Nordson Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended April 30, 2020. Dollar amounts below are in millions, except per-share data. Nordson manufactures precision dispensing, fluid management, test and inspection, and related technologies. It reorganized its former three operating segments into Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS); prior-period segment figures were recast.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $529.5 | $551.1 | $1,024.4 | $1,049.0 |
| Operating profit | $125.0 | $128.9 | $200.1 | $213.2 |
| Operating margin | 23.6% | 23.4% | 19.5% | 20.3% |
| Net income | $92.1 | $91.9 | $144.1 | $140.5 |
| Diluted EPS | $1.58 | $1.58 | $2.47 | $2.41 |
- Q2 sales declined 3.9% year over year: volume fell 2.5% and currency reduced sales 1.4%. Q2 gross margin was 54.7%, unchanged year over year.
- For the first half, sales fell 2.3%, with volume down 1.3% and unfavorable currency effects of 1.0%. Gross margin decreased to 54.0% from 54.4%; management attributed the decline to currency and product mix.
- Q2 operating profit decreased 3.0%, while net income was nearly flat. For the first half, operating profit fell 6.1%; net income increased 2.6%, primarily reflecting lower tax and interest expense. First-half effective tax rate was 19.8%, versus 23.9%.
- Q2 IPS sales declined 6.5% and operating margin fell to 27.1% from 28.3%. ATS sales declined 0.8%, while its operating margin improved to 23.7% from 22.7%. First-half operating margins declined in both segments: IPS to 24.3% from 24.9%, and ATS to 19.0% from 20.1%.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $218.2, up from $161.9; the improvement included a $15.9 cash benefit from changes in operating assets and liabilities, compared with a $44.6 use in the prior-year period, principally due to stronger receivables collections. Capital expenditures were $25.8, implying operating cash flow less capital expenditures of approximately $192.3.
- Cash and cash equivalents were $306.3 at April 30, up from $151.2 at October 31, 2019. Current assets were $1,143.3 and current liabilities $360.2.
- Debt carrying value, including current maturities and net of issuance costs, was approximately $1,280.8; cash less this debt was approximately $974.6 net debt. Long-term debt increased partly due to borrowings, including a March euro term-loan draw. The $850.0 revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Six-month financing cash outflows included $43.9 of dividends and $41.9 for treasury-share purchases. The quarterly dividend declared was $0.38 per share.
Outlook, risks and notable items
- Nordson suspended its 2020 annual guidance because the duration and effects of COVID-19 were uncertain. Management said the pandemic had not materially adversely affected reported Q2 results, but could negatively affect Q3 and later periods. Operations continued at production facilities serving critical-infrastructure customers; demand increased for some medical, food and packaging-related products, while production capacity and supply-chain disruptions constrained the response.
- Management cited longer-term growth opportunities across consumer non-durables, industrial, medical, electronics, consumer durables and automotive markets, and expected operating cash flow to support liquidity, dividends and investment. It also flagged macroeconomic weakness, trade negotiations and political instability.
- On June 1, 2020, after quarter-end, Nordson acquired Fluortek, a medical-device tubing manufacturer, for approximately $120 million net of cash and closing adjustments, using cash on hand. The company did not expect a material financial-statement impact.
- Reported litigation includes a California employee class-action matter; management did not expect a material adverse outcome. The New Richmond, Wisconsin environmental remediation accrual was $0.36 million; the company noted estimates could change but did not expect a material effect.
- Nordson adopted lease accounting in fiscal 2020 and recorded $130.3 million of operating lease liabilities at April 30. The filing states the adoption did not materially affect income or cash flows.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter orders, customer demand, production capacity, supply chains and operating costs, given the absence of 2020 guidance.
- Whether sales and margins in IPS and ATS recover, particularly in automotive, general industrial, test and inspection, and industrial fluid-dispense markets.
- The financing and liquidity impact of the Fluortek acquisition and the evolution of debt, maturities, variable-rate exposure and covenant headroom.
- Whether first-half operating cash flow benefits from receivables collections are sustainable, and how inventory levels and working capital develop.
- Developments in the employee litigation and environmental remediation obligations, and any resulting change to accrued amounts.