Nordson Corp. 10-Q Summary: Quarter Ended July 31, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 31, 2007, and the nine-month period ended on the same date. Nordson Corporation is a global manufacturer of fluid handling and process control equipment. During this period, the company restructured its operating segments, combining the automotive portion of Adhesive Dispensing Systems with Finishing and Coating Systems to form the new Industrial Coating and Automotive Systems segment. The company completed three significant acquisitions in the first nine months of 2007: Dage Holdings, PICO Dosiertechnik, and YESTech.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 31, 2007 |
3 Months Ended July 31, 2006 |
9 Months Ended July 31, 2007 |
9 Months Ended July 31, 2006 |
|---|---|---|---|---|
| Sales | $257,713 | $225,518 | $702,881 | $650,709 |
| Operating Profit | $40,979 | $36,643 | $103,622 | $106,189 |
| Net Income | $24,521 | $24,814 | $61,058 | $62,812 |
| Diluted EPS (Continuing Ops) | $0.72 | $0.77 | $1.79 | $1.99 |
| Operating Cash Flow (9mo) | $78,921 (2007) vs $75,587 (2006) | |||
| Cash & Equivalents | $30,920 (July 31, 2007) vs $48,859 (Oct 31, 2006) | |||
| Total Debt (Notes + Long-term) | $258,280 (July 31, 2007) vs $63,028 (Oct 31, 2006) |
Margins: Gross margin was 56.2% for the quarter and 56.1% for the nine months, down from 56.9% and 57.3% respectively in the prior year, primarily due to purchase accounting adjustments from acquisitions. Operating profit margin was 15.9% for the quarter and 14.7% for the nine months.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 14.3% in the quarter and 8.0% for the nine months. Growth was driven by acquisitions (8.9% in Q3, 6.5% in 9 months) and favorable currency effects (2.5% in Q3, 3.0% in 9 months), partially offset by a 1.5% decline in base business volume for the nine-month period.
- Profitability: While sales grew, operating profit for the nine months declined slightly ($103.6M vs $106.2M) due to higher interest expense ($15.4M vs $9.6M) and purchase accounting adjustments related to intangible asset amortization.
- Balance Sheet: Total assets increased by approximately $317 million, driven by goodwill and intangible assets from acquisitions. Notes payable surged to $235.4 million from $15.9 million to fund these acquisitions.
- Segment Performance: The Advanced Technology Systems segment saw sales rise 26.9% in the quarter but operating margins compressed significantly (14.1% vs 23.7%) due to acquisition impacts and lower base volume in semiconductor markets. The Industrial Coating and Automotive Systems segment improved margins to 12.9% from 8.8%.
Guidance, Outlook, and Risks
Outlook: Management expects fourth-quarter 2007 sales to increase 16% to 20% compared to the prior year, driven by 12% from acquisitions, 3% from core business, and 3% from currency. Gross margins are projected at approximately 56%. Diluted earnings per share for the fourth quarter are forecast in the range of $0.73 to $0.83.
Risks and Contingencies:
- Environmental Liability: The company is involved in a remediation project in New Richmond, Wisconsin. A liability of $2.97 million has been accrued, with an estimated additional potential obligation of up to $1.0 million if remediation takes longer than expected.
- Acquisition Integration: The company faces risks related to the integration of recent acquisitions (Dage, PICO, YESTech, and a subsequent acquisition of TAH Industries announced in August 2007).
- Market Conditions: Weakness in semiconductor and electronic assembly markets continues to impact base business volume in the Advanced Technology Systems segment.
Investor Verification Checklist
- Acquisition Impact: Verify the extent to which purchase accounting adjustments (amortization of intangibles) are suppressing reported margins and operating profit.
- Debt Servicing: Confirm the company's ability to service the increased debt load ($258M total) taken on to fund acquisitions, noting the new $400M credit facility.
- Base Business Trends: Distinguish between organic growth and acquisition-driven growth, noting the 1.5% decline in base business volume for the nine-month period.
- Environmental Exposure: Monitor the New Richmond remediation project for potential cost overruns beyond the current $2.97M accrual.
- Segment Margins: Analyze the margin compression in the Advanced Technology Systems segment to determine if it is temporary (due to acquisitions) or indicative of structural market weakness.