FORM 10-Q
OR
Commission file number 0-7977
NORDSON CORPORATION
(Exact name of registrant as specified in its charter)
(440) 892-1580
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Shares with no par value
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 þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Shares with no par value as of April 29, 2005: 36,474,587
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Nordson Corporation
Table of Contents
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Part I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income
See accompanying notes.
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Condensed Consolidated Balance Sheet
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Condensed Consolidated Statement of Cash Flows
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Notes to Condensed Consolidated Financial Statements
May 1, 2005
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In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of No. 151 is effective for fiscal years beginning after June 15, 2005. The Company has not yet determined the impact of adoption on its consolidated financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. No. 123 (R) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. No. 123(R) requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the Company’s financial statements. The Company will be required to adopt No. 123(R) in the first quarter of fiscal 2006 as a result of an extension granted by the Securities and Exchange Commission on April 14, 2005 and has not yet determined the impact of adoption on its consolidated financial position or results of operations.
In 2004, the Company issued a guarantee to a U.S. bank related to a five-year trade financing agreement for a sale to a customer in Turkey. The loan is secured by collateral with a current value well in excess of the amount due. The guarantee would be triggered upon a payment default by the customer to the bank. The amount of the guarantee at May 1, 2005 was Euro 2 million (approximately $2,573,000) and will decline ratably as semi-annual principal payments are made by the customer beginning later in 2005. The Company has recorded $1,161,000 in other current liabilities related to this guarantee. The recorded amount will be adjusted as the customer makes payments.
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Information regarding the Company’s intangible assets subject to amortization is as follows:
At May 1, 2005 and October 31, 2004, $4,891,000 of intangible assets related to a minimum pension liability for the Company’s pension plans were not subject to amortization.
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Amortization expense for the thirteen and twenty-six weeks ended May 1, 2005 was $438,000 and $875,000, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows:
Accumulated other comprehensive loss at May 1, 2005 consisted of net foreign currency translation adjustment credits of $15,500,000 offset by $25,454,000 of minimum pension liability adjustments. At May 2, 2004 it consisted of net foreign currency translation adjustment credits of $6,769,000 offset by $22,804,000 of minimum pension liability adjustments. Accumulated other comprehensive loss at May 1, 2005 and May 2, 2004 is as follows:
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A reconciliation of total segment operating income to total consolidated income before income taxes is as follows:
The Company has significant sales in the following geographic regions:
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collection, treatment, recovery and environmentally sound disposal of WEEE from products placed on the market after August 13, 2005 and from products in use prior to that date that are being replaced. The second of these Directives is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) Directive. The RoHS Directive addresses the restriction on use of certain hazardous substances such as mercury, lead, cadmium, and hexavalent cadmium in electrical and electronic equipment placed on the market after July 1, 2006. As of May 1, 2005, EU Member States continue to develop legislation to implement these Directives.
During 2004, the Company established a project management team whose efforts are directed at assessing the impact of the Directives on the Company’s supply chain management and manufacturing processes and developing a strategy to permit the Company to react and comply with legislation enacted by Member States. The cost to the Company to comply with the Directives and Member States’ legislation will not be quantifiable until Member States have fully implemented the Directives.
On February 11, 2005, the Company announced it had reached an agreement to purchase hhs Leimauftrags-Systeme GmbH (“hhs”), a manufacturer of cold glue and hot melt adhesive dispensing technologies and quality control monitoring systems for the print finishing, paper and paperboard converting, and wood assembly industries. Headquartered in Germany, hhs has annual sales of approximately $32 million. This acquisition has not yet occurred and is still under review by the German Federal Cartel Office.
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
Worldwide sales for the second quarter of 2005 were $207.6 million, a 5.6% increase from sales of $196.6 million for the comparable period of 2004. Volume gains made up 3.0% of the increase, with favorable currency effects traced to the weaker U.S dollar making up the remainder of the increase.
Sales volume for the Company’s Finishing and Coating segment increased 17% from 2004. Higher sales of powder and container systems in Europe and Asia contributed to this increase. Sales volume for the Company’s Adhesive Dispensing and Nonwoven Fiber segment was flat compared to the prior year. Higher fiber system sales were offset by lower packaging and nonwoven sales. Volume of the Advanced Technology Segment was up 2%, with the UV Curing and March Plasma businesses each showing increases of more than 10%.
On a geographic basis, second quarter sales volume was up 11% in the United States, 5% in Asia and 3% in the Americas region. These increases were partially offset by decreases of 8% in Japan and 1% in Europe.
