UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

For the fiscal year ended October 31, 2008

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

(Registrant’s Telephone Number, including area code)

 

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

Common Shares with no par value

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of Common Stock, no par value per share, held by nonaffiliates (based on the closing sale price on the Nasdaq) as of April 30, 2008 was approximately $1,874,765,000.

 

There were 33,510,485 shares of Common Stock outstanding as of December 1, 2008.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the 2009 Annual Meeting — Part III

 

Table of Contents

 

 

Table of Contents

 

 

NOTE REGARDING DOLLAR AMOUNTS

 

In this annual report, all amounts related to U.S. 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.

 

Nordson is one of the world’s leading manufacturers of equipment used for precision material dispensing, testing and inspection, surface preparation and curing. Our technology-based systems can be found in production facilities around the world. Nordson serves many diverse markets, including the appliance, automotive, bookbinding, container, converting, electronics, food and beverage, furniture, life sciences, medical, metal finishing, nonwoven, packaging and semiconductor industries.

 

Our strategy for long-term growth is based on a customer-driven focus and a global mindset. Headquartered in Westlake, Ohio, our products are marketed through a network of direct operations in more than 30 countries. Consistent with this global strategy, more than two-thirds of Nordson’s revenues are generated outside the United States.

 

Nordson has more than 4,100 employees worldwide. Principal manufacturing facilities are located in the United States in California, Georgia, New Jersey, Ohio and Rhode Island, as well as in China, Germany, India, The Netherlands and the United Kingdom.

Nordson strives to be a vital, self-renewing, worldwide organization that, within the framework of ethical behavior and enlightened citizenship, grows and produces wealth for its customers, employees, shareholders and communities.

 

We operate for the purpose of creating balanced, long-term benefits for all of our constituencies: customers, employees, shareholders and communities.

 

Our corporate goal for growth is to double our value over a five-year period, with the primary measure of value set by the market for Nordson’s Common Shares.

 

While external factors may impact value, the achievement of this goal will rest with earnings growth, capital and human resource efficiency and positioning for the future.

 

Nordson does not expect every quarter to produce increased sales, earnings and earnings per share, or to exceed the comparative prior year’s quarter. We do expect to produce long-term gains. When short-term swings occur, we do not intend to alter our basic objectives in efforts to mitigate the impact of these natural occurrences.

 

Growth is achieved by seizing opportunities with existing products and markets, investing in systems to maximize productivity and pursuing growth markets. This strategy is augmented through product line additions, engineering, research and development, and acquisition of companies that can serve multinational industrial markets.

 

We create benefits for our customers through a Package of Values^®, which includes carefully engineered, durable products; strong service support; the backing of a well-established worldwide company with financial and technical strengths; and a corporate commitment to deliver what was promised.

 

We strive to provide genuine customer satisfaction; it is the foundation upon which we continue to build our business.

 

Complementing our business strategy is the objective to provide opportunities for employee self-fulfillment, growth, security, recognition and equitable compensation. This goal is met through Human Resources’ facilitation of employee training and leadership training and the creation of on-the-job growth opportunities. The result is a highly qualified and professional management team capable of meeting corporate objectives.

We recognize the value of employee participation in the planning process. Strategic and operating plans are developed by all business units and divisions, resulting in a sense of ownership and commitment on the part of employees in accomplishing Nordson’s objectives. In addition, employees participate in Lean initiatives to continuously improve our processes.

 

Nordson is an equal opportunity employer.

 

We are committed to contributing approximately 5 percent of domestic pretax earnings to human services, education and other charitable activities, particularly in communities where we have major facilities.

In accordance with Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” Nordson has reported information about its three operating segments. This information is contained in Note 17 of Notes to Consolidated Financial Statements, which can be found in Part II, Item 8 of this document.

Nordson is one of the world’s leading manufacturers of equipment used for precision dispensing, testing and inspection, surface preparation and curing. Our technology-based systems can be found in production facilities around the world. Equipment ranges from manual, stand-alone units for low-volume operations to microprocessor-based automated systems for high-speed, high-volume production lines.

 

Nordson markets its products in the United States and in more than 50 other countries, primarily through a direct sales force and also through qualified distributors and sales representatives. We have built a worldwide reputation for creativity and expertise in the design and engineering of high-technology application equipment that meets the specific needs of our customers.

 

The following is a summary of the products and markets served by our business segments:

 

 

This segment delivers Nordson proprietary precision dispensing technology to diverse markets for applications that commonly reduce material consumption, increase line efficiency and enhance product brand and appearance.

 

 

 

This segment integrates Nordson proprietary product technologies found in progressive stages of a customer’s production process, such as surface preparation, precisely controlled dispensing of material onto the surface, curing of dispensed material, bond testing and X-ray inspection to ensure quality. This segment primarily serves the specific needs of electronic and related high-tech industries.

 

 

 

This segment provides both standard and highly-customized equipment used primarily for applying coatings, paint, finishes, sealants and other materials. This segment primarily serves the consumer durables market.

 

Nordson’s production operations include machining and assembly. We manufacture specially designed parts and assemble components into finished equipment. Many components are made in standard modules that can be used in more than one product or in combination with other components for a variety of models. Nordson has principal manufacturing operations in the United States in Amherst, Ohio; Norcross, Swainsboro and Dawsonville, Georgia; Carlsbad, California; Robbinsville, New Jersey and East Providence, Rhode Island; as well as in Shanghai and Suzhou, China; Luneburg, Germany; Bangalore, India; Maastricht, The Netherlands and in Slough and Aylesbury, United Kingdom.

 

Principal materials used to make our products are metals and plastics, typically in sheets, bar stock, castings, forgings and tubing. Nordson also purchases many electrical and electronic components, fabricated metal parts, high-pressure fluid hoses, packings, seals and other items integral to its products. Suppliers are competitively selected based on cost, quality and service. All significant raw materials that we use are available through multiple sources.

 

Nordson’s senior operating executives supervise an extensive quality control program for our equipment, machinery and systems.

 

Natural gas and other fuels are our primary energy sources. However, standby capacity for alternative sources is available if needed.

Nordson maintains procedures to protect its intellectual property (including patents, trademarks and copyrights) both domestically and internationally. Risk factors associated with our intellectual property are discussed in Item 1A Risk Factors.

Generally, the highest volume of sales occurs in our fourth fiscal quarter due in large part to the timing of customers’ capital spending programs. First-quarter sales volume is typically the lowest of the year due to customer holiday shutdowns.

No special or unusual practices affect our working capital. However, Nordson generally requires advance payments as deposits on customized equipment and systems and, in certain cases, requires progress payments during the manufacturing of these products. We have initiated a number of new processes focused on reduction of manufacturing lead times. These initiatives have resulted in lower investment in inventory while maintaining the capability to respond promptly to customer needs.

Nordson serves a broad customer base, both in terms of industries and geographic regions. In fiscal year 2008, no single customer accounted for 5 percent of sales.

Nordson’s backlog of open orders decreased to approximately $82,000 at October 31, 2008, from approximately $98,000 at October 31, 2007. The decrease can be traced primarily to lower Advanced Technology Systems backlog and to unfavorable effects of changes in currency rates. All orders in the fiscal 2008 year-end backlog are expected to be shipped to customers in fiscal year 2009.

Nordson’s business neither includes nor depends upon a significant amount of governmental contracts or subcontracts. Therefore, no material part of our business is subject to renegotiation or termination at the option of the government.

Nordson equipment is sold in competition with a wide variety of alternative bonding, sealing, caulking, finishing, coating, testing and inspection techniques. Any production process that requires surface preparation or modification, application of material to a substrate or surface, curing or testing and inspection is a potential use for our equipment.

