Nordson Corporation — Q3 2014 Form 10-Q
Business context and period: The quarter ended July 31, 2014; fiscal year ends October 31. Nordson supplies precision dispensing, coating, testing and related technology across industrial, electronics, medical and consumer end markets. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Three months ended July 31, 2014 | Prior year | Nine months ended July 31, 2014 | Prior year |
|---|---|---|---|---|
| Sales | $458.550 | $402.960 | $1,235.431 | $1,132.103 |
| Operating profit | $114.455 | $93.216 | $261.148 | $236.982 |
| Net income | $77.879 | $65.424 | $174.693 | $162.040 |
| Diluted EPS | $1.21 | $1.01 | $2.71 | $2.50 |
| Gross margin | 56.2% | 55.9% | 55.7% | 56.5% |
| Operating margin | 25.0% | 23.1% | 21.1% | 20.9% |
- Quarterly sales rose 13.8%; management attributed the increase to 7.9% organic growth, 4.9% acquisition contribution and 1.0% favorable currency. Nine-month sales rose 9.1%, including 3.8% organic growth and 5.3% from acquisitions; currency was neutral.
- Quarterly diluted EPS increased 19.8%; nine-month diluted EPS increased 8.4%. Repurchases lowered the average share count and contributed to EPS growth.
- Quarterly gross margin improved on product mix and currency. Nine-month gross margin declined, reflecting Kreyenborg acquisition dilution and a purchase-accounting inventory adjustment. Operating margin improved in both periods, primarily from higher-volume leverage.
- Third-quarter segment sales: Adhesive Dispensing Systems $226.762 million (+15.7%); Advanced Technology Systems $174.636 million (+16.2%); Industrial Coating Systems $57.152 million (+0.8%). Advanced Technology benefited from electronics-related demand; Industrial Coating faced softness in selected durable-goods markets.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $182.958 million, down from $194.584 million. Working-capital and other operating asset/liability changes used $44.754 million, versus $16.524 million in the prior-year cash-flow statement.
- Investing activities used $28.512 million, including $27.936 million of capital expenditures. Financing activities used $142.430 million, including $94.410 million for treasury-share purchases and $34.525 million of dividends.
- Cash was $53.223 million at July 31, up $10.848 million since fiscal year-end. Current assets were $679.791 million and current liabilities $260.057 million.
- Long-term debt was $612.358 million and current maturities of long-term debt were $10.755 million. Notes payable were $9.405 million. The company reported compliance with debt covenants; $265.684 million was outstanding under its $500 million revolving facility.
- The board’s $200 million repurchase authorization had $104.419 million remaining at July 31. Nine-month repurchases under the program totaled 1.249 million shares for $91.611 million.
Changes, outlook and risks
- On August 8, 2014, after quarter-end, Nordson acquired Avalon Laboratories for $180 million, subject to adjustments. Avalon makes specialized medical catheters and tubing and will join Advanced Technology Systems. The purchase was financed with borrowings, including under a new $100 million, 364-day PNC facility entered into August 6.
- Management forecast fourth-quarter 2014 sales growth of 10%–14% year over year, comprising 7%–11% organic volume growth and 3% acquisition contribution; currency impact was expected to be immaterial. Diluted EPS guidance was $1.07–$1.17 and included the Avalon acquisition.
- Management described near-term growth as strong but remained cautiously optimistic beyond the near term, citing slower emerging-market growth, a low-growth global economic outlook and political instability in some regions. It expected operating cash flow to support liquidity needs, dividends and strategic investment.
- Other expense was $0.236 million in the quarter versus other income of $2.699 million a year earlier; the prior-year period included a $2.106 million gain on sale of real estate in China. The effective tax rate was 29.5% for the quarter and 30.1% year to date.
- Pending or potential litigation was not expected by management to have a material adverse effect. The New Richmond landfill remediation accrual was $0.615 million; the filing notes estimates could increase if additional requirements emerge. Management said risk-factor disclosures had not changed materially from the 2013 Form 10-K.
Important facts for investors to verify
- Whether fourth-quarter sales and diluted EPS guidance, including the assumed Avalon contribution, was achieved.
- Avalon’s final purchase price, financing mix, integration results and effect on leverage and segment performance.
- Whether operating cash flow improves as working-capital uses ease, and how repurchases, dividends and capital spending affect liquidity.
- How acquisition-related purchase accounting, product mix, foreign exchange, and macroeconomic weakness affect margins and demand across segments.