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On a year-to-date basis, 2005 worldwide sales were $397.8 million, up 8.3% from 2004. Sales volume increased 5.2%, while favorable currency effects increased sales by 3.1%. Volume was up 14% in the Finishing and Coating segment, driven by higher powder system sales. Sales volume for the Advanced Technology segment was up 8%. Within this segment, the March Plasma and Asymtek businesses were particularly strong. Volume for the Adhesive Dispensing and Nonwoven Fiber segment increased 2%, with shipments to Packaging and Product Assembly customers up 2%. Higher automotive sales were offset by lower fiber system sales.
Sales volume for the twenty-six weeks ended May 1, 2005 was up 8% in the United States, 3% in Japan, 23% in the Americas region and 11% in Asia. European sales volume was down 1%, where there was a large fiber system sale in the first half of 2004.
Operating Profit
The gross margin percentage for the second quarter of 2005 was 55.7%, down from 57.3% for the second quarter of 2004. The year-to-date gross margin percentage decreased slightly to 55.8% from 56.0% last year. Favorable currency effects added approximately 0.5% to the margin rate for both the second quarter and year-to-date. Margins were negatively impacted by both product and geographic sales mix, as well as pricing issues in the Finishing and Coating segment.
Selling and administrative expenses increased 3.4% and 6.9% for the thirteen and twenty-six weeks ended May 1, 2005 compared to the comparable periods of 2004. Currency translation effects accounted for 2.0% of the thirteen-week increase and 2.6% of the twenty-six week increase, with the balance traced primarily to compensation increases and higher employee benefit costs. An acquisition in the second half of 2004 and the consolidation of a previously unconsolidated subsidiary also contributed to the increase. As a percent of sales, these expenses decreased to 42.1% from 43.0% for the second quarter and to 42.8% from 43.4% on a year-to-date basis.
Operating profit, as a percentage of sales, was 13.6% in the second quarter of 2005, compared to 14.3% in the second quarter of 2004. For the first half of 2005, operating profit, as a percent of sales was 13.1%, up from 12.6% last year. For the Adhesive Dispensing and Nonwoven Fiber segment, operating profit as a percent of sales was 19% for the second quarter of 2005, compared to 20% in 2004. On a year-to-date basis, the operating profit percentage increased less than 1%. Operating profit as a percent of sales for the Advanced Technology segment decreased to 20% for the second quarter of 2005 from 24% last year and decreased to 19% from 20% on a year-to-date basis. The decreases were primarily due to higher operating expenses in 2005. The Finishing and Coating segment generated small operating profits for the second quarter and first half of 2005, after small losses in 2004. The improvement in 2005 is primarily due to the sales increase.
Net Income
Compared to 2004, interest expense decreased $.4 million for the second quarter and $1.1 million for the first half as a result of lower borrowing levels. Other income increased $.6 million for the quarter and $1.0 million for the first half, largely due to foreign exchange gains. The Company’s effective tax rate was 32.5% in 2005, down from 33.0% last year.
Net income for the second quarter of 2005 was $17.5 million or $.47 per share on a diluted basis compared with $16.7 million or $.46 per share on a diluted basis in 2004. Year-to-date net income in 2005 was $31.8 million or $.86 per share, compared to $26.3 million or $.73 per share last year.
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Foreign Currency Effects
In the aggregate, average exchange rates for the second quarter and first half of 2005 used to translate international sales and operating results into U.S. dollars compared favorably with average exchange rates existing during the comparable 2004 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 second quarter 2005 were translated at exchange rates in effect during the second quarter of 2004, sales would have been approximately $5.1 million lower while third-party costs and expenses would have been approximately $3.0 million lower. If the 2005 year-to-date transactions were translated at exchange rates in effect during 2004, sales would have been approximately $11.4 million lower and third party costs would have been approximately $7.4 million lower.
Financial Condition
During the first half of 2005, net assets increased $28.8 million. This increase is primarily the result of net income and the effect of translating foreign net assets at the end of the second quarter earnings when the U.S. dollar was weaker against other currencies than at the prior year-end. Offsetting these increases were dividend payments of $11.6 million.
