Nordson Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended January 31, 2014; comparisons are with the three months ended January 31, 2013 unless noted. Dollar figures below are approximate and in millions, except per-share amounts.
Business context and results
Nordson designs, manufactures and sells precision dispensing, coating, fluid-management, testing and related systems. It serves customers across consumer, technology and industrial end markets, with operations in more than 30 countries.
- Sales: $359.4 million, up 3.6%. Volume rose 4.7%, including 6.1% from acquisitions, while organic volume declined 1.4%; unfavorable currency reduced sales by 1.1%.
- Profitability: Gross margin fell to 54.2% from 56.8%; operating profit was $53.9 million versus $61.6 million, and operating margin declined to 15.0% from 17.7%.
- Net income and EPS: Net income was $34.9 million versus $42.0 million. Diluted EPS was $0.54 versus $0.65.
- Cash flow: Cash from operations was $47.7 million, up from $39.8 million. Capital expenditures were $7.9 million versus $7.5 million. Cash and cash equivalents ended the quarter at $46.9 million, compared with $54.4 million a year earlier.
- Liquidity and debt: Current assets were $583.3 million and current liabilities $213.6 million at January 31, 2014. Long-term debt, including current maturities, was $624.2 million; notes payable were $7.9 million. The company reported compliance with debt covenants.
- Shareholder returns: Dividends declared were $0.18 per share, up from $0.15. Nordson paid $11.6 million in dividends during the quarter.
Material changes and segment performance
- Adhesive Dispensing Systems: Sales increased 14.2% to $209.5 million; operating margin was 22.9% versus 23.8%. Growth included Kreyenborg acquisition contributions and organic growth, while acquisition-related purchase accounting reduced margin.
- Advanced Technology Systems: Sales declined 10.3% to $97.5 million; operating margin fell to 10.6% from 19.1%, mainly reflecting lower demand for automated dispensing equipment serving mobile-device and other niche electronics markets.
- Industrial Coating Systems: Sales declined 4.6% to $52.4 million; operating margin fell to 9.5% from 13.0%, reflecting revenue levels and product mix.
- Europe sales rose 23.1%, including acquisition-related growth; Japan sales fell 26.3%. The company said international sales represented 67.9% of total sales in both periods.
- Cost of sales increased 9.9%, faster than sales. Management attributed lower gross margin partly to Kreyenborg acquisition effects and lower Advanced Technology sales and absorption. Selling and administrative expense increased 3.9% to $140.9 million.
- The effective tax rate rose to 30.5% from 25.5%, reflecting expiration of the federal R&D tax credit and favorable discrete tax items in the prior-year quarter.
Outlook, risks and contingencies
- Q2 FY2014 outlook: Sales growth of 5%–9% year over year, including expected organic volume growth of 0%–4%, acquisition growth of 5%, and no significant currency effect at then-current exchange rates. Expected diluted EPS: $0.85–$0.94.
- Management described a cautious outlook for the balance of FY2014, citing slowing emerging-market growth and a low-growth global economic environment. It expects operating cash flow to support liquidity needs, dividends and investment.
- Risks include uncertain global demand, foreign-currency movements, segment and product-mix changes, and acquisition-related effects. The filing said disclosed risk factors had not changed materially from the FY2013 10-K.
- Pending or potential litigation includes environmental, product-liability, patent, contract and employment matters. Management did not expect these matters to have a material effect. The environmental remediation accrual was $0.668 million; management noted the estimate could be exceeded as requirements or circumstances evolve.
- Other notable items: foreign-currency translation reduced other comprehensive income by $5.6 million; the company repurchased 29 thousand shares under its program for approximately $2.0 million during the quarter.
Most important facts for investors to verify
- Whether Advanced Technology demand and segment margins recover, and whether the Q2 sales and EPS outlook is achieved.
- How much acquisition-related growth and purchase-accounting effects contribute to future sales and margins.
- Whether the higher tax rate persists after the prior-year tax benefits and the federal R&D credit expiration.
- Debt levels, covenant compliance, cash generation, and the funding and intended use of share repurchases.
- Potential changes in environmental remediation exposure and other litigation contingencies.