Nordson Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; comparative period is the three months ended January 31, 2018. Nordson designs and sells precision technology used across industrial, medical, electronics, packaging, and other end markets. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial results and position
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Sales | $497.9 | $550.4 | -9.5% |
| Gross margin | 54.0% | 54.7% | -0.7 percentage points |
| Operating profit / margin | $84.3 / 16.9% | $119.4 / 21.7% | Profit down 29.4% |
| Net income | $48.6 | $104.6 | -53.5% |
| Diluted EPS | $0.83 | $1.78 | -53.4% |
| Operating cash flow | $56.8 | $109.3 | Down $52.4 |
| Capital expenditures | $14.1 | $16.7 | Down $2.6 |
The prior-year net income comparison was materially affected by a $22.1 million discrete tax benefit recorded in Q1 FY2018 related to U.S. tax reform. The current-quarter effective tax rate was 28.6%, versus -1.0% a year earlier; Q1 FY2019 also included a $4.9 million tax expense to finalize provisional tax-reform accounting.
At January 31, 2019, cash was $85.5 million, total current assets were $867.2 million, and current liabilities were $324.5 million (current ratio about 2.67). Total debt, including current maturities and net of debt issuance costs, was $1,385.1 million; cash less debt implies net debt of about $1,299.6 million. Long-term debt was $1,331.4 million. The company reported compliance with debt covenants and stated its $850 million revolving facility was not borrowing-limited by covenants. Cash declined $10.1 million from October 31, 2018.
Material changes and operating drivers
- Organic sales volume fell 8.8%; acquisitions contributed 1.1% and unfavorable currency translation reduced sales by 1.8%.
- Advanced Technology Systems sales fell 13.7% to $234.5 million, primarily reflecting lower demand in electronics dispensing and a sharp decline in Japan. Adhesive Dispensing Systems sales declined 4.2% to $211.5 million; Industrial Coating Systems fell 10.2% to $51.9 million.
- Lower sales volume was the principal pressure on operating profit. Gross margin also declined from unfavorable mix and currency; selling and administrative expenses rose 1.7% and increased to 37.1% of sales from 33.0%.
- Segment operating margins were 22.6% for Adhesive Dispensing Systems, 17.4% for Advanced Technology Systems, and 14.5% for Industrial Coating Systems. Advanced Technology Systems had the largest margin decline, 7.4 percentage points.
- Operating cash flow fell partly because changes in operating assets and liabilities used $25.8 million, compared with providing $16.3 million in the prior-year quarter. Financing used $55.3 million, including $107.7 million for treasury-share purchases and $20.2 million in dividends; long-term debt proceeds were $70.5 million.
Outlook, risks, and unusual items
Management expected FY2019 organic sales growth of 3%–5% versus the prior year, offset by an estimated 2% unfavorable currency effect based on then-current exchange rates. Management described longer-term growth opportunities but cautioned about slower emerging-market growth, low expected global GDP growth, tariffs and trade uncertainty, and political instability. It expected operating cash flow to meet liquidity needs, support dividends, and fund investment.
The quarter included $1.5 million of severance and restructuring costs, mainly for a U.S. facility consolidation in Adhesive Dispensing Systems; additional costs were not expected to be material. Adoption of the new revenue standard had no material cumulative impact; certain Advanced Technology Systems customer-specific contracts shifted to over-time revenue recognition, also not material overall. The company disclosed a $0.4 million environmental remediation accrual and said it did not expect material financial effects, while noting the estimate could increase. Other ordinary-course litigation was not expected to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the projected 3%–5% organic sales growth and currency assumptions were achieved, particularly given the Q1 volume declines and macroeconomic risks.
- How much the prior-year tax benefit explains the reported net-income and EPS decline, and how future effective tax rates compare with the current 28.6% rate.
- Whether operating cash flow recovers and working-capital movements normalize after the quarter’s cash use.
- Debt maturities, interest costs, revolving-credit availability, and the funding of continued share repurchases and dividends.
- Developments in Advanced Technology Systems demand and margins, the environmental remediation estimate, and any further restructuring costs.