NORDSON CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors affecting our financial condition and results of operations for the periods included in the accompanying condensed consolidated financial statements. Overview Nordson Corporation is an innovative precision technology company that leverages a scalable growth framework to deliver top tier growth with leading margins and returns. The Company’s direct sales model and applications expertise serves global customers through a wide variety of critical applications. Its diverse end market exposure includes consumer non-durable, medical, electronics and industrial end markets. Founded in 1954 and headquartered in Westlake, Ohio, the Company has approximately 7,200 employees with operations and support offices in over 35 countries. COVID-19 Update In December 2019, a novel strain of coronavirus (COVID-19) emerged and has since spread to other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 as a pandemic (the COVID-19 pandemic). The COVID-19 pandemic, including multiple variants, has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business interruptions and other measures. Throughout the COVID-19 pandemic, we have supported, and continue to support, multiple “critical infrastructure” sectors by manufacturing materials and products needed for medical supply chains, packaging, transportation, energy, communications, and other critical infrastructure industries. We have benefited from our geographical and product diversification as the end markets we serve have remained resilient in response to the COVID-19 pandemic, and we continue to invest in the businesses, people, and strategies necessary to achieve our long-term priorities as we focus on driving profitable growth. We have continued to operate during the COVID-19 pandemic in all our production facilities, having taken the recommended public health measures to ensure worker and workplace safety. As a result, there have been unfavorable impacts on our manufacturing efficiencies. Additionally, we are taking steps to offset cost increases from COVID-19 pandemic-related supply chain disruptions. We continue to actively monitor the rapidly evolving circumstances and impact of the COVID-19 pandemic, which has negatively disrupted, and may continue to negatively disrupt, our business and results of operations in the future. For example, in the first quarter of 2023, our revenue growth in Asia-Pacific was negatively impacted by labor shortages and business disruption from the spread of COVID-19. The full extent of the COVID-19 pandemic on our operations and the markets we serve remains highly uncertain and will depend largely on future developments related to the COVID-19 pandemic, including infection rates increasing or returning in various geographic areas, variations of COVID-19, the ultimate duration of the COVID-19 pandemic, actions by government authorities to contain the outbreak or treat its impact, such as reimposing previously lifted measures or putting in place additional restrictions, and the widespread distribution and acceptance of an effective vaccine, among other things. These developments are constantly evolving and cannot be accurately predicted. CyberOptics Acquisition On November 3, 2022, the Company completed the acquisition of CyberOptics Corporation (“CyberOptics”) pursuant to the terms of the Agreement and Plan of Merger, dated as of August 7, 2022, by and among the Company, Meta Merger Company and CyberOptics. CyberOptics is a leading global developer and manufacturer of high-precision 3D optical sensing technology solutions. The CyberOptics acquisition expanded our test and inspection platform, providing differentiated technology that expands our product offering in the semiconductor and electronics industries and will be reported in our Advanced Technology Solutions segment. The all-cash transaction of approximately $378,000, net of cash acquired, was funded using borrowings under our revolving credit facility and cash on hand and is not expected to have a material impact on our Consolidated Financial Statements. Critical Accounting Policies and Estimates A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the year ended October 31, 2022 (the 2022 Form 10-K). There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended October 31, 2022. Page 20 Table of Contents Nordson Corporation Results of Operations Three months ended January 31, 2023 Worldwide sales for the three months ended January 31, 2023 were $610,477, an increase of 0.2% from sales of $609,166 for the comparable period of 2022. The increase consisted of a 1.4% increase in organic sales and a favorable 2.8% increase due to an acquisition, which was partially offset by an unfavorable effect from currency translation of 4.0%. The organic sales increase was driven by strong demand in Europe and the Americas region, partially offset by weakness in the Asia Pacific region, predominantly in China. In the Americas region, sales were $264,878 for the three months ended January 31, 2023, an increase of 10.4% from 2022, consisting of an organic sales increase of 8.6% and an increase due to an acquisition of 2.1%, partially offset by unfavorable currency effects of 0.3%. In the Asia Pacific region, sales were $182,660, a decrease of 14.4% from 2022, consisting of an organic sales decrease of 13.3% and a 5.8% decrease due to unfavorable currency effects, partially offset by a 4.7% increase due to an acquisition. In Europe, sales were $162,939, an increase of 4.5% from 2022, consisting of an organic sales increase of 10.7% and a 1.3% increase due to an acquisition, partially offset by unfavorable currency