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 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, 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. Although the World Health Organization declared an end to the COVID-19 pandemic on May 5, 2023, we continue to actively monitor the impact of COVID-19, 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 COVID-19 on our operations and the markets we serve remains uncertain and will depend largely on future developments related to COVID-19, including infection rates increasing or returning in various geographic areas, variations of COVID-19, 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. Future developments regarding COVID-19 and its effects 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. Results of Operations Three months ended April 30, 2023 Worldwide sales for the three months ended April 30, 2023 were $650,165, an increase of 2.3% from sales of $635,403 for the comparable period of 2022. The increase consisted of a 1.3% increase in organic sales and a 2.8% increase due to an acquisition, which was partially offset by an unfavorable effect from currency translation of 1.8%. The organic sales increase was driven by strong growth in the Asia Pacific region. In the Americas region, sales were $278,731 for the three months ended April 30, 2023, an increase of 1.8% from the comparable period of 2022, consisting of an increase due to an acquisition of 2.4%, partially offset by an organic sales decrease of 0.6%. In the Asia Pacific region, sales were $203,530, an increase of 7.5% from the comparable period of 2022, consisting of an organic sales increase of 7.4% and a 4.2% increase due to an acquisition, partially offset by unfavorable currency effects of 4.1%. In Page 22 Table of Contents Nordson Corporation Europe, sales were $167,904, a decrease of 2.5% from the comparable period of 2022, consisting of an organic sales decrease of 2.3% and unfavorable currency effects of 2.3%, partially offset by a 2.1% increase due to an acquisition. Cost of sales for the three months ended April 30, 2023 were $298,040, up from $277,768 in the comparable period of 2022. Gross profit, expressed as a percentage of sales, decreased to 54.2% from 56.3% in the comparable period of 2022. The 2.1 percentage point decrease in gross margin was primarily driven by reduced manufacturing efficiency in sites dealing with meaningful volume decreases and unfavorable sales mix. Selling and administrative expenses for the three months ended April 30, 2023 were $179,618, up from $173,662 in the comparable period of 2022. The 3.4% increase was primarily driven by the first-year effect of an acquisition and severance-related cost structure simplification actions, partially offset by favorable currency translation effects and lower incentive costs. Operating profit decreased to $172,507 for the three months ended April 30, 2023, compared to $183,973 in the comparable period of 2022. Operating profit as a percentage of sales decreased to 26.5% f or the three months ended April 30, 2023, compared to 29.0% in the comparable period of 2022 . The 2.5 percentage point decline in operating margin was primarily driven by unfavorable currency translation effects and lower gross margins. Interest expense for the three months ended April 30, 2023 was $9,913, compared to $5,361 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 $1,405 compared to $39,764 in the comparable period of 2022. Included in 2023 other expense were pension and postretirement income of $1,332 and $2,168 of foreign currency losses. Included in 2022 other expense were non-cash pension settlement charges of $41,221 related to the purchase of an annuity contract to relieve the Company of certain pension benefit obligations, pension and postretirement income of $746 and $1,000 in foreign currency gains. Net income for the three months ended April 30, 2023 was $127,563, or $2.21 per diluted share, compared to $109,634, or $1.88 per diluted share, in the same period of 2022. This represents a 16.4% increase in net income, and a 17.6% increase in diluted earnings per share. Net income for the three months ended April 30, 2022 includes after tax non-cash pension settlement charges of $32,450, or $0.56 per diluted share, related to the purchase of an annuity contract to relieve the Company of certain pension benefit obligations. Excluding the prior year pension settlement charges, the reduction in income was driven by lower margins and increased interest expense. Industrial Precision Solutions Sales of the Industrial Precision Solutions segment were $335,807 in the three months ended April 30, 2023, an increase of 6.1% from sales of $316,434 for the comparable period of 2022. The increase consisted of an organic sales increase of 8.5%, which was partially offset by unfavorable currency effects that decreased sales by 2.4%. The organic sales increase was driven primarily by robust demand in the polymer processing product lines and for products in the consumer non-durable end market across most regions. Operating profit as a percentage of sales increased to 33.3% for the three months ended April 30, 2023, compared to 32.3% in the comparable period of 2022 . The 1.0 percentage point improvement in operating margin was primarily due to lower selling and administrative expenses as a percentage of sales. Medical and Fluid Solutions Sales of the Medical and Fluid Solutions segment were $166,526 in the three months ended April 30, 2023, a decrease of 3.3% from sales of $172,212 for the comparable period of 2022. The decrease consisted of an organic sales decrease of 2.3% and unfavorable currency effects that decreased sales by 1.0%. The organic sales decrease was driven by significant