It has been about a month since the last earnings report for Nordson (NDSN). Shares have added about 4.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Nordson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Nordson Q4 Earnings Lag Estimates, Organic View Solid
Nordson reported weaker-than-expected results for the fourth quarter of fiscal 2018 (ended Oct 31, 2018). The negative earnings surprise of roughly 2% came in after the company reported two consecutive quarters of earnings beat.
Adjusted earnings, excluding charges related to the restructuring measures and discrete tax gains, in the reported quarter were $1.44 per share. This lagged the Zacks Consensus Estimate of $1.47. On a year-over-year basis, the bottom line increased 4.3% from the year-ago tally of $1.38 primarily on the back of lower taxes.
For fiscal 2018, Nordson's adjusted earnings per share were $5.94, reflecting growth of 10.6% from the year-ago tally of $5.37. However, results lagged the Zacks Consensus Estimate of $5.98.
Lower Organic Volume & Forex Woes Affect Revenues
In the reported quarter, Nordson's net sales were $569.3 million, decreasing 0.8% year over year. The poor performance was due to 1% decline in organic volumes and 1% adverse impact of unfavorable movements in foreign currencies, partially offset by 1% benefit from acquired assets. However, the top line surpassed the Zacks Consensus Estimate of $560.4 million by 1.6%.
At the reported quarter end, backlog was $394 million, down 1% year over year.
On a regional basis, revenues, sourced from the United States, inched up 0.9% year over year to $184.7 million. Revenues generated from operations in Japan declined 31.9% to $34.5 million while that from the Asia Pacific region decreased 15.2% to $128.7 million. Sales in Europe improved 17% to $174.7 million and that in the Americas increased 19.5% to $46.7 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 in the quarter under review is provided below:
The Adhesive Dispensing Systems segment's revenues totaled $250.8 million, increasing 1.2% year over year. Results were driven by 3.3% volume growth, partially offset by 2.1% forex woes.
Advanced Technology Systems' revenues were $250.2 million, down 0.6% year over year. The fall was due to 0.8% adverse impact from foreign currency movements, partially offset by 0.2% growth in volumes.
Revenues generated from Industrial Coating Systems decreased 8.2% year over year to $68.2 million. Volume declined 7% and foreign currency movements had a negative impact of 1.2%.
For fiscal 2018, the company's net sales were $2,254.7 million, increasing 9.1% year over year. The result was roughly in line with the Zacks Consensus Estimate.
In the quarter under review, Nordson's cost of sales declined 0.1% year over year to $261.6 million. It represented 45.9% of net sales versus 45.6% in the year-ago quarter. Selling and administrative expenses increased 3.1% year over year to $193.2 million. It represented 33.9% of net sales in the reported quarter versus 32.6% in the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter under review were $143.4 million, decreasing 4.3% year over year. Operating profits declined 8.2% year over year to $114.6 million while the margin came in at 20.1% versus 21.7% in the year-ago quarter. Operating margins suffered from the adverse impacts of investments made to launch a service center in the United States and facility consolidations in Adhesives segment.
Balance Sheet & Cash Flow
Exiting the fiscal fourth quarter, Nordson's cash and marketable securities were $95.7 million, down roughly 64.1% from $266.8 million in the previous quarter end. The company's long-term debt decreased 15.5% sequentially to $1,285.4 million.
In the fiscal fourth quarter, the company generated net cash of $161.7 million from its operating activities, reflecting year-over-year growth of 19.8%. Capital spent on the addition of property, plant and equipment grew 97.1% to $43.8 million. Adjusted free cash flow was $118.1 million, increasing 4.6% year over year.
During the reported quarter, the company used approximately $19 million to buy back shares and also paid dividends amounting to $72 million in fiscal 2018.
For fiscal 2019, Nordson believes that strengthening end-markets and its growth initiatives will support growth of organic sales. Organic volumes are anticipated to grow 3-5%, higher than 2.5% registered in fiscal 2018. Unfavorable foreign currency movements will have an adverse impact of 2%.
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.
At this time, Nordson has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Nordson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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