Nordson Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Nordson designs and sells precision dispensing, coating, testing, inspection and surface-treatment systems across consumer, medical, electronics and industrial markets. This report covers the quarter and six months ended April 30, 2016; dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $437.6 | $400.7 | $809.8 | $779.7 |
| Operating profit | $101.9 | $76.4 | $153.9 | $139.2 |
| Net income | $70.6 | $49.2 | $111.8 | $92.1 |
| Diluted EPS | $1.23 | $0.80 | $1.95 | $1.48 |
| Gross margin | 56.8% | 55.4% | 55.0% | 55.2% |
| Operating margin | 23.3% | 19.1% | 19.0% | 17.9% |
- Quarterly sales rose 9.2%; management attributed the increase to 8.5% organic growth and 1.5% acquisition contribution, partly offset by 0.8% unfavorable currency effects. Six-month sales rose 3.9%, with 4.6% organic growth and 2.3% acquisition contribution offset by 3.0% unfavorable currency effects.
- Q2 diluted EPS increased 53.8%, faster than net income, partly because share repurchases reduced the average share count. Six-month diluted EPS increased 31.8%.
- Six-month operating cash flow was $126.9, versus $117.4 a year earlier. Capital expenditures were $25.5, versus $36.2. Cash and cash equivalents were $47.9 at April 30, down $2.3 from fiscal year-end.
- At April 30, current assets were $723.5 and current liabilities $270.8. Long-term debt was $1,055.0 and current maturities of long-term debt were $10.8; notes payable were $7.2. Long-term debt including current maturities declined $37.7 from October 31, 2015.
- Six-month financing cash outflow was $105.9, including $46.2 of net repayments of short- and long-term borrowings, $33.4 of treasury-share purchases and $27.3 of dividends. The declared dividend was $0.24 per share for the quarter.
Material changes and segment performance
- Adhesive Dispensing Systems: Q2 sales increased 8.7% to $221.0; operating profit was $63.0 versus $50.8. Growth was broad, particularly in consumer non-durables, hygiene and general product assembly.
- Advanced Technology Systems: Q2 sales increased 22.5% to $158.6; operating profit was $38.7 versus $24.8. Growth reflected electronics dispensing, test and inspection demand and strength in medical and industrial fluid management.
- Industrial Coating Systems: Q2 sales declined 14.7% to $58.0; operating profit was $10.3 versus $11.5. Weakness in liquid painting, container and powder coating offset growth in UV curing.
- Quarterly operating margin expanded primarily through selling and administrative expense leverage and favorable mix. Six-month gross margin edged down 0.2 percentage points, with currency effects more than offsetting favorable mix.
Outlook, risks and unusual items
- For Q3 2016, management expected sales to increase 1%–5% year over year, including organic volume from down 1% to up 3%, a 3% acquisition contribution and an estimated 1% currency headwind. Expected diluted EPS was $1.25–$1.37.
- Management expected continued volume improvement based on recent order activity, while cautioning about slow emerging-market growth, low projected global GDP growth and political instability. It cited operating efficiency, customer support and investment in new applications as priorities.
- Q2 other income included an $0.8 litigation settlement and a favorable tax-exam adjustment; six-month other income also included foreign-currency gains. The six-month effective tax rate was 23.4% versus 29.3%, reflecting discrete tax benefits, including $6.2 related to dividends from previously taxed foreign earnings and $2.0 from the reinstated R&D tax credit.
- Restructuring costs were $1.6 for the quarter and $2.7 for six months. Total costs recorded to date for the initiatives were $14.1; further costs were not expected to be material.
- Nordson reported compliance with debt covenants and available capacity under its $600.0 revolving facility; $431.8 was outstanding under that facility. The company said ordinary-course litigation was not expected to materially affect results, though environmental remediation estimates could increase. The New Richmond remediation accrual was $0.5.
- Management reported effective disclosure controls as of April 30, 2016, with no material change in internal control over financial reporting during the quarter. Risk factors were reported as not materially changed from the 2015 Form 10-K.
Important facts for investors to verify
- Whether Q3 guidance is achieved, particularly given the forecast range for organic volume and currency headwind.
- Whether strong Adhesive Dispensing and Advanced Technology growth offsets continued weakness in Industrial Coating and U.S. sales.
- How much reported earnings growth reflects recurring operations versus tax benefits, the litigation settlement and share-count reductions.
- Whether operating cash flow remains sufficient to support debt repayments, dividends, capital investment and share repurchases.
- Whether environmental remediation costs or other litigation and contingencies change materially from management’s current estimates.