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Why Is Nordson (NDSN) Down 1.1% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Nordson (NDSN). Shares have lost about 1.1% 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's Q2 Earnings and Revenues Miss, Down Y/Y

Nordson’s second-quarter of fiscal 2019 (ended Apr 30, 2019) earnings lagged expectations, the negative earnings surprise being 3.1%. This was the third consecutive quarter of weaker-than-expected results.

Adjusted earnings, excluding one-time charges and gains, were $1.54 per share, missing the Zacks Consensus Estimate of $1.59. Also, the bottom line decreased 1.3% from the year-ago figure of $1.56 primarily due to decline in sales, increase in cost of sales, and higher interest expenses.

Forex Woes Affect Revenues

In the reported quarter, Nordson’s net sales were $551.1 million, decreasing 0.5% year over year. The top line suffered from 4% adverse impact of unfavorable movements in foreign currencies, partially offset by 3% increase in organic volume. Further, the top line missed the Zacks Consensus Estimate of $556.7 million.

At the reported quarter end, backlog was $436 million, down 2% year over year.

On a regional basis, revenues sourced from the United States grew 6.7% year over year to $190.7 million. Revenues generated from operations in Japan declined 9.1% to $30 million while that from the Asia Pacific decreased 7.4% to $137.2 million. Revenues generated in Europe decreased 3.4% to $149.5 million and that in the Americas increased 12.1% to $43.7 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 for the quarter is provided below:

Adhesive Dispensing Systems segment’s revenues totaled $236.8 million, decreasing 0.9% year over year. The segment suffered from 5% adverse impact of foreign currency translation, partially offset by 4.1% increase in volume.

Advanced Technology Systems’ revenues were $249.3 million, down 0.6% year over year. The fall was due to 2.4% adverse impact of foreign currency movements, partially offset by 1.8% increase in volume.

Revenues generated from Industrial Coating Systems increased 1.6% year over year to $65.1 million. Volume improved 4.3% while foreign currency movements had a negative impact of 2.7%.

Margin Details

In the quarter under review, Nordson’s cost of sales increased 1.2% year over year to $249.6 million. It represented 45.3% of net sales versus 44.6% in the year-ago quarter. Selling and administrative expenses declined 3.1% to $172.6 million. It represented 31.3% of net sales in the reported quarter versus 32.2% a year ago.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $156.1 million, decreasing 2.4% year over year.

Operating profit was relatively flat at $128.9 million while the margin came in at 23.4% versus 23.3% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the fiscal second quarter, Nordson’s cash and marketable securities were $149.2 million, up roughly 55.9% from $95.7 million as of Oct 31, 2018. The company’s long-term debt decreased 5.1% to $1,220.4 million from fiscal year end 2018.

In the fiscal second quarter, the company generated net cash of $105.1 million from operating activities, reflecting a year-over-year increase of 2%. Capital spent on the addition of property, plant and equipment decreased 23.7% to $12.5 million. Adjusted free cash flow was roughly $93.3 million, increasing 5.2%. During the reported quarter, the company paid dividends amounting to $20 million.

Outlook

For fiscal 2019 (ending October 2019), organic volume is anticipated to grow in low single digits. Further, EBITDA and operating margins are predicted to increase 100 basis points year over year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.04% due to these changes.

VGM Scores

Currently, Nordson has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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