Business context and reporting period
Nordson Corporation designs and manufactures precision dispensing, coating, fluid-management, test and inspection, and related technology systems. This unaudited Form 10-Q covers the three months ended January 31, 2020, compared with the three months ended January 31, 2019. Nordson reported three operating segments: Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. Unless noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Sales | $494.9 million | $497.9 million; down 0.6% |
| Gross margin | 53.2% | 54.0% |
| Operating profit / margin | $75.1 million / 15.2% | $84.3 million / 16.9% |
| Income before taxes | $63.1 million | $68.0 million |
| Income tax expense / effective rate | $11.1 million / 17.6% | $19.5 million / 28.6% |
| Net income | $52.0 million | $48.6 million; up 7.1% |
| Diluted EPS | $0.89 | $0.83; up 7.2% |
| Operating cash flow | $116.3 million | $56.8 million |
| Capital expenditures | $13.9 million | $14.1 million |
| Cash and cash equivalents | $115.1 million | $151.2 million at October 31, 2019 |
| Total debt, including current maturities | $1,117.9 million | $1,248.4 million at October 31, 2019 |
Operating cash flow less capital expenditures was approximately $102.4 million, compared with $42.7 million in the prior-year quarter. Operating cash flow benefited from a $28.5 million cash inflow from changes in operating assets and liabilities, principally higher receivables collections; those changes used $25.8 million in the prior-year quarter. Cash declined by $36.1 million during the quarter, as $138.2 million of financing outflows—principally $126.0 million of debt repayments and $21.9 million of dividends—exceeded operating cash generation.
At January 31, current assets were $930.3 million and current liabilities were $343.3 million. The company had an $850 million revolving credit facility, with no amount drawn, and reported compliance with debt covenants. It had approximately $485.2 million remaining under its $1 billion share-repurchase authorization.
Material changes versus the prior comparable period
- Sales were nearly flat overall, but performance varied by segment: Adhesive Dispensing Systems sales fell 2.0% to $207.2 million; Advanced Technology Systems sales fell 1.4% to $231.1 million; Industrial Coating Systems sales rose 8.9% to $56.6 million.
- Operating profit declined 10.9% and operating margin contracted 1.7 percentage points. Management cited unfavorable sales-volume absorption and product mix, higher selling and administrative costs, severance and restructuring costs, and unfavorable currency effects.
- Net income and diluted EPS rose despite lower operating profit, primarily because of lower income tax and interest expenses. The prior-year tax rate included a discrete $4.9 million expense related to finalizing estimates under the Tax Cuts and Jobs Act.
- Cash from operations more than doubled year over year, mainly reflecting the favorable swing in working-capital movements. Nordson repaid $126.0 million of long-term debt, compared with net debt proceeds in the prior-year quarter.
- Nordson adopted lease accounting standard ASC 842 on November 1, 2019, recognizing operating lease assets and liabilities; adoption did not materially affect income or cash flows.
Outlook, commentary, risks and contingencies
Management forecast fiscal 2020 organic sales growth of 1% to 3%, offset by an unfavorable currency effect of less than 1%, and earnings-per-share growth of 2% to 6% versus the prior year. It cited longer-term opportunities across its served markets, recurring revenue from parts and consumables, and operational-efficiency initiatives, while expressing caution about macroeconomic growth, trade negotiations, and political instability.
Nordson was monitoring the coronavirus outbreak and evaluating potential effects on customers, supply chains, and freight. At the time of filing, management did not expect a material impact on full-year 2020 results, while acknowledging the business could be negatively affected. The filing does not quantify a potential downside.
The company reported ordinary-course litigation and environmental matters. It stated that, after consultation with counsel, losses beyond accrued amounts were not expected to materially affect financial condition, results, or cash flows. The New Richmond, Wisconsin environmental obligation was accrued at $0.4 million; Nordson noted that remediation estimates remain subject to uncertainty. A purported California employee class action seeks unspecified damages and other relief; management did not expect a material adverse outcome. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether subsequent results support the 1%–3% organic-sales and 2%–6% EPS growth outlook, particularly as coronavirus and macroeconomic effects develop.
- Whether sales softness in Advanced Technology Systems and international markets persists, and whether operating margins recover from the quarter’s volume, mix, and cost pressures.
- How much of the operating-cash-flow improvement reflects sustainable earnings and how much reflects timing of receivables and other working-capital movements.
- Debt maturities, variable-rate exposure, covenant headroom, and cash available after debt service, dividends, and investment needs.
- The sustainability of the 17.6% effective tax rate; the prior-year comparison was affected by a discrete tax expense.
- Any material change in the coronavirus outlook, litigation, environmental remediation estimates, or other risks disclosed in the filing.