By: Bill Bregar
July 20, 2012
WESTLAKE, OHIO (July 20, 2:35 p.m. ET) — Nordson Corp., a $1.23 billion maker of equipment for adhesive dispensing, industrial coating and semiconductor technologies, is a big player in medical, packaging and electronics — and now has burst onto the plastics scene.
Nordson is paying $200 million apiece for Xaloy Inc., the largest U.S. maker of screws and barrels, and flat-die maker Extrusion Dies Industries LLC. The announcements were separated by just nine business days, EDI on May 21 and Xaloy on June 4.
“We think we got two good companies,” said Michael Hilton, president and CEO.
Hilton said plastics could end up becoming a separate business platform, with future add-on purchases. Nordson has used that strategy several times since its early days as a specialist in coating and adhesive technology to expand into the electronics and, more recently, medical markets.
Last year, the company bought Value Plastics Inc., a Colorado molder of medical fittings, and a Belgian flat-die maker similar to EDI, Constructiewerkhuizen G. Verbruggen NV. And a few Nordson operations do injection molding to make precision dispensing syringes, tips and other components.
But now Xaloy, in particular, is a macro-plastics buy that vaults Nordson into the broad industry. Nearly everything made out of plastic needs a screw and barrel to melt and convey the material. And spending on screws and barrels is an economic indicator of the plastics industry’s health.
New Castle, Pa.-based Xaloy also makes extrusion equipment such as gear pumps, screen changers and pelletizers. EDI, in Chippewa Falls, Wis., makes flat dies and extrusion coating dies.
“So if you think about it, packaging is a large business, electronics is large business. Medical we’re trying to grow. And now an adjunct here is what we’re trying to do in the plastics processing space is, in effect grow another platform,” Hilton said.
Hilton spelled out Nordson’s strategy during an interview July 12 at company headquarters in Westlake, a suburb of Cleveland. “We want to buy companies that have scale in their particular niche. And we think these companies do,” he said.
The slam-bang nature of the deals grabbed the plastics industry’s attention. So did the fact that Nordson, a Nasdaq-traded company with a long history, bought Xaloy and EDI from private equity owners. Private equity firms, which pool investment money to buy and sell after a few years, have swept through the plastics machinery and components sector.
Hilton said Nordson is making a long-term investment.
“From a strategic standpoint, we’re looking at the long haul,” Hilton said. “We’re looking at how we grow these two businesses that we bought. How do we take advantage of what they bring and leverage what we can bring from the core company? How do we grow them, and they become potentially another platform for the company?”
Xaloy and EDI bring about $200 million in combined sales and more than 1,000 employees to Nordson.
Hilton said Nordson focuses on continuous improvement and lean manufacturing. He said Nordson officials are happy with operations at Xaloy and EDI.
“Each of the businesses had growth plans that we liked. And each had performance improvement plans under way, and they’re doing a very good job,” he said.
Current management will remain at both companies.
Analysts, competitors weigh in
The deals drew praise from financial analysts and screw industry officials. For each company, Nordson paid about 10 times EBITDA (earnings before interest, taxes, depreciation and amortization), according to Nordson officials and analysts.
“Neither deal is considered ‘cheap’ on the surface, but both appear to be high-quality businesses,” said Jason Ursaner at CJS Securities in White Plains, N.Y. He said EDI and Xaloy fit into Nordson’s desire to grow in flexible packaging and plastics processing.
Executives at two screw manufacturers believe long-term strategic ownership is preferable to private equity.
Jeffrey Kuhman, president of Tecumseh, Mich.-based screw maker Glycon Corp., said his understanding was that private equity firm Industrial Growth Partners LLC, which bought Xaloy in 2008, had a goal to sell it within three to five years. Nordson should provide stable ownership, he said.
“That’s where we would see some commitment from technology and so it should be good for everybody and not just people that make screws and barrels, but processors,” Kuhman said.
Westland Corp. President Dave Larson agreed. “I believe it is a very good thing for the industry, to have somebody that wants to invest in R&D and move forward. I think it’s very good for the industry and all of their employees. It will make Xaloy a better competitor, which obviously makes us a better competitor as well,” said Larson, president of Westland in Wichita, Kan.
Nordson is in solid financial shape to invest in Xaloy and EDI, and make future acquisitions, said analysts and company executives. “We’re a big proponent of being a technology leader, and we don’t under-fund technology development,” Hilton said.
Sales in 2011 reached an all-time high of $1.23 billion, as sales improved by double-digit percents in all segments and geometries for the second consecutive year. Seventy-five percent of sales come from outside the United States. Profit was $222.3 million, for an 18 percent net profit margin.
Maintenance parts and consumables — items that eventually wear out — account for about 40 percent of sales. Xaloy and EDI fit into this strategy; Hilton said Xaloy products are replaced an average of two to five times over the life of the injection press or extruder.
