Nordson Corporation — Q3 2020 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2020. Amounts below are in millions of U.S. dollars, except per-share data. Nordson makes precision technology products and serves industrial, consumer, electronics and medical markets. In Q2, it realigned its former three operating segments into Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS); comparative segment figures were recast.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $538.2 | $559.7 | $1,562.6 | $1,608.8 |
| Operating profit | $112.1 | $130.3 | $312.2 | $343.5 |
| Net income | $87.0 | $93.9 | $231.1 | $234.4 |
| Diluted EPS | $1.49 | $1.62 | $3.96 | $4.03 |
| Gross margin | 52.2% | 54.1% | 53.3% | 54.3% |
| Operating margin | 20.8% | 23.3% | 20.0% | 21.3% |
- Q3 sales declined 3.9% year over year: organic volume fell 4.0%, acquisitions added 0.8%, and currency reduced sales 0.7%. Nine-month sales fell 2.9%, reflecting lower volume and unfavorable currency.
- Q3 operating profit declined 14.0%; net income fell 7.4% and diluted EPS fell 8.0%. Nine-month net income and diluted EPS declined 1.4% and 1.7%, respectively.
- Q3 segment sales and operating profit: IPS $289.0 and $74.7; ATS $249.2 and $50.0. IPS sales fell 5.8% and ATS sales fell 1.5% versus the prior year.
- Q3 gross margin pressure reflected unfavorable mix, currency, Fluortek inventory step-up and severance. Operating margin was also pressured by lower volume and severance, partly offset by lower base-business costs.
- Q3 effective tax rate was 8.9%, versus 21.4%, mainly due to share-based payment tax benefits. The nine-month rates were 16.0% and 22.8%. These benefits reduced reported tax expense and should be considered when assessing earnings comparability.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $310.0, compared with $236.4 in 2019. Capital expenditures were $36.1, down from $46.0; operating cash flow less capital expenditures was approximately $273.9. Management attributed improved cash flow primarily to working-capital liquidation and deferred-tax changes.
- Cash and equivalents were $221.8 at July 31, versus $151.2 at October 31, 2019. Current assets were $1,080.7 and current liabilities $347.2.
- Debt carrying value, including current maturities, was approximately $1,264.7; cash less this debt implies net debt of approximately $1,042.9. The $850 million revolving credit facility had no borrowings outstanding. Nordson reported compliance with debt covenants.
- Investing cash outflow was $163.2, including $125.3 for the Fluortek acquisition; financing cash outflow was $75.4, including $65.7 of dividends and $51.9 of treasury-share purchases.
Outlook, risks and notable items
- Management expected Q4 2020 sales to be comparable to or slightly better than Q3, with operating profit forecast to improve modestly. It described the outlook as uncertain and did not provide specific numerical guidance.
- COVID-19 affected demand in certain medical products tied to elective procedures and in industrial markets; manufacturing efficiencies were also adversely affected, and the company was addressing pandemic-related supply-chain cost increases. Management said the pandemic could continue to affect results, liquidity and investment, but its ultimate impact could not be reliably estimated.
- Fluortek, a medical-device tubing manufacturer, was acquired on June 1 for $125.3, net of cash and closing adjustments. Preliminary allocation included $76.0 of goodwill and $29.4 of identifiable intangibles; Fluortek’s results were not material to consolidated results.
- Q3 included $2.5 of pension settlement loss. Other expense was $9.7, including pension costs and foreign-currency losses; derivative and related balance-sheet currency effects can offset and make period results variable.
- A California employee class action had a tentative settlement after mediation, subject to a written agreement and court approval. Environmental remediation accrual was $0.36; management did not expect these matters to materially affect results, while noting estimates can change.
- Management cited macroeconomic uncertainty, trade negotiations, political instability, foreign-exchange movements and COVID-19 as risks. It reported effective disclosure controls as of July 31, 2020.
Most important facts for investors to verify
- Whether Q4 demand and operating-profit improvement matched the company’s outlook, particularly in industrial and elective-procedure-related medical markets.
- Whether margins recover as severance, acquisition-related inventory step-up and lower-volume effects abate.
- How much operating cash flow reflects durable earnings versus working-capital movements, and how debt and foreign-currency exposure evolve.
- Whether the lower tax rate and share-based payment benefits recur, and how Fluortek’s final purchase-price allocation and performance develop.
- Whether the class-action settlement receives court approval and whether environmental or other contingencies change materially.