 

Many factors influence Nordson’s competitive position, including pricing, product quality and service. We enjoy a leadership position in our business segments by delivering high-quality, innovative products and technologies, as well as after-the-sale service and technical support. Working with customers to understand their processes and developing the application solutions that help them meet their production requirements also contributes to Nordson’s leadership position. Our worldwide network of direct sales and technical resources also is a competitive advantage.

Investments in research and development are important to Nordson’s long-term growth, enabling us to keep pace with changing customer and marketplace needs through the development of new products and new applications for existing products. We place strong emphasis on technology developments and improvements through internal engineering and research teams. Research and development expenses related to continuing operations were approximately $33,566 in fiscal year 2008, compared with approximately $35,432 in fiscal year 2007 and $25,336 in fiscal year 2006.

Nordson is subject to extensive federal, state, local and foreign environmental, safety and health laws and regulations concerning, among other things, emissions to the air, discharges to land and water and the generation, handling, treatment and disposal of hazardous waste and other materials. Under certain of these laws, we can be held strictly liable for hazardous substance contamination of any real property we have ever owned, operated or used as a disposal site or for natural resource damages associated with such contamination. Nordson is also required to maintain various related permits and licenses, many of which require periodic modification and renewal. The operation of manufacturing plants unavoidably entails environmental, safety and health risks, and we could incur material unanticipated costs or liabilities in the future if any of these risks were realized in ways or to an extent that we did not anticipate.

 

We believe that we operate in compliance, in all material respects, with applicable environmental laws and regulations. Compliance with environmental laws and regulations requires continuing management effort and expenditures. We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations and to obtain and maintain the necessary permits and licenses. We believe that the cost of complying with environmental laws and regulations will not have a material affect on our earnings, liquidity or competitive position but cannot assure that material compliance-related costs and expenses may not arise in the future. For example, future adoption of new or amended environmental laws, regulations or requirements or newly discovered contamination or other circumstances that require us to incur costs and expenses that cannot be presently anticipated.

 

Nordson believes that policies, practices and procedures have been properly designed to prevent unreasonable risk of material environmental damage arising from its operations. We accrue for estimated environmental liabilities with charges to expense and believe our environmental accrual is adequate to provide for our portion of the costs of all such known environmental liabilities. Except for the disclosure in Item 3, Legal Proceedings, compliance with federal, state and local environmental protection laws during fiscal year 2008 had no material effect on our capital expenditures, earnings or competitive position. Based upon consideration of currently available information, we believe liabilities for environmental matters will not have a material adverse affect on our financial position, operating results or liquidity, but we cannot assure that material environmental liabilities may not arise in the future.

As of October 31, 2008, Nordson had 4,111 full- and part-time employees, including 141 at our Amherst, Ohio, facility that are represented by a collective bargaining agreement that expires on October 31, 2010. No material work stoppages have been experienced at any of our facilities during any of the periods covered by this report.

Nordson’s proxy statement, annual report to the Securities and Exchange Commission (Form 10-K), quarterly reports (Form 10-Q) and current reports (Form 8-K) and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge at http://www.nordson.com/investors/SEC/ as soon as reasonably practical after such material is electronically filed with, or furnished to, the SEC. Copies of these reports may also be obtained free of charge by sending written requests to Corporate Communications, Nordson Corporation, 28601 Clemens Road, Westlake, Ohio 44145.

 

 

In an enterprise as diverse as Nordson’s, a wide range of factors could affect future performance. We discuss in this section some of the risk factors that, if they actually occurred, could materially and adversely affect our business, financial condition, value and results of operations. You should consider these risk factors in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. The risks that we highlight below are not the only ones that we face. Additional risks and uncertainties that we do not presently know about or that we currently believe will be immaterial may also affect our business.

 

The significant risk factors affecting our operations include the following:

 

Changes in U.S. or international economic conditions could adversely affect the profitability of any of our businesses.

In fiscal year 2008, 28 percent of Nordson’s revenue was derived from domestic customers while 72 percent was derived from international customers. Our largest markets include appliance, automotive, bookbinding, construction, container, converting, electronics assembly, food and beverage, furniture, life sciences, medical, metal finishing, nonwovens, packaging and semiconductor. A slowdown in any of these specific end markets could directly affect our revenue stream and profitability.

A portion of our product sales is attributable to industries and markets, such as the semiconductor and metal finishing industries, which historically have been cyclical and sensitive to relative changes in supply and demand and general economic conditions. The demand for our products depends, in part, on the general economic conditions of the industries or national economies of our customers. Downward economic cycles in our customers’ industries or countries may reduce sales of some of our products. It is not possible to predict accurately the factors that will affect demand for our products in the future.

 

Any significant downturn in the health of the general economy, either globally, regionally or in the markets in which we sell products could have an adverse effect on our revenues and financial performance.

 

Inability to access capital could impede growth or the repayment or refinancing of existing indebtedness.

The limits imposed on us by the restrictive covenants contained in our credit facilities could prevent us from making acquisitions or cause us to lose access to these facilities.

 

Our existing credit facilities contain restrictive covenants that limit our ability to, among other things:

 

 

In addition, our credit facilities require us to meet financial ratios, including total indebtedness to consolidated trailing EBITDA (both as defined in the credit facility) and consolidated trailing EBITDA to consolidated trailing interest expense (as defined in the credit facility).

 

These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs and could otherwise restrict our financing activities.

 

Nordson’s ability to comply with the covenants and other terms of our credit facilities will depend on our future operating performance. If we fail to comply with such covenants and terms, we will be in default and the maturity of the related debt could be accelerated and become immediately due and payable. We may be required to obtain waivers from our lenders in order to maintain compliance under our credit facilities, including waivers with respect to our compliance with certain financial covenants. If we are unable to obtain necessary waivers and the debt under our credit facilities is accelerated, we would be required to obtain replacement financing at prevailing market rates.

 

We may need new or additional financing in the future to expand our business or refinance existing indebtedness. If we are unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment requirements under our existing credit facilities. Our ability to obtain new or additional financing will depend on a variety of factors, many of which are beyond our control. We may not be able to obtain new or additional financing because we have substantial debt or because we may not have sufficient cash flow to service or repay our existing or future debt. In addition, depending on market conditions and our financial performance, neither debt nor equity financing may be available on satisfactory terms or at all. Finally, as a consequence of worsening financial market conditions, our credit facility providers may not provide the agreed capital if they become undercapitalized.

 

Significant movements in foreign currency exchange rates or change in monetary policy may harm our financial results.

Nordson is exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, the British Pound and the Yen. Any significant change in the value of the currencies of the countries in which we do business against the U.S. dollar could affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our business, financial condition and results of operations. For additional detail related to this risk, see Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

The majority of Nordson’s consolidated revenues in fiscal year 2008 were generated in currencies other than the U.S. dollar, which is our reporting currency. We recognize foreign currency transaction gains and losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business have caused and will continue to cause foreign currency transaction and translation gains and losses, which historically have been material and could continue to be material. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. Nordson takes actions to manage our foreign currency exposure, such as entering into hedging transactions, where available, but we cannot assure that our strategies will adequately protect our consolidated operating results from the effects of exchange rate fluctuations.

 

We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or customers located in or conducting business in a country imposing controls. Currency devaluations diminish the U.S. dollar value of the currency of the country instituting the devaluation and, if they occur or continue for significant periods, could adversely affect our earnings or cash flow.

 

We could be adversely affected by rapid changes in interest rates.

