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FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2004
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-7977
| Ohio | 34-0590250 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |
| 28601 Clemens Road Westlake, Ohio | 44145 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yesx Noo
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, 2004 was approximately $903,738,000.
There were 36,370,983 shares of Common Shares outstanding as of December 10, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2005 Annual Meeting
Table of Contents
Table of Contents
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| PART II | ||||||
| Item 5. | 9 | |||||
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| Item 7a. | 19 | |||||
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| Item 10. | 53 | |||||||
| Item 11. | 53 | |||||||
| Item 12. | 54 | |||||||
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| PART IV | ||||||||
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| Exhibit 3(B) 1998 Amended Regulations | ||||||||
| Exhibit 10-F Employment Agreement | ||||||||
| Exhibit 10-H Nordson Corporation Assurance Trust Agreement | ||||||||
| Exhibit 10-H-1 Employment Agreement | ||||||||
| Exhibit 10-H-2 Form of Employment Agreement | ||||||||
| Exhibit 21 Subsidiaries of the Registrant | ||||||||
| Exhibit 23 Consent of Independent Auditors | ||||||||
| Exhibit 31.1 Certification | ||||||||
| Exhibit 31.2 Certification | ||||||||
| Exhibit 32.1 Certification | ||||||||
| Exhibit 32.2 Certification | ||||||||
| Exhibit 99-A Form S-8 Undertakings | ||||||||
| Exhibit 99-B Form S-8 Undertakings | ||||||||
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PART I
NOTE REGARDING DOLLAR AMOUNTS
In this annual report, all amounts related to United States and foreign currency and to number of shares of Nordson Corporation stock, except for per share earnings and dividend amounts, are expressed in thousands.
Item 1. Business
General Description of Business
Nordson products are used around the world in the appliance, automotive, bookbinding, container, converting, electronics, food and beverage, furniture, medical, metal finishing, nonwovens, packaging, semiconductor, life sciences and other diverse industries.
The company’s strategy for long-term growth is based on a customer-driven focus that is global in scope. Reaching out from corporate headquarters in Westlake, Ohio, Nordson markets its products through a network of direct operations in 30 countries. Consistent with this strategy, approximately two-thirds of the Company’s revenues are generated outside the United States.
Nordson has more than 3,500 employees worldwide. Principal manufacturing facilities are located in Alabama, California, Georgia, Ohio and Rhode Island in the United States, as well as in China, Germany, Italy, The Netherlands and the United Kingdom.
Corporate Purpose and Goals
Nordson operates 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 the value of the Company over a moving five-year period, with the primary measure of value set by the market for Company 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 within existing markets, investing in new products and pursuing new markets. This strategy is augmented by the acquisition of companies that can serve multinational industrial markets.
We create benefits for our customers through a Package of ValuesTM, 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.
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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 employee 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 company objectives.
Nordson Corporation is an equal opportunity employer.
Nordson is committed to contributing an average of five percent of domestic pretax earnings to human services, health, education and other charitable activities, particularly in communities where the Company has major facilities.
Financial Information About Operating Segments, Foreign and Domestic Operations, and Export Sales
Principal Products and Uses
Nordson markets its products in the United States and fifty-seven other countries, primarily through a direct sales force and also through qualified distributors and sales representatives. Nordson has built a worldwide reputation for its creativity and expertise in the design and engineering of high-technology application equipment that meets the specific needs of its customers.
