent amount and the amount of innovation coming out of that has picked up. Can you talk about the efforts you guys have made to really more focus on that business in terms of organic development, not just the acquisition stuff you guys have done?

Michael F. Hilton -- President and Chief Executive Officer

I think that's a good point, Charlie. There's a lot of new products that are coming out of our medical business. I think one of the things that's helps with the acquisition we made last year with the Vention business and the restructuring we've done along the Vention model, there's a sort of design and development pipeline on the front end. It really gets us in early with key customer. Not only the large customer, but some of the emerging innovators. What that allows us to do is innovate our systems and our components around their desires and where things are heading.

A big focus is around minimally invasive procedures. When you think about what the fastest growing part of the medical device segment is, it is around minimally invasive procedures. That's heart and lung and brain, and some spinal cord and other vascular areas. And our design and development capabilities and our components fit nicely into those end markets. So what we have now is a more complete set of offerings that allows us to participate in more opportunities. So, we have a strong pipeline there and we're introducing a lot of products to support the growth there and we're excited about what we see.

Charles Brady -- SunTrust Robinson Humphrey -- Analyst

That's helpful. Thanks. Just switching gears here on the typical question here on industrial calls, price costs. Are you guys seeing raw material inflation and pricing as a put through? Can you just talk a little bit about what you're experiencing in terms of that?

Michael F. Hilton -- President and Chief Executive Officer

Yeah, so there are some raw material increases that things like steel and aluminum that we see. Our sourcing team has done a nice job of mitigating the impact there. We've also been able to move some pricing to, I'd say largely to this point offset the impacts that we've seen. There is some cost push there that is atypical that I think we've been able to offset.

Charles Brady -- SunTrust Robinson Humphrey -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Matt Summerville of D.A. Davidson. Your line is open.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks, morning. First, could you sort of do a walkthrough in terms of what you saw in the quarter across the four pieces of the adhesive business? I'm talking about rigid packaging, polymer, non-woven, and product assembly? And, I guess, looking out at least in to the fourth quarter, even into early next year what your overall outlook for those businesses is?

Michael F. Hilton -- President and Chief Executive Officer

If you look in the third quarter, I'd say in our core business, it was pretty solid, Stronger packaging and product assembly. A little soft in non-wovens. But that you can see quarter-to-quarter movement there based on big projects. So, I don't read anything into that. With pretty strong comps to prior year of about 6%. I'd say, again, our plastic product lines, pretty solid performance in the quarter across most product lines within our plastics business and building a strong backlog in that particular area to the point that we're seeing some lead times extend a little bit. Not only for us, but some others in the industry. So, that's encouraging to see the backlog there build across the plastic component piece of things.

Matt Summerville -- D.A. Davidson -- Analyst

Then just as a follow-up, while I recognize you guys, given sort of the short-cycle nature of the business, you don't really guide beyond the next quarter. Having said that, to your point earlier, given some of these comparisons that you're facing, specifically the 50% plus comps you're facing in advanced tech in the fiscal third quarter of '19, is there any comment you might make as to whether or not you feel the Street at this point is effectively handicapping or capturing that comp?

Michael F. Hilton -- President and Chief Executive Officer

Obviously, the comp is out there. I think most folks recognize that. I can't really comment on whether everybody is looking at that. But I'd say if we step back, and this is where quarter-to-quarter kind of movements can maybe give an improper indication of how the business is going fundamentally. If we step back and look year-over-year, this is, as I said earlier, for the electronics business, this is a challenging year, but we're going to be close to flat, offsetting a pretty significant drop in mobile dispense, with the efforts that we've had to diversify both from a customer and an applications standpoint and the strength of the other parts of our electronics business.

Then I think the continued growth in medical and general industries activities are going to more than offset what we've seen there, which I think is pretty good performance here. But you can see these swings quarter-to-quarter because we can't control when our customers are going to place orders. What we can control is how we respond to those and take advantage of it. So, I think if you look at annually and over a cycle, you're going to see this business continuing to grow. In the short-term, there's more volatility and we're trying to mitigate that with our diversification efforts.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks, Mike. I'll get back in queue.

Operator

Thank you. Our next question comes from Chris Dankert of Longbow Research. Your line is open.