Any period of unexpected or rapid increase in interest rates may also adversely affect our profitability. At October 31, 2008, Nordson had $284,901 of total debt outstanding, of which approximately 74 percent was priced at interest rates that float with the market. A 1 percent increase in the interest rate on the floating rate debt in fiscal year 2008 would have resulted in approximately $2,431 of additional interest expense. A higher level of floating rate debt would increase the exposure discussed above. For additional detail related to this risk, see Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

 

Our growth strategy includes acquisitions, and we may not be able to make acquisitions of suitable candidates or integrate acquisitions successfully.

Nordson’s recent historical growth has also depended, and our future growth is likely to continue to depend, in part on our acquisition strategy and the successful integration of acquired businesses into our existing operations. We intend to continue to seek additional acquisition opportunities both to expand into new markets and to enhance our position in existing markets throughout the world. We cannot assure, however, that we will be able to successfully identify suitable candidates, prevail against competing potential acquirers, negotiate appropriate acquisition terms, obtain financing that may be needed to consummate such acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. In addition, we cannot assure that any acquisition, once successfully integrated, will perform as planned, be accretive to earnings, or prove to be beneficial to our operations and cash flow.

 

The success of any acquisition is subject to other risks and uncertainties, including:

 

 

In addition, an acquisition could adversely impact our operating performance as a result of the incurrence of acquisition-related debt, acquisition expenses, or the amortization of acquisition-acquired assets.

 

We may also face liability with respect to acquired businesses for violations under environmental laws occurring prior to the date of our acquisition, and some or all of these liabilities may not be covered by environmental insurance secured to mitigate the risk or by indemnification from the sellers from which we acquired these businesses. We could also incur significant costs, including, but not limited to, remediation costs, natural resources damages, civil or criminal fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws.

 

The inability to continue to develop new products could limit Nordson’s revenue and profitability.

Innovation is critical to our success. We believe that we must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be a market leader. We also believe that we must continue to make improvements in our productivity in order to maintain our competitive position. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and our consolidated results of operations.

 

Our inability to protect our intellectual property rights could adversely affect product sales and financial performance.

Difficulties in acquiring and maintaining our intellectual property rights could also adversely affect our business and financial position. Our performance may depend in part on our ability to establish, protect and enforce intellectual property rights with respect to our patented technologies and proprietary rights and to defend against any claims of infringement. These activities involve complex and constantly evolving legal, scientific and factual questions and uncertainties. Nordson’s ability to compete effectively with other companies depends in part on our ability to maintain and enforce our patents and other proprietary rights, which are essential to our business. These measures afford only limited protection and may not in all cases prevent our competitors from gaining access to our intellectual property and proprietary information.

 

Litigation has been and may continue to be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. In addition, Nordson may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. If a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we have been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. If Nordson is unable to timely obtain licenses on reasonable terms, we may be forced to cease selling or using any of our products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties. This may not always be possible or, if possible, may be time consuming and expensive. Intellectual property litigation, whether successful or unsuccessful, could be expensive to us and divert some of our resources. Nordson’s intellectual property rights may not be as valuable as we believe, which could result in a competitive disadvantage or adversely affect our business and financial performance.

Political conditions in foreign countries in which we operate could adversely affect us.

Nordson conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to risks associated with doing business outside the United States. In fiscal year 2008, approximately 72 percent of our total sales were to customers outside the U.S. We expect that international operations and U.S. export sales will continue to be important to our business for the foreseeable future. Both the sales from international operations and U.S. export sales are subject in varying degrees to risks inherent in doing business outside the United States. Such risks include, but are not limited to, the following:

 

 

Any of these events could reduce the demand for our products, limit the prices at which we can sell our products, or otherwise have an adverse effect on our operating performance.

 

Nordson may, from time to time, post financial or other information on our Web site, http://www.nordson.com/Investors/. The Internet address is for informational purposes only and is not intended for use as a hyperlink. We are not incorporating any material on our Web site into this Report.

 

 

None.

 

 

The following table summarizes Nordson’s principal properties as of fiscal 2008 year end.

 

 

 

Business Segment — Property Identification Legend

 

1 — Adhesive Dispensing Systems

2 — Advanced Technology Systems

3 — Industrial Coating and Automotive Systems

a — During fiscal year 2007, Nordson sold a 75,000 square foot complex in East Providence, Rhode Island and a 44,000 square foot facility in Lincoln, Rhode Island and purchased a 116,000 square foot facility in East Providence, Rhode Island. The two sold properties are being leased back until December 31, 2008.

 

The facilities listed above have adequate, suitable and sufficient capacity (production and nonproduction) to meet present and foreseeable demand for our products.

 

Other properties at international subsidiary locations and at branch locations within the United States are leased. Lease terms do not exceed 25 years and generally contain a provision for cancellation with some penalty at an earlier date.

 

In addition, Nordson leases equipment under various operating and capitalized leases. Information about leases is reported in Note 8 of Notes to Consolidated Financial Statements that can be found in Part II, Item 8 of this document.

 

 

Nordson is involved in pending or potential litigation regarding environmental, product liability, patent, contract, employee and other matters arising from the normal course of business. Including the environmental matter discussed below, it is our opinion, after consultation with legal counsel, that resolutions of these matters are not expected to result in a material effect on our financial condition, quarterly or annual operating results or cash flows.

 

Environmental — Nordson has voluntarily agreed with the City of New Richmond, Wisconsin and other Potentially Responsible Parties (“PRP”) to share costs associated with the remediation of the City of New Richmond municipal landfill (the “Site”) and constructing a potable water delivery system serving the impacted area down gradient of the Site.

 

The Feasibility Study / Remedial Investigation for this project was completed and approved by the Wisconsin Department of Natural Resources (“WDNR”) in September 2006. In the fourth quarter of fiscal year 2007, the PRPs signed an Environmental Repair Contract with the WDNR. The estimated cost to Nordson for Site remediation, constructing a potable water delivery system and ongoing operation, maintenance and monitoring (“OM&M”) at the Site and the impacted area down gradient of the Site over the statutory monitoring period of 30 years is $3,008. At October 31, 2007, the Company recorded $1,858 in other current liabilities, and the remaining amount of $1,150 was classified as long-term. During fiscal year 2008, $1,858 was paid in fulfillment of our obligation to fund a portion of the estimated cost of site remediation, construction of the potable water delivery system and one year of OM&M. At October 31, 2008, the remaining obligation for OM&M consists of $40 in accrued liabilities and $1,110 in other long-term liabilities.

 

During fiscal year 2008, agreements were reached with seven insurance companies that resulted in reimbursement to Nordson of $1,863 for costs related to this remediation project.

 

The liability for environmental remediation represents management’s best estimate of the probable and reasonably estimable undiscounted costs related to known remediation obligations. The accuracy of our estimate of environmental liability is affected by several uncertainties such as additional requirements that may be identified in connection with remedial activities, the complexity and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, our liability could be greater than our current estimate. However, we do not expect that the costs associated with remediation will have a material adverse effect on our financial condition or results of operations.

 

 

None.

 

Nordson’s executive officers as of October 31, 2008, were as follows:

 

 

 

(a) Nordson’s Common Shares are listed on the NASDAQ Global Select Market under the symbol NDSN. As of December 1, 2008, there were 1,951 registered shareholders. The table below is a summary of dividends paid per Common Share, the range of market prices, and average price-earnings ratios with respect to common shares, during each quarter of fiscal years 2008 and 2007. The price-earnings ratios reflect average market prices relative to trailing four-quarter total earnings per share from continuing operations.

 

 

(b) Use of Proceeds. Not applicable.

