Nordson Corporation — FY 2018 Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited fourth-quarter results. Unless stated otherwise, dollar amounts below are U.S. dollars.
Business context
Nordson engineers and manufactures precision systems for dispensing and controlling fluids and materials, testing and inspecting products, and treating or curing surfaces. Its three segments are Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. It serves diverse industrial, consumer, medical and technology markets through operations in more than 35 countries. Approximately 68% of FY 2018 sales came from outside the United States; no customer represented 10% or more of sales.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change or context |
|---|---|---|---|
| Sales | $2,254.7 million | $2,067.0 million | Up 9.1%; 2.5% organic growth, 4.6% acquisition contribution and 2.0% favorable currency translation |
| Gross margin | 54.8% | 55.1% | Down 0.3 percentage points, mainly from product mix |
| Operating profit | $494.6 million | $457.7 million | Up 8.1%; operating margin 21.9%, versus 22.1% |
| Net income | $377.4 million | $295.8 million | Up 27.6% |
| Diluted EPS | $6.40 | $5.08 | Up 26.0% |
| Operating cash flow | $504.6 million | $356.8 million | Cash from operations was 22.4% of sales |
| Capital expenditures | $89.8 million | $71.6 million | Increase included investment in a China manufacturing facility |
| Cash and cash equivalents | $95.7 million | $90.4 million | About 91% of FY 2018 cash was held at foreign subsidiaries |
| Total debt, including current maturities | $1,314.1 million | $1,583.0 million | Net debt repayments reduced borrowings during FY 2018 |
Current assets were $884.1 million and current liabilities were $350.3 million at year-end; reported working capital was $533.8 million. The company reported $797.8 million of available capacity under its $850 million revolving credit facility, which expires in February 2020. It was in compliance with debt covenants at October 31, 2018.
Interest expense rose 35.4% to $49.6 million, attributed primarily to higher average borrowing levels. About 51% of total debt was floating-rate; the filing estimates a 1-percentage-point rate increase would add approximately $10.7 million of annual interest expense.
Fourth-quarter results
Unaudited FY 2018 fourth-quarter sales were $569.3 million, compared with $573.9 million in the prior-year quarter. Net income was $86.7 million versus $79.8 million, and diluted EPS was $1.47 versus $1.37.
Material changes versus FY 2017
- Advanced Technology Systems sales increased 15.8% to $1,039.4 million, including 10.7% growth from acquisitions and 3.8% organic growth. Its operating margin declined to 23.4% from 25.4%, reflecting product mix and higher amortization.
- Adhesive Dispensing Systems sales grew 4.3% to $955.2 million; operating margin declined to 27.2% from 27.7%. Packaging and product assembly growth was partly offset by softness in polymer processing.
- Industrial Coating Systems sales grew 2.7% to $260.1 million; operating margin improved to 19.5% from 17.4%, primarily on favorable product mix.
- The effective tax rate fell to 15.9% from 29.6%. Tax reform produced a provisional $49.1 million deferred-tax remeasurement benefit and a $27.6 million transition-tax expense, a net tax benefit of $21.5 million. The company cautioned that these tax calculations remained provisional.
- Operating cash flow increased substantially; investing cash use was $139.9 million, including $50.6 million for the Sonoscan and Clada acquisitions. Financing activities used $353.7 million, including net debt repayments, dividends and treasury-share purchases.
- The annual dividend rose to $1.25 per share from $1.11. The board authorized an additional $500 million share-repurchase program in August 2018; approximately $600.0 million remained available under the total authorization at year-end.
Outlook, risks and unusual items
- For FY 2019, management expected organic sales growth of 3% to 5%, offset by an estimated 2% unfavorable currency effect at then-current exchange rates. Management cited slower emerging-market growth, low global GDP growth, trade and tax-policy uncertainty, and political instability as reasons for caution.
- Management said operating cash flow, available borrowing capacity and capital-market access should be adequate for expected liquidity needs and investments. FY 2019 capital spending priorities included information systems and manufacturing and distribution capacity and efficiency.
- Key risks include cyclical end-market demand, foreign-exchange movements, tariffs and trade restrictions, acquisition execution and integration, cybersecurity and data privacy, product innovation and acceptance, interest rates, debt-covenant compliance, goodwill impairment, environmental exposure and pension assumptions.
- FY 2018 included $6.6 million of severance and restructuring costs; management did not expect additional costs from those initiatives to be material. A nonrecurring $2.5 million gain was included in other income.
- The company disclosed a $0.4 million environmental remediation accrual for a Wisconsin landfill matter. Management stated that known litigation and environmental matters were not expected to have a material adverse effect, while noting estimates may change.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded the two 2018 acquisitions, which together represented about 1% of year-end assets and 1% of sales.
Most important facts for investors to verify
- Whether FY 2019 organic growth guidance is achieved and how currency movements affect reported results.
- Whether Advanced Technology Systems margins stabilize after acquisition-related amortization and product-mix pressure.
- The durability of FY 2018 earnings growth given the lower, tax-reform-influenced effective tax rate and other discrete tax benefits.
- Debt maturities, floating-rate exposure, covenant headroom and the timing of refinancing the revolving credit facility expiring in February 2020.
- Integration and returns from acquisitions, and the carrying values and impairment sensitivity of goodwill and intangible assets.
- Cash availability at the parent company, given that most consolidated cash was held by foreign subsidiaries, and the competing uses of cash for debt, dividends, repurchases and investment.