Nordson Corporation — Q2 2018 Form 10-Q
Business context and period. The filing covers the three and six months ended April 30, 2018. Nordson makes precision dispensing, coating, testing, inspection and related systems for industrial, medical, electronics and other markets. Results are unaudited; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $553.7m | $496.1m | $1,104.1m | $903.6m |
| Operating profit | $126.7m | $103.5m | $244.4m | $179.4m |
| Net income | $91.2m | $64.5m | $195.8m | $114.5m |
| Diluted EPS | $1.55 | $1.11 | $3.32 | $1.97 |
| Gross margin | 55.4% | 55.5% | 55.1% | 55.4% |
| Operating margin | 22.9% | 20.9% | 22.1% | 19.9% |
| Operating cash flow | — | $212.3m | $144.3m |
Q2 sales rose 11.6%; six-month sales rose 22.2%. Q2 diluted EPS increased 39.6%, while six-month diluted EPS increased 68.5%. Six-month capital expenditures were $33.0m, making operating cash flow less capital expenditures approximately $179.3m.
At April 30, cash was $155.9m; current assets were $984.0m and current liabilities $534.7m. Total debt, including current maturities, was $1,539.0m, versus $1,582.984m at October 31, 2017; net debt was approximately $1,383.1m. Shareholders’ equity was $1,362.9m. The company reported compliance with debt covenants. A subsequent amendment extended a $200m term-loan tranche’s maturity from September 2018 to September 2021.
Changes and drivers
- Sales growth reflected acquisitions and favorable currency translation as well as underlying demand. For Q2, volume rose 6.6%, including 7.2% from acquisition effects, while organic volume fell 0.6%; currency added 5.0%. For the six months, volume rose 17.4%, including 8.1% organic growth and 9.3% acquisition effects; currency added 4.8%.
- Advanced Technology Systems was the largest growth contributor: sales increased 19.4% in Q2 and 47.0% for six months, with acquisition effects significant. Adhesive Dispensing Systems sales rose 5.2% and 5.7%, respectively; Industrial Coating Systems sales rose 8.5% and 7.6%.
- Operating margin improved despite slight gross-margin declines. Management cited expense leverage, lower acquisition transaction costs and favorable currency; unfavorable product mix and acquisition-related amortization and inventory purchase-accounting charges were offsets.
- Interest expense increased to $12.1m in Q2 and $23.4m for six months, mainly due to higher borrowings. Cash used for the Sonoscan acquisition was $44.2m; the January 2018 acquisition added $21.4m of goodwill and $7.9m of identifiable intangibles.
Outlook, commentary and risks
For Q3 2018, management expected sales to range from 1% growth to 3% decline year over year, including organic volume down 2% to 6%, acquisition contribution of 1%, and favorable currency of 2% at then-current exchange rates. Diluted EPS guidance was $1.47–$1.63. For the balance of the year, management expected sales volume growth, including acquisition effects, and said operating cash flow and available borrowing capacity should be adequate for liquidity needs and investment.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit of $22.1m for the six months, including a $45.2m benefit from deferred-tax remeasurement and $23.1m transition-tax expense. The six-month effective tax rate was 11.7%, versus 30.6%; management said the tax accounting remained provisional and could change.
- Q2 other income included a non-recurring $2.5m gain. Six-month other income also reflected a $0.7m write-off of building improvements. Foreign currency movements affected reported sales and costs; the company uses short-term currency forwards and does not designate them as hedges.
- Management noted uncertainty in the pace of global economic improvement. Risks include foreign-exchange exposure, the evolving tax-law interpretation, acquisition integration and amortization, and environmental, product-liability, patent, contract and other ordinary-course litigation. The New Richmond, Wisconsin remediation accrual was $0.5m; management did not expect material effects from litigation or remediation.
Important facts for investors to verify
- Whether the expected Q3 organic-volume decline materialized, and how much reported growth depended on acquisitions and currency.
- Whether the provisional tax estimates and future tax-law provisions changed, and how tax benefits affected comparable earnings.
- Debt repayment, refinancing and interest costs, including the effect of the term-loan maturity extension and revolving-credit borrowings.
- Cash conversion and capital spending, and whether acquisition-related goodwill, amortization and integration costs affect margins or returns.
- The nature and sustainability of the $2.5m non-recurring gain and the status of the environmental and other disclosed contingencies.