Nordson Corporation — Form 10-Q summary
Business context and reporting period. Nordson designs and sells precision dispensing, processing, fluid-management, testing and inspection systems across industrial and consumer markets. This unaudited filing covers the third quarter and first nine months of fiscal 2015, ended July 31, 2015; comparisons are with the corresponding 2014 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $462.7 | $458.6 | $1,242.5 | $1,235.4 |
| Operating profit | $102.9 | $114.5 | $242.1 | $261.1 |
| Operating margin | 22.2% | 25.0% | 19.5% | 21.1% |
| Net income | $69.4 | $77.9 | $161.5 | $174.7 |
| Diluted EPS | $1.14 | $1.21 | $2.61 | $2.71 |
| Gross margin | 53.7% | 56.2% | 54.7% | 55.7% |
| Operating cash flow | — | — | $167.3 | $183.0 |
- Quarterly sales rose 0.9%; management reported sales volume growth of 8.1% (5.7% organic and 2.4% from acquisitions), offset by a 7.2% unfavorable currency impact. Nine-month sales increased 0.6%, with volume up 7.3% and currency reducing sales by 6.7%.
- Margins and earnings declined despite modest reported sales growth. Management attributed lower margins primarily to product/customer mix and unfavorable currency translation. Quarterly diluted EPS fell less than net income, partly because share repurchases reduced the average share count.
- Segment sales and operating profit: Adhesive Dispensing Systems $211.6 and $54.9 million for the quarter (sales down 6.7%); Advanced Technology Systems $184.9 and $44.6 million (sales up 5.9%); Industrial Coating Systems $66.2 and $12.3 million (sales up 15.8%). Advanced Technology operating margin fell to 24.1% from 32.3%; Industrial Coating margin improved to 18.6% from 13.1%.
- Quarterly interest expense increased to $4.5 million from $3.8 million; nine-month interest expense was $12.9 million versus $10.9 million, primarily reflecting higher borrowings. Effective tax rates were 29.5% for the quarter and 29.4% year to date. Nine-month tax benefits included $2.3 million of discrete benefits, primarily related to 2014.
Financial position, cash flow and material changes
- At July 31, cash was $61.0 million, total assets $2,316.4 million and shareholders’ equity $820.4 million. Current assets were $721.4 million and current liabilities $260.6 million.
- Long-term debt, including current maturities, was $933.5 million; notes payable were $5.1 million. Combined debt was approximately $938.6 million, versus approximately $799.8 million at October 31, 2014. The filing cites higher borrowing levels as a driver of increased interest expense. The company reported covenant compliance and available capacity under its credit facilities.
- Nine-month operating cash flow of $167.3 million was down from $183.0 million. Investing used $64.8 million, including $48.9 million of capital expenditures and $14.9 million for the Liquidyn acquisition. Financing used $78.9 million, including $187.7 million for treasury-share purchases and $40.5 million of dividends; net short- and long-term borrowings provided $146.8 million.
- Capital spending increased from $27.9 million to $48.9 million, including investment in a Colorado facility, production machinery and information systems. Inventory rose $18.0 million from fiscal year-end, which management linked to expected fourth-quarter order activity.
- Nordson acquired German micro-dispensing company Liquidyn in June for $14.6 million net of cash acquired; preliminary allocations included $10.7 million of goodwill and $4.0 million of identifiable intangible assets. After quarter-end, it acquired WAFO for €7.0 million and MatriX for €46.0 million, subject to adjustments.
- The company repurchased 2.413 million shares for $185.5 million during the first nine months, at an average $76.88 per share. A new $200 million repurchase authorization was approved after quarter-end, supplementing the December 2014 $300 million authorization.
Outlook, risks and contingencies
- For Q4 fiscal 2015, management forecast sales growth of down 7% to down 3% year over year, including organic volume growth of down 1% to up 3%, 1% acquisition growth and an estimated 7% negative currency effect. Expected diluted EPS was $1.00–$1.12. At the guidance midpoint, management expected full-year organic growth in the mid-single digits.
- Management cited solid order growth but expressed near-term caution about slow emerging-market growth, a low-growth global economic outlook and political instability. It highlighted longer-term opportunities across consumer, medical, electronics and industrial markets, and expected operating cash generation to support liquidity needs, dividends and strategic investment.
- Currency was a significant headwind: management estimated that translating Q3 results at prior-year exchange rates would have increased sales by approximately $32.9 million, while third-party costs and expenses would also have been approximately $18.8 million higher.
- The company reported ordinary-course litigation involving environmental, product liability, patent, contract and other matters; management did not expect these matters to materially affect financial condition, results or cash flows. Its New Richmond, Wisconsin environmental-remediation accrual was $0.565 million; management noted the estimate could increase as requirements become clearer but did not expect a material adverse effect.
- A $2.319 million restructuring charge was recorded in Advanced Technology Systems for U.S. and Germany efficiency and customer-service actions, comprising $1.429 million severance and $0.890 million lease-termination costs. No severance payments for these actions were made in Q3.
- Management stated that risk factors had not changed materially since the 2014 Form 10-K. Disclosure controls were assessed as effective at July 31, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q4 sales and diluted EPS meet the company’s stated guidance, particularly given foreign-exchange exposure and cautious macroeconomic commentary.
- How much of reported and expected growth is organic versus acquisition-related, and whether segment margins recover—especially in Advanced Technology Systems.
- Debt, interest costs, covenant headroom and liquidity following the 2015 borrowing activity and post-quarter acquisitions.
- Cash conversion and capital allocation, including elevated capital expenditures, substantial share repurchases, dividends and the additional repurchase authorization.
- Final Liquidyn purchase accounting, integration and performance of Liquidyn, WAFO and MatriX; the latter two transactions occurred after quarter-end.
- Whether environmental-remediation estimates or other legal contingencies change, and the impact of evolving revenue-recognition and inventory-accounting standards when adopted.