Nordson Corporation — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014. Nordson designs and sells precision dispensing, coating, testing, inspection, and related systems across industrial and technology markets. Financial statement amounts below are in U.S. dollars; amounts are converted to millions unless noted.
Financial performance
| Metric | Three months ended April 30, 2014 | Six months ended April 30, 2014 |
|---|---|---|
| Sales | $417.5 million; up 9.3% | $776.9 million; up 6.5% |
| Operating profit | $92.8 million; up 12.9% | $146.7 million; up 2.0% |
| Operating margin | 22.2%, versus 21.5% | 18.9%, versus 19.7% |
| Net income | $61.9 million; up 13.4% | $96.8 million; up 0.2% |
| Diluted EPS | $0.96, versus $0.84 | $1.50, versus $1.49 |
| Gross margin | 56.4%, versus 56.8% | 55.4%, versus 56.8% |
For the six months, operating cash flow was $102.2 million, investing cash outflow was $16.4 million, and financing cash outflow was $78.1 million. Cash increased $7.4 million to $49.7 million. Capital expenditures were $16.5 million. The company paid $23.1 million in dividends and spent $58.1 million on treasury-share purchases.
At April 30, 2014, current assets were $638.8 million and current liabilities were $236.6 million. Notes payable were $8.4 million, long-term debt including current maturities was $647.4 million, and total shareholders’ equity was $923.2 million. Outstanding borrowings under the $500 million multicurrency credit facility were $269.3 million. Nordson reported compliance with applicable debt covenants.
Material changes and drivers
- Second-quarter sales growth included 4.2% organic growth, 5.0% from acquisitions, and 0.1% favorable currency effects. For the six months, growth included 1.4% organic growth and 5.6% from acquisitions, partly offset by 0.5% unfavorable currency effects.
- Adhesive Dispensing Systems grew strongly: second-quarter sales rose 18.1%, including the first-year effect of the Kreyenborg acquisition. Advanced Technology Systems sales fell 1.8% in the quarter and 5.7% for the six months, principally reflecting weaker demand for automated dispensing equipment in selected electronics markets. Industrial Coating Systems sales rose 3.9% in the quarter but were nearly flat for the six months.
- Second-quarter operating margin improved with higher sales volume. The six-month margin declined as gross margin weakened due to acquisition-related dilution, a short-term acquired-inventory purchase-accounting adjustment, product mix, and lower Advanced Technology Systems volume.
- Six-month net income was nearly unchanged year over year. The prior-year comparison benefited from a $1.7 million discrete tax benefit related to the retroactive R&D tax credit and a $0.9 million favorable adjustment to unrecognized tax benefits. The 2014 effective tax rate was 30.5%, versus 28.2% for the prior-year six-month period.
- Share repurchases reduced average shares outstanding and supported EPS growth relative to net income growth. The company repurchased 779,000 shares under its program during the six months for $55.4 million, or $71.09 per share.
Outlook, risks, and other notable items
- Management said it was cautious about the balance of fiscal 2014 amid slowing emerging-market growth and a low-growth global economic outlook. It cited operational efficiencies and expected operating cash generation to support liquidity needs, dividends, and strategic investment.
- For Q3 FY2014, management forecast sales of $439 million to $455 million, up 9% to 13% year over year, and diluted EPS of $1.06 to $1.16. The sales outlook assumed 3% to 7% organic volume growth and a 1% favorable currency effect at then-current exchange rates.
- Risks discussed include uncertain global demand, foreign-exchange exposure, and the usual uncertainties associated with litigation and environmental remediation. The company’s $0.7 million accrual for the New Richmond, Wisconsin landfill remediation was unchanged; management did not expect a material adverse effect, but noted estimates could increase as requirements become clearer.
- Nordson reported no material change to its previously disclosed risk factors or market-risk information. Management concluded disclosure controls were effective as of April 30, 2014 and reported no material changes in internal control over financial reporting during the quarter.
- A new revenue-recognition accounting standard issued in May 2014 is expected to apply beginning in 2018; the company was assessing its impact. Management reported no significant changes to critical accounting policies during the period.
Important facts for investors to verify
- Whether the Q3 sales and EPS outlook was achieved, and how much subsequent growth came from organic demand versus acquisitions and currency.
- Whether gross-margin pressure from acquired inventory, acquisition mix, and Advanced Technology Systems demand persisted.
- Cash conversion and working-capital movements, given that operating assets and liabilities used cash during the first half.
- Debt levels, credit-facility availability, covenant compliance, and funding of continued repurchases and dividends.
- Whether environmental remediation estimates or other litigation contingencies changed after this filing.