FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 2, 1998 ------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 0-7977 --------------- NORDSON CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0590250 - ------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 28601 Clemens Road, Westlake, Ohio 44145 - -------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 892-1580 ----------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: COMMON SHARES WITHOUT PAR VALUE AS OF AUGUST 2, 1998: 16,350,797 Page 1
NORDSON CORPORATION INDEX Part I - Financial Information Page Number Condensed Consolidated Statement of Income - Thirteen and Thirty-Nine Weeks ended August 2, 1998 and August 3, 1997 3 Condensed Consolidated Balance Sheet - August 2, 1998 and November 2, 1997 4 Condensed Consolidated Statement of Cash Flows - Thirty-Nine Weeks ended August 2, 1998 and August 3, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II - Other Information Item 5, Other Information 13 Item 6, Exhibits and Reports on Form 8-K 13 Signature 14 Exhibit Index 15 Page 2
<TABLE> Part I - Financial Information NORDSON CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Dollars and shares in thousands except for per share amounts) Thirteen Weeks Ended Thirty-Nine Weeks Ended August 2, August 3, August 2, August 3, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Sales $167,171 $158,888 $474,211 $452,293 Cost of sales 73,241 70,087 215,780 193,884 Selling & administrative expenses 71,397 70,228 214,988 209,808 Asset impairment, retirement and severance costs -- -- 9,718 -- ---------- ---------- ---------- ---------- Operating profit 22,533 18,573 33,725 48,601 Other income (expense): Interest expense (2,505) (1,879) (7,070) (5,891) Interest and investment income 199 138 420 509 Other - net 644 1,262 2,228 2,581 ---------- ---------- ---------- ---------- Income before income taxes 20,871 18,094 29,303 45,800 Income taxes 7,096 5,899 9,963 15,458 ---------- ---------- ---------- ---------- Net income $ 13,775 $ 12,195 $ 19,340 $ 30,342 ========== ========== ========== ========== Shares used in computing per share amounts: Basic 16,358 17,227 16,544 17,379 ========== ========== ========== ========== Diluted 16,465 17,490 16,668 17,675 ========== ========== ========== ========== Earnings per share: Basic $ .84 $ .71 $ 1.17 $ 1.75 ========== ========== ========== ========== Diluted $ .84 $ .70 $ 1.16 $ 1.72 ========== ========== ========== ========== Dividends per common share $ .22 $ .20 $ .66 $ .60 ========== ========== ========== ========== <FN> See accompanying notes. </TABLE> Page 3
<TABLE> NORDSON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands) August 2, 1998 November 2, 1997 -------------- ---------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 7,937 $ 1,517 Marketable securities 30 200 Receivables 148,200 163,692 Inventories 126,168 122,084 Deferred income taxes 25,829 23,263 Prepaid expenses 4,918 8,059 -------- -------- Total current assets 313,082 318,815 Property, plant and equipment 214,534 210,129 Less accumulated depreciation and amortization of property, plant and equipment (118,255) (108,462) Intangible assets - net 58,097 60,378 Other assets 21,160 22,136 -------- -------- $488,618 $502,996 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 84,122 $ 74,500 Accounts payable 27,281 37,699 Current portion of long-term debt 4,180 5,175 Other current liabilities 65,376 61,289 -------- -------- Total current liabilities 180,959 179,663 Long-term debt 65,429 66,502 Other liabilities 44,361 36,286 Shareholders' equity: Common shares 12,253 12,253 Capital in excess of stated value 77,428 75,899 Cumulative translation adjustments (5,940) (977) Retained earnings 425,989 417,589 Common shares in treasury, at cost (311,555) (283,816) Deferred stock-based compensation (306) (403) -------- -------- Total shareholders' equity 197,869 220,545 -------- -------- $488,618 $502,996 ======== ======== <FN> See accompanying notes. </TABLE> Page 4
<TABLE> NORDSON CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Thirty Nine Weeks Ended August 2, 1998 August 3, 1997 -------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income $19,340 $30,342 Non-recurring charge 15,670 -- Changes in operating assets and liabilities (9,969) (6,805) Other - net 21,696 22,806 -------- -------- 47,237 46,343 Cash flows from investing activities: Additions to property, plant and equipment (10,029) (11,568) Proceeds from sale of property, plant and equipment 47 74 Acquisition of new business (504) -- Proceeds from sale of marketable securities 170 110 -------- -------- (10,316) (11,384) Cash flows from financing activities: Net proceeds from notes payable 13,252 17,550 Payment of long-term debt (5,529) (4,637) Issuance of common shares 582 3,150 Purchase of treasury shares (26,927) (40,311) Dividends paid (10,940) (10,423) -------- -------- (29,562) (34,671) Effect of exchange rate changes on cash (938) (723) -------- -------- (Decrease)/increase in cash 6,420 (435) Cash and cash equivalents Beginning of fiscal year 1,517 9,221 -------- -------- End of period $ 7,937 $ 8,786 ======== ======== <FN> See accompanying notes. </TABLE> Page 5
