Nordson Corporation — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended July 31, 2017. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
Business context
Nordson designs and sells precision dispensing, coating, inspection, and fluid-management technologies across industrial, electronics, medical, and consumer markets. It reported three segments: Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales | $589.4m | $489.9m | $1,493.0m | $1,299.7m |
| Operating profit | $153.5m | $123.7m | $332.9m | $277.6m |
| Net income | $101.5m | $84.2m | $216.0m | $196.0m |
| Diluted EPS | $1.74 | $1.46 | $3.71 | $3.41 |
| Gross margin | 55.4% | 55.8% | 55.4% | 55.3% |
| Operating margin | 26.0% | 25.2% | 22.3% | 21.4% |
- Q3 sales rose 20.3%; management attributed 10.8 percentage points to organic growth and 9.9 points to acquisitions, with currency reducing growth by 0.4 points. Nine-month sales increased 14.9%, including 10.2% organic growth and 5.8% acquisition contribution, partly offset by 1.1% unfavorable currency.
- Advanced Technology Systems was the largest growth contributor: Q3 sales increased 41.4%, including acquisition effects and organic demand in electronics and medical-related product lines. Adhesive Dispensing Systems sales rose 5.7%; Industrial Coating Systems sales rose 3.0%.
- Q3 gross margin declined 0.4 percentage points, largely from acquired businesses, purchase-accounting inventory charges, and currency. Operating margin improved as sales growth leveraged selling and administrative costs; acquisition-related costs partly offset the benefit.
- Interest expense increased to $11.3m in Q3 and $24.9m year to date, primarily because of higher borrowing. The effective tax rate was 28.8% for Q3 and 29.8% year to date, versus 28.2% and 25.5% in the comparable 2016 periods.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $216.2m, up from $194.7m. Capital expenditures were $49.3m.
- Investing cash outflow was $855.8m, including $805.9m for acquisitions. Financing cash inflow was $678.2m, primarily reflecting borrowing to fund acquisitions. Cash increased $43.5m to $110.7m.
- At July 31, 2017, current assets were $920.2m and current liabilities $437.4m. Long-term debt was $1,569.7m, with $126.6m of current maturities; total debt including current maturities was $1,696.3m. Debt rose substantially from October 31, 2016, principally due to acquisition financing.
- The $705m Vention term loan carried a weighted average rate of 2.51% and has tranches due in 2018, 2020, and 2022. The $600m revolving credit facility had $342.6m outstanding at July 31, 2017. Nordson reported compliance with debt covenants.
Material changes, outlook, and risks
- Nordson acquired Vention Medical Advanced Technologies for approximately $705m, as well as Plas-Pak, InterSelect, and ACE during the first half of 2017. Vention contributed $54.1m of sales and $4.3m of net income from its acquisition date through July 31. Purchase-price allocations remained preliminary. Acquisition-related transaction costs totaled $14.3m through the period.
- For Q4 FY2017, management forecast sales growth of 4%–8% year over year, comprising an expected 3%–7% decline in organic volume, 10% acquisition contribution, and 1% favorable currency translation. Expected diluted EPS was $1.18–$1.32.
- Management cited slow growth in emerging markets, a low-growth global economic outlook, and political instability as reasons for near-term caution. It expected continued volume improvement mainly from acquisitions and said operating cash flow should support liquidity needs, dividends, investment, and potential strategic transactions.
- Environmental, product liability, patent, contract, employee, and other matters arise in the ordinary course of business; management did not expect pending matters to have a material effect. The environmental remediation accrual was $0.5m, though the estimate is subject to uncertainty. The filing reported no material change in risk factors and effective disclosure controls.
Key facts for investors to verify
- Whether Q4 guidance was achieved, particularly the forecast organic-volume decline and acquisition contribution.
- Acquisition integration, final Vention purchase accounting, and the effect of acquisition costs and amortization on margins and earnings.
- Debt levels, scheduled maturities, borrowing costs, covenant compliance, and cash generation relative to acquisition-related obligations.
- Organic demand trends by segment and region, including weakness cited in certain product lines and the macroeconomic and currency risks described by management.