Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
NOTE REGARDING AMOUNTS AND FISCAL YEAR REFERENCES
In this annual report, all amounts related to United States dollars and foreign currency and to the number of Nordson Corporation’s common shares, except for per share earnings and dividend amounts, are expressed in thousands. Unless the context otherwise indicates, all references to “we,” “us,” “our,” or the “Company” mean Nordson Corporation.
Unless otherwise noted, all references to years relate to our fiscal year ending October 31.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. We base our estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the board of directors.
Revenue recognition - A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the consideration is probable. Revenue is recognized when performance obligations under the terms of the contract with a customer are satisfied. Generally, our revenue results from short-term, fixed-price contracts and is recognized as of a point in time when the product is shipped or at a later point when the control of the product transfers to the customer. Refer to Note 1 to the Consolidated Financial Statements for further discussion regarding the Company's revenue recognition policy.
Business combinations - The acquisitions of our businesses are accounted for under the acquisition method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder, if any, recorded as goodwill. The fair values are determined by management, taking into consideration information supplied by the management of the acquired entities, and other relevant information. Such information typically includes valuations obtained from independent appraisal experts, which management reviews and considers in its estimates of fair values. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to present value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future revenue growth rates and EBITDA margins, discount rates, customer attrition rates, and asset lives, among other items. This judgment could result in either a higher or lower value assigned to amortizable or depreciable assets. The impact could result in either higher or lower amortization and/or depreciation expense.
Goodwill - Goodwill is the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired in various business combinations. Goodwill is not amortized but is tested for impairment annually at the reporting unit level, or more often if indications of impairment exist.
We test goodwill in accordance with Accounting Standards Codification ("ASC") 350. We did not record any goodwill impairment charges in 2023. We use an independent valuation specialist to assist with refining our assumptions and methods used to determine fair values. To test for goodwill impairment, we estimate the fair value of each of our reporting units using a combination of the Income Approach and the Market Approach.
The discounted cash flow method ("Income Approach") uses assumptions for revenue growth, operating margin and working capital turnover that are based on management’s strategic plans tempered by performance trends and reasonable expectations about those trends. Terminal value calculations employ a published formula known as the Gordon Growth Model Method that essentially captures the present value of perpetual cash flows beyond the last projected period assuming a constant Weighted Average Cost of Capital ("WACC") methodology and growth rate. For each reporting unit, a sensitivity analysis is performed to vary the discount and terminal growth rates in order to provide a range of reasonableness for detecting impairment. Discount rates are developed using a WACC methodology.
The WACC represents the blended average required rate of return for equity and debt capital based on observed market return data and company specific risk factors. For 2023, the WACC rates used ranged from 8.3 percent to 11.0 percent depending upon the reporting unit's size, end market volatility and projection risk. See Note 5 to the Consolidated Financial Statements for further details regarding the valuation methodologies used.
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In 2023, 2022 and 2021, the results of our annual impairment tests indicated no impairment.
The fair value ("FV") was compared to the carrying value ("CV") for each reporting unit. Based on the results shown in the table below and based on our measurement date of August 1, 2023, our conclusion is that no goodwill was impaired in 2023. Potential events or circumstances, such as a sustained downturn in global economies, could have a negative effect on estimated fair values.
WACC Excess of
FV over CV Goodwill
Industrial Precision Solutions Segment - Adhesives 8.3% 697% $ 511,799
Industrial Precision Solutions Segment - Industrial Coating Systems 11.0% 678% $ 24,084
Advanced Technology Solutions Segment - Electronics
Systems
9.0% 387% $ 27,534
Advanced Technology Solutions Segment - Test & Inspection 9.5% 168% $ 371,425
Medical and Fluid Solutions Segment - Fluid
Management
9.0% 186% $ 1,175,938
Pension plan in the United States - The measurement of the liabilities related to our domestic pension plan is based on management’s assumptions related to future factors, including interest rates, return on pension plan assets, compensation increases, mortality and turnover assumptions, and health care cost trend rates. The liabilities associated with the Company's international pension plans and OPEB are not as materially sensitive to changes in assumptions as the pension plan in the United States.