Carl Shem -- Longbow Research -- Analyst

Good morning. This is Carl Shem on for Chris. Just on the facility consolidation, do you have any updates on the timing and the expected benefits there?

Michael F. Hilton -- President and Chief Executive Officer

We're looking at, by the end of the calendar year to be through the consolidation effort, the primary effort is in the U.S., although we have some effort in Germany, as well. But we should be through both of those by the end of the calendar year. I think, as Greg mentioned earlier, he's highlighted what the additional cost that we've seen this year as a result of the consolidation, we'd expect that to go away next year. In the long run, we'd expect to see some more efficiencies to come out of the new facilities as well. But right now, we're still in the middle of the final transfers and ramping up the new facilities. So, not ready to project efficiency improvements beyond that at this point.

Carl Shem -- Longbow Research -- Analyst

Okay, great. Thanks. Any update on the mid-tier product offering in growth in ADSPT, ADS there?

Michael F. Hilton -- President and Chief Executive Officer

Did you say in adhesives? Yeah, so in adhesives, we've seen some nice growth in our -- despite my former comment here -- some nice growth in the lowest tier of the non-wovens business, as we've talked about that before. We're into a group of customers we haven't captured before. I think both from and end customer standpoint and an OEM standpoint, we're seeing nice growth there beyond what we had expected for the year, so that's very encouraging because in the end, they'll move up the line. So, I think that's good. I'd also say in adhesives we've added to our systems additional measuring capabilities in our packaging business, which our customers find very helpful and the material suppliers also find very helpful in demonstrating the benefits not only of our equipment, but of their materials. We're working closely with them. I think that's encouraging as well.

Carl Shem -- Longbow Research -- Analyst

Great. Thank you.

Operator

Thank you. Again, ladies and gentlemen, to ask a question, please press * then 1 on your touchtone phone. Our next question comes from Matthew Trusz of Gabelli & Company. Your line is open.

Matthew Trusz -- Gabelli & Company -- Analyst

Good morning. Thank you for taking my question. Are you seeing tariffs or trade rhetoric more broadly impacting your customers in a way that's impactful to your business? And overall, I'd wonder what is your overall business confidence and macro outlook now and has that evolved at all over the last three months since we last talked?

Michael F. Hilton -- President and Chief Executive Officer

I would say it's hard to say that we've seen any significant impact on the tariff discussions to date. I would say in general, projects are proceeding the way they would normally proceed. I think the broader discussions about more aggressive tariffs, particularly with China and China with the U.S. is a little bit more concerning and could have some broader impacts. We're encouraged to see there is some discussion going on right now, but it's hard to predict where that's going to head. I'd say our view of the overall macro economy hasn't really changed. I think in the last quarter we talked a little bit about the U.S. being stronger than it has been for the last two or three years.

However, Japan and Europe are still growing, but at a softer rate than we certainly saw last year. China is hanging it at about the same rate as we saw last year. Certainly not improving. The one thing that has changed significantly and whether that's a function of the tariff discussions or a function of federal reserve policy is currency has flipped around as we look going into the next quarter from being a tailwind to a headwind. So, that's probably the one thing at this point looks a little bit different. It's hard to predict how that's going to go forward as well. But I'd say sort of the outlook we saw three months ago is pretty similar. I'd say there is some added concern if the tariff piece escalates more.

Matthew Trusz -- Gabelli & Company -- Analyst

Okay, thanks. Then with automotive, how much visibility in that end market do you have and how do you feel about cold dispensing opportunities as we look forward to next year on weighting new platforms or otherwise?

Michael F. Hilton -- President and Chief Executive Officer

I would say we have a pretty good idea of projects that are planned? I'd say not all those go ahead. And so if you about it, we talked about this last time. I think we saw global platform peaks in '16, modest decline last year, and more of a decline this year. It's hard to tell exactly what the cycle is going to be on that. I think obviously a drive to more efficient pieces is important. But I would say one of the areas that we're pursuing in our cold materials side of the business is a focus around the electric battery side, both for the automobile side of things, but also for stage capability.