 

(c) Issuer Purchases of Equity Securities

 

 

The following is a graph that compares the five-year cumulative return from investing $100 on November 1, 2003 in each of Nordson Common Shares, the MidCap 400 Index and the S&P MidCap 400 Industrial Machinery

 

TOTAL SHAREHOLDER RETURNS
INDEXED RETURNS

 

 

 

Five-Year Summary

 

 

 

 

 

 

In this annual report, all amounts related to U.S. and foreign currency and to the number of shares of Nordson Corporation Common Shares, except for per share earnings and dividend amounts, are expressed in thousands.

Nordson’s 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 Nordson’s 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 — Most of Nordson’s 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. Revenues from contracts with multiple element arrangements, such as those including installation or other services, are recognized as each element is earned based on objective evidence of the relative fair value of each element. If the installation or other services are inconsequential to the functionality of the delivered product, the entire amount of revenue is recognized upon satisfaction of the criteria noted above. Inconsequential installation or other services are those that can generally be completed in a short period of time, at insignificant cost, and the skills required to complete these installations are not unique to Nordson. If installation or other services are essential to the functionality of the delivered product, revenues attributable to these obligations are deferred until completed. Amounts received in excess of revenue recognized are included as deferred revenue within accrued liabilities in the accompanying balance sheets. Revenues deferred in fiscal years 2008, 2007 and 2006 were not material.

 

Goodwill — Goodwill represents the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired. At October 31, 2008, and October 31, 2007, goodwill represented 49 percent and 47 percent, respectively, of Nordson’s total assets. The majority of the goodwill resulted from the acquisition of Dage Holdings, Limited in fiscal year 2007 and EFD Inc. in fiscal year 2001. In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is tested for impairment annually at the reporting unit level, or more often if indications of impairment exist. Our reporting units as defined by the Standard are our three operating segments, Adhesive Dispensing Systems, Advanced Technology Systems, and Industrial Coating and Automotive Systems. The impairment test is a two-step process. In the first step, we calculate a fair value using a discounted cash flow valuation methodology and compare the result against the carrying value for net assets of each reporting unit. This analysis assumed that the impact of current economic conditions upon revenue growth would be temporary (lasting through fiscal year 2009) and also included savings traced to identified employee reductions associated with announced restructuring actions. The excess of the fair value over the carrying value is compared to the carrying value for each reporting unit. The current fair value determination results in an amount that exceeds the carrying amount of each reporting unit by a moderate to substantial margin. Based on these results, the second step of the goodwill impairment test does not need to be performed.

To test the outcome of the discounted cash flow valuations, the combined results are compared to the market capitalization value (net of debt) and our published share price. This comparison indicated that the discounted cash flow valuation is well above the market capitalization at year-end; however, this is traced to a recent and dramatic reduction in the trading value of Nordson’s stock. With the exception of one quarter in fiscal year 2000, Nordson’s price/earnings multiple has not been below 15 in any quarter over the past 15 years. The price/earnings multiple using the closing price on October 31, 2008 has declined to approximately eleven as a consequence of the current global economic crisis, during which all major stock markets have suffered significant declines.

 

Inventories — Inventories are valued at the lower of cost or market. Cost has been determined using the last-in, first-out (LIFO) method for 27 percent of consolidated inventories at October 31, 2008, and 28 percent at October 31, 2007, with the first-in, first-out (FIFO) method used for the remaining inventory. On an ongoing basis, inventory is tested for technical obsolescence, as well as for future demand and changes in market conditions. Nordson has historically maintained inventory reserves to reflect those conditions when the cost of inventory is not expected to be recovered. Inventory reserves are also maintained for inventory used for demonstration purposes. The inventory reserve balance was $13,133, $12,365 and $8,576 at October 31, 2008, 2007 and 2006, respectively. The fiscal year 2007 increase is attributable to acquisitions and currency changes.

 

Pension Plans and Postretirement Medical Plan — The measurement of liabilities related to Nordson’s pension plans and postretirement medical 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.

 

Effective October 31, 2007, Nordson adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R) (FAS 158). This Statement requires employers to recognize the overfunded or underfunded status of defined benefit post-retirement plans in their balance sheets. This amount is measured as the difference between the fair value of plan assets and the benefit obligation of the plans (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). Changes in the funded status of the plans are recognized in the year in which the change occurs through accumulated other comprehensive income. Under FAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under FAS No. 87, Employers’ Accounting for Pensions and FAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, that have not yet been recognized through net periodic benefit cost are recognized in accumulated other comprehensive income, net of tax effects.

 

The weighted-average discount rate used to determine the present value of our domestic pension plan obligations was 8.00 percent at October 31, 2008, compared to 6.25 percent at October 31, 2007. The discount rate for these plans, which comprised 77 percent of the worldwide pension obligations at October 31, 2008, was based on quality fixed income investments with a duration period approximately equal to the period over which pension obligations are expected to be settled. The weighted-average discount rate used to determine the present value of Nordson’s various international pension plan obligations was 5.87 percent at October 31, 2008, compared to 5.00 percent at October 31, 2007. The discount rates used for the international plans were determined by using quality fixed income investments.

 

In determining the expected return on plan assets, Nordson considers 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 was 8.48 percent for both fiscal years 2008 and 2007. The average expected rate of return on international pension assets increased to 5.04 percent in fiscal year 2008 from 4.99 percent in fiscal year 2007.

 

The assumed rate of compensation increases for domestic employees was 3.30 percent for both fiscal years 2008 and 2007. The assumed rate of compensation increases for international employees was 3.45 percent in fiscal year 2008, compared to 3.36 percent in fiscal year 2007.

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.

 

 

With respect to the domestic postretirement medical plan, the discount rate used to value the benefit obligation increased from 6.25 percent at October 31, 2007 to 8.00 percent at October 31, 2008. The annual rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is assumed to be 9.00 percent in fiscal year 2009, decreasing gradually to 4.50 percent in fiscal year 2015.

 

For the international postretirement plan, the discount rate used to value the benefit obligation increased from 5.25 percent at October 31, 2007 to 7.70 percent at October 31, 2008. The annual rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is assumed to be 8.50 percent in fiscal year 2009, decreasing gradually to 4.80 percent in fiscal year 2013.

 

The discount rate and the health care cost trend rate assumptions have a significant effect on the amounts reported. For example, a one-percentage point change in the discount rate and assumed health care cost trend rate would have the following effects:

 

 

Employees hired after January 1, 2002, are not eligible to participate in the domestic postretirement medical plan.

 

Pension and postretirement expenses in fiscal year 2009 are expected to be approximately $3,000 lower than fiscal year 2008, primarily reflecting changes in actuarial assumptions.

Financial Instruments — Assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies are sensitive to changes in currency exchange rates. Nordson enters into foreign currency forward contracts, which are derivative financial instruments, to reduce the risk of foreign currency exposures resulting from the collection of receivables, payables and loans denominated in foreign currencies. The maturities of these contracts are usually less than 90 days. Forward contracts are marked to market each accounting period, and the resulting gains or losses are included in “other — net” within other income (expense) on the Consolidated Statement of Income.

 

Warranties — Nordson provides customers with a product warranty that requires us to repair or replace defective products within a specified period of time (generally one year) from the date of delivery or first use. An accrual is recorded for expected warranty costs for products shipped through the end of each accounting period. In determining the amount of the accrual, we rely primarily on historical warranty claims by product sold. Amounts charged to the warranty reserve were $6,070, $5,702 and $6,092 in fiscal years 2008, 2007 and 2006, respectively. The reserve balance was $5,336, $5,784 and $4,917 at October 31, 2008, 2007 and 2006, respectively.

