Nordson Corporation — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended July 31, 2023. Nordson supplies precision technology and equipment to industrial, medical, electronics and other markets. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $648.7 | $662.1 | $1,909.3 | $1,906.7 |
| Gross margin | 55.5% | 55.2% | 54.5% | 55.8% |
| Operating profit | $171.0 | $184.9 | $487.7 | $524.8 |
| Operating margin | 26.4% | 27.9% | 25.5% | 27.5% |
| Net income | $127.9 | $141.8 | $359.7 | $371.9 |
| Diluted EPS | $2.22 | $2.45 | $6.24 | $6.37 |
| Interest expense | $12.1 | $5.7 | $32.5 | $16.7 |
- Q3 sales fell 2.0%; organic sales declined 4.5%, partly offset by acquisition contribution of 2.4% and favorable currency translation of 0.1%. Q3 net income decreased 9.8% and diluted EPS decreased 9.4%, reflecting lower operating profit and higher interest expense.
- Nine-month sales were nearly flat: acquisition contribution of 2.6% was substantially offset by unfavorable currency translation of 1.8% and an organic decline of 0.7%. Net income declined 3.3% and diluted EPS 2.0%.
- Nine-month 2022 results included a $41.2 million non-cash pension settlement charge ($0.56 per diluted share after tax). Management says that, excluding this prior-year item, the current-period decline chiefly reflected lower margins, acquisition-related fees, severance and inventory charges, and higher interest expense.
- Segment Q3 sales: Industrial Precision Solutions $338.3 million, down 0.9%; Medical and Fluid Solutions $170.9 million, down 3.9%; Advanced Technology Solutions $139.5 million, down 2.5%. Weakness in electronics dispense, especially semiconductor applications, and biopharma was partly offset by medical interventional solutions and polymer processing strength.
- Nine-month operating margins were 33.4% for Industrial Precision Solutions, 28.7% for Medical and Fluid Solutions, and 16.2% for Advanced Technology Solutions. Advanced Technology Solutions’ margin was pressured by $10.3 million of CyberOptics-related fees, severance and non-cash inventory charges, as well as lower-volume factory inefficiencies.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $478.1 million, versus $339.7 million a year earlier. The comparison benefited from a $19.2 million cash source from changes in operating assets and liabilities, versus a $162.3 million use in the prior period.
- Investing cash outflow was $402.0 million, including $377.8 million for CyberOptics and $24.2 million of capital expenditures. Financing cash outflow was $102.1 million, including $111.5 million of dividends and $78.2 million of treasury-share purchases; net long-term borrowings were $74.0 million.
- Cash declined $20.3 million from fiscal year-end to $143.1 million at July 31, 2023. Inventories rose $56.3 million to $439.7 million, primarily due to the CyberOptics acquisition.
- Debt carrying amount, including its current portion, was $838.1 million; cash was $143.1 million. Nordson had a new $300 million term loan and $200 million drawn on its $850 million revolving facility. The revolving facility matures in 2028; the term loan matures in 2026. The weighted-average rate on these borrowings was 6.00% at July 31. The company reported compliance with all debt covenants.
- Management stated that operating cash flow, existing capital resources and available financing were adequate for requirements over the next 12 months and foreseeable future.
Material developments, outlook and risks
- CyberOptics was acquired in November 2022 for approximately $377.8 million net of cash acquired. Its purchase-price allocation remained preliminary at July 31; the acquisition added $279.6 million of goodwill and $58.6 million of identifiable intangible assets.
- After quarter-end, on August 24, 2023, Nordson completed its all-cash acquisition of ARAG for approximately €957 million, net of approximately €30.3 million of acquired-company debt repayment. It will be part of Industrial Precision Solutions. The company funded it using a €760 million, 364-day term facility and its revolving facility; ARAG’s results were not expected to have a material impact on Nordson’s consolidated financial statements.
- No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management identifies economic and market conditions, currency movements, acquisition integration, trade and tax policy, geopolitical events and pandemics as risks. It also says the full effects of COVID-19 remain uncertain.
- Gross margin improved in Q3 on manufacturing efficiency and price realization, partly offset by severance-related costs. Nine-month gross margin declined due to manufacturing inefficiencies, severance and $2.7 million of incremental CyberOptics inventory step-up amortization. Higher interest expense reflected increased average debt and interest rates.
- Pending or potential litigation includes environmental, product liability, patent, contract and employment matters. Management does not expect losses beyond recorded accruals to materially affect results or cash flows. The New Richmond, Wisconsin environmental accrual was $0.3 million; management notes remediation estimates remain subject to uncertainty.
Key facts for investors to verify
- Whether electronics and Asia-Pacific demand stabilize, and whether medical interventional and polymer-processing strength continues.
- How margins and cash conversion evolve as acquisition, severance, inventory and factory-efficiency costs change.
- ARAG’s final purchase price, financing and integration performance, including the effect of the short-term euro term facility and interest costs.
- CyberOptics’ final purchase-price allocation and contribution to Advanced Technology Solutions sales and profitability.
- Debt levels, covenant headroom, working-capital trends and the sustainability of dividends and share repurchases.