softness in the medical fluid components and fluid solutions product lines, offset by strong demand for medical interventional solutions product lines. Operating profit as a percentage of sales decreased to 28.8% for the three months ended April 30, 2023 compared to 33.9% in the comparable period of 2022 . T he 5.1 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 $147,832 in the three months ended April 30, 2023, an increase of 0.7% from sales of $146,757 for the comparable period of 2022. The increase was the result of a 12.3% increase due to an acquisition, substantially offset by an organic sales decrease of 9.9% and unfavorable currency effects of 1.7%. The organic sales decrease was driven by lower demand in electronic dispense product lines, more than offsetting steady demand in test and inspection product lines, particularly strong in the Asia Pacific region. Page 23 Table of Contents Nordson Corporation Operating profit as a percentage of sales decreased to 17.6% for the three months ended April 30, 2023, compared to 27.4% in the comparable period of 2022 . T he 9.8 percentage point decline in operating margin was driven by the organic sales decrease, partially offset by profitable acquisition growth . Six months ended April 30, 2023 Worldwide sales for the six months ended April 30, 2023 were $1,260,642, an increase of 1.3% from sales of $1,244,569 for the comparable period of 2022. The increase consisted of a 1.3% increase in organic sales volume and a 2.8% increase due to an acquisition, partially offset by an unfavorable effect from currency translation of 2.8%. Strength in consumer non-durable end markets and medical interventional solutions product lines were the primary drivers of the growth. In the Americas region, sales were $543,610 for the six months ended April 30, 2023, an increase of 5.8% from the comparable period of 2022, consisting of an organic sales increase of 3.7% and an increase due to an acquisition of 2.2%, minimally offset by an unfavorable effect from currency translation of 0.1%. In the Asia Pacific region, sales were $386,189, a decrease of 4.1% from the comparable period of 2022, consisting of an organic sales decrease of 3.6% and a 4.9% decrease from unfavorable currency translation effects, partially offset by a 4.4% increase due to an acquisition. In Europe, sales were $330,843, an increase of 0.8% from the comparable period of 2022, consisting of an organic sales increase of 3.6% and a 1.7% increase due to an acquisition, significantly offset by unfavorable currency effects of 4.5%. Cost of sales for the six months ended April 30, 2023 were $579,650, up from $546,800 in the comparable period of 2022. Gross profit, expressed as a percentage of sales, decreased to 54.0% from 56.1% in the comparable period of 2022. The 2.1 percentage point decrease in gross margin was driven by an unfavorable product mix impact, reduced manufacturing efficiency in sites dealing with meaningful volume decreases and incremental inventory step-up amortization of $2,743 incurred in the first quarter of 2023 compared to 2022 . Selling and administrative expenses for the six months ended April 30, 2023 were $364,266, up from $357,936 in the comparable period of 2022. The 1.8% increase was primarily driven by the first-year effect of acquisitions and severance related to cost structure simplification actions, partially offset by favorable currency translation effects and lower incentive costs. Operating profit decreased to $316,726 for the six months ended April 30, 2023, compared to $339,833 in the comparable period of 2022. Operating profit as a percentage of sales decreased to 25.1% f or the six months ended April 30, 2023, compared to 27.3% in the comparable period of 2022 . The 2.2 percentage point decline in operating margin was primarily driven by unfavorable sales mix, unfavorable foreign currency translation and a combination of fees, severance and non-cash inventory charges associated with the CyberOptics acquisition . Interest expense for the six months ended April 30, 2023 was $20,443, compared to $11,011 in the comparable period of 2022. The increase was due to higher average debt levels and higher variable interest rates compared to the prior year period. Other expense was $4,601 compared to $38,472 in the comparable period of 2022. Included in 2023 other expense were pension income of $2,701 and $6,739 in foreign currency losses. Included in 2022 other expense were non-cash pension settlement charges of $41,221 related to the purchase of an annuity contract to relieve the Company of certain pension benefit obligations, other pension and postretirement income of $1,027 and $1,364 in foreign currency gains. Net income for the six months ended April 30, 2023 was $231,824, or $4.02 per diluted share, compared to $230,043, or $3.93 per diluted share, in the same period of 2022. This represents a 0.8% increase in net income, and a 2.3% increase in diluted earnings per share. Net income for the six months ended April 30, 2022 includes after tax non-cash pension settlement charges of $32,450, or $0.56 per diluted share, related to the purchase of an annuity contract to relieve the Company of certain pension benefit obligations. Excluding the prior year pension settlement charges, the decrease was driven primarily by a combination of lower margins; fees, severance and non-cash inventory charges associated with the CyberOptics acquisition; and higher interest expense. Industrial Precision Solutions Sales of the Industrial Precision Solutions segment were $647,353 in the six months ended April 30, 2023, an increase of 1.1% from sales of $640,367 for the comparable period of 2022. The increase consisted of an organic sales increase of 4.8%, partially