Nordson Corporation — Q1 FY2012 10-Q
Reporting period: Three months ended January 31, 2012; balance-sheet comparisons are with October 31, 2011. Nordson reports in U.S. dollars; financial statement amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $275.8 | $271.0 | Up 1.8% |
| Gross margin | 61.4% | 61.3% | Up 0.1 percentage point |
| Operating profit | $56.5 | $65.5 | Down 13.8% |
| Operating margin | 20.5% | 24.2% | Down 3.7 percentage points |
| Net income | $38.3 | $45.9 | Down 16.5% |
| Diluted EPS | $0.58 | $0.67 | Down 13.4% |
| Operating cash flow | $44.3 | $55.9 | Down $11.6 |
Sales growth reflected 3.5% acquisition contribution, partly offset by a 1.7% decline in organic volume; currency translation was neutral overall. Selling and administrative expense rose 11.3% to $112.0 million, outpacing sales growth. Management cited higher compensation and the first-year effect of 2011 acquisitions. Cost of sales rose 1.6%; gross margin edged higher due mainly to mix, price increases and low-cost sourcing.
By segment, Adhesive Dispensing Systems sales rose 1.6% to $139.2 million and operating margin was 33.9%, versus 33.7%. Advanced Technology Systems sales rose 3.6% to $100.1 million, but operating margin fell to 16.0% from 24.1%. Industrial Coating Systems sales declined 2.1% to $36.6 million, and operating margin fell to 3.1% from 8.2%. Management attributed segment profit pressure to higher selling and administrative costs, purchase-accounting adjustments and, in Advanced Technology Systems, pension termination expense. Fuel cell products were reassigned from Advanced Technology Systems to Industrial Coating Systems; prior-year segment results were reclassified.
Financial position and cash
- Cash and cash equivalents were $49.5 million, up from $37.4 million at October 31, 2011. Current assets were $473.0 million and current liabilities were $161.9 million.
- Total debt, including current maturities, was $351.6 million, versus $319.1 million at fiscal year-end. Interest expense increased to $2.0 million from $1.4 million, primarily due to higher borrowings following a fourth-quarter 2011 acquisition.
- Operating activities provided $44.3 million. Investing activities used $8.6 million, including $8.6 million of capital expenditures. Financing activities used $23.1 million, including $47.0 million for treasury share purchases and $8.1 million of dividends; net borrowings provided $32.5 million.
- Nordson declared dividends of $0.125 per share, up from $0.105. The company repurchased 1.064 million shares during the quarter for $47.0 million; 1.062 million were under the publicly announced program.
Outlook, risks and unusual items
- For Q2 FY2012, management forecast sales ranging from down 2% to up 2% year over year, including 3% growth from the first-year effect of acquisitions and a 1% negative currency impact. Diluted EPS guidance was $0.83–$0.91.
- Management said it was approaching 2012 cautiously amid global economic uncertainty, particularly in Europe. It cited longer-term growth opportunities from emerging markets, adjacent markets and acquisitions, alongside product development and operational initiatives.
- Approximately $0.8 million of severance and restructuring costs was recorded in Q1. About $0.4 million more was expected in Q2 and Q3. The Georgia restructuring was estimated at approximately $2.6 million in total; a German initiative was estimated at approximately $0.2 million.
- U.S. pension cost included a $0.7 million settlement loss related to termination of a pension plan. The effective tax rate was 31.1%, versus 29.6%; Q1 FY2012 included $0.3 million of tax expense from a Japanese tax-rate change, while Q1 FY2011 included a $1.2 million research-credit tax benefit.
- The company reported ordinary-course litigation and environmental matters; it stated these were not expected to have a material effect. The New Richmond, Wisconsin remediation accrual was $0.8 million, though actual costs could exceed the estimate. Management said risk factors had not materially changed since its FY2011 Form 10-K.
- Foreign currency forwards were used to reduce transaction exposure, not for trading or speculation. Management reported no material change in market-risk disclosures, no material subsequent events, and effective disclosure controls as of January 31, 2012.
Important facts for investors to verify
- Whether organic demand improves, given the 1.7% overall decline and weakness in several product lines and regions.
- Whether elevated selling and administrative expenses and segment margin pressure persist, particularly in Advanced Technology and Industrial Coating Systems.
- Progress against Q2 sales and diluted EPS guidance, including the expected acquisition and currency effects.
- Debt growth, borrowing costs, and the use of borrowing and working capital to fund share repurchases.
- Actual remaining restructuring costs and any changes to pension or environmental obligations.