The weighted-average discount rate used to determine the present value of our domestic pension plan obligations was 6.08 percent at October 31, 2023 and 5.70 percent at October 31, 2022. The discount rate used was determined by using quality fixed income investments with a duration period approximately equal to the period over which pension obligations are expected to be settled.
In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plans. We consult with and consider the opinions of financial and actuarial experts in developing appropriate return assumptions. The expected rate of return (long-term investment rate) on domestic pension assets used to determine net benefit costs was 6.40 percent and 5.75 percent in 2023 and 2022, respectively.
The assumed rate of compensation increases used to determine the present value of our domestic pension plan obligations was 3.92 percent and 4.30 percent at October 31, 2023 and October 31, 2022, respectively.
Annual expense amounts are determined based on the discount rate used at the end of the prior year. Differences between actual and assumed investment returns on pension plan assets result in actuarial gains or losses that are amortized into expense over a period of years.
Economic assumptions have a significant effect on the amounts reported. The effect of a one percent change in the discount rate, expected return on assets and compensation increase is shown in the table below. Bracketed numbers represent decreases in expense and obligation amounts.
United States
1% Point
Increase 1% Point
Decrease
Discount rate:
Effect on total net periodic pension cost in 2023
$ (1,698) $ 2,101
Effect on pension obligation as of October 31, 2023
$ (38,854) $ 47,913
Expected return on assets:
Effect on total net periodic pension cost in 2023
$ (4,081) $ 4,081
Compensation increase:
Effect on total net periodic pension cost in 2023
$ 2,480 $ (2,187)
Effect on pension obligation as of October 31, 2023
$ 15,052 $ (13,644)
Income taxes – Income taxes are estimated based on income for financial reporting purposes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances
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against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Management believes the valuation allowances are adequate after considering future taxable income, allowable carryforward periods and ongoing prudent and feasible tax planning strategies. In the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount (including the valuation allowance), an adjustment to the valuation allowance would increase income in the period such determination was made. Conversely, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the valuation allowance would be expensed in the period such determination was made.
Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual effective income tax rates and related income tax liabilities may differ materially from our estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.
ARAG Group Acquisition
On August 24, 2023, the Company completed the acquisition of the ARAG Group pursuant to the terms of the Sale and Purchase Agreement, dated as of June 25, 2023, by and among the Company and the Sellers. ARAG is a global market and innovation leader in the development, production and supply of precision control systems and smart fluid components for agricultural spraying. ARAG operates as a division of our Industrial Precision Solutions segment. In anticipation of the acquisition, the Company entered into a €760,000 senior unsecured term loan facility with a group of banks in August 2023 (the “364-Day Term Loan Facility”). The all-cash ARAG acquisition of approximately €957,000, net of the repayment of approximately €30,300 of debt of the acquired companies, was funded using borrowings under the 364-Day Term Loan Facility and the Company's revolving credit facility. The 364-Day Term Loan Facility was subsequentially paid off in September 2023 with the net proceeds of a senior notes offering (see Note 9 to the Consolidated Financial Statements for additional details). Based on the fair value of the assets acquired and the liabilities assumed, goodwill of $694,900 and identifiable intangible assets of $353,500 were recorded. The identifiable intangible assets consist primarily of $27,500 of tradenames (amortized over nine years), $31,000 of technology (amortized over five years), and $295,000 of customer relationships (amortized over twenty-two years). The financial results of the ARAG Group acquisition are not expected to have a material impact on our Consolidated Financial Statements.
Results of Operations
Below is a detailed discussion comparison of our results of operations for the fiscal years ended October 31, 2023 and October 31, 2022. For a discussion of other changes from the fiscal year ended October 31, 2022 to the fiscal year ended October 31, 2021, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
As used throughout this annual report, geographic regions include the Americas (United States, Canada, Mexico and Central and South America), Asia Pacific and Europe.
2023 compared to 2022
Worldwide sales for 2023 were $2,628,632, an increase of 1.5 percent from 2022 sales of $2,590,278. The increase consisted of a 3.8 percent increase from acquisitions, partially offset by a 1.4 percent decline in organic sales and unfavorable currency translation effects that decreased sales by 0.9 percent.
