Nordson Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. The filing also reports fourth-quarter results. Unless otherwise noted, amounts below are in millions of U.S. dollars; per-share amounts are in dollars.
Business context
Nordson designs and manufactures precision systems for dispensing and controlling materials, testing and inspection, and surface treatment and curing. It serves diverse industrial, consumer, electronics and medical markets through three segments: Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. Approximately 70.4% of FY2014 sales were outside the United States; no customer accounted for 10% or more of sales.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $1,704.0 | $1,542.9 |
| Gross margin | 55.5% | 56.1% |
| Operating profit | $367.1 | $323.8 |
| Operating margin | 21.5% | 21.0% |
| Net income | $246.8 | $221.8 |
| Diluted EPS | $3.84 | $3.42 |
| Operating cash flow | $288.2 | $268.4 |
| Capital expenditures | $43.6 | $47.2 |
- Sales increased 10.4%: volume rose 10.9%, comprising 6.2% organic growth and 4.7% from acquisitions; unfavorable currency effects reduced sales by 0.5%. Net income rose 11.3% and diluted EPS rose 12.3%.
- Segment sales and year-over-year growth: Adhesive Dispensing Systems $899.7 million (+13.4%); Advanced Technology Systems $561.8 million (+8.8%); Industrial Coating Systems $242.5 million (+4.0%).
- Gross margin declined 0.6 percentage points, principally from product mix, a higher systems-revenue mix in legacy operations and currency effects. Operating margin improved 0.5 points as higher volume and cost efficiencies more than offset these pressures.
- Cash from operations was $288.2 million. Investing activities used $230.5 million, including $186.4 million for the Avalon and Dima acquisitions; financing activities used $53.5 million, including $166.4 million for treasury-share purchases and $48.4 million in dividends. Cash ended the year at $42.3 million.
- At year-end, total assets were $2,280.1 million, working capital $301.8 million, and shareholders’ equity $904.8 million. Notes payable and long-term debt totaled approximately $799.8 million; debt and notes payable increased from approximately $652.6 million in 2013. Approximately 68% of debt was floating-rate.
- The company reported $124.8 million of availability under its $500 million revolving facility and $121.7 million remaining under its private shelf agreement. It was in compliance with debt covenants at year-end. A 1 percentage-point increase in rates on floating-rate debt would have added approximately $4.2 million of interest expense in 2014.
Material changes and notable items
- FY2014 acquisitions Avalon Laboratories and Dima Group B.V. were included in Advanced Technology Systems. Their combined cash acquisition outlay was $186.4 million; preliminary purchase accounting added $124.4 million of goodwill.
- Goodwill was $1,052.5 million at year-end. Annual impairment testing found no impairment; the filing notes that a sustained economic downturn could reduce estimated fair values.
- FY2014 effective tax rate was 30.0%, versus 28.7% in 2013. The prior-year rate benefited from a $0.9 million tax adjustment and a $1.7 million discrete research-credit benefit related to 2012.
- Other comprehensive income was a loss of $45.8 million, including $24.0 million of adverse currency translation and $21.8 million of pension and postretirement-plan effects.
- Quarterly fourth-quarter sales were $468.6 million, versus $410.8 million a year earlier; net income was $72.1 million versus $59.8 million, and diluted EPS was $1.13 versus $0.92. Fourth-quarter 2014 included $1.3 million of pretax severance costs and a $1.0 million pretax property-insurance gain.
- The company repurchased $163.6 million of shares in FY2014 and paid $0.76 per share in dividends, up from $0.63 in 2013. After year-end, the board authorized a new $300 million repurchase program.
Outlook, risks and contingencies
- Management expressed optimism about 2015 opportunities across its end markets but cautioned about slower emerging-market growth, low expected global GDP growth and political instability. It provided no numerical 2015 sales or earnings guidance in the supplied filing text.
- Management expected operating cash flow to remain sufficient for liquidity needs, dividends, investment in product development and potential acquisitions. Planned 2015 capital spending included information systems, completion of a Colorado facility, and manufacturing and distribution capacity and efficiency projects. Pension and postretirement contributions for 2015 were estimated at approximately $28.1 million combined.
- Key risks include economic and end-market cyclicality, international exposure and currency movements, acquisition execution and integration, product innovation and acceptance, cybersecurity, intellectual-property disputes, goodwill impairment, floating-rate debt and access to financing, pension assumptions, political and trade disruption, and environmental liabilities.
- Environmental remediation accrual for the New Richmond, Wisconsin site was $0.615 million; management did not expect a material adverse effect, but noted estimation uncertainties. Other pending or potential litigation was not expected to materially affect financial condition, results or cash flows.
- Approximately 87% of consolidated cash was held at foreign subsidiaries. Undistributed foreign earnings intended to remain invested abroad were approximately $622.9 million.
- Management and the independent auditor concluded internal control over financial reporting was effective. The control assessment excluded Avalon and Dima, which represented 9% of year-end assets, under the SEC accommodation for recently acquired businesses.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable organic growth versus acquisitions, and whether gross-margin pressure persists.
- Integration and performance of Avalon and Dima, including final purchase-price allocations and returns on acquisition spending.
- Debt repayment plans, floating-rate exposure, covenant headroom and the funding mix for acquisitions and the $300 million repurchase authorization.
- Cash accessibility and potential tax implications of foreign-held cash and permanently reinvested earnings.
- Goodwill valuation assumptions, pension and postretirement funding needs, and any changes in environmental or other litigation estimates.
- Whether 2015 results align with management’s qualitative outlook; the filing supplies no numerical earnings or revenue forecast.