Nordson Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018; comparisons are with the three months ended January 31, 2017 unless otherwise noted. Dollar amounts below are in U.S. dollars.
Business context
Nordson develops and sells precision technology used to dispense, apply, test, inspect and treat materials across industrial, medical, electronics and other markets. It reports three segments: Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems.
Financial performance
| Metric | Q1 FY2018 | Prior comparable quarter |
|---|---|---|
| Sales | $550.4 million | $407.5 million |
| Operating profit | $117.7 million | $75.9 million |
| Net income | $104.6 million | $50.0 million |
| Diluted EPS | $1.78 | $0.86 |
| Operating cash flow | $109.3 million | $81.2 million |
| Capital expenditures | $16.7 million | $10.1 million |
- Sales increased 35.1%: volume grew 30.4% (18.6% organic and 11.8% from acquisitions), with a 4.7% favorable currency effect.
- Gross margin was 54.7%, down from 55.3%; operating margin rose to 21.4% from 18.6%. Management attributed pressure on gross margin to product mix and purchase-accounting charges on acquired inventory, partly offset by currency effects. Higher sales helped leverage selling and administrative costs.
- Segment sales were $220.9 million for Adhesive Dispensing Systems (+6.3%), $271.7 million for Advanced Technology Systems (+86.9%) and $57.9 million for Industrial Coating Systems (+6.6%). Advanced Technology growth included acquisitions and stronger demand for test and inspection, automated dispensing, and medical and industrial fluid-management products.
- The effective tax rate was -1.0%, versus 29.0%. Net income included a $22.1 million net tax benefit from provisional U.S. Tax Cuts and Jobs Act adjustments; the reported diluted EPS benefit was $0.37. A separate $4.7 million share-based-payment tax benefit also reduced tax expense.
- Cash and cash equivalents were $132.8 million at January 31, 2018, versus $90.4 million at October 31, 2017. Total debt, including current maturities, was $1.585 billion; current maturities were $326.6 million. Cash increased by $42.5 million during the quarter.
Material changes and transactions
- Nordson acquired Sonoscan on January 2, 2018 for an aggregate purchase price of $44.0 million, net of cash acquired. The acquisition was reported in Advanced Technology Systems; its purchase-price allocation remained preliminary.
- Cash used for acquisitions was $43.3 million. The prior-year comparison reflects the 2017 acquisitions of Vention, Plas-Pak, ACE and InterSelect, which contributed to current-year reported growth.
- Interest expense increased to $11.3 million from $5.6 million, primarily because of higher average borrowings. Other expense was $3.2 million, including $1.9 million of foreign-currency losses and $0.7 million primarily related to writing off building improvements.
- Cash provided by operations increased to $109.3 million; investing activities used $59.9 million and financing activities used $11.8 million. Dividends paid were $17.3 million.
Outlook, risks and contingencies
- For Q2 FY2018, management expected sales to increase 9%–13% year over year, including organic volume ranging from down 3% to up 1%, 7% growth from acquisitions and 5% favorable currency translation. Expected diluted EPS was $1.33–$1.47.
- For the balance of the year, management expected sales-volume growth, including acquisition contributions, and said operating cash flow, borrowing capacity and capital-market access were expected to meet liquidity needs. Management noted that the pace of global economic improvement remained unclear.
- The one-time transition tax on certain foreign earnings is payable in installments over eight years. Tax reform calculations were provisional and could change as the company completes its analysis; future tax provisions may also be affected by new tax-law requirements and interpretation.
- Nordson reported compliance with debt covenants at January 31, 2018. Its $200 million term loan tranche due in April 2018 and $200 million term-loan tranche due in October 2018 are notable near-term maturities.
- Ordinary-course litigation was not expected to have a material effect, according to management. The environmental remediation accrual was $472,000; management noted that actual costs could exceed its estimate because of uncertainties in remediation requirements and environmental regulation.
- Management stated that disclosed risk factors had not changed materially from the 2017 Form 10-K. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much reported growth and future performance depend on organic demand versus acquisitions and currency effects.
- The final measurement of tax-reform balances and the resulting effect on future tax expense and cash taxes.
- Debt repayment and refinancing plans for 2018 maturities, and ongoing covenant compliance.
- Sonoscan’s final purchase-price allocation and contribution to segment results.
- Whether the Q2 guidance and stated full-year growth expectations are achieved, particularly given the uncertain global economic outlook.
- Whether environmental remediation costs remain within the recorded $472,000 estimate.