Sales outside the United States accounted for 66.2 percent of total sales in 2023, as compared to 66.8 percent in 2022. On a geographic basis, sales in the Americas region were $1,149,760, an increase of 4.8 percent from 2022, with organic sales increasing 2.0 percent, a 2.4 percent increase from acquisitions, and favorable currency effects of 0.4 percent. Sales in the Asia Pacific region were $796,196, a decrease of 6.1 percent from 2022, with organic sales decreasing 8.2 percent and unfavorable currency effects of 3.1 percent, partially offset by a 5.2 percent increase from acquisitions. Sales in Europe were $682,676, an increase of 5.7 percent from 2022, with organic sales increasing 1.4 percent, a 4.2 percent increase from acquisitions, and favorable currency effects of 0.1 percent.
Cost of sales were $1,203,227 in 2023, up 3.4 percent from $1,163,742 in 2022. Gross profit, expressed as a percentage of sales, decreased to 54.2 percent in 2023 from 55.1 percent in 2022. The 0.9 percentage point decrease in gross margin was primarily driven by incremental inventory step-up amortization related to acquisitions in 2023 of $8,862 and unfavorable foreign currency effects.
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Selling and administrative expenses were $752,644 in 2023, up from $724,176 in 2022. The 3.9 percent increase was driven by a 8.3 percent increase due to the first-year effect of an acquisition, including acquisition costs, partially offset by lower base business costs and favorable currency translation effects which decreased costs by 5.3 percent. Selling and administrative expenses as a percentage of sales increased slightly to 28.6 percent in 2023 from 28.0 percent in 2022. The 0.6 percentage point increase was primarily due to cost structure simplification actions taken in 2023.
Operating profit as a percentage of sales decreased to 25.6 percent in 2023 compared to 27.1 percent in 2022. The 1.5 percent decrease in operating margin was primarily driven by inventory step-up amortization and other costs related to the first-year effect of acquisitions.
Interest expense in 2023 was $59,505, an increase of $37,092, or 165.5 percent, from 2022 . The increase was due to higher average debt levels and higher average interest rates compared to the prior year primarily driven by acquisitions. During 2022, the Company recognized non-cash pension settlement charges of $41,221 related to the purchase of an annuity contract to relieve the Company of certain U.S. pension benefit obligations. Other expense in 2023 was $597 compared to other income of $8,527 in 2022 . Included in other expense in 2023 w ere $7,742 in net foreign currency losses, which were largely offset by pension gains. Included in the prior year’s other income were $6,270 in foreign currency gains.
Income tax expense in 2023 was $127,846, or 20.8 percent of pre-tax income, as compared to $136,176, or 21.0 percent of pre-tax income in 2022 . The income tax provision for 2023 included a tax benefit of $4,286 due to our share-based payment transactions. Our income tax provision for 2022 included a tax benefit of $3,273 due to our share-based payment transactions.
Net income was $487,493, or $8.46 per diluted share, in 2023, compared to net income of $513,103, or $8.81 per diluted share, in 2022. This represented a 5.0 percent decrease in net income and a 4.1 percent decrease in diluted earnings per share. The decrease of $0.35 per diluted share was primarily driven by higher interest expense and acquisition-related expenses in 2023 compared to non-cash pension settlement charges in 2022.
Industrial Precision Solutions
Sales of the Industrial Precision Solutions segment were $1,391,046 in 2023, an increase of 4.0 percent, from 2022 sales of $1,337,242. The increase was the result of an organic sales increase of 3.1 percent and an increase of 1.9 percent from acquisitions, partially offset by unfavorable currency effects of 1.0 percent. Organic sales growth was generally strong across most product lines and regions.
Operating profit as a percentage of sales increased to 33.1 percent in 2023 compared to 32.5 percent in 2022. The 0.6 percentage point improvement in operating margin was primarily the result of improved selling and administrative expense leverage due to increased sales volumes.
