Nordson Corporation — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 30, 2019. Amounts below are in millions of U.S. dollars except per-share data. Nordson makes precision dispensing, coating, fluid-management, test and inspection, and related technology systems, serving diversified industrial, consumer, medical and technology markets.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $551.1 | $553.7 | $1,049.0 | $1,104.1 |
| Operating profit | $128.9 | $128.9 | $213.2 | $248.2 |
| Net income | $91.9 | $91.2 | $140.5 | $195.8 |
| Diluted EPS | $1.58 | $1.55 | $2.41 | $3.32 |
| Operating margin | 23.4% | 23.3% | 20.3% | 22.5% |
- Q2 sales declined 0.5%; organic volume rose 3.1%, more than offset by a 3.6% unfavorable currency impact. Q2 net income increased 0.8% and diluted EPS increased 1.9% year over year.
- First-half sales fell 5.0%, reflecting a 2.9% organic volume decline and 2.7% unfavorable currency impact, partly offset by a 0.6% acquisition contribution. First-half net income declined 28.2% and diluted EPS 27.4%.
- Q2 gross margin was 54.7%, down from 55.4%; management attributed the decline mainly to currency, with a smaller unfavorable product-mix effect. First-half gross margin was 54.4% versus 55.1%. First-half operating margin fell primarily because of selling and administrative expense leverage, currency and product mix.
- Q2 segment sales were $236.7 million in Adhesive Dispensing Systems, $249.3 million in Advanced Technology Systems and $65.1 million in Industrial Coating Systems. Advanced Technology faced softer electronics dispensing demand; fluid-management growth partly offset it. For the first half, Advanced Technology sales declined 7.4%, including a 6.8% organic volume decline.
- Income-tax rates were 20.9% for Q2 and 23.9% for the first half, versus 22.8% and 11.7%, respectively, in 2018. The prior-year first half included a $22.1 million provisional tax benefit related to U.S. tax reform; the current first half included a $4.9 million discrete tax expense from finalizing tax-reform estimates. These items affect year-over-year earnings comparability.
- Six-month operating cash flow was $161.9 million, down from $212.3 million. Operating asset and liability changes used $44.6 million of cash, compared with $4.0 million in the prior-year period. Capital expenditures were $26.6 million; investing activities used $25.7 million.
- Cash and cash equivalents were $149.2 million at April 30, 2019, compared with $95.7 million at October 31, 2018. Current assets were $964.9 million and current liabilities $446.5 million.
Debt, liquidity and capital allocation
- Total debt, including current maturities, was $1,374.1 million at April 30, 2019, versus $1,314.1 million at fiscal year-end; long-term debt excluding current maturities was $1,220.4 million. Current maturities rose $125.0 million, including reclassifications of $100 million of term loans and $25 million of notes.
- In April, Nordson extended and amended its $605 million term loan and established an $850 million unsecured multicurrency revolving facility expiring in April 2024. No revolver borrowings were outstanding at quarter-end. The company reported compliance with debt covenants.
- Financing activities used $86.6 million in the first half, including $118.1 million for treasury-share purchases and $40.2 million in dividends, partly offset by net long-term debt proceeds. About $487.6 million remained available under the $1.0 billion share-repurchase authorization.
Outlook, commentary and risks
- Management expected 2019 organic sales to increase in the low single digits versus the prior year, offset by an approximately 2% unfavorable currency effect at prevailing exchange rates. It cited longer-term opportunities across consumer, medical and industrial markets, while noting uncertainty about the pace of global improvement.
- Management cautioned about slower emerging-market growth, low global GDP growth expectations, tariffs and international trade uncertainty, and political instability. Foreign-exchange movements were a significant reported-sales and margin headwind.
- Six-month severance and restructuring costs were $1.5 million, primarily related to U.S. facility consolidation in Adhesive Dispensing Systems; additional costs were not expected to be material. The filing also reports a nonrecurring gain in prior-period other income, affecting comparisons.
- Pending matters include environmental remediation at a Wisconsin landfill, with a $0.4 million recorded accrual, and a former employee’s California labor-code class-action suit. Management did not expect these matters to have a material adverse effect, but noted that environmental estimates involve uncertainty.
- Topic 606 revenue recognition was adopted November 1, 2018; the cumulative and expected ongoing effects were not material. Nordson expected lease accounting adoption on November 1, 2019 to increase reported assets and liabilities due to recognition of operating lease right-of-use assets and liabilities.
Important facts for investors to verify
- Whether the projected low-single-digit organic growth and approximately 2% currency headwind were realized, and how demand in electronics, Japan and Asia Pacific evolved.
- Whether first-half cash-flow weakness from working-capital changes persisted, and whether operating cash flow covered capital spending, dividends and repurchases.
- The schedule and refinancing implications of the increased current debt maturities, and the terms and ongoing covenant headroom under the amended credit facilities.
- How much of first-half earnings deterioration reflects operating performance versus prior-year tax benefits and other unusual items.
- Developments in the environmental and labor litigation matters, and the eventual balance-sheet effect of lease-standard adoption.