Cash and cash equivalents increased $83.7 million from the 2004 year-end. Cash provided by operations was $56.7 million, net proceeds from the sale of marketable securities were $49.1 million, and cash generated by the exercise of stock options was $3.1 million. Cash was used for dividend payments of $11.6 million, capital expenditures of $8.3 million, the purchase of $2.0 million of treasury stock and $.6 million for the acquisition of a company (see Note 15). Capital expenditures included $2.8 million to purchase a building in Dawsonville, Georgia used for manufacturing and office space. This building was previously leased. Available lines of credit continue to be adequate to meet additional cash requirements over the next year.
Receivables and accounts payable decreased as a result of the traditionally lower level of business activity in the Company’s second fiscal quarter compared its fourth fiscal quarter. In 2005, other long-term liabilities reflected higher deferred tax liabilities and an increase in deferred compensation, as compared to 2004 year-end.
Critical Accounting Policies
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates the accounting policies and estimates it uses to prepare financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management.
Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position were discussed in Item 7 of the 10-K for the year ended October 31, 2004. During the first half of 2005 there were no material changes in these policies.
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Outlook
The Company expects sales volume to increase 3% to 5% for the third quarter of 2005 compared to 2004. The effect of the weaker U.S. dollar will add approximately 3% to reported sales, bringing the total expected sales increase to 6% to 8%. Sales volume for the full year of 2005 is expected to increase 4% to 5%, with the effect of the weaker U.S. dollar adding approximately 3% to reported sales. Gross margins for the second half of 2005 should be about 55%, and operating expenses for the remainder of 2005 are expected to be consistent with second quarter 2005 levels. This would result in diluted earnings per share in the $.48 to $.52 range for the third quarter and $2.00 to $2.05 for the year.
Safe Harbor Statements Under The Private Securities Litigation Reform Act Of 1995
Statements 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, but are not limited to: deferral of orders, customer-requested delays in system installations, currency exchange rate fluctuations, a sales mix different from assumptions and significant changes in local business conditions in geographic regions in which the Company conducts business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding the Company’s financial instruments that are sensitive to changes in interest rates and foreign currency exchange rates was disclosed in the Form 10-K filed by the Company on January 14, 2005. The information disclosed has not changed materially during fiscal 2005.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the Company’s disclosure controls and procedures as of May 1, 2005. Based on that evaluation, the Company’s management, including its CEO and CFO, have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in the Company’s internal controls over financial reporting or in other factors identified in connection with this evaluation that occurred during the quarter ended May 1, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II – Other Information
ITEM 1. LEGAL PROCEEDINGS
The Company has been identified as a potentially responsible party (PRP) at a Wisconsin municipal landfill and has voluntarily agreed with other PRP’s to share costs associated with (1) a feasibility study and remedial investigation (“FS/RI”) for the site and (2) providing clean drinking water to the affected residential properties through completion of the FS/RI phase of the project. The FS/RI is expected to be completed in 2005. The Company has committed $829,000 towards completing the FS/RI phase of the project and providing clean drinking water. This amount has been recorded in the Company’s financial statements. Against this commitment, the Company has made payments of $583,000 through the second quarter of 2005. The remaining amount of $246,000 is recorded in accrued liabilities in the May 1, 2005 Consolidated Balance Sheet. The total cost of the Company’s share for remediation efforts will not be ascertainable until the FS/RI is completed and a remediation plan is approved by the Wisconsin Department of Natural Resources, which is anticipated to occur in 2006. However, based upon current information, the Company does not expect that the costs associated with remediation will have a material effect on its financial condition or results of operations.
The European Union (“EU”) has adopted two Directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste Electrical and Electronic Equipment (“WEEE”) Directive which directs EU Member States to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment provide for the financing of the collection, treatment, recovery and environmentally sound disposal of WEEE from products placed on the market after August 13, 2005 and from products in use prior to that date that are being replaced. The second of these Directives is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) Directive. The RoHS Directive addresses the restriction on use of certain hazardous substances such as mercury, lead, cadmium, and hexavalent cadmium in electrical and electronic equipment placed on the market after July 1, 2006. As of May 1, 2005, EU Member States continue to develop legislation to implement these Directives.
In addition, the Company is involved in various other legal proceedings arising in the normal course of business. Based on current information, the Company does not expect that the ultimate resolution of pending and threatened legal proceedings, including the environmental matter described above, will have a material adverse effect on its financial condition, results of operations or cash flows.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes common stock repurchased by the Company during the second quarter of 2005:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Nordson Corporation was held on February 22, 2005 for the purpose of electing four directors.
All of management’s nominees for directors, as listed in the proxy statement, were elected by the following votes:
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ITEM 6. EXHIBITS
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SIGNATURES
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.
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