NORDSON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS August 2, 1998 1. BASIS OF PRESENTATION. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three quarters ended August 2, 1998 are not necessarily indicative of the results that may be expected for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended November 2, 1997. 2. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual amounts could differ from these estimates. Estimates are reevaluated frequently, and changes in estimates are recorded throughout the year. During the first quarter of fiscal 1997, an accrual representing the Company's estimated annual obligation to its Employee Stock Ownership Plan was reduced by $1.4 million to reflect the actual amount contributed. 3. INVENTORIES. Inventories consisted of the following (in thousands of dollars): August 2, 1998 November 2, 1997 -------------- ---------------- Finished goods $ 50,196 $ 51,639 Work-in-process 16,498 12,056 Raw materials and finished parts 59,474 58,389 -------- -------- $126,168 $122,084 ======== ======== Page 6
4. ACCOUNTING CHANGES. In the first quarter of 1998, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share." Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The Financial Accounting Standards Board has issued the following statements which the Company has not yet adopted: Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (FAS 132) and Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 132 revises employers' disclosures about pension and other postretirement benefit plans. FAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company must adopt FAS 132 no later than fiscal year 1999 and FAS 133 no later than fiscal year 2000. These statements are not expected to have a material effect on the financial statements. 5. EARNINGS PER SHARE. The following table sets forth the computation of basic and diluted earnings per share (dollars and shares in thousands except for per share amounts): <TABLE> Thirteen Weeks Ended Thirty-Nine Weeks Ended August 2, August 3, August 2, August 3, 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Numerator - net income $ 13,775 $ 12,195 $ 19,340 $ 30,342 ======== ======== ======== ======== Denominator for basic EPS - weighted- average common shares outstanding 16,358 17,227 16,544 17,379 Incremental common shares attributable to outstanding stock options, nonvested stock, and deferred stock-based compensation 107 263 124 296 -------- -------- -------- -------- Denominator for diluted EPS 16,465 17,490 16,668 17,765 ======== ======== ======== ======== Basic earnings per share $ .84 $ .71 $ 1.17 $ 1.75 ======== ======== ======== ======== Diluted earnings per share $ .84 $ .71 $ 1.16 $ 1.72 ======== ======== ======== ======== </TABLE> Page 7
6. ACQUISITIONS. In October, 1997, Nordson acquired a provider of ultraviolet curing equipment to the container industry. The acquisition of its U.S. operations was recorded in the fourth quarter of 1997; the acquisition of its U.K. operations was recorded in the first quarter of 1998. 7. ONE-TIME CHARGE. In the second quarter of fiscal 1998, Nordson recognized a one-time pre-tax charge of $15,670,000. This charge includes $5,952,000 related to inventory valuations and charged to cost of sales. The balance relates to an early retirement program, involuntary severances and fixed asset write-downs, and is reported below selling and administrative expenses. The one-time charge on an after-tax basis was $10,342,000 or $.62 per share. 8. SUBSEQUENT EVENT. In August, 1998, Nordson reached an agreement to purchase BDL Holdings Inc., the privately owned parent company of J&M Laboratories, Inc., headquartered in Dawsonville, Georgia. J&M Laboratories manufactures systems that produce synthetic fibers used to make nonwoven fabrics and other products. The transaction is expected to be finalized by the end of September, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion and analysis of certain significant factors affecting the Company's financial condition and results of operations for the periods included in the accompanying condensed consolidated financial statements. RESULTS OF OPERATIONS SALES Sales for the third quarter and year-to-date 1998 increased 5.2% and 4.8%, respectively, over the comparable periods of 1997. Price/volume gains of 8.5% for the third quarter and 9.2% year-to-date were partially offset by unfavorable currency effects. Price increases averaging 2% were implemented on orders taken after the beginning of the year for standardized small systems and parts. Strong sales volume growth in Europe and North America continued to drive sales performance for the third quarter of 1998. Compared with 1997, activity in Europe remained strong, reflecting wide-spread growth across all Nordson's businesses, with sales volume up 13.6% for the quarter and 18.1% for the year-to-date. Sales volume in North America increased 14.1% for the quarter and 11.7% for the first three quarters of 1998, led by strong sales of electronics, liquid finishing and ultraviolet curing systems. Page 8
