Nordson Corporation — Q3 FY2010 Form 10-Q
Reporting period: Three and nine months ended July 31, 2010. Amounts below are in millions of U.S. dollars, except per-share data. The financial statements are unaudited.
Business context and results
Nordson sells dispensing, coating, and related technology systems through Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. Management attributed growth to a recovery in demand and higher sales volumes.
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Sales | $279.1 | $206.3 | $751.4 | $581.7 |
| Operating profit | $67.7 | $37.2 | $161.6 | $68.8 |
| Net income | $55.3 | $24.0 | $114.5 | $49.0 |
| Diluted EPS | $1.61 | $0.71 | $3.35 | $1.46 |
| Gross margin | 59.4% | 59.0% | 60.1% | 57.0% |
| Operating margin | 24.3% | 18.0% | 21.5% | 11.8% |
Financial position and cash flow
- Nine-month operating cash flow was $66.5, down from $119.3 a year earlier. Higher operating assets and liabilities used cash, including the effects of increased business activity and $52.0 of U.S. pension contributions.
- Investing cash outflow was $27.9, including $18.5 net cash paid for the GLT acquisition; capital expenditures were $7.8. Financing cash outflow was $9.0. Cash increased $29.3 to $48.0.
- At July 31, current assets were $433.4 and current liabilities $190.7. Long-term debt was $152.0, with $14.3 of current maturities and $2.1 of notes payable. Capital-lease obligations were reported separately.
- Receivables were $225.2 and inventories $119.6, up from $191.2 and $97.6, respectively, at October 31, 2009.
Material changes and unusual items
- Q3 sales rose 35.3%; management reported volume growth of 37.7%, partly offset by unfavorable currency translation. Nine-month sales rose 29.2%.
- All three segments and all five reported geographic regions grew in Q3. Advanced Technology Systems sales rose 53.1%; Industrial Coating Systems sales rose 53.6%. Asia Pacific sales increased 80.7%.
- Management cited higher fixed-cost absorption, product mix, cost reductions, and expenses growing more slowly than sales as contributors to margin improvement. Restructuring costs were $0.3 in Q3 and $1.4 year to date, versus $1.0 and $14.1 in the prior-year periods.
- Q3 tax expense included a $10.7 tax benefit from writing off tax basis associated with the graphic arts and lamps product lines sold to Baldwin Technology. The nine-month effective tax rate also reflected a $5.3 charge related to Medicare Part D tax treatment and a $3.5 tax benefit from consolidating certain operations and legal entities.
- Nine-month pension cost included $8.0 of settlement losses, versus $1.6 in the prior-year period. FY2010 pension contributions were expected to be $72.7, compared with the prior estimate of $28.4.
- Nordson acquired German distributor GLT in January for $21.9 in cash consideration ($18.5 net of cash acquired). It agreed in June to sell its graphic arts and lamps product lines; their current-year results and net assets were described as immaterial.
Outlook, risks, and contingencies
Management said business conditions and order trends were improving but recovery remained uncertain. It planned to remain cautious on spending, preserve cost changes, and pursue selected investment, operational initiatives, and strategic acquisitions. For Q4 FY2010, it forecast sales growth of 19%–23% year over year, including an estimated 3% unfavorable currency effect, and diluted EPS of $1.30–$1.41.
Management said pending or potential litigation was not expected to materially affect financial condition, results, or cash flows. The New Richmond, Wisconsin landfill remediation accrual was $0.9; management noted estimates could increase if additional requirements or obligations emerge. The filing reported no material change in previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- How much of earnings growth and the Q3 tax rate reflects the one-time $10.7 tax benefit, and what underlying tax rate is appropriate for forecasting.
- Whether working capital and pension funding continue to constrain operating cash flow despite sharply higher earnings.
- Whether Q4 sales and EPS guidance was achieved, particularly given the uncertain recovery and projected currency headwind.
- The expected timing and remaining cost of restructuring actions; management anticipated the remaining costs in Q4, within an estimated total of $23.6.
- Whether pension contribution expectations and environmental remediation estimates change as obligations develop.