Nordson Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2015. Amounts below are in millions of dollars, except per-share data, percentages, and where noted. Nordson makes precision dispensing, processing, testing, and related systems for industrial and technology markets.
Financial performance
| Metric | Three months 2015 | Year-over-year | Six months 2015 | Year-over-year |
|---|---|---|---|---|
| Sales | $400.7 | Down 4.0% | $779.7 | Up 0.4% |
| Operating profit | $76.4 | Down 17.7% | $139.2 | Down 5.1% |
| Operating margin | 19.1% | 22.2% prior year | 17.9% | 18.9% prior year |
| Net income | $49.2 | Down 20.5% | $92.1 | Down 4.9% |
| Diluted EPS | $0.80 | $0.96 prior year | $1.48 | $1.50 prior year |
| Gross margin | 55.4% | 56.4% prior year | 55.2% | 55.4% prior year |
Quarterly sales volume rose 3.6% (0.8% organic and 2.8% acquisition contribution), but currency reduced sales 7.6%. For the six-month period, volume rose 6.9% (4.2% organic and 2.7% acquisitions), while currency reduced sales 6.5%. Quarterly results also reflected higher selling and administrative expense as a percentage of sales and increased interest expense. Share repurchases reduced average shares outstanding and cushioned the per-share decline relative to the decline in net income.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $117.4, versus $102.2 a year earlier. Capital expenditures were $36.2, versus $16.5; cash used in investing was $36.1.
- Cash increased $9.1 to $51.5 at April 30. Current assets were $662.1 and current liabilities $298.3.
- Cash used in financing was $68.9, including $138.9 of treasury-share purchases and $27.1 of dividends; net short- and long-term borrowings provided $95.2.
- At April 30, notes payable were $57.7 and long-term debt including current maturities was $829.9. The filing attributes higher interest expense primarily to higher borrowing levels. Nordson reported compliance with debt covenants.
- Inventory rose $28.5 from October 31, 2014, which management attributed to anticipated higher business activity in the second half.
Business changes and management commentary
- Quarterly segment sales: Adhesive Dispensing Systems $203.3, down 12.4%; Advanced Technology Systems $129.5, up 1.5%; Industrial Coating Systems $68.0, up 17.4%. Currency pressure was especially evident in Adhesive Dispensing Systems; Industrial Coating Systems benefited from stronger demand across several end markets.
- Management cited a stronger U.S. dollar, slow growth in emerging markets, a low-growth global macroeconomic outlook, and political instability as concerns. It remained optimistic about opportunities in consumer, medical, electronics, and industrial markets and emphasized operational efficiency and investment in growth.
- During the period, Nordson amended and extended its revolving credit facility to $600 million for five years, with a potential increase to $850 million subject to conditions. It also entered a $200 million PNC term loan in April.
- Nordson repurchased 1.788 million shares during the six months for $136.6 million, averaging $76.43 per share, under a $300 million authorization approved in December 2014.
Outlook, risks, and unusual items
- For Q3 2015, management expected sales growth of 2%–6% year over year, including organic volume growth of 6%–10%, acquisition contribution of 2%, and an estimated 6% negative currency effect. Expected diluted EPS was $1.19–$1.30. Full-year organic growth was expected in the mid-single digits.
- The six-month tax provision included a $1.7 million discrete benefit, primarily related to the 2014 federal R&D tax credit. The six-month comprehensive-income result also included a $30.6 million negative currency translation adjustment.
- Nordson reported pending or potential litigation involving environmental, product liability, patent, contract, employee, and other matters, but did not expect the matters to have a material effect. Its New Richmond, Wisconsin environmental-site accrual was $0.6 million; management noted estimates could rise if additional remediation requirements emerge.
- The filing said risk factors had not materially changed from the 2014 Form 10-K. Management reported disclosure controls were effective as of April 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the projected Q3 sales and EPS ranges and mid-single-digit full-year organic growth were achieved, and how actual currency movements compared with assumptions.
- Whether organic demand, especially in Adhesive Dispensing Systems and Asia Pacific, improved or weakened, and whether segment margins recovered.
- How elevated capital spending and inventory translated into subsequent operating cash flow and returns.
- Debt levels, interest costs, covenant headroom, and the pace and funding of share repurchases and dividends.
- Any changes in environmental remediation estimates or other litigation and contingency exposures.