In contrast to Europe and North America, sales volumes declined in Japan and other Pacific Rim countries, reflecting the ongoing economic challenges in these markets. Unfavorable currency effects further reduced reported revenues. Compared with 1997, sales volume in Japan was down 4.4% for the third quarter and 8.9% for the first three quarters of 1998. In the Pacific South division, which spans the Pacific Rim, South Asia and Latin America, sales volume was down 15.3% for the third quarter and 12.2% year-to-date. Sales to international customers for year-to-date 1998 comprised approximately 56% of total sales. Translating international sales at exchange rates reflecting generally higher average exchange rates as compared to the same periods of the prior year had the effect of decreasing sales by 3.3% for the third quarter and 4.4% for the year-to-date period. OPERATING PROFIT During the second quarter of fiscal 1998, Nordson recognized a one-time pre-tax charge of $15.7 million. The charge included $8.3 million for costs associated with an early retirement program and other staff reductions implemented during the second quarter. The balance of this charge related to asset write-downs, primarily inventory and fixed assets. The amount related to inventories was charged to cost of sales. Operating profit, as a percentage of sales, increased to 13.5% for the third quarter of 1998 from 11.7% for the third quarter of 1997. Excluding the one-time charge, year-to-date operating profit declined to 10.4% of sales for 1998, from 10.7% for the same period of 1997. The gross margin rate increased for the third quarter from 55.9% in 1997 to 56.2% in 1998 and decreased for the first three quarters, before the one-time charge, from 57.1% in 1997 to 55.8% in 1998. The influencing factors behind the lower margin for the first three quarters were the unfavorable currency effects, combined with the mix of products sold in both North America and Europe. Selling and administrative expenses for the third quarter and the first three quarters of 1998, before the effects of the one-time charge, increased 1.7% and 2.5%, respectively, over the comparable periods in 1997. These minimal rates of increase reflect efforts to contain costs in the face of unstable international business climates. NET INCOME For the third quarter of 1998, net income, as a percentage of sales, increased to 8.2% from 7.7% for the same period of 1997. Year-to-date income, excluding the one-time charge, was 6.3% of sales in 1998, compared to 6.7% in 1997. In addition to the factors impacting operating profit discussed above, year-to-date interest expense increased $1,179,000 due to higher levels of short-term borrowing, driven primarily by the continuing repurchases of Nordson stock. Page 9
In the first quarter of 1998, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share." Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. For 1998 and 1997, diluted earnings per share were $.84 and $.71, respectively, for the third quarter and $1.16 and $1.72, respectively, for year-to-date. The one-time charge on an after-tax basis was $10.3 million or $.62 per share on a diluted basis. Diluted earnings per share, before the one-time charge, were $1.78 for the 1998 year-to-date period. FOREIGN CURRENCY EFFECTS In the aggregate, average exchange rates for the third quarter and year-to-date 1998 used to translate international sales and operating results into U.S. dollars compared unfavorably with average exchange rates during the comparable 1997 periods. It is not possible to precisely measure the impact on operating results arising from foreign currency exchange rate changes, because of changes in selling prices, sales volume, product mix and cost structure in each country in which the Company operates. However, if transactions for the third quarter 1998 were translated at exchange rates in effect during 1997, sales would have been approximately $5,300,000 higher while third-party costs and expenses would have been $3,000,000 higher. If transactions for year-to-date 1998 were translated at exchange rates in effect during 1997, sales would have been approximately $20,000,000 higher and third-party costs and expenses would have been $11,800,000 higher. FINANCIAL CONDITION During the first three quarters of 1998, net assets decreased $22,676,000. This decrease is primarily due to net repurchases of Nordson stock totaling $26,345,000, the payment of $10,940,000 in dividends and a decrease of $4,963,000 from translating foreign net assets at the end of the third quarter when the U.S. dollar was stronger against other currencies than at the prior year end, offset by earnings of $19,340,000. Working capital, as of the end of the quarter, decreased $7,029,000 over the prior year-end. This change consisted primarily of decreases in accounts receivable and increases in notes payable and other current liabilities, offset by increases in cash and inventories and decreases in accounts payable. All changes include decreases from the effects of translating into U.S. dollars current amounts denominated in generally weaker foreign currencies. Receivables decreased from the collection of year-end receivables arising from strong sales in the fourth quarter of 1997, notes payable increased from net borrowings and other current liabilities increased as a result of customer advance payments on orders which are expected to be invoiced during the fourth quarter of 1998. Inventories increased in anticipation of fourth quarter demand for Nordson products and accounts payable decreased from the repayment of additional purchases at prior year-end. Page 10
