Nordson Corporation — Form 10-Q summary
Business context and period: Nordson designs and manufactures precision dispensing, coating, plastics-processing, fluid-management, inspection and surface-treatment products. This unaudited report covers the quarter and six months ended April 30, 2013; comparisons are with the corresponding 2012 periods. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended April 30, 2013 | Year-over-year change | Six months ended April 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Sales | $382.1 | +21.2% | $729.1 | +23.4% |
| Operating profit | $82.2 | +7.0% | $143.8 | +7.8% |
| Net income | $54.6 | +4.8% | $96.6 | +6.8% |
| Diluted EPS | $0.84 | +$0.04 | $1.49 | +$0.11 |
| Gross margin | 56.8% | Down from 60.2% | 56.8% | Down from 60.7% |
| Operating margin | 21.5% | Down from 24.4% | 19.7% | Down from 22.6% |
- Growth drivers: For the quarter, sales volume rose 23.2%, comprising 7.4% organic growth and 15.8% from acquisitions; currency reduced sales 2.0%. For the six months, volume rose 24.6%, including 7.6% organic growth and 17.0% from acquisitions; currency reduced sales 1.2%.
- Segment trends: Quarterly sales increased across all three segments: Adhesive Dispensing Systems (ADS) +26.9%, Advanced Technology Systems (ATS) +13.0%, and Industrial Coating Systems (ICS) +22.5%. ADS and ICS growth included acquired businesses. ATS and ICS operating margins improved, while ADS margin fell substantially, primarily due to acquired-product-line dilution.
- Cash flow: Six-month operating cash flow was $102.6 versus $99.0 a year earlier. Investing used $25.8, including $23.7 of capital expenditures; financing used $57.1. Cash increased $21.6 to $62.8. Working-capital changes used more cash than in the prior-year period.
- Liquidity and debt: Current assets were $607.7 and current liabilities $273.3 at April 30. Notes payable were $60.0, current maturities of long-term debt $5.7, and long-term debt $551.6. Total debt on those balance-sheet lines was approximately $617.3. Interest expense rose to $3.6 for the quarter and $7.7 for the six months, mainly due to higher acquisition-related borrowings. The company reported compliance with debt covenants.
- Shareholder returns: Six-month dividends paid were $19.3; declared dividends were $0.15 per share for the quarter. The company repurchased $25.2 of shares in the six-month period. The $100 million authorization had $62.4 remaining at April 30.
Material changes and unusual items
- Sales growth was significantly acquisition-driven, reflecting 2012 acquisitions including EDI, Xaloy and SEE; the filing attributes lower consolidated gross and operating margins primarily to acquisition-related dilution.
- Six-month capital expenditures increased to $23.7 from $14.4 in 2012. Spending included a technical and laboratory facility in China and global information systems investments.
- Six-month earnings benefited from a $1.7 discrete tax benefit related to the retroactive extension of the federal R&D tax credit and a $0.9 favorable adjustment to unrecognized tax benefits. The six-month effective tax rate was 28.2%, versus 30.7%.
- Foreign-exchange losses contributed to other expense: $0.6 for the quarter and $1.8 for the six months, compared with other income in the prior-year periods. Currency translation also reduced reported sales.
- Current-year severance and restructuring costs were $0.1 for the quarter and $0.7 for the six months; approximately $0.2 of additional severance costs were expected for the remainder of the fiscal year.
Outlook, risks and contingencies
- For the third quarter of fiscal 2013, management forecast sales of $404–$419 million, up 6%–10% year over year, and diluted EPS of $1.00–$1.09. The sales outlook included 0%–4% organic volume growth, 7% growth from the first-year acquisition effect, and a 1% negative currency effect.
- Management said it was proceeding cautiously amid uncertainty around European sovereign debt, U.S. deficit-reduction issues, possible slowing growth in Asia and a low-growth global economic outlook. It cited application expertise, market expansion, operational efficiency and cash generation as strategic priorities.
- Risks include global demand and currency fluctuations, acquisition integration and margin dilution, and the economic uncertainties described by management. The filing said risk factors had not changed materially from the fiscal 2012 Form 10-K.
- Nordson reported ordinary-course litigation involving environmental, product-liability, patent, contract and employment matters, which it did not expect to materially affect results or cash flows. The accrual for its New Richmond, Wisconsin environmental remediation obligations was $0.7 million; management noted actual costs could exceed the estimate, but did not expect a material adverse effect.
- A $200 million delayed-draw credit facility entered into in March 2013 had not been drawn as of April 30 and would terminate July 1 if unused. A separate $50 million acquisition-related facility was repaid June 3, 2013. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth sustains momentum as acquisition contributions diminish, especially in ADS, where organic growth was limited and margins declined.
- Whether acquired businesses’ product margins and consolidated gross and operating margins improve.
- Whether working-capital demands, capital spending and debt levels remain consistent with management’s cash-generation and liquidity expectations.
- Whether the third-quarter sales and diluted-EPS outlook is achieved, and how actual currency movements compare with the assumed effect.
- Whether environmental remediation costs, litigation, or other contingencies change materially from the estimates disclosed.