Nordson Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2012. Dollar amounts below are in millions unless noted. Comparisons are with the corresponding 2011 period, except balance-sheet comparisons, which are with October 31, 2011.
Business context and results
Nordson sells dispensing, advanced technology and industrial coating systems globally. Q2 sales were $315.2 million, down 1.2%; six-month sales were $591.0 million, up 0.2%. Acquisitions contributed to volume, while organic volume declined and currency translation reduced reported sales.
- Q2 sales by segment: Adhesive Dispensing Systems $154.7 million (down 3.0%); Advanced Technology Systems $115.0 million (up 2.1%); Industrial Coating Systems $45.5 million (down 3.0%).
- Q2 geographic results were mixed: U.S. sales rose 8.0%, while Europe fell 6.8%; Asia Pacific, Japan and the Americas also declined slightly.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $315.2m | $318.9m | $591.0m | $589.9m |
| Operating profit | $76.9m | $92.4m | $133.3m | $158.0m |
| Net income | $52.1m | $65.2m | $90.4m | $111.1m |
| Diluted EPS | $0.80 | $0.95 | $1.38 | $1.61 |
| Gross margin | 60.2% | 62.0% | 60.7% | 61.7% |
| Operating margin | 24.4% | 29.0% | 22.6% | 26.8% |
| Operating cash flow | — | $99.0m | $112.1m |
Q2 net income fell 20.1% and diluted EPS fell 15.8%; for the first six months, net income declined 18.6% and diluted EPS 14.3%. Lower share counts moderated the EPS declines. Margin pressure reflected higher selling and administrative expense, product mix, restructuring and, year to date, purchase-accounting inventory adjustments. Interest expense rose 61.5% in Q2, principally due to higher borrowing after a 2011 acquisition.
Cash, liquidity and debt
- At April 30, cash was $57.5 million, versus $37.4 million at fiscal year-end. Current assets were $506.5 million and current liabilities $224.2 million (current ratio approximately 2.3).
- Long-term debt, including current maturities, was $342.1 million; cash less this debt was approximately $284.6 million. A $50 million note due in February 2013 was reclassified to current maturities.
- Six-month operating cash flow was $99.0 million. Capital expenditures were $14.4 million. Financing used $66.1 million, including $74.4 million for treasury-share purchases and $16.2 million in dividends.
- $215.3 million was outstanding under the $500 million revolving credit facility at April 30. Nordson reported compliance with debt covenants. A new $250 million, 364-day unsecured credit facility was entered into after quarter-end; no amount was drawn as of the filing date.
Material changes, outlook and risks
- Management said current order rates were encouraging and above 2011 and first-half 2012 levels, but highlighted global economic uncertainty, particularly in Europe, and credit availability challenges for some smaller customers.
- For Q3 2012, Nordson forecast sales growth of 8%–12% year over year, including an estimated 4% unfavorable currency effect, and diluted EPS of $0.96–$1.04. These are forward-looking estimates, not results.
- After quarter-end, Nordson signed agreements to acquire EDI Holdings and Xaloy Superior Holdings for $200 million each, subject to purchase-price adjustments and customary conditions. Both were expected to close in Q3 and were to be financed using existing and new credit facilities.
- Restructuring costs included production-transfer and start-up costs for the Georgia consolidation; management expected approximately $120,000 of additional restructuring expense in Q3. A U.S. pension-plan termination resulted in a $682,000 settlement loss in the first half.
- Routine litigation was not expected to materially affect results. The New Richmond, Wisconsin environmental matter had a $795,000 accrual; the filing notes remediation estimates are subject to uncertainty. Management reported no material interim change in the risk factors disclosed in the 2011 Form 10-K.
Most important facts for investors to verify
- Whether stronger order rates translate into organic sales growth, given Q2 organic volume weakness and uneven regional and end-market demand.
- Whether margin recovery is achievable as restructuring, acquisition-related costs, cost inflation or unfavorable product mix affect results.
- The closing, final consideration, integration performance and financing impact of the EDI and Xaloy acquisitions.
- Debt repayment and refinancing plans, particularly the $50 million February 2013 maturity, and capacity under credit-facility covenants.
- Whether Q3 sales and EPS guidance is met, including the effect of currency movements and global economic conditions.