Nordson Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; comparisons are with the three months ended January 31, 2016 unless noted. Nordson develops and sells precision dispensing, coating, testing, inspection and related technology systems across consumer, medical, electronics and industrial markets. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $407.5 | $372.2 | +9.5% |
| Operating profit | $75.9 | $52.0 | +46.1% |
| Operating margin | 18.6% | 14.0% | +4.6 percentage points |
| Net income | $50.0 | $41.2 | +21.4% |
| Diluted EPS | $0.86 | $0.72 | +19.4% |
| Cash provided by operations | $78.0 | $48.5 | +$29.5 |
Gross margin rose to 55.3% from 52.9%, reflecting favorable product mix and volume leverage, particularly in Adhesive Dispensing Systems and Advanced Technology Systems. Selling and administrative expense was $149.2 million, or 36.6% of sales, versus 38.9% a year earlier. The effective tax rate was 29.0%, compared with 12.6%; the prior-year rate benefited from discrete tax benefits totaling $8.2 million, including a $6.2 million benefit related to dividends from previously taxed foreign earnings.
Segment results
| Segment | Sales | Sales change | Operating profit | Operating margin |
|---|---|---|---|---|
| Adhesive Dispensing Systems | $207.8 | +2.2% | $53.1 | 25.5% |
| Advanced Technology Systems | $145.4 | +23.3% | $26.4 | 18.1% |
| Industrial Coating Systems | $54.3 | +6.6% | $7.1 | 13.1% |
Worldwide sales volume increased 10.7%, comprising 10.2% organic growth and 0.5% from the first-year effect of acquisitions; unfavorable currency translation reduced sales by 1.2%. Advanced Technology growth reflected demand for electronics testing, inspection and automated dispensing, along with strength in medical and industrial fluid management. Sales outside the United States were 69.2% of total sales.
Cash, liquidity and debt
- Cash and cash equivalents were $87.7 million at January 31, 2017, up from $67.2 million at October 31, 2016. Operating cash flow was $78.0 million; capital expenditures were $10.1 million.
- Investing activities used $23.2 million, including $14.0 million for the ACE Production Technologies asset acquisition and $2.6 million for equity investments. Financing activities used $35.2 million, including net debt repayments, $15.5 million in dividends and $3.1 million for treasury shares tendered for taxes on restricted stock.
- Long-term debt, including current maturities, was $950.5 million; notes payable were $4.0 million. The $600 million revolving credit facility had $245.0 million outstanding, with a weighted-average borrowing rate of 1.62%. Nordson reported compliance with its debt covenants and said borrowing capacity was not covenant-limited.
- Receivables fell $70.2 million from October 31, 2016, primarily due to higher collections; inventory increased $20.9 million in anticipation of second-quarter order activity.
Material developments, outlook and risks
- Acquisitions: Nordson acquired certain ACE assets for $14.0 million on January 3; preliminary allocation included $6.6 million of goodwill and $5.0 million of identifiable intangibles. After quarter-end, it acquired Plas-Pak Industries and InterSelect GmbH, funded through existing cash or the revolving facility. On February 20, it agreed to acquire Vention Medical’s Advanced Technologies business for approximately $705 million in cash. Closing was expected in Q2 FY2017, subject to completion; planned funding included cash, credit-facility borrowings and a new term loan. Vention was excluded from the Q2 guidance.
- Guidance: For Q2 FY2017, management expected sales up 3%–7% year over year, including 3%–7% organic volume growth and 2% acquisition contribution, offset by 2% unfavorable currency effects. Diluted EPS guidance was $1.21–$1.33, excluding Vention. For the balance of the year, management expected continued volume improvement based on recent order activity.
- Management commentary and risks: Management remained optimistic about longer-term opportunities but cited caution over slow emerging-market growth, a low-growth global GDP outlook and political instability. Currency translation was an operating headwind. The filing states that risk factors had not materially changed from the FY2016 Form 10-K.
- Unusual items and contingencies: Current-quarter severance and restructuring costs were $0.2 million; further costs for the cited initiative were not expected to be material. The environmental remediation accrual was $0.5 million; management said related costs were not expected to have a material adverse effect, while noting estimates could increase as requirements become clearer. Other ordinary-course litigation was not expected to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- Whether the expected Vention closing occurred on schedule and how its roughly $705 million purchase price was financed; assess resulting leverage and integration costs.
- Whether organic growth and margin gains continued, particularly in Advanced Technology Systems, and how much growth depended on acquisitions and favorable mix.
- How the 29.0% quarterly tax rate compares with the company’s full-year tax outlook, given substantial discrete benefits in the prior-year quarter.
- Whether currency headwinds, emerging-market weakness and political risks affected subsequent results or management’s sales and EPS guidance.
- Whether preliminary purchase-price allocations, restructuring accruals or environmental remediation estimates changed materially after this filing.