Nordson’s businesses generate steady income. Nordson technology works, at very high speeds, behind the scenes in plants around the world — depositing adhesive onto cereal boxes and non-wovens such as diapers, sealing chips onto circuit boards, precisely applying glue during the assembly of smartphones and tablet computers, applying biomedicines that aid wound healing.
Nordson touches some of the products you encounter every day. Its equipment applies the sealant when car windshields are installed. The labels for bottled beverages and canned food used to be glued down all the way around the container. Nordson engineers developed a jetting technology that sprayed just a few drops of glue as the package zips past — saving consumer products customers a ton of money.
Adhesive Dispensing Systems is the largest segment, generating about half of total sales.
Hilton said Nordson’s core business should generate a solid 8 percent growth over the long term. That healthy business, combined with a strong balance sheet and operational improvements, puts the company in a good position to make more acquisitions, Hilton said.
In a report, Ursaner, the CJS Securities analyst, wrote, “Nordson remains one of the highest quality industrial companies in our entire coverage universe. Despite an uncertain macro environment, the company is leveraging its core competitive advantages — differentiated technology, application expertise, and a global system of direct sales and service — to drive sustainable long-term growth.”
Nordson was founded in 1954 in Amherst, Ohio, by brothers Eric and Evan Nord. The company’s roots go much further back, to 1909, when their father, Walter G. Nord stated U.S. Automatic Co., which made metal parts for the emerging automotive industry. U.S. Automatic shifted to war-time production in World War II.
After the war, Walter and his sons (thus the name “Nordson”) acquired patents for the “hot airless” method of spraying paint and other coating materials. In the mid-1960s, the company developed equipment to apply hot-melt adhesives.
Walter Nord started a charitable foundation in 1952, which today is the Nord Family Foundation. Nordson Corp. also continues the legacy by contributing a portion of its pre-tax earnings to charity every year.
Operationally, the company launched an initiative for lean manufacturing and Six Sigma, under the former president and CEO, Edward Campbell. James Jaye, director of corporate communications and investor relations, said Campbell wanted to improve Nordson for the long term.
The effort removed costs and improved efficiency. “Ed’s the one who introduced lean to the company in the early 2000s, which led to significant improvements in the company over the whole decade,” Jaye said.
When Campbell retired, Nordson brought in Hilton, a veteran of Air Products and Chemicals Inc, who also led continuous improvement activities. Hilton continued the process, making some medical acquisitions, including Value Plastics. Last year, the consolidated four adhesives factories into two mega-plants, one dedicated to higher-volume standard products, the other to equipment that is engineered to order.
The improvements launched by Campbell helped the company bounce back quickly from the brutal recession year of 2009. Sales dropped 27 percent from 2008, to $819.1 million. Nordson lost $160 million. Even so, gross margins actually rose in 2009, to 57 percent of sales vs. 56 percent in 2008.
Analyst Walter Liptak said that proved the company was built to last. “It was a bell ringing,” he said.
Sales and net profit snapped back quickly in 2010, then hit a record in 2011.
Future plastics acquisitions?
The internal improvements helped the company capitalize on a healthy cash-generating core business. “We essentially doubled our earnings capacity, doubled the cash flow ... So then coming out of that, we said OK, now we’d like to focus on not only supporting our growth, but we’d like to add to it with acquisitions that made sense,” Hilton said. Nordson paid for Xaloy and EDI out of existing credit, and Hilton said the company has access to low-cost debt, thanks to its strong performance and cash generation.
Hilton said Nordson generated $350 million in EBITDA last year. The previous peak was about $200 million in 2008.
“That’s a lot of cash to do something with,” Hilton said. “That money can go to support growth of the core business, pay dividends, offset dilution from our incentive programs ... and we’d like to invest in acquisitions, particularly where we can build new platforms and scale, and ones that are close-in to our core business,” Hilton said.
For example, he cited Nordson’s adhesives business, focused on melting, pumping, controlling pressure and temperature, and ultimately depositing material. Xaloy and EDI products do that, too.
Nordson also serves both end users and machinery makers. That also made Xaloy and EDI attractive, he said. “Obviously, we look at the underlying markets. What the growth rates are, how does it compare to what we’re really good at? While we might not have a huge presence in the plastic processing area, we do understand companies that have leading positions, companies that have strong technology. We know how to work both an OEM chain and a director-customer chain, and make sense of that.”
A year ago, most people in the plastics industry probably never heard of Nordson. But that has changed quickly. Can we expect more plastics-related deals? In a June 26 conference call, Hilton told financial analysts it could happen: “We like the base business, the organic growth prospects. But there is also potential to add to our portfolio in this space.”
During the interview with Plastics News, Hilton said Nordson leaders set up a strategic plan in 2010
“Early in 2011, we put out some thoughts saying, if we can get that 8 percent organic [growth], we’d like to add at least a couple of percentage points each year, through M&A. The reality is, we could do a lot more,” Hilton said.
Plastics processing and flexible packaging is one area of interest, Hilton said. Another is medical dispensing systems and components. Within Nordson’s electronics business, the company wants to continue adding to its test and inspection equipment.