Nordson Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. The filing also reports fourth-quarter results. Financial amounts below are USD millions, rounded, except per-share data.
Business context
Nordson designs and manufactures precision dispensing, coating, testing, inspection, and surface-treatment systems for industrial, medical, electronics, packaging, and other end markets. It operates through Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. About 65% of FY2019 sales were generated outside the United States. The company appointed Sundaram Nagarajan CEO effective August 1, 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $2,194.2 | $2,254.7 |
| Gross margin | 54.3% | 54.8% |
| Operating profit | $483.1 | $502.6 |
| Operating margin | 22.0% | 22.3% |
| Net income | $337.1 | $377.4 |
| Diluted EPS | $5.79 | $6.40 |
| Cash from operations | $382.9 | $504.6 |
| Capital expenditures | $64.2 | $89.8 |
Fourth-quarter sales were $585.5 million, net income was $102.7 million, and diluted EPS was $1.76, compared with $569.3 million, $86.7 million, and $1.47, respectively, in FY2018’s fourth quarter.
Cash and cash equivalents were $151.2 million; current assets were $1,011.2 million and current liabilities $477.6 million, with reported working capital of $533.6 million. Debt carrying value, including current maturities, was $1,244.1 million; approximately 51% was floating-rate. The $850 million revolving credit facility had no borrowings outstanding at year-end. About 94% of consolidated cash was held at foreign subsidiaries. Operating cash flow less capital expenditures was approximately $318.6 million.
Changes versus prior year
- Sales fell 2.7%: volume declined 0.7% and unfavorable currency translation reduced sales 2.0%. Organic volume was down 1.1%, partly offset by 0.4% acquisition growth.
- Advanced Technology Systems sales declined 5.1%, with lower electronics demand; Adhesive Dispensing Systems sales decreased 0.4%, while Industrial Coating Systems sales decreased 1.0%.
- Sales increased in the United States and Americas but declined in Europe, Japan, and Asia Pacific. Japan sales were down 21.6%.
- Net income fell 10.7% and diluted EPS 9.5%. The effective tax rate rose to 21.8% from 15.9%; FY2018 benefited from a net $21.5 million tax benefit related to U.S. tax reform.
- Operating cash flow decreased $121.7 million, principally reflecting lower earnings and operating assets and liabilities using $84.0 million of cash, versus providing $27.9 million in FY2018.
Outlook, risks, and unusual items
- For FY2020, management forecast organic sales growth of 1%–3%, partly offset by an unfavorable currency effect of less than 1%, and EPS growth of 2%–6% versus FY2019. Management cited uncertainty around global growth, trade negotiations, and political instability.
- Management said available cash, operating cash flow, and borrowing capacity should meet near-term liquidity needs, including working capital, capital spending, pension contributions, dividends, and debt service. The company was in compliance with debt covenants at year-end.
- Key risks include economic and end-market cyclicality, trade tensions and tariffs, foreign-exchange movements, acquisition execution and integration, cybersecurity, interest-rate exposure, and potential goodwill impairment. A 1-percentage-point increase in rates was estimated to add about $7.2 million of annual interest expense on floating-rate debt.
- Goodwill was $1,614.7 million; annual impairment tests found no impairment. The 2019 Optical Control acquisition was described as not material to the consolidated financial statements.
- The company disclosed a California wage-and-hour class action and environmental remediation obligations; management did not expect these matters to materially affect financial condition or results. The New Richmond, Wisconsin environmental accrual was $0.4 million.
- Pension and postretirement obligations increased, with pension expense in FY2020 expected to be about $9.9 million higher than FY2019. The company adopted revenue-recognition guidance in FY2019 without material consolidated impact and adopted the new lease standard on November 1, 2019, expecting right-of-use assets and lease liabilities of approximately 3% and 6% of total assets and liabilities, respectively.
Important facts for investors to verify
- Whether management’s FY2020 sales and EPS forecasts were achieved, particularly given macroeconomic and trade uncertainty.
- How much the FY2019 sales and margin performance reflected currency effects versus underlying demand, especially in Advanced Technology Systems and Japan.
- Debt maturities, floating-rate exposure, covenant headroom, and the location and practical availability of cash held overseas.
- Cash conversion and working-capital trends after the FY2019 decline in operating cash flow.
- Assumptions supporting the substantial goodwill balance and changes in pension funding needs and obligations.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded that internal controls were effective as of October 31, 2019.