Nordson Corporation — Q3 FY2019 10-Q
Business context and period: The quarter and nine months ended July 31, 2019; comparisons are with the corresponding 2018 periods. Nordson supplies precision dispensing, coating, fluid-management, test and inspection, and related technology systems across three segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Sales | $559.7m, down 3.7% | $1,608.8m, down 4.5% |
| Operating profit | $130.3m, down 5.3% | $343.5m, down 11.0% |
| Operating margin | 23.3%, versus 23.7% | 21.3%, versus 22.9% |
| Net income | $93.9m, down 1.0% | $234.4m, down 19.4% |
| Diluted EPS | $1.62, versus $1.61 | $4.03, versus $4.93 |
| Gross margin | 54.1%, versus 55.1% | 54.3%, versus 55.1% |
Quarterly diluted EPS increased slightly despite lower net income, while diluted weighted-average shares declined to 58.1m from 58.9m. The filing attributes margin pressure principally to unfavorable currency effects and product mix; lower sales and weaker volume also weighed on results.
Segment and geographic trends
- Adhesive Dispensing Systems: Q3 sales rose 1.7% to $249.0m; nine-month sales fell 1.0% to $697.2m. Q3 segment operating margin improved to 31.2% from 28.3%.
- Advanced Technology Systems: Q3 sales fell 5.1% to $253.1m; nine-month sales fell 6.6% to $736.9m. Management cited softness in electronics-related dispensing; nine-month segment margin declined to 20.5% from 24.5%.
- Industrial Coating Systems: Q3 sales fell 17.5% to $57.7m; nine-month sales fell 8.9% to $174.7m. Weakness was broad across product lines and regions, with Q3 segment margin down to 19.3% from 22.4%.
- For Q3, sales declined in Europe and Asia Pacific, while the Americas and Japan grew. Nine-month sales were especially weak in Japan and Asia Pacific. Foreign exchange reduced sales by 1.5% in Q3 and 2.3% year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $236.4m, down from $342.9m. Changes in operating assets and liabilities used $96.0m, primarily reflecting lower accrued liabilities, higher inventory and higher receivables tied to shipment timing.
- Capital expenditures were $46.0m. Investing cash outflow was $57.9m, including $12.1m for the Optical acquisition. Financing cash outflow was $129.6m, including $118.1m of treasury-share purchases and $60.3m of dividends.
- Cash and equivalents were $147.8m at July 31, 2019, up from $95.7m at October 31, 2018. Current assets were $980.7m and current liabilities $444.2m; current debt maturities were $168.7m.
- Total debt, including current maturities, was approximately $1.349bn, compared with $1.318bn at fiscal year-end. The $850m revolving credit facility had no outstanding balance; Nordson reported covenant compliance and no borrowing restriction under its covenants. The term loan carried a 2.98% weighted-average rate.
- Approximately $487.6m remained available under the $1.0bn share-repurchase authorizations. The company repurchased no shares in the quarter, though it had repurchased shares earlier in the nine-month period.
Outlook, risks and notable items
- For FY2019, management expected flat to modest organic sales growth, offset by an approximately 2% unfavorable currency effect at then-current exchange rates. It described the outlook cautiously amid slower emerging-market growth, low global GDP expectations, tariffs and trade uncertainty, and political instability.
- Management expected operating cash generation to cover liquidity needs, dividends and investments in new applications and markets. The filing provides no specific earnings or EPS guidance.
- The U.S. Tax Cuts and Jobs Act affected comparisons: the nine-month 2018 effective tax rate was 15.6%, versus 22.8% in 2019. Nordson recorded a $4.9m discrete tax expense in 2019 to finalize prior provisional tax accounting; 2018 included a $22.1m provisional tax benefit.
- Nordson adopted the new revenue-recognition standard on November 1, 2018; the cumulative adoption impact was not material. Certain customer-specific Advanced Technology Systems contracts moved to over-time recognition, also not material to overall financial statements.
- The company acquired certain assets of Optical Control GmbH on July 1, 2019; the transaction was not material and purchase-price allocations remained preliminary. The CEO transition took effect August 1, 2019, with Sundaram Nagarajan succeeding Michael Hilton.
- Nordson disclosed routine litigation and environmental matters, including an ongoing landfill remediation accrual of $0.4m and a California labor class action. Management did not expect these matters to have a material adverse effect. It stated that risk factors had not changed materially from the 2018 Form 10-K.
- Management expected adoption of the lease standard on November 1, 2019 to increase reported assets and liabilities substantially, primarily through recognition of operating-lease right-of-use assets and liabilities.
Important facts for investors to verify
- Whether demand in electronics-related Advanced Technology Systems products and Industrial Coating Systems stabilizes, and whether Asia Pacific and Japan sales recover.
- Whether the FY2019 sales outlook and assumed 2% currency headwind remain appropriate as market conditions and exchange rates change.
- Working-capital trends, especially receivables, inventory and accrued liabilities, and the resulting conversion of earnings into operating cash flow.
- Debt maturities and refinancing needs, including the $100m term-loan tranche due in March 2020 and other notes maturing beginning in 2020.
- The final acquisition accounting for Optical, the effects of lease-standard adoption, and any developments in the disclosed legal or environmental matters.