Nordson Corporation — Q3 FY2012 Form 10-Q
Business context and period: Nordson manufactures equipment and systems for dispensing, applying, coating, and inspecting materials. This filing covers the three and nine months ended July 31, 2012; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended July 31, 2012 | Nine months ended July 31, 2012 |
|---|---|---|
| Sales | $379.9; up 21.7% year over year | $970.9; up 7.6% |
| Operating profit | $98.5; up from $78.7 | $231.9; down from $236.6 |
| Operating margin | 25.9%, versus 25.2% | 23.9%, versus 26.2% |
| Net income | $66.7; up 17.9% | $157.1; down 6.3% |
| Diluted EPS | $1.03, versus $0.82 | $2.41, versus $2.44 |
| Gross margin | 58.8%, versus 60.2% | 60.0%, versus 61.2% |
Quarterly sales growth included 15.9% organic growth and 10.2% from acquisitions, offset by a 4.4% unfavorable currency effect. For the nine-month period, volume rose 9.7%, including 4.1% organic growth, while currency reduced sales 2.1%. Asia Pacific and Advanced Technology Systems were notable growth drivers. Nine-month segment operating profit was lower in Adhesive Dispensing Systems and Industrial Coating Systems, while Advanced Technology Systems profit increased.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $177.6, compared with $180.3 in the prior-year period. Capital expenditures were $21.6, versus $14.3.
- Investing activities used $423.3, principally reflecting $405.2 for the EDI and Xaloy acquisitions. Financing activities provided $264.1, including acquisition-related borrowing; cash increased $16.2 to $53.6.
- At July 31, current assets were $582.3 and current liabilities $334.5. The balance sheet showed $50.0 of notes payable, $55.7 of current long-term debt maturities, and $588.0 of long-term debt.
- Total debt, including notes payable and current maturities, was approximately $693.6. Debt increased substantially from October 31, 2011, primarily to finance acquisitions and share repurchases. The company reported compliance with debt covenants.
Material changes, outlook, and risks
- Nordson acquired EDI Holdings on June 14 and Xaloy Superior Holdings on June 21 for a combined purchase price of $405.2. Their post-acquisition sales and net income included in the reported results were approximately $22.1 and $0.8, respectively. Purchase-price allocations were preliminary; the acquisitions added substantial goodwill and amortizable intangibles.
- On August 1, 2012, after quarter-end, Nordson acquired Sealant Equipment & Engineering. The filing provides no purchase price.
- Management forecast fourth-quarter sales growth of 23%–27% year over year, including an estimated 4% unfavorable currency effect, and diluted EPS of $0.96–$1.04. Management cited encouraging order rates but cautioned that macroeconomic uncertainty clouds near-term growth.
- Lower gross margins reflected acquisition-related inventory valuation adjustments, product mix, currency, and $2.0 of restructuring-related production-transfer costs. Nine-month operating margin also faced higher selling and administrative costs and restructuring expenses. Higher borrowing levels increased nine-month interest expense to $6.9 from $3.6.
- Foreign currency movements weighed on translated sales. The company uses short-term forward contracts to reduce transaction exposure and states it does not use financial instruments for speculation.
- Nordson disclosed ordinary-course litigation and an environmental remediation obligation. The recorded New Richmond, Wisconsin site liability was $0.8; management did not expect the matters to have a material financial impact, but noted remediation estimates are uncertain.
Key facts for investors to verify
- Whether fourth-quarter sales and EPS guidance was achieved, and how much growth came from organic demand versus acquisitions.
- Acquisition integration, final purchase-price allocations, acquired-business contributions, and the effect of amortization and inventory valuation adjustments on margins.
- Debt repayment, interest costs, covenant headroom, and liquidity after the acquisitions and share repurchases.
- Whether the weaker nine-month margins and earnings reflect temporary costs or persistent operating pressures, particularly in Adhesive Dispensing and Industrial Coating Systems.
- Exposure to currency movements, macroeconomic conditions, and any changes in environmental or other legal contingencies.