Nordson Corporation — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended April 30, 2011; fiscal year ends October 31. Amounts below are in $ millions unless stated otherwise. Per-share data reflects the two-for-one stock split.
Financial results
| Metric | Three months ended Apr. 30, 2011 | Year-over-year change | Six months ended Apr. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Sales | $318.9 | +26.7% | $589.9 | +24.9% |
| Operating profit | $92.4 | +60.5% | $158.0 | +68.3% |
| Operating margin | 29.0% | 22.9% prior year | 26.8% | 19.9% prior year |
| Net income | $65.2 | +101.2% | $111.1 | +87.9% |
| Diluted EPS | $0.95 | +$0.48 | $1.61 | +$0.75 |
| Gross margin | 62.0% | 61.1% prior year | 61.7% | 60.5% prior year |
Six-month operating cash flow was $112.1, versus $18.9 a year earlier; capital expenditures were $10.7. Cash increased $24.5 to $66.8. At April 30, current assets were $497.4 and current liabilities $182.3 (current ratio approximately 2.7x). Long-term debt was $51.9 and current maturities $14.4; notes payable were $0.7. Total debt including notes payable was approximately $67.0, down from $112.4 at October 31, 2010. Cash exceeded this debt balance.
Business trends and changes
- Q2 sales growth reflected 22.8% higher volume and a 3.9% favorable currency effect. Six-month growth reflected 23.4% higher volume and a 1.5% favorable currency effect.
- Q2 segment sales increased across the board: Adhesive Dispensing Systems $159.4 (+22.5%); Advanced Technology Systems $113.0 (+25.5%); Industrial Coating Systems $46.5 (+47.8%). Segment operating margins were 37.4%, 29.8%, and 16.3%, respectively.
- Management attributed margin expansion mainly to sales mix, low-cost sourcing, fixed-cost absorption, favorable currency, higher volume, and a more efficient cost structure. Selling and administrative expense rose 9.4% in Q2, but declined as a share of sales to 33.0% from 38.0%.
- Micromedics was acquired for $21.3 cash on November 1, 2010 and added to Advanced Technology Systems. The acquisition added $13.3 of goodwill and $7.5 of identifiable intangible assets.
- Cash flow from operations improved primarily with higher earnings and lower operating-asset and liability cash use than in the prior-year period, which included $52.0 of U.S. pension contributions. Financing used $65.1, including $45.5 of net debt repayments, $19.1 of share repurchases, and $14.3 of dividends.
Outlook, risks and unusual items
- For Q3 FY2011, management expected sales to increase 13%–17% year over year, including an estimated 7% favorable currency effect, and diluted EPS of $0.84–$0.91. Management said orders remained very high but growth was transitioning toward a more sustainable long-term level; it intended to continue investing, pursuing acquisitions, and advancing operational initiatives.
- Management reported minor Japan facility damage following the March 2011 earthquake and tsunami, with an immaterial charge below the insurance deductible. Japan represented approximately 9% of FY2010 worldwide sales. No significant results impact was expected, though infrastructure and commercial uncertainty remained.
- A Georgia facility consolidation in Adhesive Dispensing Systems resulted in a $1.3 impairment charge in Q2 and the six-month period. The prior-year comparison included an $8.0 pension settlement loss in six-month pension costs and a $5.3 Q2 tax charge related to Medicare Part D deferred-tax treatment. Current-period tax benefits included research-credit and employee stock ownership plan items; the six-month effective tax rate was 29.7% versus 35.5% a year earlier.
- Other income included foreign-exchange gains of $1.2 in Q2 and $1.8 for six months, although individual derivative and balance-sheet currency effects partially offset one another. The filing states that forward contracts are used to manage currency exposures, not for speculation.
- Pending litigation and environmental matters were not expected to have a material effect, according to management. The New Richmond, Wisconsin remediation accrual was $0.8; the filing cautions that actual environmental costs could exceed estimates. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q3 sales and EPS guidance was achieved, and whether order growth moderated as management anticipated.
- How much reported sales and earnings growth came from underlying volume versus currency, acquisition effects, and discrete tax benefits.
- Whether the improved operating margins and operating cash flow are sustainable, including the effects of working capital, capital spending, and pension funding.
- Progress and costs associated with the Georgia consolidation, Micromedics integration, and any further acquisitions or investment plans.
- Developments in Japan, environmental remediation, tax audits and unrecognized tax benefits, and the company’s debt and pension obligations.