 

Long-Term Incentive Compensation Plan (LTIP) — Under the long-term incentive compensation plan, executive officers and selected other employees receive cash or stock payouts based solely on corporate performance measures over three-year performance periods. Payouts vary based on the degree to which corporate performance equals or exceeds predetermined threshold, target and maximum performance levels at the end of a performance period. No payout will occur unless Nordson equals or exceeds certain threshold performance objectives.

 

For the fiscal years 2006-2008, fiscal years 2007-2009 and the fiscal years 2008-2010 performance periods, payouts will be in Common Shares. 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 calculation is also based upon the weighted-average value of Nordson’s Common Shares at the dates of grant. These payouts are recorded as capital in excess of stated value in shareholders’ equity. The amount recorded at October 31, 2008 for the plans originating in fiscal years 2006, 2007 and 2008 was $9,483.

 

Compensation expense attributable to all LTIP performance periods for executive officers and selected other employees for fiscal years 2008, 2007 and 2006 was $4,762, $4,606 and $5,456, respectively.

 

Discontinued Operations

On October 13, 2006, Nordson entered into an agreement to sell its Fiber Systems Group to Saurer Ltd. for $5,966. The Fiber Systems Group was acquired in fiscal year 1998 as part of the acquisition of J&M Laboratories as a means of expanding the Adhesive Dispensing Systems segment. However, due to the changing competitive environment, the Fiber Systems Group did not meet Nordson’s financial performance objectives. The sale enabled us to concentrate our activities on better performing or faster growing businesses. Proceeds of $5,411 were received on the closing date, with the remaining $555 to be paid over an 18-month period following the closing date. Settlement of a dispute related to the collectibility of letters of credit resulted in receipt of $295 of the remaining $555. In accordance with FASB Statement of Accounting Standards No. 144, the results of this business have been classified as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of this business have been segregated in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows.

 

Sales of the discontinued operations were $5,919 for fiscal year 2006. The net loss from operations was $9,882 for fiscal year 2006. Included in the fiscal year 2006 loss from discontinued operations was severance expense of $699 related to 27 employees of the Fiber Systems Group that were not hired by Saurer Ltd. Also, included in the fiscal year 2006 loss from discontinued operations is the recognition of an impairment of an intangible asset of $2,630. A gain of $2,813 was recognized on the sale of the assets. The net tax benefit of $1,872 on disposal is the result of $2,867 tax expense on one-time gains resulting from the disposal, offset by $4,739 tax benefit resulting from an excess of tax basis over book basis in Fiber Systems Group assets.

Fiscal Years 2008 and 2007

Sales — Worldwide sales for fiscal year 2008 were $1,124,829, an increase of 13.2 percent from fiscal year 2007 sales of $993,649. Organic sales volume increased 5.1 percent, while the first year effect of acquisitions accounted for 3.8 percentage points of the growth. Favorable currency translation effects caused by the weaker U.S. dollar increased sales by an additional 4.3 percent over the prior year.

 

Sales of the Adhesive Dispensing Systems segment were $580,711 in fiscal year 2008, an increase of $71,143, or 14.0 percent, from fiscal year 2007. The increase was split evenly between sales volume and favorable currency translation effects. All product lines within this segment and all geographic regions experienced sales volume increases over the prior year.

 

Sales of the Advanced Technology Systems segment were $367,366 in fiscal year 2008, an increase of $66,647, or 22.2 percent from fiscal year 2007. The first year effect of acquisitions generated a volume increase of 12.4 percent, while organic sales volume increased 9.7 percent. Favorable currency translation effects contributed 0.1 percent to sales growth within this segment. The volume increase can be traced primarily to the Asia Pacific region, the U.S. and Europe, as demand improved for our products in certain semiconductor and consumer electronics end markets.

 

Industrial Coating and Automotive Systems segment sales in fiscal year 2008 were $176,752, a decrease of $6,610, or 3.6 percent, from the prior year. The decrease is the result of a sales volume decrease of 7.5 percent, partially offset by favorable currency translation effects of 3.9 percent. The sales volume decrease can be traced to recent cyclical weakness in key consumer durable goods markets, primarily in the U.S.

 

It is estimated that the effect of pricing on total revenue was neutral relative to the prior fiscal year.

 

Sales outside the United States accounted for 71.9 percent of total fiscal year 2008 sales, up from 69.3 percent in fiscal year 2007. Sales volume in fiscal year 2008 exceeded that of fiscal year 2007 in all five geographic regions in which we operate, largely driven by the Advanced Technology Systems segment. Sales volume was up 21.7 percent in Asia Pacific, 10.5 percent in Europe, 4.2 percent in Japan, 3.5 percent in the United States and 2.3 percent in the Americas (Canada, Mexico and Central and South America). Currency translation effects favorably impacted sales in all international regions.

 

Operating profit — Cost of sales in fiscal year 2008 was $494,394, up 12.4 percent from fiscal year 2007, due primarily to the increase in sales volume. Currency effects increased cost of sales by 3.1 percent. Gross margins, expressed as a percent of sales, increased to 56.0 percent in fiscal year 2008 from 55.7 percent in fiscal year 2007. The increase was the result of the absence of short-term inventory purchase accounting adjustments related to acquisitions that reduced the fiscal year 2007 gross margin percentage by approximately 0.9 percent and favorable currency effects that increased the fiscal year 2008 gross margin rate by 0.4 percent. Offsetting these items were changes in product mix that reduced the gross margin percentage.

 

Selling and administrative expenses, excluding severance and restructuring costs, were $434,476 in fiscal year 2008, an increase of $33,182, or 8.3 percent, from fiscal year 2007. The increase is largely due to the first year effect of fiscal 2007 acquisitions, which added 3.7 percent, and currency translation effects, which added 3.5 percent. Annual compensation increases and higher employee benefit costs also contributed to the increase. Selling and administrative expenses as a percentage of sales decreased to 38.6 percent in fiscal year 2008 from 40.4 percent in fiscal year 2007, reflecting ongoing operational improvement efforts and revenue increases that were supported by existing capacity.

 

In September 2008, Nordson announced an acceleration of its ongoing operating margin improvement activities. This acceleration effort involves a combination of non-workforce related efficiencies and workforce reductions primarily in North America and Europe with targeted annual savings of approximately $30,000 in operating expenses by the end of fiscal year 2010. Major areas of improvement include the streamlining of marketing and sales organizations, optimization of engineering and information technology resources, rationalization of products, and continued integration of recent acquisitions. We also expect to reduce exposure to certain underperforming markets. It is anticipated that non-recurring severance and related costs for implementation of these actions will total approximately $16,000, with $5,561 in charges occurring in 2008 and the remainder occurring in fiscal year 2009. The severance costs have been recorded in the Corporate segment.

Our operating profit margin increased to 16.9 percent in fiscal year 2008 from 15.3 percent in fiscal year 2007. Purchase accounting adjustments for inventory associated with fiscal year 2007 acquisitions reduced that year’s operating profit margin by 0.9 percent. The improvement was also due to favorable currency translation effects and revenue increases that were supported by existing capacity. The operating profit margin was reduced by 0.5 percent as a result of the severance and restructuring costs described above.

 

Segment operating profit margins in fiscal years 2008 and 2007 were as follows:

 

 

Operating capacity for each of our segments can support fluctuations in order activity without significant changes in operating costs. Also, currency translation affects reported operating profit margins. Operating profit margins for each segment were favorably impacted from a weaker dollar during the year as compared to the prior year.

 

Operating profit margin for the Adhesive Dispensing Systems segment was 25.0 percent, up from 23.2 percent in fiscal year 2007. The increase can be traced to the increased sales volume across all product lines and geographic regions and to favorable currency translation effects.

