Nordson Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended July 31, 2018. Financial amounts below are in millions of dollars unless otherwise noted. Nordson designs and manufactures precision dispensing, coating, testing, inspection and related technology systems for diverse industrial and consumer end markets.
Key financial results
| Metric | Three months ended July 31, 2018 | Three months ended July 31, 2017 | Nine months ended July 31, 2018 | Nine months ended July 31, 2017 |
|---|---|---|---|---|
| Sales | $581.2 | $589.4 | $1,685.4 | $1,493.0 |
| Operating profit | $135.6 | $153.5 | $380.0 | $332.9 |
| Operating margin | 23.3% | 26.0% | 22.5% | 22.3% |
| Net income | $94.9 | $101.5 | $290.7 | $216.0 |
| Diluted EPS | $1.61 | $1.74 | $4.93 | $3.71 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $342.9 | $221.8 |
- Quarterly sales declined 1.4%; sales volume fell 2.4%, including a 3.2% decline in organic volume, partly offset by Sonoscan and favorable currency translation.
- Quarterly operating profit declined 11.7%, and net income declined 6.5%. Management attributed the lower operating margin chiefly to higher selling and administrative costs relative to sales and unfavorable product mix.
- Nine-month sales rose 12.9%, reflecting 3.6% organic growth, 6.0% acquisition contribution and 3.3% favorable currency translation. Nine-month net income increased 34.6%; the comparison also reflects lower taxes, including Tax Act benefits.
- Gross margin was 55.1% in both the quarter and nine-month period, versus 55.4% in each 2017 comparison.
- For the nine months, investing cash outflow was $91.0 million, including $45.4 million for Sonoscan; capital expenditures were $46.0 million. Financing cash outflow was $73.5 million, including $52.1 million of dividends paid.
Financial position and debt
- At July 31, cash and cash equivalents were $266.8 million, compared with $90.4 million at October 31, 2017. Current assets were $1,077.8 million and current liabilities were $341.1 million.
- Total debt, including current maturities, was $1,555.1 million, compared with $1,583.0 million at October 31, 2017. The company had no borrowings outstanding on its $850 million revolving credit facility at July 31; the facility expires in February 2020.
- In June, Nordson issued $350 million of senior notes at fixed rates of 3.71% to 4.17%, with maturities from 2023 through 2030, and used about $315 million of proceeds to repay revolving-credit borrowings. The company reported compliance with debt covenants.
- Interest expense rose to $13.8 million for the quarter and $37.2 million for the nine months, primarily due to higher borrowing levels compared with the prior periods.
Material changes, outlook and risks
- Segment performance: Quarterly Adhesive Dispensing Systems sales rose 4.9% and Industrial Coating Systems sales rose 6.5%; Advanced Technology Systems sales fell 8.2%, with organic volume down 10.6%. Advanced Technology Systems operating margin declined to 25.2% from 30.1%, primarily due to unfavorable product mix.
- Acquisition: Nordson acquired Sonoscan on January 2, 2018, for approximately $46.0 million net of cash. The acquisition was reported in Advanced Technology Systems; purchase-price allocations remained preliminary at quarter-end. Nine-month results also reflect the first-year impact of acquisitions made in 2017, including Vention Medical.
- Tax items: The nine-month effective tax rate was 15.6%, compared with 29.8% in 2017; the quarterly rates were 22.7% and 28.8%, respectively. The company recorded a provisional net Tax Act benefit of $22.1 million for the nine months, including deferred-tax revaluation and transition-tax items. Calculations remained subject to refinement. The filing says future international tax provisions effective in fiscal 2019 were still being evaluated.
- Other unusual items: Nine-month other income included a non-recurring gain of $2.5 million, partly offset by a $0.7 million write-off of building improvements. Nordson recorded $3.6 million of severance and restructuring costs for the nine months; it did not expect additional costs from the specified U.S. facility consolidation to be material.
- Outlook: Management expected full-year sales-volume growth, including acquisition effects, and described longer-term opportunities across its end markets. For fiscal Q4, it forecast sales flat to down 4% year over year, including organic volume up 1% to down 3%, 1% acquisition growth and a 2% unfavorable currency effect. Expected diluted EPS was $1.38 to $1.54.
- Risks and contingencies: Management cautioned that global economic conditions and currency movements could affect results, and that actual Tax Act outcomes could differ from provisional estimates or interpretations. The company is involved in ordinary-course litigation; it reported a $472,000 accrual for a Wisconsin landfill remediation obligation and said the matter was not expected to materially affect results, while noting environmental estimates involve uncertainties. The filing reported no material interim change in disclosed risk factors or market-risk information.
- Management concluded disclosure controls were effective as of July 31, 2018, and reported no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether the forecast for Q4 sales and diluted EPS was achieved, and how organic demand and currency effects developed.
- Whether Advanced Technology Systems’ sales and margins recovered after the quarter’s organic-volume decline and adverse product mix.
- The realized contribution from Sonoscan and other acquisitions, and any final purchase-price allocation adjustments.
- Subsequent changes to the provisional Tax Act estimates, transition-tax liabilities and the expected impact of new international tax provisions.
- Debt maturities, refinancing needs and interest costs, including the revolving facility’s February 2020 expiration.