Nordson Corporation — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2017. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise stated. The filing is an annual report, with unaudited fourth-quarter results also provided.
Business context
Nordson designs, manufactures and services equipment and systems for dispensing and controlling fluids, applying coatings, and testing, inspecting and treating products. It operates through Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems, serving diverse industrial, medical, electronics and consumer markets. Approximately 68.7% of FY2017 sales were outside the United States.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $2,067.0 | $1,809.0 |
| Gross margin | 55.1% | 54.9% |
| Operating profit | $457.7 | $388.4 |
| Operating margin | 22.1% | 21.5% |
| Net income | $295.8 | $271.8 |
| Diluted EPS | $5.08 | $4.73 |
| Operating cash flow | $349.7 | $331.2 |
| Capital expenditures | $71.6 | $60.9 |
| Cash and cash equivalents at year-end | $90.4 | $67.2 |
| Total debt, including current maturities | $1,583.0 | $980.9 |
Cash used in investing activities was $878.0 million, including $805.9 million for acquisitions. Financing activities provided $547.8 million, primarily reflecting increased borrowings. Working capital was $240.6 million, down from $414.0 million. Long-term debt maturities classified as current were $326.6 million. Management reported $350.9 million of available capacity under its revolving credit facility and $53.3 million under its private shelf agreement. Approximately 80% of debt was floating-rate; a 1 percentage point rate increase would have added an estimated $11.1 million of FY2017 interest expense.
Segment sales and operating margins: Adhesive Dispensing Systems, $916.0 million and 27.7%; Advanced Technology Systems, $897.6 million and 25.4%; Industrial Coating Systems, $253.3 million and 17.4%.
Material changes versus comparable periods
- FY2017 sales increased 14.3% year over year: 7.9% organic growth and 6.9% from acquisitions, partly offset by 0.5% unfavorable currency translation. Advanced Technology Systems sales rose 32.7%, including acquisition contribution; Industrial Coating Systems sales were essentially flat.
- Operating profit rose 17.8%, and operating margin expanded 0.6 percentage points, supported by expense leverage, favorable mix and lower restructuring costs. Net income increased 8.8%; diluted EPS increased 7.4%.
- Interest expense rose 71.7% to $36.6 million, primarily due to higher average borrowings. The effective tax rate increased to 29.6% from 26.2%; FY2016 included discrete tax benefits not present at the same level in FY2017.
- Four 2017 acquisitions—ACE, Plas-Pak, InterSelect and Vention—were included in Advanced Technology Systems. Vention was acquired for approximately $705 million and contributed $94.5 million in sales and $7.8 million in net income from its acquisition date. Acquisition-related corporate charges were $14.7 million.
- Year-end backlog increased to approximately $402 million from $278 million, driven mainly by Advanced Technology Systems; the 2017 backlog was expected to ship in 2018.
- Fourth-quarter sales were $573.9 million versus $509.3 million in Q4 2016; net income was $79.8 million versus $75.9 million, and diluted EPS was $1.37 versus $1.31.
Outlook, risks and unusual items
- For Q1 FY2018, management expected sales growth of 30%–34% year over year, comprising 15%–19% organic volume growth, 11% acquisition contribution and an estimated 4% favorable currency effect. Management expected growth to moderate after Q1 and noted limited visibility beyond a quarter.
- Management cited cautiousness around slow growth in emerging markets, low global GDP expectations, tax and trade policy changes, and political instability. It expected operating cash flow and available financing to meet near-term liquidity needs and support dividends, investment and debt service.
- Key exposures include cyclical customer markets, international operations and currency movements, acquisition integration and goodwill impairment, cybersecurity and data protection, intellectual property, environmental liabilities, pension assumptions, and debt covenants and floating interest rates.
- Environmental remediation accrual for a Wisconsin landfill was $0.5 million; the company did not expect a material adverse effect. Other pending or potential litigation was described as not expected to materially affect financial condition, results or cash flows.
- No goodwill impairment was recorded. Restructuring costs were $2.4 million in FY2017. FY2017 reported earnings also included acquisition costs and higher interest expense following acquisition financing.
- Management and Ernst & Young reported effective internal control over financial reporting and issued unqualified audit opinions. The internal-control assessment excluded the four 2017 acquisitions, which together represented 26% of year-end assets, 6% of sales and 4% of net income.
Important facts for investors to verify
- Whether the Vention and other acquisitions deliver expected growth, integration benefits and returns, given the substantial increase in debt, goodwill and intangible assets.
- Debt repayment and refinancing requirements, covenant headroom, unused borrowing capacity, and sensitivity to floating interest rates.
- How much reported growth and the Q1 FY2018 outlook depend on acquisitions and currency versus sustainable organic demand, particularly after management’s expected growth moderation.
- The quality and conversion of the $402 million backlog into 2018 shipments and cash flow.
- Potential changes in the effective tax rate and the status of undistributed foreign earnings and tax positions.
- Controls and integration progress at acquired businesses, which were excluded from the year-end internal-control evaluation.