effects of 7.5%. Cost of sales for the three months ended January 31, 2023 were $281,610, up from $269,032 in the comparable period of 2022. Gross profit, expressed as a percentage of sales, decreased to 53.9% from 55.8% in the comparable period of 2022. The 1.9 percentage point decrease in gross margin was primarily driven by the impact of passing through inflationary cost increases and incremental inventory step-up amortization of $2,743. Selling and administrative expenses for the three months ended January 31, 2023 were $184,648, up from $184,274 in the comparable period of 2022. The 0.2% increase was primarily driven by the first-year effect of an acquisition, partially offset by favorable currency translation effects and a reduction in variable expenses. Operating profit decreased to $144,219 for the three months ended January 31, 2023, compared to $155,860 in the comparable period of 2022. Operating profit as a percentage of sales decreased to 23.6% f or the three months ended January 31, 2023 compared to 25.6% in the comparable period of 2022 . The 2.0 percentage point decline in operating margin was primarily driven by fees, severance and non-cash inventory charges associated with the CyberOptics acquisition, as well as unfavorable currency translation effects. Interest expense for the three months ended January 31, 2023 was $10,530, compared to $5,650 in the comparable period of 2022. The increase was primarily due to higher average debt levels compared to the prior year period, as well as increases in interest rates. Other expense was $3,196 compared to other income of $1,292 in the comparable period of 2022. Included in 2023 other expense were pension and postretirement income of $1,369 and $4,571 of foreign currency losses. Included in 2022 other income were pension and postretirement income of $281 and $364 of foreign currency gains. Net income for the three months ended January 31, 2023 was $104,261, or $1.81 per diluted share, compared to $120,409, or $2.05 per diluted share, in the same period of 2022. This represents a 13.4% decrease in net income, and a 11.7% decrease in diluted earnings per share. The decrease was driven by a combination of fees, severance, and non-cash inventory charges associated with the CyberOptics acquisition, increased interest expense, and foreign currency losses. Industrial Precision Solutions Sales of the Industrial Precision Solutions segment were $311,546 in the three months ended January 31, 2023, a decrease of 3.8% from sales in the comparable period of 2022 of $323,933. The decrease consisted of an organic sales increase of 1.2%, which was offset by unfavorable currency effects that decreased sales by 5.0%. The organic sales increase was driven primarily by steady demand across most product lines and regions, offset by softness in the Asia Pacific region due to labor shortages and business disruption from the spread of COVID-19, as well as the timing of the Chinese New Year. Operating profit as a percentage of sales increased to 32.8% for the three months ended January 31, 2023 compared to 31.5% in the comparable period of 2022 . The 1.3 percentage point improvement in operating margin was primarily due to favorable product mix. Medical and Fluid Solutions Sales of the Medical and Fluid Solutions segment were $154,287 in the three months ended January 31, 2023, a decrease of 2.8% from sales in the comparable period of 2022 of $158,784. The decrease consisted of an organic sales decrease of 0.8% and unfavorable currency effects that decreased sales by 2.0%. The organic sales decrease was driven by lower demand for the medical fluid components product lines and fluid solutions product lines in China, offset by strong demand for medical interventional solutions product lines. Page 21 Table of Contents Nordson Corporation Operating profit as a percentage of sales decreased to 25.5% for the three months ended January 31, 2023 compared to 30.9% in the comparable period of 2022 . T he 5.4 percentage point decline in operating margin was primarily due to meaningful sales mix changes within medical product lines and related factory inefficiencies due to reduced volumes. Advanced Technology Solutions Sales of the Advanced Technology Solutions segment were $144,644 in the three months ended January 31, 2023, an increase of 14.4% from sales in the comparable period of 2022 of $126,449. The increase was the result of organic sales increase of 4.6% and a 13.5% increase due to an acquisition, partially offset by an unfavorable currency effect of 3.7%. The organic sales increase was driven by test and inspection product lines. Operating profit as a percentage of sales decreased to 11.7% for the three months ended January 31, 2023 compared to 21.5% in the comparable period of 2022 . T he 9.8 percentage point decline in operating margin was primarily due to fees, severance and non-cash inventory charges of $10,295 associated with the CyberOptics acquisition and unfavorable sales mix. Income taxes We record our interim provision for income taxes based on our estimated annual effective tax rate, as well as certain items discrete to the current period. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. We have considered several factors in determining the probability of realizing deferred income tax assets which include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. We review our tax positions on a regular basis and adjust the balances as new information becomes available. The effective tax rate for the three months ended January 31, 2023 was 20.5%, compared to 20.8% for the three months ended January 31, 2022. Foreign Currency Effects In the aggregate, average exchange rates for 2023 used to translate international sales and operating results into U.S. dollars were generally unfavorable compared with average exchange rates existing during 2022. 