Nordson Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012. Amounts below are in U.S. dollars, millions, unless noted. The filing also reports fourth-quarter results.
Business context
Nordson designs and manufactures precision dispensing, fluid-management, testing and inspection, and coating systems for industrial, medical, electronics, packaging, and other markets. It operates through Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating Systems. International customers generated 72.4% of FY2012 sales.
Financial performance and liquidity
- Revenue: $1,409.6, up 14.3% from $1,233.2 in FY2011. Sales volume rose 16.4%: 7.9% organic growth and 8.5% from acquisitions; currency reduced reported sales by 2.1%.
- Profit: Operating profit was $335.5, up from $315.5; operating margin declined to 23.8% from 25.6%. Net income was $224.8, up 1.1%; diluted EPS was $3.45, up 6.2%. The effective tax rate rose to 31.1% from 29.3%.
- Gross margin: 58.4%, versus 60.7% in FY2011. Management cited acquisition-related inventory valuation charges, production transfers and start-up costs, acquired product mix, and currency effects.
- Segment sales / operating margins: Adhesive Dispensing Systems $684.1 / 30.9% (34.4% prior year); Advanced Technology Systems $516.0 / 26.0% (26.2%); Industrial Coating Systems $209.5 / 12.4% (14.8%).
- Fourth quarter: Sales were $438.7 versus $331.0 in Q4 2011; net income was $67.7 versus $54.7; diluted EPS was $1.04 versus $0.81.
- Cash flow: Operating cash flow was $274.4, compared with $246.7. Capital expenditures were $31.0; operating cash flow less capital expenditures was approximately $243.4. Investing activities used $466.8, largely reflecting $443.9 of acquisition spending.
- Balance sheet and liquidity: Cash and cash equivalents were $41.2; working capital was $242.9. Total debt and notes payable were approximately $633.7, versus $319.2 a year earlier. Shareholders’ equity was $669.8. The company reported covenant compliance and $237.6 available under its $500 million revolving facility, plus $75 million remaining under its New York Life shelf agreement.
- Debt exposure: 49% of debt was floating-rate; management estimated a 1 percentage-point rate increase would add about $3.0 of annual interest expense. Approximately 73% of cash was held at foreign subsidiaries.
Material changes versus FY2011
- Three 2012 acquisitions—EDI, Xaloy, and Sealant Equipment and Engineering—contributed to growth and required $443.9 of cash. Acquisition-related goodwill increased by approximately $266.7; year-end goodwill totaled $812.8.
- Organic growth was strongest in Advanced Technology Systems (13.9%) and Industrial Coating Systems (13.3%); Adhesive Dispensing Systems organic growth was 2.0%. Asia Pacific sales rose 27.0%, while Europe sales declined 2.4%.
- Interest expense more than doubled to $11.2, primarily from higher acquisition-related borrowing. Selling and administrative expense rose 13.0% in dollars, though declined as a share of sales to 34.4% from 34.8%.
- Cash used for share repurchases was $88.5; dividends paid were $33.8. The annual dividend per share increased to $0.525 from $0.44.
Outlook, risks, and unusual items
- Management gave no specific FY2013 revenue or earnings guidance. It described the macroeconomic outlook as uncertain and said it would proceed cautiously, citing European sovereign-debt issues, U.S. deficit-reduction issues, and potentially slower Asian growth. It expects operating cash flow to support liquidity, dividends, investment, and potential acquisitions.
- Management expected FY2013 pension and postretirement expense to be approximately $5.2 higher than FY2012, primarily due to lower discount rates and changes in expected asset returns. Estimated 2013 pension contributions were $26.5 and postretirement contributions $2.3.
- Key risks include global economic and end-market cyclicality; currency movements; acquisition execution and integration; interest rates and debt covenants; international political, trade, and supply-chain disruption; innovation and intellectual-property risks; and new conflict-minerals compliance costs.
- Restructuring and acquisition-related items affected results, including production-transfer and start-up costs, inventory purchase-accounting adjustments, and severance. Management reported no goodwill impairment in 2012. A $0.75 environmental remediation accrual was recorded; management said known litigation and environmental matters were not expected to have a material effect, while noting estimates could change.
- Management and the auditor concluded internal control over financial reporting was effective. However, the assessment excluded EDI and Xaloy, which represented 25% of year-end assets and 5% of annual sales; the auditor’s control opinion excluded those acquired businesses as well.
Important facts for investors to verify
- How much of future growth and earnings depends on the 2012 acquisitions, and whether acquired businesses achieve expected synergies and margins.
- Whether gross and segment margins recover after purchase-accounting charges, production transfers, and acquisition-related mix effects.
- Debt maturity and refinancing plans, floating-rate exposure, covenant headroom, and the use of borrowing for acquisitions and repurchases.
- Cash generation, working-capital needs, and the location and availability of foreign-held cash.
- Integration and control remediation at EDI and Xaloy, along with progress on restructuring, pension costs, and environmental obligations.