 

Operating profit margin for the Advanced Technology Systems segment increased to 16.8 percent in fiscal year 2008 from 13.5 percent in fiscal year 2007. The increase was primarily the result of sales volume increasing at a higher rate than operating costs and the absence of the effect of short-term purchase accounting adjustments related to fiscal year 2007 acquisitions, partially offset by changes in sales mix.

 

Operating profit margin for the Industrial Coating and Automotive Systems segment was 6.2 percent in fiscal year 2008 as compared to 9.6 percent in fiscal year 2007. The decrease in the operating profit margin is primarily due to a sales volume decrease of 7.5 percent and to a higher mix of lower margin system sales.

 

Interest and other income (expense) — Interest expense in fiscal year 2008 was $16,714, a decrease of $4,828, or 22.4 percent from fiscal year 2007 due to lower borrowing levels and lower interest rates. Other income was $4,914 in fiscal year 2008, compared to $3,617 in fiscal year 2007. Included in other income (expense) were currency gains of $2,153 in fiscal year 2008 and currency losses of $1,028 in fiscal year 2007. The prior year amount also included a $3,038 gain on the sale-leaseback of real estate.

 

Income taxes — Nordson’s effective income tax rate on continuing operations was 34.6 percent in fiscal year 2008, up from 33.2 percent in fiscal year 2007. The increased rate is primarily due to a favorable adjustment in fiscal year 2007 related to a prior year tax revision.

 

Net income — Income from continuing operations was $117,504, or $3.43 per diluted share in fiscal year 2008. This compares to income from continuing operations of $90,692, or $2.65 per diluted share in fiscal year 2007. This represents a 29.6 percent increase in income from continuing operations and a 29.4 percent increase in earnings per share from continuing operations.

 

Recently issued accounting standards — In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements. FIN 48 also provides guidance on financial statement classification, accounting for interest and penalties, accounting for interim periods and new disclosure requirements. As discussed in Note 5, Nordson adopted FIN 48 as of November 1, 2007.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This Statement provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. It also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which permits a one-year deferral of the application of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FAS 157 is effective for Nordson as of November 1, 2008. The adoption will not have a material effect on our results of operations or financial position.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (FAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses on these instruments in earnings. We will not elect the fair value measurement option for any of our existing financial instruments other than those that are already being measured at fair value. As such, the adoption of FAS 159 on November 1, 2008 will not have an impact on our results of operations or financial position.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (FAS 141(R)). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. Nordson must adopt FAS 141(R) for all business combinations subsequent to November 1, 2009. The impact of adoption will depend on the nature and significance of any future acquisitions.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (FAS 160). This Statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Nordson must adopt FAS 160 in fiscal year 2010 and has not yet determined the impact of adoption on its results of operations or financial position.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (FAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. FAS 161 applies to all derivative instruments within the scope of FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to FAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. Nordson must adopt FAS 161, on a prospective basis, beginning in the second quarter of fiscal year 2009, with early application permitted. We are currently evaluating the disclosure implications of this statement.

 

Fiscal Years 2007 and 2006

Sales — Worldwide sales for fiscal year 2007 were $993,649, an increase of 11.4 percent from fiscal year 2006 sales of $892,221. Acquisitions accounted for 7.9 percentage points of the growth, while sales volume of base businesses increased 0.1 percent. Favorable currency effects caused by the weaker U.S. dollar increased sales by an additional 3.4 percent.

Historically, Nordson reported results in three operating segments: Adhesive Dispensing Systems, Advanced Technology Systems, and Finishing and Coating Systems. In the third quarter of fiscal year 2007, we announced an organizational restructuring in which the portion of the Adhesive Dispensing Systems segment serving the automotive industry was combined with the Finishing and Coating Systems segment to form the newly named Industrial Coating and Automotive Systems segment. The operations of this segment are headquartered in Amherst, Ohio, are managed by the same executive and share certain resources (engineering, sales and factories). Prior fiscal year results have been reclassified to reflect the segment change.

 

All three segments reported higher sales volume in fiscal year 2007 compared to fiscal year 2006. Sales of the Adhesive Dispensing Systems segment were $509,568 in fiscal year 2007, an increase of $30,710, or 6.4 percent, from fiscal year 2006. Sales volume was up 1.7 percent, while currency effects increased reported sales by 4.7 percent. The increase in sales volume can be traced to higher system sales in several geographic regions, most notably Asia Pacific.

 

Sales of the Advanced Technology Systems segment were $300,719 in fiscal year 2007, an increase of $61,461, or 25.7 percent from fiscal year 2006. Acquisitions generated a volume increase of 29.3 percent, while sales volume of base businesses was down 5.0 percent. Favorable currency translation rates contributed 1.4 percent to sales growth within this segment. Sales within this segment were impacted by weakness in the semiconductor and electronic assembly markets.

 

Industrial Coating and Automotive Systems segment sales in fiscal year 2007 were $183,362, an increase of $9,257, or 5.3 percent, from the prior year. This increase can be traced to a volume increase of 2.7 percent and favorable currency effects of 2.6 percent. The volume increase can be traced to higher system sales in Japan and Asia Pacific.

 

It is estimated that the effect of pricing on total revenue was neutral relative to the prior fiscal year.

 

Sales outside the United States accounted for 69.3 percent of total fiscal year 2007 sales, up from 67.4 percent in fiscal year 2006. Sales volume in fiscal year 2007 exceeded that the prior year in all five geographic regions, largely driven by acquisitions. Sales volume was up 14.1 percent in Japan, 11.4 percent in the Americas, 11.3 percent in Asia Pacific, 7.2 percent in Europe and 4.7 percent in the United States. Currency effects favorably impacted sales in the Americas, Asia Pacific and Europe regions but negatively impacted sales in Japan.

 

Operating profit — Cost of sales in fiscal year 2007 was $439,804, up 15.8 percent from fiscal year 2006, due primarily to the increase in sales volume. Currency effects increased cost of sales by 2.8 percent. Gross margins, expressed as a percent of sales, decreased to 55.7 percent in fiscal year 2007 from 57.4 percent in fiscal year 2006. The fiscal year 2007 percentage was negatively impacted by short-term inventory purchase accounting adjustments related to acquisitions that reduced the margin percentage by approximately 0.9 percent. These adjustments were partially offset by favorable currency effects that increased the gross margin rate by 0.3 percent. Changes in product mix also contributed to the overall margin percentage decrease.

 

Selling and administrative expenses, excluding severance and restructuring costs, were $401,294 in fiscal year 2007, an increase of $39,115, or 10.8 percent, from fiscal year 2006. Acquisitions and associated purchase accounting adjustments for property, plant and equipment and intangible assets increased selling and administrative expenses by 6.9 percent, and currency translation effects increased these expenses by 2.8 percent. The remainder of the increase was largely due to higher compensation and product development costs. Selling and administrative expenses as a percentage of sales decreased to 40.4 percent in fiscal year 2007 from 40.6 percent in fiscal year 2006, reflecting ongoing operational improvement efforts and revenue increases that were supported by existing capacity.

 

Our operating profit margin decreased to 15.3 percent in fiscal year 2007 from 16.5 percent in fiscal year 2006. Purchase accounting adjustments for inventory; property, plant and equipment; and intangible assets associated with fiscal year 2007 acquisitions reduced operating profit margin by 1.2 percent.

Segment operating profit margins in fiscal years 2007 and 2006 were as follows:

 

 

Operating capacity for each of our segments can support fluctuations in order activity without significant changes in operating costs. Also, currency translation affects reported operating margins. Operating margins for each of our segments were favorably impacted from a weaker dollar during the year.