Medical and Fluid Solutions
Sales of the Medical and Fluid Solutions segment were $660,316 in 2023, a decrease of 4.3 percent from 2022 sales of $690,177. The decrease was the result of an organic sales decrease of 3.7 percent and unfavorable currency effects that decreased sales by 0.6 percent. The organic sales decrease was driven by lower demand for the medical fluid components and fluid solutions product lines, materially offset by continued strength in medical interventional solutions product lines.
Operating profit as a percentage of sales decreased to 28.7 percent in 2023 compared to 31.5 percent in 2022. The 2.8 percent percentage point decline in operating margin was principally driven by 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 $577,270 in 2023, an increase of 2.6 percent from 2022 sales of $562,859. The increase consisted of a volume increase of 3.7 percent, inclusive of an organic sales decrease of 9.2 percent and a 12.9 percent increase from acquisitions, partially offset by unfavorable currency effects that decreased sales by 1.1 percent. The organic sales decrease was driven by lower demand in electronics dispense product lines, partially offset by stronger demand in test and inspection product lines.
Operating profit as a percentage of sales decreased to 17.6 percent in 2023 compared to 23.7 percent in 2022. The 6.1 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 factory inefficiencies due to reduced volumes.
Liquidity and Capital Resources
Cash and cash equivalents decreased $47,778 in 2023 to $115,679 as of October 31, 2023 compared to $163,457 as of October 31, 2022. Approximately 81 percent of our consolidated cash and cash equivalents were held at various foreign subsidiaries as of October 31, 2023.
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Cash provided by operating activities was $641,282 in 2023, compared to $513,131 in 2022. The primary sources were net income adjusted for non-cash income and expenses (consisting of depreciation and amortization, non-cash stock compensation, provision for losses on receivables, deferred income taxes, other non-cash expense, gain/loss on sale of property, plant and equipment, and non-cash pension settlement charges), which were $615,496 in 2023, compared to $676,200 in 2022. Changes in working capital items used cash of $3,571 compared to $107,314 used in 2022 principally driven by decreases in receivables and inventory while cash provided by other operating items was $29,357 in 2023 compared to cash used of $55,755 in 2022.
Cash used in investing activities was $1,436,879 in 2023, compared to $222,761 in 2022. In 2023, $1,422,780 in cash was used for acquisitions, utilizing borrowings and cash from operations, compared to $171,613 used in 2022. Capital expenditures were $34,583 in 2023 compared to $51,428 in 2022.
Cash provided by financing activities was $750,512 in 2023, compared to $416,006 cash used in 2022. Proceeds and repayments of long-term debt provided $976,043 of cash in 2023, compared to $33,908 used in 2022. In 2023, cash of $89,708 was used for the purchase of treasury shares, down from $262,869 used in 2022. Dividend payments were $150,356 in 2023, up from $125,914 in 2022 due to an increase in dividends on our common shares, on an annual basis, to $2.63 per share from $2.18 per share. Issuance of common shares related to employee benefit plans generated $21,373 of cash in 2023, up from $12,124 in 2022.
The following is a summary of significant changes by balance sheet caption from October 31, 2022 to October 31, 2023. Receivables-net and inventories-net combined increased $124,950, goodwill increased $979,508 , and i ntangible assets-net increased $343,342 principally due to the acquisitions of the ARAG Group and Cy berOptics. Long-term debt, including current maturities, increased $999,199, principally due to the acquisition of the ARAG Group.
We have a $1,150,000 unsecured multi-currency credit facility with a group of banks which provides for a term loan facility in the aggregate principal amount of $300,000, maturing in June 2026, and a multicurrency revolving credit facility in the aggregate principal amount of $850,000, maturing in June 2028. In anticipation of the ARAG acquisition, the Company entered into the 364-Day Term Loan Facility in August 2023. On September 13, 2023, the Company completed an underwritten public offering of $350,000 aggregate principal amount of the Company’s 5.600% Notes due 2028 (the “2028 Notes”) and $500,000 aggregate principal amount of the Company’s 5.800% Notes due 2033 (together with the 2028 Notes, the “Notes"). The Company used the net proceeds from the sale of the Notes to repay its borrowings under the 364-Day Term Loan Facility. At October 31, 2023, we had $300,000 outstanding on the term loan facility and $248,000 outstanding on the revolving credit facility compared to no outstanding balance at October 31, 2022 under the old revolving credit facility.
