FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

(Mark One)

For the quarterly period ended April 30, 2015

OR

For the transition period from           to         

Commission file number   0-7977

 

NORDSON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(440) 892-1580

(Telephone Number)

Securities registered pursuant to Section 12(b) of the Act:

Common Shares without par value

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes  x    No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  Common Shares, without par value as of April 30, 2015:  60,832,553

 

 

 

 

 

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Table of Contents

 

 

 

 

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Part I – FINANCIAL INFORMATION

Condensed Consolidated Statements of Income

 

 

See accompanying notes.

 

 

 

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Condensed Consolidated Statements of Comprehensive Income

 

 

See accompanying notes.

 

 

 

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Condensed Consolidated Balance Sheets

 

 

See accompanying notes.

 

 

 

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Condensed Consolidated Statement of Cash Flows

 

 

See accompanying notes.

 

 

 

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Notes to Condensed Consolidated Financial Statements

April 30, 2015

NOTE REGARDING AMOUNTS AND FISCAL YEAR REFERENCES

In this quarterly 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 otherwise noted, all references to years relate to our fiscal year ending October 31.

 

Basis of presentation.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six months ended April 30, 2015 are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended October 31, 2014.  

Basis of consolidation.  The consolidated financial statements include the accounts of Nordson Corporation and its majority-owned and controlled subsidiaries.  Investments in affiliates and joint ventures in which our ownership is 50% or less or in which we do not have control but have the ability to exercise significant influence, are accounted for under the equity method.  All significant intercompany accounts and transactions have been eliminated in consolidation.  

Use of estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements.  Actual amounts could differ from these estimates.

Revenue recognition.  Most of our revenues are recognized upon shipment, provided that persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectibility is reasonably assured, and title and risk of loss have passed to the customer.  

A relative selling price hierarchy exists for determining the selling price of deliverables in multiple deliverable arrangements.  Vendor specific objective evidence (VSOE) is used, if available.  Third-party evidence (TPE) is used if VSOE is not available, and best estimated selling price is used if neither VSOE nor TPE is available.  Our multiple deliverable arrangements include installation, installation supervision, training, and spare parts, which tend to be completed in a short period of time, at an insignificant cost, and utilizing skills not unique to us, and, therefore, are typically regarded as inconsequential or perfunctory.  Revenue for undelivered items is deferred and included within accrued liabilities in the accompanying balance sheet.  Revenues deferred in 2015 and 2014 were not material.  

Earnings per share.  Basic earnings per share are computed based on the weighted-average number of common shares outstanding during each year, while diluted earnings per share are based on the weighted-average number of common shares and common share equivalents outstanding.  Common share equivalents consist of shares issuable upon exercise of stock options computed using the treasury stock method, as well as restricted shares and deferred stock-based compensation.  Options whose exercise price is higher than the average market price are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. Options excluded from the calculation of diluted earnings per share for the three and six months ending April 30, 2015 were 312 and 313, respectively.  Options excluded from the calculation of diluted earnings per share for the three and six months ending April 30, 2014 were 276 and 138, respectively.   

 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard regarding revenue recognition.  Under this standard, a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard implements a five-step process for customer contract revenue recognition that focuses on transfer of control.  It will be effective for us beginning in 2018, with a possible one-year deferral as a result of a current proposal by the FASB. We are currently assessing the impact this standard will have on our consolidated financial statements as well as the method by which we will adopt the new standard.

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In April 2015, the FASB issued a new standard regarding the presentation of debt issuance costs.  Under this standard, a company is required to present unamortized debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as a separate asset. The recognition and measurement guidance for debt issuance costs are not affected by this new standard.  It will be effective for us beginning in 2017. We do not expect this standard to have a material impact on our consolidated financial statements.

 

 

At April 30, 2015 and October 31, 2014, inventories consisted of the following:

 

 

 

Changes in the carrying amount of goodwill for the three months ended April 30, 2015 by operating segment are as follows:

 

 

Accumulated impairment losses, which were recorded in 2009, were $232,789 at April 30, 2015 and October 31, 2014.  Of these losses, $229,173 related to the Advanced Technology Systems segment, and $3,616 related to the Industrial Coating Systems segment.

