Nordson Corporation — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended July 31, 2011. Nordson manufactures and sells precision dispensing, coating and related technology through Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. Unless noted, amounts below are in millions of dollars; per-share amounts reflect the two-for-one stock split.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Sales | $312.3 | $279.1 | $902.1 | $751.4 |
| Operating profit | $78.7 | $67.7 | $236.6 | $161.6 |
| Operating margin | 25.2% | 24.3% | 26.2% | 21.5% |
| Net income | $56.6 | $55.3 | $167.7 | $114.5 |
| Diluted EPS | $0.82 | $0.80 | $2.44 | $1.67 |
- Q3 sales grew 11.9%; management attributed 5.2 percentage points to volume and 6.7 points to favorable currency translation. Nine-month sales rose 20.1%, comprising 16.6% volume growth and 3.5% currency benefit.
- Gross margin improved to 60.2% from 59.4% in Q3 and to 61.2% from 60.1% year to date. Management cited product mix, low-cost sourcing, fixed-overhead absorption and currency effects. Higher sales and a more efficient cost structure supported operating-margin expansion.
- Q3 net income increased 2.2%, less than the sales and operating-profit gains; the effective tax rate was 27.7%, versus 16.8% a year earlier. Nine-month net income increased 46.5%. Prior-year quarterly tax results included a $10.7 million tax benefit related to divested product lines.
- All three segments grew sales year to date: Adhesive Dispensing Systems $449.5 million (+17.5%), Advanced Technology Systems $321.3 million (+20.0%), and Industrial Coating Systems $131.3 million (+30.3%). Japan was the exception to broad-based Q3 regional growth, with sales down 0.7% and volume down 10.8%.
Cash, debt and liquidity
- Nine-month operating cash flow was $180.3 million, versus $66.5 million; management cited higher earnings and a smaller use of cash from operating assets and liabilities. Capital expenditures were $14.3 million, compared with $7.8 million.
- Cash and equivalents were $69.1 million at July 31, up from $42.3 million at October 31, 2010. Total debt, including current maturities, was approximately $52.0 million, down from $110.3 million; cash exceeded reported debt. Cash used in financing included $46.3 million for treasury-share purchases and $21.4 million for dividends.
- Investing cash use was $41.3 million, including $34.6 million for the Micromedics and Verbruggen acquisitions. The company also entered a $150 million private shelf-note agreement in June; no borrowings were outstanding under it at quarter-end.
Outlook, notable items and risks
- For Q4 FY2011, management expected sales to rise 9%–13% year over year, including an estimated 4% favorable currency effect, and diluted EPS of $0.77–$0.84. The EPS outlook included a $0.02-per-share charge for anticipated restructuring.
- Management said order rates remained positive versus the prior year but reflected lower macroeconomic growth. It planned to monitor conditions while continuing strategic investment, acquisitions and operational initiatives.
- On August 26, 2011, after quarter-end, Nordson completed the $250 million acquisition of Value Plastics, funded with cash and existing credit lines. The company reported Value Plastics’ 2010 revenue at approximately $26 million. Its impact on subsequent financial results is not quantified in this filing.
- A Georgia facilities consolidation was expected to generate approximately $1.5 million in severance costs through Q3 2012; $1.3 million of facility impairment charges had been recorded year to date. A separate $3.1 million Japan multiemployer-pension withdrawal fee was recorded in Q3.
- Nordson reported minor Japan earthquake and tsunami-related facility damage and an immaterial charge, with no significant operating impact expected, while noting uncertainty around infrastructure and commercial effects. It cited macroeconomic, currency and other risks; the filing said existing risk-factor disclosures had not materially changed. Pending litigation was not expected to have a material effect, though environmental remediation estimates could increase; the recorded New Richmond site accrual was $0.8 million.
Important facts for investors to verify
- Whether Q4 sales and EPS guidance was achieved, and how much depended on currency and restructuring costs.
- Value Plastics’ final purchase accounting, funding mix, integration costs and contribution to earnings and cash flow.
- Whether volume growth and margin improvements persisted as management described a slower macroeconomic environment.
- Developments in Japan, foreign-exchange exposure, Georgia restructuring costs and environmental remediation estimates.
- The effect of one-time tax items when comparing reported earnings and effective tax rates across periods.