We've seen some nice growth, although relatively modest in terms of total revenue this year, but that's an encouraging longer-term opportunity for not only our cold materials, but a number of our businesses. Then in the cold material space, we're also doing some work in the aerospace side. I'd say the whole qualification process there is taking longer than we would've expected, but we see some good opportunities there as the industry looks to drive automation to help them with their backlog of orders and to effectively increase their capacity. So, those are two areas that we see as growth opportunities for that part of the business as well.

Matthew Trusz -- Gabelli & Company -- Analyst

Great. Thank you for the time.

Operator

Thank you. Again, ladies and gentlemen, to ask a question, please press * then 1 on your touchtone phone. I have a follow-up from Matt Summerville of D.A. Davidson. Your line is open.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. I'll fire off a couple more. With respect to ICS, all year really very good incremental margins in that business. Can you talk about what's driving that? Is that mix related with some of that auto stuff maybe not as strong as it was in the prior year period? I guess ultimately, where do you think ICS can go? Can that be a 20%+ margin business for you guys?

Michael F. Hilton -- President and Chief Executive Officer

Matt, you're correct. Certainly, the mix has helped when you look at the mix of different product lines there. Auto tends to have a bigger buy-in component than some of the other systems. With that being off a little bit, the mix has helped. But we also have done a lot of good things utilizing the Nordson Business System to drive productivity there. As we've said going back 4 or 5 years, we wanted to get that business up to something like 20% margins and we're getting close. We still have things to work on there. I think just given the nature of the business, I don't think it's reasonable to expect that it would be in excess of 20%, just because of the scope of what we typically supply and how much is more standard buy-in equipment, but I think 20% is still a good goal and we're getting close to it.

Matt Summerville -- D.A. Davidson -- Analyst

And then, similarly to my question on ADS earlier, with respect to advanced tech, can you maybe provide a little bit more granularity? I think last quarter you indicated outside of the mobile space specifically, most of your businesses, if not all in advanced tech, were growing in that high single to low double-digit rate. Can you talk about was the mobile piece off 50% and everything is up 10%? Can you just give us a better feel for how the various pieces of the segment there are really performing?

Michael F. Hilton -- President and Chief Executive Officer

What I would say, if you look at the total segment, remember half of it or more now is not electronics. That's performing well. Both the general industry piece and the medical. The medical piece is part of the diversification effort. We expect that to be high single-digit, double-digit going forward. It's playing out the way we expected. I'd say within the electronics segment, the test and inspection business has been very solid this year with nice growth. In part because that serves a more diverse end market than we see in the dispense side of the business, in particular.

So, the two biggest components of that business are test, inspection, and dispense. Test and inspection for the year will be up nicely. The dispense is going to be off significantly and that really is the mobile related piece. As I said overall, we expect that piece of the business, the electronics part of the business, it'll be down modestly, but we feel like we've covered a lot of ground between the diversification efforts within electronics and then the diversification efforts within that segment outside of electronics.

Matt Summerville -- D.A. Davidson -- Analyst

Then just maybe one quick one for Greg. It looks like corporate expense stepped up quite a bit, a couple million bucks on a sequential basis. Can you talk about that and what the expectation would be built in for Q4?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Matt, there were a couple of one-time items, one-time expense items in the quarter that hit in that corporate managed number. I wouldn't suggest that's a new run rate. I'd probably back it down back to that $13 million range going forward.

Matt Summerville -- D.A. Davidson -- Analyst

Okay. That's all for me. Thank you.

Operator

Thank you. Our next question comes from Walter Liptak of Seaport Global. Your line is open.

Walter Liptak -- Seaport Global -- Analyst

Good morning, guys. I just wanted to do a couple of follow-ons related to China. In the past and last year, especially, you had talked about some of the Chinese mobile phone makers and some of the new products that had detraction and growth. There was no discussion of that. I wonder if you could help us understand how much of the tough comp is related to the Chinese global phone makers? Was it the capacity went in and now we've got a pause out of China? Or is it more broad than that?

Michael F. Hilton -- President and Chief Executive Officer

What I would say is two things. If you look at total smartphone growth, it's been pretty modest. Like 1% to 2% growth for the year. So, there's not a big volume driver. So, that affects all of the customers that supply mobile phones. Two, this is a year with less innovation. So, it's going to be incremental. That's sort of a typical pattern that we've seen. A strong year of innovation and a weaker year of innovation. And so that's kind of what we're seeing here. I'd say on the Chinese mobile side, no different in terms of how they've approached things. Now, they've probably gained a little bit of market share here in the short term, but not anything that would dramatically drive the needle one way or another.