Information regarding our intangible assets subject to amortization is as follows:

 

 

Amortization expense for the three months ended April 30, 2015 and 2014 was $6,976 and $6,310, respectively. Amortization expense for the six months ended April 30, 2015 and 2014 was $13,867 and $12,640, respectively.  

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The components of net periodic pension cost for the three and six months ended April 30, 2015 and April 30, 2014 were:

 

 

The components of other postretirement benefit cost for the three and six months ended April 30, 2015 and April 30, 2014 were:

 

 

 

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. The effective tax rates for the three and six month periods ended April 30, 2015 were 31.2% and 29.3%, respectively.  The effective tax rate for both the three and six month periods ended April 30, 2014 was 30.5%.

On December 19, 2014, the Tax Increase Prevention Act of 2014 was enacted which retroactively reinstated the Federal Research and Development Tax Credit (Federal R&D Tax Credit) from January 1, 2014 to December 31, 2014 and extended certain other tax provisions. As a result, our income tax provision for the six months ended April 30, 2015 included a discrete tax benefit of $1,686 primarily related to 2014.

 

 

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The components of accumulated other comprehensive loss, including adjustments for items that are reclassified from accumulated other comprehensive loss to net income, are shown below.

 

 

 

During the 2013 Annual Meeting of Shareholders, our shareholders approved the 2012 Stock Incentive and Award Plan (the “2012 Plan”). The 2012 Plan provides for the granting of stock options, stock appreciation rights, restricted shares, performance shares, stock purchase rights, stock equivalent units, cash awards and other stock or performance-based incentives. A maximum of 2,900 common shares is available for grant under the Plan.

Stock Options

Nonqualified or incentive stock options may be granted to our employees and directors.  Generally, options granted to employees may be exercised beginning one year from the date of grant at a rate not exceeding 25 percent per year and expire 10 years from the date of grant.  Vesting accelerates upon the occurrence of events that involve or may result in a change of control.  For grants made prior to November 2012, vesting ceases upon retirement, death and disability, and unvested shares are forfeited.  For grants made during and after November 2012, in the event of termination of employment due to early retirement or normal retirement at age 65, options granted within 12 months prior to termination are forfeited, and vesting continues post retirement for all other unvested options granted.  In the event of disability or death, all unvested stock options fully vest.  Termination for any other reason results in forfeiture of unvested options and vested options in certain circumstances.  The amortized cost of options is accelerated if the retirement eligibility date occurs before the normal vesting date.  Option exercises are satisfied through the issuance of treasury shares on a first-in, first-out basis.  We recognized compensation expense related to stock options of $2,103 and $2,178 in the three months ended April 30, 2015 and 2014, respectively. Corresponding amounts for the six months ended April 30, 2015 and April 30, 2014 were $4,571 and $5,844, respectively.

The following table summarizes activity related to stock options for the six months ended April 30, 2015:

 

 

As of April 30, 2015, there was $9,556 of total unrecognized compensation cost related to nonvested stock options.  That cost is expected to be amortized over a weighted average period of approximately 1.4 years.

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The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

The weighted-average expected volatility used to value the 2015 and 2014 options was 34.3%, and 44.5%, respectively.  

Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options.  The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.

The weighted average grant date fair value of stock options granted during the six months ended April 30, 2015 and 2014 was $24.63 and $27.92, respectively.  

The total intrinsic value of options exercised during the three months ended April 30, 2015 and 2014 was $5,082 and $2,307, respectively.  The total intrinsic value of options exercised during the six months ended April 30, 2015 and 2014 was $6,179 and $5,961, respectively.

Cash received from the exercise of stock options for the six months ended April 30, 2015 and 2014 was $3,174 and $3,499, respectively.  The tax benefit realized from tax deductions from exercises for the six months ended April 30, 2015 and 2014 was $1,814 and $1,795, respectively.  

Restricted Shares and Restricted Share Units

We may grant restricted shares and/or restricted share units to our employees and directors.  These shares or units may not be transferred for a designated period of time (generally one to three years) defined at the date of grant.  

For employee recipients, in the event of termination of employment due to early retirement, restricted shares granted within 12 months prior to termination are forfeited, and other restricted shares vest on a pro-rata basis.  In the event of termination of employment due to retirement at normal retirement age, restricted shares granted within 12 months prior to termination are forfeited, and, for other restricted shares, the restriction period will terminate and the shares will vest and be transferable. Restrictions lapse in the event of a recipient’s disability or death.  Termination for any other reason prior to the lapse of any restrictions results in forfeiture of the shares.  

