Nordson Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016. Nordson supplies precision dispensing, application, testing, inspection and surface-treatment technologies to diverse industrial and consumer end markets. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Sales | $372.2 | $379.0 | -1.8% |
| Gross margin | 52.9% | 55.1% | -2.2 percentage points |
| Operating profit | $52.0 | $62.8 | -17.3% |
| Operating margin | 14.0% | 16.6% | -2.6 percentage points |
| Net income | $41.2 | $42.9 | -4.0% |
| Diluted EPS | $0.72 | $0.69 | +4.3% |
| Operating cash flow | $48.5 | $25.9 | +$22.6 |
| Capital expenditures | $11.1 | $16.8 | -$5.7 |
- Sales volume rose 3.5%—0.4% organic and 3.1% from acquisitions—but unfavorable currency translation reduced sales by 5.3%. At prior-year exchange rates, sales would have been approximately $20.0 million higher.
- Gross margin fell mainly due to product and customer mix, acquisition-related short-term inventory purchase-accounting charges, and currency effects. Selling and administrative expense declined 0.7% to $144.9 million, but rose to 38.9% of sales from 38.5%.
- Net income benefited from a 12.6% effective tax rate versus 27.0% a year earlier. The current-quarter provision included discrete tax benefits of $2.0 million from the R&D tax credit and $6.2 million related to dividends from previously taxed foreign earnings. EPS also benefited from fewer shares outstanding following repurchases.
Segments and material changes
| Segment | Sales | Year-over-year sales | Operating profit | Operating margin |
|---|---|---|---|---|
| Adhesive Dispensing Systems | $203.4 | +4.8% | $50.4 | 24.8% |
| Advanced Technology Systems | $117.9 | -10.9% | $8.0 | 6.8% |
| Industrial Coating Systems | $50.9 | -3.1% | $4.2 | 8.2% |
Adhesive Dispensing growth was led by organic expansion across product lines and markets. Advanced Technology declined on lower volume, primarily reflecting softness in electronics-related product lines; its operating margin fell from 20.3% to 6.8%. Industrial Coating sales declined, while margin improved from 7.2% to 8.2% on mix. Europe sales grew 10.3%; Asia Pacific fell 9.1%, the United States fell 4.4%, the Americas fell 5.5%, and Japan fell 9.4%.
Cash, liquidity and debt
- Cash increased $10.5 million to $60.7 million. Operating cash flow was $48.5 million, up from $25.9 million, mainly because receivables collections used less cash than in the prior-year quarter.
- Investing activities used $11.0 million, primarily for capital expenditures. Financing activities used $26.0 million, including $33.4 million for treasury-share purchases and $13.7 million for dividends; net proceeds from debt and short-term borrowings were $21.4 million.
- Current assets were $680.9 million and current liabilities $236.8 million at January 31, 2016. Total debt, including current maturities and notes payable, was approximately $1.14 billion; long-term debt including current maturities was $1.13 billion. Long-term debt fair value was $1.13 billion.
- Outstanding under the $600 million revolving credit facility was $481.8 million. Nordson reported compliance with debt covenants and no covenant-based borrowing limitation. The company stated that operating cash flow and available borrowing capacity were expected to meet liquidity needs.
- Share repurchases had approximately $119.0 million of authorization remaining. The company funded repurchases with operating cash and credit-facility borrowings.
Outlook, risks and unusual items
- For Q2 FY2016, management expected sales growth of 2%–6% year over year, including organic volume growth of 1%–5%, a 2% acquisition contribution, and an estimated 1% currency headwind. Expected diluted EPS was $0.85–$0.95.
- Management cited expected solid order growth and longer-term opportunities, but cautioned about slow growth in emerging markets, low global GDP growth expectations, and political instability. The filing does not provide full-year numerical guidance.
- Q1 severance and restructuring costs were $1.0 million across the three segments. Related severance payments, including amounts for prior actions, totaled $6.3 million during the quarter.
- Environmental remediation accrual for the New Richmond, Wisconsin site was $0.6 million. Management said the liability could exceed its estimate due to uncertainties, but did not expect a material adverse effect. Other pending or potential litigation was not expected to materially affect financial condition, results or cash flows.
- Foreign-exchange exposure remains relevant: currency translation reduced reported sales, while the quarter included $1.0 million of foreign-currency gains in other income. Management cited continued macroeconomic and geopolitical uncertainty.
Important facts for investors to verify
- Whether the anticipated Q2 sales growth and EPS range were achieved, and how currency and acquisition effects compared with the forecast.
- Whether Advanced Technology Systems sales and margins stabilized, particularly given weakness in electronics-related markets.
- How much of the low Q1 effective tax rate reflects nonrecurring discrete benefits; the filing identifies $8.2 million in current-quarter discrete tax benefits.
- Whether operating cash generation remains sufficient alongside share repurchases, dividends, capital investment and debt servicing.
- Developments in environmental remediation estimates, restructuring execution, and foreign-exchange exposure.