Nordson Corporation — Q2 2017 Form 10-Q
Period: Three and six months ended April 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Nordson designs and manufactures precision dispensing, coating, testing, inspection, and surface-treatment products for medical, electronics, packaging, industrial, and other markets. The company reported results for its fiscal second quarter and first six months of fiscal 2017. Results include acquisitions completed during the period, including Vention Medical’s Advanced Technologies business, acquired March 31.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $496.1 million | $437.6 million | $903.6 million | $809.8 million |
| Operating profit | $103.5 million | $101.9 million | $179.4 million | $153.9 million |
| Net income | $64.5 million | $70.6 million | $114.5 million | $111.8 million |
| Diluted EPS | $1.11 | $1.23 | $1.97 | $1.95 |
| Gross margin | 55.5% | 56.8% | 55.4% | 55.0% |
| Operating margin | 20.9% | 23.3% | 19.9% | 19.0% |
- Q2 sales rose 13.4%; management attributed growth to 9.4% organic growth and 5.7% acquisition contribution, partly offset by 1.7% unfavorable currency translation. Six-month sales rose 11.6%, with 9.8% organic growth, 3.3% acquisition contribution, and a 1.5% currency headwind.
- Q2 diluted EPS declined 9.8% year over year, while six-month diluted EPS increased 1.0%. Q2 and six-month results included acquisition transaction costs with a reported after-tax net-income impact of approximately $9.5 million and diluted-EPS impact of $0.16 in each period.
- Q2 selling and administrative expense included $13.4 million of Vention transaction costs. These costs, acquisition effects, weaker product mix, and acquired-inventory accounting charges weighed on quarterly margins. Six-month operating-margin improvement reflected expense leverage and favorable product mix, partly offset by acquisition-related costs and effects.
- By segment, Q2 sales were $226.9 million for Adhesive Dispensing Systems, $210.1 million for Advanced Technology Systems, and $59.1 million for Industrial Coating Systems. Advanced Technology Systems had the largest reported growth, supported by organic demand and acquisitions.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was $139.4 million, versus $126.9 million a year earlier. Capital expenditures were $27.0 million, compared with $25.5 million.
- Investing activities used $833.7 million, including $805.2 million for acquisitions. Financing activities provided $713.8 million, primarily reflecting borrowings used to fund Vention.
- Cash and equivalents were $88.4 million at April 30, up from $67.2 million at October 31, 2016. Current assets were $828.8 million and current liabilities were $456.5 million.
- Total debt, including current maturities, was $1.712 billion, versus approximately $980.9 million at October 31, 2016. The increase primarily reflected the $705 million Vention term loan. The company also had $328.975 million outstanding on its $600 million revolving facility; it reported covenant compliance and no borrowing limitation from covenants at the reporting date.
- The Vention term loan carried a 2.25% weighted-average rate and is repayable in tranches due October 2018, March 2020, and March 2022. Current maturities of long-term debt totaled $138.1 million.
- Inventories increased $55.4 million from fiscal year-end, attributed to acquisitions and anticipated higher business activity in the second half.
Material changes, outlook, and risks
- Nordson acquired Vention for an aggregate purchase price of $705 million and recorded preliminary goodwill of $465.5 million and identifiable intangible assets of $285.0 million. Vention contributed $12.9 million of sales and $0.4 million of net income after acquisition. The purchase-price allocation remained preliminary. Other 2017 acquisitions included Plas-Pak, InterSelect, and ACE.
- Q2 gross margin fell 1.3 percentage points, with acquisition effects and short-term acquired-inventory purchase accounting charges identified as principal factors. The company also recorded a $2.6 million discrete tax expense for nondeductible acquisition costs. The Q2 effective tax rate was 31.8%, compared with 28.6% a year earlier.
- For Q3 2017, management forecast sales growth of 15%–19% year over year, including 6%–10% organic volume growth and approximately 10% acquisition contribution, offset by about 1% unfavorable currency translation. Expected diluted EPS was $1.51–$1.65.
- Management expected continued volume improvement, citing recent order activity, but said it was proceeding cautiously because of slow emerging-market growth, a low-growth global economic outlook, and political instability in some regions. It expected operating cash flow and borrowing capacity to support liquidity needs, dividends, debt maturities, and investment.
- Foreign exchange remained a risk: the company used short-term currency forwards but did not designate them as hedges. Management said market-risk disclosures had not changed materially from the prior annual filing.
- Nordson reported pending or potential litigation in ordinary-course matters and a $0.516 million accrual for its share of ongoing landfill remediation and monitoring. Management did not expect these matters to have a material effect, while noting environmental estimates could increase as requirements evolve.
- Disclosure controls were assessed as effective at April 30, 2017; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the Q3 sales and EPS outlook is achieved, and how much growth is organic versus acquisition-related and currency-driven.
- Vention’s final purchase-price allocation, integration performance, and contribution to sales, margins, and cash generation; also assess the recurring impact of acquisition-related costs and amortization.
- Debt repayment capacity and refinancing needs, particularly the 2018 maturities, alongside revolver availability and covenant compliance.
- Whether margin pressure from acquisition accounting, product mix, and foreign exchange eases, and whether inventory growth converts into sales and cash flow.
- Developments in environmental remediation estimates and other pending legal matters; the filing states that broader risk-factor information had not materially changed from the 2016 Form 10-K.