For non-employee directors, all restrictions lapse in the event of disability or death of the non-employee director.  Termination of service as a director for any other reason within one year of date of grant results in a pro-rata vesting of shares or units.  

As shares or units are issued, deferred stock-based compensation equivalent to the fair market value on the date of grant is expensed over the vesting period.  Tax benefits arising from the lapse of restrictions are recognized when realized and credited to capital in excess of stated value.

The following table summarizes activity related to restricted shares during the six months ended April 30, 2015:

 

 

As of April 30, 2015, there was $2,857 of unrecognized compensation cost related to restricted shares.  The cost is expected to be amortized over a weighted average period of 2.0 years.  The amount charged to expense related to restricted shares during the three months ended April 30, 2015 and 2014 was $464 and $424, respectively. These amounts included common share dividends for the three months ended April 30, 2015 and 2014 of $12. For the six months ended April 30, 2015 and 2014, the amounts charged to expense related to restricted shares were $936 and $895, respectively.  These amounts included common share dividends for the six months ended April 30, 2015 and 2014 of $25.

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The following table summarizes activity related to restricted share units during the six months ended April 30, 2015:

 

 

As of April 30, 2015, there was $480 of remaining expense to be recognized related to outstanding restricted share units, which is expected to be recognized over a weighted average period of 0.5 years.  The amount charged to expense related to restricted share units during the three months ended April 30, 2015 and 2014 was $243 and $223, respectively.  For the six months ended April 30, 2015 and 2014, the amounts were $486 and $445, respectively.  

Deferred Directors’ Compensation

Non-employee directors may defer all or part of their cash and equity-based compensation until retirement.  Cash compensation may be deferred as cash or as share equivalent units.  Deferred cash amounts are recorded as liabilities, and share equivalent units are recorded as equity.  Additional share equivalent units are earned when common share dividends are declared.

The following table summarizes activity related to director deferred compensation share equivalent units during the six months ended April 30, 2015:

 

 

The amount charged to expense related to director deferred compensation for the three months ended April 30, 2015 and 2014 was $22 and $25, respectively. For the six months ended April 30, 2015 and 2014, the corresponding amounts were $47 and $52, respectively.

Performance Share Incentive Awards

Executive officers and selected other key employees are eligible to receive common share-based incentive awards. Payouts, in the form of unrestricted common shares, vary based on the degree to which corporate financial performance exceeds predetermined threshold, target and maximum performance levels over three-year performance periods.  No payout will occur unless certain threshold performance objectives are exceeded.

The amount of compensation expense is based upon current performance projections for each three-year period and the percentage of the requisite service that has been rendered.  The calculations are also based upon the grant date fair value determined using the closing market price of our common shares at the grant date, reduced by the implied value of dividends not to be paid.  This value was $76.48 per share for 2015, $69.25 per share for 2014 and $59.59 per share for 2013.  During the three months ended April 30, 2015 and 2014, $1,242 and $1,303, respectively, was charged to expense. For the six months ended April 30, 2015 and 2014, the corresponding amounts were $2,491 and $2,445, respectively.  The cumulative amount recorded in shareholders’ equity at April 30, 2015 was $6,593.

Deferred Compensation

Our executive officers and other highly compensated employees may elect to defer up to 100% of their base pay and cash incentive compensation and for executive officers, up to 90% of their performance share-based incentive payout each year.  Additional share units are credited for quarterly dividends paid on our common shares.  Expense related to dividends paid under this plan for the three months ended April 30, 2015 and 2014 was $45 and $32, respectively. For the six months ended April 30, 2015 and 2014, the corresponding amounts were $84 and $58, respectively.

 

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We offer warranties to our customers depending on the specific product and terms of the customer purchase agreement.  A typical warranty program requires that we repair or replace defective products within a specified time period (generally one year) from the date of delivery or first use.  We record an estimate for future warranty-related costs based on actual historical return rates.  Based on analysis of return rates and other factors, the adequacy of our warranty provisions are adjusted as necessary.  The liability for warranty costs is included in accrued liabilities in the Consolidated Balance Sheet.  

Following is a reconciliation of the product warranty liability for the six months ended April 30, 2015 and 2014: