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What to Watch When Nordson Reports Earnings

By Steve Symington - May 20, 2016 at 9:00AM

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Can the adhesive dispensing systems company sustain its healthy organic growth?

Image source: Nordson Corporation.

Nordson Corporation (NDSN -0.73%) is set to release fiscal second-quarter 2016 results on Monday, May 23, 2016, after the market close, with a conference call scheduled to discuss those results the following morning. With shares of the adhesive-dispensing products company up roughly 17% year to date on the heels of its encouraging quarterly report in February -- which saw management predict solid organic growth going forward -- it's time for investors to start thinking about what to expect.

But if one thing seems certain this time around, it's that global macroeconomic uncertainty will come into play once again. Even so, when discussing Nordson's outlook last quarter, CEO Michael Hilton insisted his company remains "well positioned to capture growth opportunities when and where they occur."

In the meantime for fiscal Q2, Nordson's guidance calls for revenue to increase 2% to 6% over the same year-ago period, which equates to a range of roughly $408.7 million to to $424.8 million. This assumes organic growth of 1% to 5%, a 2% contribution from the first-year effect of acquisitions, and a 1% headwind from the negative effects of foreign currency exchange. 

Nordson will also break out its top line on a segment and geographical basis. Regarding the former last quarter, for example, adhesive dispensing systems sales volume climbed 12%, comprised of 11% organic growth and 1% from first-year contributions of its acquisition of screw and cylinder manufacturer WAFO. Next, advanced technology sales volume decreased 8%, including a 15% decline in organic volume and a 7% increase from Nordson's acquisitions of X-ray inspection system company MatriX and dispensing system specialist Liquidyn, as well as 3% negative impact from currencies. Finally, Nordson's industrial coating systems segment saw sales volume climb 2% organically, which was offset by a 5% negative impact from foreign exchange.

Speaking of organic growth, investors should watch for color in Nordson's breakdown of its order rates and backlog, which can offer crucial insight to future results. Last quarter, for example, order rates for the 12 weeks ending February 14, 2016 rose 1% on a constant currency basis, while backlog for the quarter had risen 10% year over year, to $247 million. The latter was comprised of healthy 8% organic growth, and a 2% contribution from acquisitions.

For perspective on a geographic basis, of Nordson's $372.2 million in total sales last quarter, roughly 31.5% came from the U.S., 7.2% came from the rest of the Americas, 32.2% came from Europe, 5.2% originated in Japan, and the remaining 23.9% was generated by the Asia Pacific region. This quarter, the composition should be roughly similar barring any unexpected changes in order timing or regional demand.

Trending toward the bottom line, the mid-point of revenue guidance would result in operating margin of roughly 19%. And based on generally accepted accounting principles (GAAP), Nordson's guidance says, that should translate to earnings per diluted share of $0.85 to $0.95, which includes a charge of $0.02 per share for one-time items. 

Relatedly, whether Nordson lives up to profitability expectations will depend in part on the progress of its ongoing margin enhancement initatives -- or, as management affectionately describes them, "continuous improvement" initiatives -- including footprint consolidation, strategically limiting headcount growth, and reducing other spending where appropriate. Last quarter, Nordson's one-time charges included roughly $1 million related to this effort, primarily for integration activities within its adhesive segment. At the same time, CFO Gregory Thaxton has repeatedly warned investors during each quarterly conference call that the timing of these non-recurring charges this fiscal year will be "difficult to estimate precisely." Overall, however, they should be significantly below similar costs incurred last fiscal year.

Finally, listen for any updates regarding Nordson's fiscal third-quarter and full-year 2016 guidance. If history serves as any indication, the former should encompass expected per-share earnings and revenue growth, including both organic volume growth and contributions from acquisitions, as well as the expected (likely negative, however temporary) impact of foreign currency exchange. Full-year guidance will be more vague given Nordson's current lack of long-term visibility, focusing instead on progress and the impact of continuous improvement initiatives as it strives to continue delivering top-line growth in excess of GDP.

To be fair, that might drive analysts crazy as they work to accurately model Nordson's financial results each quarter. But as long as Nordson continues to deliver on its promises as these difficult industry headwinds persist, long-term investors should be more than pleased with the end result.

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