Nordson Corporation — Q3 FY2016 Form 10-Q
Business context and period. Nordson designs and sells precision dispensing, testing, inspection, and surface-treatment systems across consumer, medical, electronics, and industrial markets. This unaudited report covers the three and nine months ended July 31, 2016; comparisons are with the corresponding 2015 periods unless noted. Financial amounts below are in U.S. dollars, in millions except per-share data.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Sales | $489.9 | $462.7 | $1,299.7 | $1,242.5 |
| Operating profit | $123.7 | $102.9 | $277.6 | $242.1 |
| Net income | $84.2 | $69.4 | $196.0 | $161.5 |
| Diluted EPS | $1.46 | $1.14 | $3.41 | $2.61 |
| Gross margin | 55.8% | 53.7% | 55.3% | 54.7% |
| Operating margin | 25.2% | 22.2% | 21.4% | 19.5% |
- Q3 sales rose 5.9%; management attributed volume growth of 6.3% to 3.8% organic growth and 2.5% from acquisitions, partly offset by 0.4% unfavorable currency translation. Nine-month sales increased 4.6%, with 4.2% organic growth, 2.4% acquisition contribution, and a 2.0% currency headwind.
- Q3 operating profit increased 20.3%; nine-month operating profit increased 14.7%. Net income rose 21.4% in both periods. Diluted EPS growth exceeded net income growth, which the company attributed partly to a lower share count following repurchases.
- Management attributed margin improvement primarily to favorable product mix, particularly higher growth in Adhesive Dispensing Systems and Advanced Technology Systems, and operating expense leverage. Q3 gross margin improved 2.1 percentage points and operating margin 3.0 points.
- Q3 segment sales: Adhesive Dispensing Systems $220.8 million, up 4.3%; Advanced Technology Systems $205.4 million, up 11.1%; Industrial Coating Systems $63.7 million, down 3.7%. Advanced Technology benefited from electronics, medical, and industrial demand; Industrial Coating faced softness in cold-materials products. Nine-month Industrial Coating sales declined 7.5%.
- Nine-month operating cash flow was $194.7 million, compared with $167.3 million. Capital expenditures were $45.5 million. Cash increased $10.0 million from October 31, 2015, to $60.3 million.
- At July 31, 2016, total current assets were $769.7 million and current liabilities $278.4 million. Long-term debt, including current maturities, was $1,037.3 million; notes payable were $6.9 million. Long-term debt declined $66.1 million from October 31, 2015. The company reported compliance with debt covenants.
- Nine-month financing cash outflow was $141.2 million, including $106.9 million of long-term debt repayments, $33.4 million of treasury-share purchases, and $41.0 million of dividends paid. Dividends declared were $0.24 per share in Q3 and $0.72 for the nine-month period.
Changes, outlook, and risks
- Outlook: For Q4 FY2016, Nordson expected sales growth of 6%–10% year over year, including organic volume growth of 5%–9% and 1% from the first-year effect of acquisitions; currency impact was expected to be minimal. Expected diluted EPS was $1.15–$1.27, excluding non-recurring restructuring charges. Management expected continued volume improvement but said it was proceeding cautiously amid slow emerging-market growth, low expected global GDP growth, and political instability.
- Debt and liquidity: $427.1 million was outstanding on the $600 million revolving credit facility; its weighted-average interest rate was 1.42%. The facility expires in February 2020. Management said operating cash flow and available borrowing capacity should support liquidity needs, dividends, investment, and potential strategic transactions.
- Unusual items: Nine-month results included discrete tax benefits of $2.0 million related primarily to the reinstated federal R&D credit, $6.2 million related to dividends from previously taxed foreign earnings, and $1.1 million from a tax examination settlement. Q3 included a $2.7 million unfavorable adjustment related to reversal of an indemnification asset following that settlement. Nine-month other income included an $0.8 million litigation settlement and $1.9 million of foreign-currency gains.
- Restructuring: Severance and restructuring costs were $1.7 million in Q3 and $4.4 million in the nine-month period. The company said additional costs were not expected to be material.
- Acquisition after quarter-end: On September 1, 2016, Nordson acquired LinkTech Quick Couplings, funded under its revolving credit facility; the company did not expect a material financial-statement impact.
- Contingencies and risk: Nordson reported routine litigation and an environmental remediation obligation, with a $0.5 million accrual at July 31, 2016. Management did not expect a material adverse effect but noted the estimate could increase if further remediation requirements emerge. The filing said previously disclosed risk factors had not materially changed. Foreign exchange, global economic conditions, and market demand remain relevant uncertainties.
Important facts for investors to verify
- Whether Q4 sales and diluted-EPS guidance was achieved, and how actual organic growth, acquisitions, and currency compared with the outlook.
- Whether growth and margin trends in Advanced Technology and Adhesive Dispensing Systems offset ongoing weakness in Industrial Coating Systems.
- How operating cash conversion and working-capital requirements develop, given the nine-month cash use from changes in operating assets and liabilities.
- Debt repayment, revolving-credit-facility availability, interest costs, and continued covenant compliance.
- The sustainability of earnings growth after considering discrete tax benefits, foreign-exchange movements, restructuring costs, share repurchases, and the LinkTech acquisition.