Nordson Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended October 31, 2010; the filing also reports fourth-quarter results. Dollar amounts below are in millions unless stated otherwise. Nordson manufactures precision dispensing, testing and inspection, surface-preparation and curing equipment across three segments. International customers generated 73.4% of FY2010 sales.
Key financial results
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Sales | $1,041.6 | $819.2 | Up 27.1%; volume increased 25.5% and currency added 1.6%. |
| Gross margin | 59.7% | 57.2% | Improved with stronger overhead absorption, prior cost reductions, product mix and currency. |
| Operating profit (loss) | $234.8 | $(127.8) | FY2009 included $243.0 of goodwill and long-lived asset impairment charges. |
| Operating margin | 22.5% | (15.6)% | Turnaround reflected recovery in sales and the absence of the prior-year impairment charges. |
| Net income (loss) | $168.0 | $(160.1) | FY2010 diluted EPS was $4.91 versus $(4.77). |
| Cash from operations | $140.2 | $168.7 | Lower despite the earnings recovery; working capital used cash and pension/postretirement payments were significant. |
| Cash from investing | $(41.3) | $(3.9) | Included $18.6 net cash used for the GLT acquisition and $14.3 of capital expenditures. |
| Cash from financing | $(79.3) | $(161.0) | Included $45.1 net repayment of short- and long-term borrowings. |
Fourth quarter: Sales were $290.2, gross margin $170.3, net income $53.6 and diluted EPS $1.56. In Q4 FY2009, sales were $237.4 and the company recorded a net loss of $209.0, including the year’s impairment charges.
Segment sales and operating margins: Adhesive Dispensing Systems sales were $525.3, with a 31.7% margin (27.7% in 2009); Advanced Technology Systems sales were $380.3, with a 22.7% margin (versus a reported 86.2% operating loss margin in 2009, which included impairment charges); Industrial Coating Systems sales were $136.0, with a 9.2% margin (versus a reported 6.7% loss margin in 2009, also affected by impairment).
Balance sheet, debt and liquidity
- At October 31, 2010, cash and cash equivalents were $42.3 and marketable securities $7.8, compared with $18.8 and $0.04, respectively, a year earlier. Working capital was $259.1, up from $190.2.
- Total debt was approximately $112.4, including $110.3 of long-term debt and $2.2 of notes payable; long-term debt maturities included $14.3 due in 2011, $46.0 in 2012 and $50.0 in 2013. The company reported compliance with debt covenants and $354.0 of available capacity under its $400 million revolving facility.
- Total assets were $986.4 and shareholders’ equity $505.1. The company stated that cash, internally generated funds and unused financing were expected to be adequate for 2011 requirements.
- Operating cash flow was 13% of revenue in 2010, versus 20% in 2009. Management attributed the decline partly to higher operating assets and $79.5 of U.S. pension contributions and one-time postretirement payments.
Changes, outlook and notable items
- The recovery followed the FY2009 downturn: sales had fallen 27.2% that year. In 2010, all segments and geographic regions grew; Asia Pacific sales rose 73.5%, led by technology and consumer-electronics demand.
- Year-end backlog increased to approximately $128 million from $79 million; management expected all year-end orders to ship in 2011. Nordson reported no customer represented 5% or more of sales.
- Management approached 2011 cautiously, prioritizing continued operating efficiencies, lean initiatives, development of new applications and markets, and selective strategic acquisitions. Planned capital spending emphasized the SAP rollout and facility, manufacturing and distribution projects. No numerical 2011 sales or EPS guidance is provided.
- Management expected pension and postretirement expense in 2011 to be approximately $5 million below 2010, mainly because 2010 included a settlement loss related to a lump-sum retirement payment.
- Nordson acquired German distributor GLT in January 2010 for $22.0 million, or $18.6 million net of cash acquired. It sold its UV Curing graphic arts and lamps product lines in June for a pretax loss of $0.4 million; the divested business was described as immaterial to consolidated results. On November 1, 2010, it acquired Micromedics, which was to be integrated into Advanced Technology Systems.
- FY2010 tax expense was $63.3 million, an effective rate of 27.4%. The rate included a $10.2 million tax benefit related to the UV product-line sale and a $5.2 million charge from the change in Medicare Part D subsidy tax treatment.
Risks, contingencies and controls
- Demand depends on global economic conditions and cyclical end markets, including semiconductor, electronics and consumer durables. Foreign operations generated 73.4% of sales, exposing results to currency, political, regulatory, trade and collection risks.
- At year-end, 43% of total debt was floating-rate; Nordson estimated a 1 percentage-point rate increase would add approximately $1.1 million of annual interest expense. Credit facilities include restrictive covenants and financial-ratio requirements.
- Other identified risks include successful innovation and intellectual-property protection, acquisition selection and integration, and environmental compliance and remediation liabilities.
- Pending or potential litigation in the ordinary course was not expected by management, after consultation with counsel, to materially affect financial condition, results or cash flows. The recorded New Richmond, Wisconsin landfill remediation accrual was $0.9 million; management noted actual costs could exceed estimates but did not expect a material adverse effect.
- The company recorded no goodwill or long-lived asset impairment in 2010 after annual testing; FY2009 impairment charges totaled $243.0 million. Goodwill valuation depends on forecast assumptions, including growth, margins and discount rates.
- Management and the independent auditor concluded internal control over financial reporting was effective at October 31, 2010; the auditor issued unqualified opinions on the financial statements and controls.
Investor verification priorities
- Assess whether the strong 2010 rebound and higher backlog translated into sustained 2011 demand, particularly in Asia Pacific and Advanced Technology Systems.
- Reconcile operating cash conversion with earnings, working-capital growth and pension funding; review future pension contributions and funded status.
- Review debt maturities, facility availability and covenant headroom, including exposure to floating interest rates.
- Evaluate the assumptions supporting goodwill and intangible-asset valuations, given the large FY2009 impairment and sensitivity to a slower recovery.
- Verify the financial contribution and integration progress of GLT and Micromedics, and the ongoing effects of the UV product-line divestiture and related tax items.