Nordson Corporation — Q1 FY2011 Form 10-Q
Period: Three months ended January 31, 2011, compared with the three months ended January 31, 2010. Financial statements are unaudited; amounts below are in U.S. dollars. Nordson designs and manufactures dispensing, coating and related technology systems.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Sales | $271.0 million | $220.6 million | +22.8% |
| Gross margin | 61.3% | 59.7% | +1.6 percentage points |
| Operating profit | $65.5 million | $36.3 million | +80.6% |
| Operating margin | 24.2% | 16.4% | +7.8 percentage points |
| Net income | $45.9 million | $26.7 million | +71.7% |
| Diluted EPS | $1.33 | $0.78 | +70.5% |
| Operating cash flow | $55.9 million | $49.5 million | +$6.5 million |
- Sales volume increased 24.0%; unfavorable currency translation reduced sales by 1.2%. Management attributed margin improvement to mix, price increases, low-cost sourcing, fixed-cost absorption and sales growing faster than operating costs.
- Segment sales and operating margins: Adhesive Dispensing Systems, $137.0 million and 33.7%; Advanced Technology Systems, $96.7 million and 24.0%; Industrial Coating Systems, $37.3 million and 8.4%. Segment sales rose 17.1%, 29.2% and 29.8%, respectively.
- Cash and cash equivalents were $61.1 million at January 31, versus $42.3 million at October 31, 2010. Current assets were $441.4 million and current liabilities $167.8 million (about 2.6x current ratio).
- Long-term debt was $87.9 million and current maturities of long-term debt were $14.3 million, or $102.3 million combined, compared with $110.3 million at October 31. Notes payable were $0.4 million. Cash flow from financing included $9.8 million of net debt repayments, $9.5 million of share repurchases and $7.1 million of dividends paid.
- Investing cash outflow was $19.2 million, including $21.3 million for Micromedics and $5.5 million in capital expenditures. Cash increased by $18.8 million during the quarter.
Material changes and unusual items
- Micromedics, a medical biomaterials application and dispensing business, was acquired for $21.3 million cash on November 1, 2010 and included in Advanced Technology Systems. Preliminary purchase accounting recorded $13.3 million of goodwill and $7.5 million of identifiable intangible assets; the allocation remained subject to final appraisal.
- The effective tax rate increased to 29.6% from 24.5%. Q1 FY2011 included a $1.2 million benefit from retroactive reinstatement of a research credit. Q1 FY2010 benefited from a $3.5 million state tax item, partly offset by $0.4 million of other tax adjustments.
- Q1 FY2010 included an $8.0 million pension settlement loss and $0.5 million of severance and restructuring costs; neither item was reported in Q1 FY2011.
- Foreign currency forward contracts are used to reduce exposure, not for speculation. The company reported $10.8 million of losses on foreign exchange contracts in the quarter; management separately reported $0.6 million of foreign exchange gains included in other income. Currency effects reduced translated sales, while geographic effects varied.
- On March 1, 2011, Nordson announced a two-for-one stock split, to be paid as a 100% stock dividend effective April 12, 2011 to shareholders of record March 25. Per-share amounts in this filing were not restated.
Outlook, risks and contingencies
- For Q2 FY2011, management expected sales to rise 22%–26% year over year, including an estimated 2% favorable currency effect, and diluted EPS of $1.70–$1.82.
- Management cited improving business conditions and order trends, but cautioned that recovery-phase growth rates may moderate. It planned cautious spending, continued operational initiatives and pursuit of strategic acquisitions.
- Risks noted include dependence on economic and order trends, foreign-exchange movements and uncertainty around estimates. The filing states risk factors had not materially changed from the FY2010 Form 10-K.
- Nordson was involved in ordinary-course environmental, product liability, patent, contract, employee and other matters; management did not expect these matters to have a material effect. The New Richmond, Wisconsin remediation accrual was $0.9 million; the company warned actual costs could exceed its estimate, though it did not expect a material adverse effect.
- Management reported disclosure controls were effective as of January 31, 2011, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Q2 sales and EPS guidance was achieved, and whether growth was sustained beyond recovery-driven order strength.
- How much of reported growth and margin expansion was organic versus acquisition-related, favorable pricing/mix and fixed-cost absorption.
- Micromedics’ final purchase-price allocation, contribution to sales and earnings, and subsequent integration performance.
- The sustainability of the effective tax rate and comparability with the prior-year tax benefit and pension settlement.
- Cash conversion and working-capital movements: the cash flow statement reports a $3.6 million source from changes in operating assets and liabilities, while MD&A describes a $0.5 million use; reconcile these presentations.
- Foreign-exchange exposure and the reported contract losses, including how they relate to the net currency impact on operating results.
- Potential changes in environmental remediation obligations and the effect of the announced stock split on future per-share comparisons.