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Nordson (NDSN) Down 1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Nordson (NDSN). Shares have lost about 1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nordson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Nordson Q1 Earnings Lag Estimates, Down on Weak Sales

Nordson's results for the first quarter of fiscal 2019 (ended Jan 31, 2019) lagged expectations, with negative earnings surprise of 18.6%. This was the second consecutive quarter of weaker-than-expected results.

Adjusted earnings, excluding one-time charges and gains, in the reported quarter were 92 cents per share. This lagged the Zacks Consensus Estimate of $1.13. Moreover, the bottom line decreased 31.9% from the year-ago tally of $1.35 primarily due to decline in sales, increase in selling and administrative expenses, and higher taxes.

Weak Organic Volume & Forex Woes Affect Revenues

In the reported quarter, Nordson's net sales were $497.9 million, decreasing 9.5% year over year. The top line suffered from 9% decline in organic volume and 2% adverse impact of unfavorable movements in foreign currencies, partially offset by 1% benefit from acquired assets. Further, the top line missed the Zacks Consensus Estimate by 0.01%.

At the reported quarter end, backlog was $439 million, up 9% year over year.

On a regional basis, revenues, sourced from the United States, grew 2.7% year over year to $170.4 million. Revenues generated from operations in Japan declined 55.9% to $29 million while that from the Asia Pacific region decreased 6.4% to $133.4 million. Revenues generated in Europe decreased 6.5% to $132.7 million and that in the Americas declined 5.4% to $32.4 million.

The company reports top-line results under three segments namely Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. A brief discussion on the segmental performance in the quarter under review is provided below:

The Adhesive Dispensing Systems segment's revenues totaled $211.5 million, decreasing 4.2% year over year. The segment suffered from 1.6% fall in volume and 2.6% adverse impact of foreign currency translation.

Advanced Technology Systems' revenues were $234.5 million, down 13.7% year over year. The fall was due to 1.3% adverse impact of foreign currency movements and 12.4% decline in volume.

Revenues generated from Industrial Coating Systems decreased 10.2% year over year to $51.9 million. Volume declined 8.6% and foreign currency movements had a negative impact of 1.6%.

Margin Weak

In the quarter under review, Nordson's cost of sales decreased 8.2% year over year to $228.9 million. It represented 46% of net sales versus 45.3% in the year-ago quarter. Selling and administrative expenses increased 1.7% year over year to $184.7 million. It represented 37.1% of net sales in the reported quarter versus 33% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter under review were $107.8 million, decreasing 24% year over year. Operating profits declined 29.4% year over year to $84.3 million while the margin came in at 16.9% versus 21.7% in the year-ago quarter.

Balance Sheet & Cash Flow
 
Exiting the fiscal first quarter, Nordson's cash and marketable securities were $85.5 million, down roughly 10.6% from $95.7 million in the previous quarter end. The company's long-term debt increased 3.6% sequentially to $1,331.4 million.

In the fiscal first quarter, the company generated net cash of $56.8 million from operating activities, reflecting a year-over-year decline of 48%. Capital spent on the addition of property, plant and equipment decreased 15.3% to $14.1 million. Adjusted free cash flow was roughly $43 million, decreasing 54% year over year. During the reported quarter, the company used approximately $102 million to buy back 856,000 shares and paid dividends amounting to $20.2 million.

Outlook

For fiscal 2019 (ending October 2019), Nordson believes that strengthening end-markets and growth initiatives will aid organic sales. Organic volume is anticipated to grow 3-5%, higher than 2.5% registered in fiscal 2018.

Further, EBITDA and operating margins are predicted to increase 100-150 basis points year over year. Interest expenses will likely total $45 million while effective tax rate will be roughly 23% and capital expenditure (for maintenance) will total $50 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Nordson has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nordson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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