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 we operate. However, if transactions for the three months ended January 31, 2023 were translated at exchange rates in effect during the same period of 2022, we estimated that sales would have been approximately $24,800 higher while costs of sales and selling and administrative expenses would have been approximately $16,600 higher. Financial Condition Liquidity and Capital Resources During the three months ended January 31, 2023, cash and cash equivalents decreased $41,463 as cash was used to fund the CyberOptics acquisition, partially offset by incremental borrowings and cash generated from operations in the period. Cash provided by operations during this period was $123,337 compared to $118,087 for the three months ended January 31, 2022. Changes in operating assets and liabilities decreased cash by $58,371 in the three months ended January 31, 2023, primarily driven by a decrease in accounts payable and accrued liabilities, compared to decreasing cash by $29,217 in the comparable period of 2022. Other improved year over year due primarily to cash inflows related to settlement of foreign exchange contracts. Cash used in investing activities was $387,136 for the three months ended January 31, 2023, compared to $184,097 used in the comparable period of 2022. During the three months ended January 31, 2023, cash of $377,843 was used for the CyberOptics acquisition and cash of $9,302 was used for capital expenditures. During the three months ended January 31, 2022, cash of $171,613 was used for the NDC acquisition and $12,491 was used for capital expenditures. The decrease in capital expenditures related primarily to 2022 expenditures being higher as a result of capacity expansion in our medical fluid dispensing and components product lines. Cash provided by financing activities was $215,693 for the three months ended January 31, 2023, compared to $61,902 cash used in the comparable period of 2022. In the three months ended January 31, 2023, cash of $37,199 was used for dividend payments and cash of $6,875 was used for the purchase of treasury shares, compared to $29,724 and $35,002, respectively, in the comparable period of 2022. The three months ended January 31, 2023 included net borrowings of long-term debt of $252,278, used primarily to fund the acquisition of CyberOptics, compared to net repayments of $1,257 during the three months ended January 31, 2022 . The following is a summary of significant changes in balance sheet captions from October 31, 2022 to January 31, 2023. Inventories-net increased by $64,329, primarily as a result of the CyberOptics acquisition. Goodwill and intangibles increased by $279,630 and $58,600, respectively, due to the CyberOptics acquisition. Accrued liabilities decreased by $49,964 due primarily to incentive compensation payments made in the three months ended January 31, 2023, and long-term debt increased principally as result of borrowing $250,000 under the revolving credit facility for the CyberOptics acquisition. Page 22 Table of Contents Nordson Corporation We believe the combination of present capital resources, cash from operations and unused financing sources, such as our credit facilities, which includes our revolving credit facility and new term loan entered in January 2023, are more than adequate to meet cash requirements for the next twelve months and for the foreseeable future thereafter. There are no significant restrictions limiting the transfer of funds from international subsidiaries to the parent Company. We were in compliance with all debt covenants as of January 31, 2023. Refer to our Long-term debt Note in the notes to our condensed consolidated financial statements for additional details regarding our debt outstanding. Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995 This Form 10-Q, particularly “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income, earnings, cash flows, changes in operations, operating improvements, businesses in which we operate and the United States and global economies. Statements in this quarterly report that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” use of the future tense and similar words or phrases. These statements reflect management’s current expectations and involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, U.S. and international economic conditions; financial and market conditions; currency exchange rates and devaluations; possible acquisitions including the Company’s ability to complete and successfully integrate acquisitions, including the integration of CyberOptics; the Company’s ability to successfully divest or dispose of businesses that are deemed not to fit with its strategic plan; the effects of changes in U.S. trade policy and trade agreements; the effects of changes in tax law; and the possible effects of events beyond our control, such as political unrest, including the conflict between Russia and Ukraine and tensions between the United States and China, acts of terror, natural disasters and pandemics, including the COVID-19 pandemic. In light of these risks and uncertainties, actual events and results may vary significantly from those included in or contemplated or implied by such statements. Readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Factors that could cause actual results to differ materially from the expected results are discussed in Part I, Item 1A, Risk Factors in our 2022 Form 10-K.