 

Operating profit margin for the Adhesive Dispensing Systems segment was 23.2 percent in fiscal year 2007, up from 22.8 percent in fiscal year 2006. The increase can be traced to the increased sales volume and to favorable currency translation effects. In March 2007, Nordson announced that it would close a manufacturing operation located in Talladega, Alabama and move production activities to other Nordson facilities that are closer to supplier locations. Total severance costs for the 36 affected employees will be approximately $541 and are being recorded over the future service period of April 2007 through March 2008. The expense amount recorded in fiscal year 2007 was $433. During fiscal year 2006, Nordson realigned the management of the Adhesive Dispensing Systems segment, which resulted in the elimination of nine positions. These actions better positioned the segment to achieve our growth objectives. Total costs recorded in fiscal year 2006 attributable to the position eliminations were $429.

 

Operating profit margin for the Advanced Technology Systems segment decreased to 13.5 percent in fiscal year 2007 from 23.8 percent in fiscal year 2006. The operating profit of this segment was impacted by approximately $11,800 of purchase accounting adjustments for inventory; property, plant and equipment; and intangible assets related to the fiscal year 2007 acquisitions. In addition, demand for our base products within this segment declined in fiscal year 2007 as capital spending in some of the end markets served by this segment was down from the prior year as customers reacted to capacity requirements and technology shifts. Since the decline in demand is viewed as a cyclical trend, we continued to invest in new product development and distribution capacity for sustained long-term sales growth. The reduced demand resulted in lower manufacturing overhead absorption causing lower operating profit margin for the year. Sales mix also contributed to the decrease in the operating profit margin from the prior year. In an effort to improve efficiencies in operations serving the curing and drying market, we eliminated 13 positions in the Advanced Technology Systems segment during the second half of fiscal year 2006. Total costs attributable to the position eliminations were $380.

 

Operating profit margin for the Industrial Coating and Automotive Systems segment was 9.6 percent in fiscal year 2007, up from 5.9 percent in fiscal year 2006. The improvement in the operating profit margin is primarily due to sales volume increasing at a rate greater than operating costs. In addition, during the fourth quarter of fiscal year 2005, Nordson began a number of restructuring actions to improve performance and reduce costs in this segment. These actions, which included operational consolidations and approximately 60 personnel reductions, were completed in the fourth quarter of fiscal year 2006. As a result of these actions, this segment now operates with lower costs and improved operating performance. Fiscal year 2006 results include $1,818 of severance and restructuring costs.

 

Interest and other income (expense) — Interest expense in fiscal year 2007 was $21,542, an increase $9,525, or 79.3 percent from fiscal year 2006 due to higher borrowing levels resulting from the four acquisitions made during fiscal year 2007. Interest and investment income in fiscal year 2007 was $1,505, down from $1,867 in the prior year. The prior year amount included income of $898 from an income tax refund. Other income was $3,617 in fiscal year 2007, as opposed to other expense of $1,031 in fiscal year 2006. The current year amount included a $3,038 gain on the sale-leaseback of real estate. Included in other income (expense) are currency losses of $1,028 in fiscal year 2007 and $1,796 in fiscal year 2006.

 

Income taxes — Nordson’s effective income tax rate on continuing operations was 33.2 percent in fiscal year 2007, up from 28.4 percent in fiscal year 2006. The fiscal year 2006 rate reflects the approval by the Joint Committee on Taxation of an income tax refund of approximately $3,100. The increase in the effective tax rate is also due to higher tax rates on foreign income and a lower extraterritorial income exclusion.

Net income — Income from continuing operations was $90,692, or $2.65 per diluted share in fiscal year 2007. This compares to income from continuing operations of $97,667, or $2.86 per diluted share in fiscal year 2006. This represents a 7.1 percent decrease in income from continuing operations and a 7.3 percent decrease in earnings per share from continuing operations. Net income, including discontinued operations, was $90,598, or $2.65 per diluted share in fiscal year 2006.

 

Liquidity and Capital Resources

Cash generated by operations in fiscal year 2008 was $114,046, compared to $124,248 in fiscal year 2007. The primary sources were net income adjusted for the add-back of non-cash expenses, totaling $164,197 compared to $124,936 in fiscal year 2007. Uses of cash from operating activities included $20,922 associated with operating assets and liabilities, compared to $7,012 in fiscal year 2007. The primary reason for the change is a valuation decline in measurement funds underlying deferred compensation plans. Another reduction in cash relates to the difference in translated value of intercompany balances on foreign subsidiary books using average exchange rates and the corresponding balances on the parent company’s books using exchange rates in effect at the beginning and end of the fiscal year.

 

Cash used by investing activities was $31,924 in fiscal year 2008, compared to $348,109 in fiscal year 2007. The prior year amount included $325,245 of cash used for acquisitions. Capital expenditures were $26,386 in fiscal year 2008 and were primarily associated with improvements to the EFD building in East Providence, Rhode Island purchased in fiscal year 2007, global information systems and machinery and equipment in China.

 

Cash of $102,720 was used for financing activities in fiscal year 2008, compared to cash provided by financing activities of $202,224 in fiscal year 2007. In fiscal year 2008, $87,276 of short-term borrowings (net) was repaid, and $24,290 of scheduled long-term debt payments were made. Issuance of Common Shares related to employee benefit plans generated $16,135 of cash. Dividend payments were $24,645 in fiscal year 2008, an increase of $1,164 from fiscal year 2007 due to an increase in the per-share amount of 4.3 percent from fiscal year 2007. In fiscal year 2007, net proceeds from short-term borrowings of $281,293 were used for four acquisitions.

 

The following is a summary of significant changes in balance sheet captions from the end of fiscal year 2007 to the end of fiscal year 2008. Accounts payable decreased primarily due to the pay-down of vendor invoices associated with the demand for inventory. The decrease in income taxes payable is due to a tax benefit from the exercise of stock options, reclassifications to other long-term liabilities resulting from the adoption of FIN 48 and to tax payments related to current and prior year income. Intangible assets decreased as a result of amortization and currency rate changes. The decrease in other noncurrent asserts was primarily caused by the lower market value of assets held in a Rabbi Trust related to a deferred compensation obligation. The increase in long-term pension and retirement liabilities is due to a decrease in the fair value of plan assets partially offset by decreases in obligations from higher discount rates.

 

On February 22, 2008, we entered into a Note Purchase and Private Shelf Agreement (the “Agreement”) with Prudential Investment Management, Inc. The Agreement consists of a $50,000 Senior Note and a $100,000 Private Shelf Facility. The Senior Note bears interest at a rate of 4.98 percent and matures on February 22, 2013. The Agreement also contains customary events of default and covenants related to limitations on indebtedness and the maintenance of certain financial ratios. We were in compliance with all of our debt covenants at October 31, 2008. Under the Private Shelf Facility, we may also borrow during the next three years unto $100,000 at interest rates then in effect at the time of borrowing. Borrowings can be for up to 12 years with an average life not to exceed 10 years. At October 31, 2008, the amount we could borrow under the Private Shelf Facility would not have been limited by any debt covenants.

 

The board of directors authorized Nordson to repurchase up to 1,000 of our Common Shares over a three-year period beginning November 2006. The board of directors amended this resolution in August 2007 to permit us to enter into written agreements with independent third party brokers to purchase Common Shares on the open market or in privately negotiated transactions. Uses for repurchased shares include the funding of benefit programs, including stock options, restricted stock and 401(k) matching. Shares purchased are treated as treasury shares until used for such purposes. The repurchase program is funded using working capital. During fiscal year 2008, Nordson repurchased 664 of the shares authorized to be repurchased under this program for $30,678.

