Nordson Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing also reports fourth-quarter results. Unless noted otherwise, dollar amounts below are in millions; the filing presents most financial amounts in thousands.
Business context
Nordson engineers and sells equipment and systems for dispensing and processing materials, fluid management, testing and inspection, surface treatment, and curing. Its three segments are Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. Approximately 69.8% of FY2013 sales were outside the United States; no customer represented 10% or more of sales.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Sales | $1,542.9 | $1,409.6 | +9.5% |
| Gross margin | 56.1% | 58.4% | -2.3 percentage points |
| Operating profit | $323.8 | $335.5 | -3.5% |
| Operating margin | 21.0% | 23.8% | -2.8 percentage points |
| Net income | $221.8 | $224.8 | -1.3% |
| Diluted EPS | $3.42 | $3.45 | -0.9% |
| Operating cash flow | $268.4 | $274.4 | -2.2% |
| Capital expenditures | $47.2 | $31.0 | +$16.3 |
- Sales growth reflected 10.2% contribution from acquisitions and 0.4% organic growth, offset by 1.1% unfavorable currency effects. Pricing was neutral.
- Segment sales: Adhesive Dispensing Systems $793.5 million (+16.0%); Advanced Technology Systems $516.3 million (+0.1%); Industrial Coating Systems $233.2 million (+11.3%).
- Gross and operating margin declines were attributed primarily to acquired businesses’ lower margins, sales mix, and currency effects; selling and administrative expenses also rose.
- At year-end, cash was $42.4 million, working capital was $365.1 million, and total assets were $2,042.3 million. Total debt and notes payable were approximately $652.6 million; shareholders’ equity was $887.9 million.
- About 59% of debt was floating rate. Management estimated that a 1 percentage-point rate increase would add approximately $3.5 million of annual interest expense.
- Operating cash flow funded acquisitions and investment: acquisition spending was $176.3 million, while net cash used in investing activities was $220.5 million. Cash increased $1.1 million for the year.
- Fourth-quarter sales were $410.8 million versus $438.7 million in the prior-year quarter; net income was $59.8 million versus $67.7 million, and diluted EPS was $0.92 versus $1.04.
Material changes, outlook and risks
- Three 2013 acquisitions included the Kreyenborg Group, Kodama assets, and Nellcor assets. Acquisitions drove much of reported growth and increased goodwill by $117.4 million; year-end goodwill totaled $939.2 million. Annual goodwill testing found no impairment.
- Interest expense increased 33.1% to $14.8 million, mainly due to higher acquisition-related borrowings. The effective tax rate declined to 28.7% from 31.1%; FY2013 included a $1.7 million research-credit benefit and a $0.9 million favorable tax adjustment.
- Management gave no specific numerical FY2014 revenue or earnings guidance. It described a cautious outlook amid uncertainty in the Eurozone, U.S. fiscal policy, emerging-market growth, and the global economy, while expecting operating cash generation to support liquidity, dividends, investment, and potential acquisitions.
- Management said existing capital resources and financing capacity were adequate for 2014. At year-end, approximately $246 million remained available under the revolving credit facility and $111.1 million under the private shelf facility; the company reported compliance with debt covenants.
- Key risks include economic and end-market cyclicality, acquisition integration and goodwill impairment, foreign exchange exposure, interest-rate changes, access to capital and debt covenants, pension assumptions, intellectual-property claims, and environmental liabilities. Approximately 79% of consolidated cash was held at foreign subsidiaries; about $510.8 million of foreign earnings was intended to remain permanently invested abroad.
- Environmental remediation accrual for the New Richmond, Wisconsin landfill was $0.668 million. The company said pending or potential litigation was not expected to materially affect financial condition or results, while noting environmental estimates are uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control. Management’s internal-control assessment excluded the recently acquired Kreyenborg Group, which represented 11% of total assets.
Most important facts to verify
- Whether organic growth and acquired sales contributions translate into durable growth, particularly given minimal organic growth overall and softness in some markets.
- Whether acquired businesses improve margins and cash generation, and whether the preliminary purchase-price allocations or goodwill valuations change.
- Debt maturity, floating-rate exposure, covenant headroom, and the availability and cost of committed financing.
- Cash conversion and working-capital trends, including inventory growth and the availability of foreign-held cash to the parent.
- The assumptions underlying management’s cautious FY2014 outlook, pension and postretirement obligations, and the adequacy of environmental and other contingency accruals.