offset by unfavorable currency effects that decreased sales by 3.7%. The organic sales increase was driven primarily by strong demand in polymer processing product lines and consumer non-durable end markets. Operating profit as a percentage of sales increased to 33.1% for the six months ended April 30, 2023, compared to 31.9% in the comparable period of 2022 . The 1.2 percentage point improvement in operating margin was driven by favorable margins and lower selling and administrative expenses as a percentage of sales. Medical and Fluid Solutions Sales of the Medical and Fluid Solutions segment were $320,813 in the six months ended April 30, 2023, a decrease of 3.1% from sales of $330,996 for the comparable period of 2022. The decrease consisted of an organic sales decrease of 1.5% and unfavorable Page 24 Table of Contents Nordson Corporation currency effects that decreased sales by 1.6%. The organic sales decrease was driven by lower demand for the medical fluid components and fluid solutions product lines, partially offset by strong demand for medical interventional solutions product lines. Operating profit as a percentage of sales decreased to 27.2% for the six months ended April 30, 2023, compared to 32.4% in the comparable period of 2022 . T he 5.2 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 $292,476 in the six months ended April 30, 2023, an increase of 7.1% from sales of $273,206 for the comparable period of 2022. The increase was the result of a 12.9% increase due to an acquisition, partially offset by an organic sales volume decrease of 3.3% and unfavorable currency effects of 2.5%. The organic sales decrease was driven by lower demand in electronic dispense product lines, partially offset by stronger demand in test and inspection product lines in the Asia Pacific region. Operating profit as a percentage of sales decreased to 14.7% for the six months ended April 30, 2023, compared to 24.7% in the comparable period of 2022 . T he 10.0 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 incurred in the first quarter of 2023 and factory inefficiencies due to reduced volumes. 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 and six months ended April 30, 2023 was 21.1% and 20.8% respectively, compared to 21.3% and 21.0% for the three and six months ended April 30, 2022, respectively. Due to our share-based payment transactions, our income tax provision included a discrete tax benefit of $583 and $1,749, for the three months and six months ended April 30, 2023, respectively, compared to $309 and $1,424 for the three and six months ended April 30, 2022, respectively. 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 April 30, 2023 were translated at exchange rates in effect during the same period of 2022, we estimated that sales would have been approximately $14,200 higher while costs of sales and selling and administrative expenses would have been approximately $8,800 higher. If transactions for the six months ended April 30, 2023 were translated at exchange rates in effect during the same period of 2022, we estimated that sales would have been approximately $39,000 higher while costs of sales and selling and administrative expenses would have been approximately $25,400 higher. Financial Condition Liquidity and Capital Resources During the six months ended April 30, 2023, cash and cash equivalents decreased $34,384 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 $287,905 compared to $214,501 for the six months ended April 30, 2022. Changes in operating assets and liabilities decreased cash by $45,857 in the six months ended April 30, 2023 and decreased cash by $85,070 in the comparable period of 2022. The decrease in cash from operating assets and liabilities was due primarily to a decrease in accrued liabilities in both periods. Other improved year over year due primarily to cash inflows related to settlement of foreign exchange contracts. Cash used in investing activities was $393,153 for the six months ended April 30, 2023, compared to $196,374 used in the comparable period of 2022. During the six months ended April 30, 2023, cash of $377,843 was used for the CyberOptics acquisition and cash of $15,349 was used for capital expenditures. During the six months ended April 30, 2022, cash of $171,613 was used for the NDC acquisition and $24,776 was used for capital expenditures. Page 25 Table of Contents Nordson Corporation Cash provided by financing activities was $64,822 for the six months ended April 30, 2023, compared to $192,935 cash used in the comparable period of 2022. In the six months ended April 30, 2023, cash of $74,463 was used for dividend payments and cash of $54,365 was used for the purchase of treasury shares, compared to $59,301 and $140,466, respectively, in the comparable period of 2022. The six months ended April 30, 2023 included net borrowings of long-term debt of $184,617, used primarily to fund the acquisition of CyberOptics, compared to net repayments of $1,654 during the six months ended April 30, 2022 . The following is a summary of significant changes in balance sheet captions from October 31, 2022 to April 30, 2023. Inventories-net increased by $56,781, 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 $48,520 due primarily to incentive compensation payments made in the six months ended April 30, 2023, and Current maturities of long-term debt and notes payable increased principally as result of borrowings under the revolving credit facility for the CyberOptics acquisition. We believe the combination of present and expected 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 April 30, 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 recent 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.