Cash and cash equivalents increased $6,420,000 during the first three quarters of 1998. Cash provided from operating activities was $47,237,000 and cash provided by net proceeds from notes payable was $13,252,000. Uses for cash included purchases of treasury shares, outlays for capital expenditures, dividends and scheduled repayments of long-term debt. Available lines of credit continue to be more than adequate to meet additional cash requirements over the next year. Other non-current liabilities increased $8,075,000 from the prior year-end, primarily from pension and other postretirement plan accruals, related to the early retirement program, which will be paid over an extended number of years and will not materially effect any individual year. OUTLOOK Our improved operating profit margin for the third quarter of 1998 reflects the initial results of our efforts to improve the efficiency and effective- ness of our operations undertaken during the second quarter. Despite the challenges of today's international business environment, we remain committed to making investments that will help us achieve our long-term growth objectives. YEAR 2000 Many computerized systems use only two digits, rather than four, to record the year in a date field. These systems may recognize the year 2000 as the year 1900 or some other date, resulting in errors when dates are used in computations and comparisons. Nordson is addressing this issue for its information systems, products, equipment (with embedded micro-controllers), facilities, suppliers and vendors. Assessment has been completed, while remediation, testing and contingency planning are in progress. Nordson expects that all phases will be completed by mid-1999. The total cost of the project including purchased hardware and software and internal and external resources is estimated to be $5.5 million. Remaining costs are approximately $3.9 million of which $2.0 will be expensed through 1999 and the balance capitalized. Nordson believes that the steps referred to above will minimize its business risk related to the Year 2000. However, Nordson cannot guarantee that cost and time estimates or planned results will be achieved. For a listing of risks associated with the Year 2000, refer to the "Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995" disclosure found on Page 12. Page 11
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in the paragraphs titled "Outlook" and "Year 2000" that refer to anticipated trends, events or occurrences in, or expectations for, the future (generally indicated by the use of phrases such as "Nordson expects" or "Nordson believes" or words of similar import or by references to "risks") are "forward-looking statements" intended to qualify for the protection afforded by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and involve risks and uncertainties. Consequently, the Company's actual results could differ materially from the expectations expressed in the forward-looking statements. Factors that could cause the Company's actual results to differ materially from the expected results include deferral of orders, customer-requested delays in system installations, currency exchange rate fluctuations, a sales mix different from assumptions, significant changes in local business conditions in geographic regions in which we conduct business and, in the case of Year 2000 issues, the availability and retention of internal and external resources, delayed or unsuccessful completion of planned activities of the Company, and delayed, unsuccessful or incompatible Year 2000 conversions by third parties of their products or systems on which the Company relies. Page 12
Part II - Other Information Item 5. Other Information The Company's proxies for its 1999 Annual Meeting of Shareholders will confer discretionary authority to vote on any matter if the Company does not receive timely written notice of such matter in accordance with Section 7 of Article I of the Company's Amended Regulations. In general, Section 7 provides that, to be timely, a shareholder's notice of business requested to be brought before an annual meeting of shareholders must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 nor more than 90 days prior to the annual meeting. The Company has not yet set the date for its 1999 Annual Meeting of Share- holders, but expects that it will be held on a date that is close to the anniversary of the 1998 Annual Meeting of Shareholders. If the 1999 Annual Meeting of Shareholders were to be held on the same day of the month as the 1998 Annual Meeting of Shareholders (March 12), 60 days prior to the annual meeting would be January 11, 1999, and 90 days prior to the annual meeting would be December 12, 1998. For business to be properly requested by a shareholder to be brought before an annual meeting of shareholders, the shareholder must comply with all of the requirements of Section 7, not just the timeliness requirements outlined above. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - Exhibit 27 Financial Data Schedules (b) There were no reports on Form 8-K filed for the quarter ended August 2, 1998. Page 13
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: September 15, 1998 Nordson Corporation /s/ Nicholas D. Pellecchia -------------------------- Nicholas D. Pellecchia Vice President, Finance and Controller (Principal Financial Officer and Chief Accounting Officer) Page 14
NORDSON CORPORATION EXHIBIT INDEX Exhibit 27 Financial Data Schedules Exhibit 27-a Period Ending August 2, 1998 Exhibit 27-b Period Ending August 3, 1997 Page 15