Nordson Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016. The filing also reports unaudited fourth-quarter results. Dollar amounts below are in millions, except per-share data.
Business context
Nordson designs and sells precision systems for dispensing and controlling fluids, coating and treating surfaces, and testing and inspecting products. Its three segments are Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. Approximately 70.6% of FY2016 sales were outside the United States; no customer represented 10% or more of sales.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $1,809.0 | $1,688.7 |
| Gross margin | 54.9% | 54.1% |
| Operating profit | $388.4 | $317.7 |
| Operating margin | 21.5% | 18.8% |
| Net income | $271.8 | $211.1 |
| Diluted EPS | $4.73 | $3.45 |
| Cash from operations | $331.2 | $262.0 |
| Capital expenditures | $60.9 | $62.1 |
Sales increased 7.1%: volume rose 8.5%, comprising 6.5% organic growth and 2.0% acquisition contribution, while currency reduced sales by 1.4%. Improved product mix and operating expense leverage lifted margins. Net income rose 28.8%; diluted EPS rose 37.1%, helped by fewer shares outstanding following repurchases.
At year-end, cash was $67.2, working capital $414.0, and total debt and notes payable approximately $984.8, down from approximately $1,116.6 in FY2015. The current ratio was about 2.25. Cash increased $17.0; investing activities used $102.2 and financing activities used $210.3. The company reported $355.3 of available capacity on its revolving credit facility and $42.8 under its private shelf facility, and stated it was in compliance with debt covenants. About 64% of debt was floating-rate; a 1 percentage point increase would have added an estimated $7.2 of FY2016 interest expense.
Dividends declared were $0.99 per share, versus $0.90 in FY2015. Year-end backlog rose to approximately $274 from $228, primarily reflecting Advanced Technology Systems orders; the 2016 backlog was expected to ship in 2017.
Segment results and material changes
- Adhesive Dispensing Systems: Sales of $879.6, up 5.2%; operating margin increased to 26.1% from 23.4%. Organic growth was broad but weaker in the Americas and Japan.
- Advanced Technology Systems: Sales of $676.3, up 13.9%; operating margin increased to 23.6% from 20.4%. Growth reflected electronics test/inspection and dispensing demand, medical and industrial fluid management, and acquisitions.
- Industrial Coating Systems: Sales of $253.1, down 2.2%; operating margin increased to 17.2% from 16.0%. Weakness in powder coating and container product lines offset strength in cold materials.
FY2016 included the acquisition of LinkTech for $42.7, reported in Advanced Technology Systems. Severance and restructuring costs were $10.8, mainly for operational optimization; management did not expect additional costs from these initiatives to be material. A $9.0 reduction in the effective tax rate versus FY2015 included discrete benefits related to the R&D tax credit, dividends from previously taxed foreign earnings, and settlement of a tax examination. Other income included an $0.8 litigation settlement and foreign currency gains.
Fourth-quarter sales were $509.3 versus $446.2 in the prior-year quarter; net income was $75.9 versus $49.6, and diluted EPS was $1.31 versus $0.84. Fourth-quarter 2016 included $6.4 of pre-tax severance and restructuring costs.
Outlook, risks and contingencies
Management expressed optimism about longer-term opportunities but cautioned about near-term slow growth in emerging markets, low global GDP growth expectations, political instability, and uncertainty surrounding Brexit. Brexit’s interim effects on operations and results had not been material as of the filing. No specific numerical sales or earnings guidance was provided. Management expected operating cash flow and available borrowing capacity to cover ordinary liquidity needs, dividends, investment, and potential acquisitions; 2017 capital spending was expected to focus on information systems and manufacturing and distribution efficiency.
- Key exposures include economic and end-market cyclicality, foreign-currency movements, interest rates, international political and trade developments, and reliance on continued product innovation and successful acquisitions.
- Other disclosed risks include cybersecurity, intellectual-property claims, goodwill impairment, pension assumptions and funding, and environmental compliance. Goodwill was approximately $1.11 billion; no impairment was identified in FY2016 testing.
- The New Richmond, Wisconsin environmental matter had an accrued liability of $0.516 at October 31, 2016. The company said known litigation and environmental matters were not expected to materially affect its financial condition or results, while noting estimates and outcomes remain uncertain.
- Approximately 93% of cash was held at foreign subsidiaries. Undistributed earnings intended to remain invested abroad were approximately $757.5; potential additional tax on distribution was not practicably estimable.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded LinkTech, acquired during the year.
Most important facts for investors to verify
- Whether organic growth and margin gains persist, particularly in Advanced Technology Systems, and how much future performance depends on acquired businesses.
- Debt repayment capacity, floating-rate exposure, covenant headroom, and the use of remaining borrowing and share-repurchase capacity.
- The repeatability of FY2016 earnings given discrete tax benefits, restructuring charges, and other unusual items.
- Foreign-exchange sensitivity, Brexit and broader international-market effects, and the effectiveness of hedging.
- Pension funding and assumptions, environmental and other contingencies, and the eventual purchase-price allocation and integration of LinkTech.