Walter Liptak -- Seaport Global -- Analyst

Okay. Is what you're saying that the Chinese mobile manufacturers, that they're still growing because they're coming off of a small base? Or [crosstalk].

Michael F. Hilton -- President and Chief Executive Officer

Well, there's not a small base anymore, but they are still growing. I'd say the opportunity is still there for increased levels of automation. So, both in terms of the degree of overall automation and in terms of their process approach that they take, it's less sophisticated than the global guys. But I'd say, in general, this has been a pretty quiet year for innovation. And so as we've talked about in the past, as the smartphone penetration got closer to saturation, it's really around change and innovation. This year has been a weaker year across the board on that.

Walter Liptak -- Seaport Global -- Analyst

Okay, got it. Then just a follow-on. I appreciate your answer on the tariff question. I wonder specifically, I'm sure you've run through the $50 billion tariff and the $200 billion tariff. Are your product categories included in either of those tariff discussions?

Michael F. Hilton -- President and Chief Executive Officer

I would say in the first set of tariffs, very few, very modest. In the second set, we don't really know yet all of the details on the codes and we don't know what the Chinese response is going to be. So, those are the two unknowns to date. We'll have to wait and see. Obviously, we're trying to understand that as best we can and we've got a team focused on that. But there's not enough clarity yet to make a comment there. But I'd say when you talk about $200 billion, it gets more concerning.

Walter Liptak -- Seaport Global -- Analyst

Okay. Let's say in the second $200 billion that your product going into China for electronics assembly was included, is that 25% increase, is that big enough to be a deterrent to demand or is there any other choices? I don't think there's local supply for the kind of dispensing equipment that you make for electronics.

Michael F. Hilton -- President and Chief Executive Officer

Well, I'd really not want to speculate here until we see how that plays out. Obviously, we do have manufacturing capability in Suzhou, and we are doing both test and inspection and some of our mid-tier dispense products out of there. But we would pull all the levers we could if there was an impact to us. Like I said, we really are waiting to get a better feel for both the U.S. side and the Chinese side and trying to anticipate what might happen and how we might mitigate any particular impacts there. But I would just say in general, when you look at that magnitude of a number, it's more concerning than $15 billion or $16 billion.

Walter Liptak -- Seaport Global -- Analyst

Okay. Thank you.

Operator

Thank you. I have a follow-up from Christopher Glynn of Oppenheimer. Your line is open.

Christopher Glynn -- Oppenheimer -- Analyst

I was just wondering if you could remind us what the algorithm is for FX translation as impacts EPS ultimately with when you add in the transactional influences?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Yeah, Chris. This is Greg. If you look historically, the way it kind of models out is if you look at the percentage change in sales, it's a 2x to 3x that number percentage change in EPS. So, if currency adds 1% to sales, it might be a +2.5% tailwind to earnings per share change from the prior year.

Christopher Glynn -- Oppenheimer -- Analyst

Thanks. Then on interest, I'm not sure if my numbers are right, but I think you had $13 million in the quarter and said $8 million for the fourth quarter? Can you explain the dynamic there if I got those numbers correct?

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Yeah, a little bit of a timing issue where we had some cash on the balance sheet that will post the third quarter year-on we'll be paying down some debt.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Thank you.

Operator

Thank you. At this time, I would like to turn the call over to Mr. Mike Hilton for closing remarks.

Michael F. Hilton -- President and Chief Executive Officer

Thank you for your interest in our call today. Thank you again to our global team for continuing to serve our customers well.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.

Duration: 39 minutes

Call participants:

Michael F. Hilton -- President and Chief Executive Officer

Gregory A. Thaxton -- Executive Vice President and Chief Financial Officer

Lara Mahoney -- Vice President, Investor Relations & Corporate Communications

Christopher Glynn -- Oppenheimer -- Analyst

Charles Brady -- SunTrust Robinson Humphrey -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

Carl Shem -- Longbow Research -- Analyst

Matthew Trusz -- Gabelli & Company -- Analyst

Walter Liptak -- Seaport Global -- Analyst

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