Our operating performance, balance sheet position and financial ratios for 2023 remained strong. Total debt increased $999,199 during 2023 primarily d ue to the acquisition of the ARAG Group. The Company is well-positioned to manage liquidity needs that arise from working capital requirements, capital expenditures, and contributions related to pension and postretirement obligations, as well as principal and interest payments on our outstanding debt. Primary sources of capital to meet these needs, as well as other opportunistic investments, are a combination of cash provided by operations and borrowings under our loan agreements. Cash from operations, which when combined with our available borrowing capacity and ready access to capital markets, is expected to be more than adequate to fund our liquidity needs over the twelve months and the foreseeable future thereafter. The Company believes it has the ability to generate and obtain adequate amounts of cash to meet its long-term needs for cash.
Contractual and Other Material Cash Obligations
The following table summarizes contractual and other material cash obligations as of October 31, 2023:
Payments Due by Period
Total Less than
1 Year 1-3
Years 4-5
Years After 5
Years
Debt (1)
$ 1,749,305 $ 115,662 $ 435,643 $ 648,000 $ 550,000
Interest payments on long-term debt (1)
416,926 58,526 160,695 81,884 115,821
Finance lease obligations (2)
18,349 4,918 6,055 1,633 5,743
Operating leases (2)
119,317 16,853 28,441 21,172 52,851
Contributions related to pension and postretirement benefits (3)
6,770 6,770 — — —
Purchase obligations (4)
192,453 187,498 4,943 12 —
Total obligations $ 2,503,120 $ 390,227 $ 635,777 $ 752,701 $ 724,415
(1) Refer to Note 9 to the Consolidated Financial Statements for further discussion.
(2) Refer to Note 10 to the Consolidated Financial Statements for further discussion.
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(3) Pension and postretirement plan funding amounts will be determined based on the future funded status of the plans and therefore cannot be estimated at this time. Refer to Note 6 to the Consolidated Financial Statements for further discussion.
(4) Purchase obligations primarily represent commitments for materials used in our manufacturing processes that are not recorded on our Consolidated Balance Sheet.
We believe that the combination of present capital resources, cash from operations and unused financing sources such as our credit facilities, including our revolving credit facility, are more than adequate to meet cash requirements for the twelve months and the foreseeable future thereafter. There are no significant restrictions limiting the transfer of funds from international subsidiaries to the parent company.
New Accounting Standards
There have been no new accounting standards issued which would require either disclosure or adoption during the current period by the Company.
Effects of Foreign Currency
The impact of changes in foreign currency exchange rates on sales and operating results cannot be precisely measured due to fluctuating selling prices, sales volume, product mix and cost structures in each country where we operate. As a general rule, a weakening of the United States dollar relative to foreign currencies has a favorable effect on sales and net income, while a strengthening of the dollar has a detrimental effect.
In 2023, as compared with 2022, the United States dollar was generally stronger against foreign currencies. If 2022 exchange rates had been in effect during 2023, sales would have been approximately $23,153 higher and third-party costs would have been approximately $15,210 higher. In 2022, as compared with 2021, the United States dollar was generally stronger against foreign currencies. If 2021 exchange rates had been in effect during 2022, sales would have been approximately $103,829 higher and third-party costs would have been approximately $68,788 higher. These effects on reported sales do not include the impact of local price adjustments made in response to changes in currency exchange rates.
Trends
Our solid historical performance is attributed to our diverse geographic and end market participation and our long-term commitment to develop and provide quality products and worldwide service to meet our customers’ changing needs.
Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995
This annual report, 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 annual 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 the ARAG Group and 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 conflicts in Europe and the Middle East, acts of terror, natural disasters and pandemics.
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 our actual results to differ materially from the expected results are discussed in Part 1, Item 1A, Risk Factors of this annual report.
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