The following table summarizes obligations as of October 31, 2008:

 

 

(1) Nordson has various lines of credit with both domestic and foreign banks. At October 31, 2008, these lines totaled $512,470, of which $300,409 was unused. Included in the total amount of $512,470 was a $400,000 unsecured, multicurrency credit facility with a group of banks that expires in fiscal year 2012. This facility may be increased by $100,000 to $500,000 under certain conditions. At October 31, 2008, $170,000 was outstanding under this facility, compared to $280,000 outstanding at October 31, 2007. There are two primary financial covenants that must be met under this facility. The first covenant limits the amount of total indebtedness that can be incurred to 3.5 times consolidated trailing EBITDA (both indebtedness and EBITDA as defined in the credit agreement). The second covenant requires trailing consolidated trailing EBITDA to be at least three times consolidated trailing interest expense (both as defined in the credit agreement). We were in compliance with all debt covenants at October 31, 2008.

 

(2) Pension and postretirement plan funding amounts after fiscal year 2009 will be determined based on the future funded status of the plans and therefore cannot be estimated at this time.

 

We believe that the combination of present capital resources, internally generated funds and unused financing sources are more than adequate to meet cash requirements for fiscal year 2009. There are no significant restrictions limiting the transfer of funds from international subsidiaries to the parent company.

 

Outlook

Current disruptions in global financial markets and resulting turmoil in the general economic environment will have an impact on Nordson’s performance; however, we believe we are well positioned to manage the impact upon our liquidity. Our liquidity needs arise from working capital requirements, capital expenditures and principal and interest payments on indebtedness. Primary sources of liquidity to meet these needs are cash provided by operations and borrowings under our loan agreements. Cash provided by operations extending back to the end of the 2001 – 2002 recession ranged from 10 percent to 14 percent of net sales. During the 2001 and 2002 recession years, cash from operations were 10 percent and 20 percent of net sales, respectively. Since the recession of 2001 – 2002, Nordson has enhanced its sources of revenue by expanding its diversity of end markets and geographies into which it sells and also has employed lean practices into all areas of operations to gain cost efficiencies and improve operating margins and cash flow from operations. In addition, during the fourth quarter of fiscal year 2008, we announced an acceleration of ongoing operational improvement activities (as described above). Cash is available through a $400,000 5-year committed revolving line of credit with 12 domestic and international banks. This line of credit was put into place in July 2007 and expires in July 2012. As of October 31, 2008 we are in compliance with the financial covenants of this credit facility and have $230,000 available borrowing capacity. In addition, in February 2008, Nordson put in place a Master Shelf Arrangement with the Prudential Insurance Company to allow for the issuance of medium to long-term unsecured notes. As of October 31, 2008, we are in compliance with the financial covenant relating to a $50,000 five-year note issued under this arrangement. While these facilities provide the contractual terms for any borrowing, we cannot be assured that these facilities would be available in the event of these financial institutions failure to remain sufficiently capitalized.

Nordson’s priorities for fiscal year 2009 are focused upon the continuation of strategic actions to optimize revenue opportunities in a challenging economic environment and achieve its expectations for operational improvements through a combination of non-workforce related efficiencies and workforce reductions. Major areas of improvement include the streamlining of marketing and sales organizations, optimization of engineering and information technology resources, rationalization of products, and continued integration of recent acquisitions. We also expect to reduce exposure to certain underperforming markets. Given the current economic challenges, we expect this focus to result in optimized improvements in cash provided by operations.

 

With respect to spending, the table above presents Nordson’s financial obligations for the long-term being $391,600 of which $108,598 is payable in 2009, excluding amounts payable under terms of our revolving line of credit. On December 10, 2008, our Board of Directors approved a stock repurchase program of up to 1,000 shares over a three-year period beginning December 22, 2008. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors including levels of cash generation from operations, cash requirements for acquisitions, repayment of debt and our share price. Capital expenditures for 2009 will be reduced from recent years and primarily focused upon our in-process rollout of SAP enterprise management software and various projects that improve manufacturing and distribution.

 

We will continue to look for strategic acquisition opportunities, develop new applications and markets for our technologies, and move forward with our initiatives to improve operating performance.

 

Effects of Foreign Currency

The impact of changes in foreign currency exchange rates on sales and operating results cannot be precisely measured because of fluctuating selling prices, sales volume, product mix and cost structures in each country where we operate. As a general rule, a weakening of the U.S. dollar relative to foreign currencies has a favorable effect on sales and net income, while a strengthening of the U.S. dollar has a detrimental effect.

 

In fiscal year 2008 compared with fiscal year 2007, the U.S. dollar was generally weaker against foreign currencies. If fiscal year 2007 exchange rates had been in effect during fiscal year 2008, sales would have been approximately $43,051 lower and third-party costs would have been approximately $27,719 lower. In fiscal year 2007 compared with fiscal year 2006, the U.S. dollar was also generally weaker against foreign currencies. If fiscal year 2006 exchange rates had been in effect during fiscal year 2007, sales would have been approximately $30,261 lower and third-party costs would have been approximately $20,807 lower. These effects on reported sales do not include the impact of local price adjustments made in response to changes in currency exchange rates.

 

Nordson operates internationally and enters into intercompany transactions denominated in foreign currencies. Consequently, we are subject to market risk arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We regularly use foreign exchange contracts to reduce our risks related to most of these transactions. These contracts, primarily Euro, British Pound and Yen, usually have maturities of 90 days or less, and generally require us to exchange foreign currencies for U.S. dollars at maturity, at rates stated in the contracts. Gains and losses from changes in the market value of these contracts offset foreign exchange losses and gains, respectively, on the underlying transactions. Other transactions denominated in foreign currencies are designated as hedges of Nordson’s net investments in foreign subsidiaries or are intercompany transactions of a long-term investment nature. As a result of the use of foreign exchange contracts on a routine basis to reduce the risks related to most of our transactions denominated in foreign currencies, as of October 31, 2008, we did not have a material foreign currency risk.

 

Note 11 to the financial statements contains additional information about Nordson’s foreign currency transactions and the methods and assumptions used to record these transactions.

 

A portion of our operations is financed with short-term and long-term borrowings and is subject to market risk arising from changes in interest rates for long-term debt.

The tables that follow present principal repayments and related weighted-average interest rates by expected maturity dates of fixed-rate debt.

 

At October 31, 2008

 

Nordson also has variable-rate notes payable. The weighted average interest rate of this debt was 3.7 percent at October 31, 2008 and 5.3 percent at October 31, 2007. A 1 percent increase in interest rates would have resulted in additional interest expense of approximately $2,431 on the notes payable in fiscal year 2008.

Inflation

Inflation affects profit margins because the ability to pass cost increases on to customers is restricted by the need for competitive pricing. Although inflation has been modest in recent years and has had no material effect on the years covered by these financial statements, we continue to seek ways to minimize the impact of inflation through focused efforts to raise productivity.

 

Trends

The Five-Year Summary in Item 6 documents Nordson’s historical financial trends. Over this period, the world’s economic conditions fluctuated significantly. Our solid performance is attributed to our participation in diverse geographic and industrial markets and our long-term commitment to develop and provide quality products and worldwide service to meet customers’ changing needs.

 

Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995

This Form 10-K, particularly “Management’s Discussion and Analysis,” 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 U.S. and global economies. Statements in this 10-K 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.

 

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. Nordson undertakes 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 Item 1A, Risk Factors.

 

Years ended October 31, 2008, 2007 and 2006

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

October 31, 2008 and 2007

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

Years ended October 31, 2008, 2007 and 2006