The following is a summary of the products produced and markets served by the Company’s various businesses:
1. Adhesive Dispensing and Nonwoven Fiber Systems
| • | Packaging — Automated adhesive dispensing systems that seal corrugated cases and paperboard cartons, apply product labels and stabilize pallets. |
| • | Product Assembly — Adhesive and sealant dispensing systems for bonding or sealing plastic, metal and wood products. |
| • | Web Coating — Laminating and coating systems used to manufacture continuous-roll goods in the nonwovens, textile, paper and flexible-packaging industries. |
| • | Nonwovens — Systems for producing nonwoven fiber fabrics; equipment for applying adhesives, lotions, liquids and fibers to disposable nonwoven products. |
| • | Automotive — Adhesive and sealant dispensing systems for bonding and sealing window glass, body panels and structural components used on automobiles and trucks. |
2. Finishing and Coating Systems
| • | Powder Coating — Automated and manual spray systems that apply powder paints and coatings to consumer and industrial products. |
| • | Liquid Finishing — Automated and manual spray systems that apply liquid paints and coatings to consumer and industrial products. |
| • | Container — Systems used to dispense and cure coatings used in the manufacture of metal and plastic containers. |
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3. Advanced Technology Systems
| • | Asymtek — Automated dispensing systems for high-speed, accurate application of a broad range of attachment, protection and coating fluids to semiconductor packages, printed circuit boards and electronic assemblies. |
| • | UV Curing — Drying and curing systems for graphic arts, finishing and product assembly operations. |
| • | March Plasma Systems — Systems for cleaning and modifying surfaces during the assembly of semiconductor devices, printed circuit boards, medical instruments and electronic products. |
| • | EFD, Inc. — Manual and automated dispensing units for the controlled application of fluid materials for the electronics, medical and automotive industries. |
Manufacturing and Raw Materials
Principal materials used to make Nordson 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 and quality. All significant raw materials that Nordson uses are available through multiple sources.
Nordson’s senior operating executives supervise an extensive quality control program for Nordson equipment, machinery and systems.
Natural gas and other fuels are primary energy sources for Nordson. However, standby capacity for alternative sources is available if needed.
Intellectual Property
Seasonal Variation in Business
Working Capital Practices
Customers
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Backlog
Government Contracts
Competitive Conditions
Many factors influence the Company’s competitive position, including pricing, product quality and service. Nordson enjoys a leadership position in the competitive industrial application systems business 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. Nordson’s worldwide network of direct sales and technical resources also is a competitive advantage.
Risk factors associated with Nordson’s competitive position include the development and commercial acceptance of alternative processes or materials and the growth of local competitors serving specific markets.
Research and Development
Environmental Compliance
Employees
Available Information
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Item 2. Properties
The following table summarizes the principal properties of the Company as of its fiscal 2004 year-end.
| Approximate | ||||||
| Location | Description of Property | Square Feet | ||||
Amherst, Ohio(1)(2)(3) | A manufacturing, laboratory and office complex located on 52 acres of land | 585,000 | ||||
Norcross, Georgia(1) | A manufacturing, laboratory and office building located on 10 acres of land | 150,000 | ||||
Dawsonville, Georgia(1) | A manufacturing, laboratory and office building (leased) | 143,000 | ||||
Carlsbad, California(3) | Three manufacturing and office buildings (leased) | 120,000 | ||||
Duluth, Georgia(1) | An office and laboratory building | 110,000 | ||||
East Providence, Rhode Island(3) | A manufacturing, warehouse, distribution and office complex | 75,000 | ||||
| Westlake, Ohio | Corporate headquarters located on 25 acres of land | 68,000 | ||||
Swainsboro, Georgia(1) | A manufacturing building | 59,000 | ||||
Atlanta, Georgia(1) | A distribution center and office building (leased) | 50,000 | ||||
Branford, Connecticut(2) | A manufacturing and office building (leased) | 46,000 | ||||
Lincoln, Rhode Island(3) | A manufacturing building | 44,000 | ||||
Talladega, Alabama(1) | A manufacturing and office building (leased) | 27,000 | ||||
St. Petersburg, Florida(3) | A manufacturing and office building (leased) | 26,000 | ||||
Luneburg, Germany(1) | A manufacturing building and laboratory | 130,000 | ||||
Erkrath, Germany(1)(2) | An office, laboratory and warehouse building (leased) | 63,000 | ||||
Maastricht, The Netherlands(1)(2)(3) | A manufacturing, distribution center and office building (leased) | 48,000 | ||||
Tokyo, Japan(1)(2)(3) | An office, laboratory and warehouse building (leased) | 42,000 | ||||
Milano, Italy(1)(2) | An office, laboratory and warehouse building (leased) | 41,000 | ||||
St. Thibault Des Vignes, France(1)(2) | An office building (leased) | 29,000 | ||||
Shanghai, China(1)(2) | A manufacturing, warehouse and office building (leased) | 20,000 | ||||
Bangalore, India(1)(2)(3) | An office and warehouse building | 16,000 | ||||
Slough, U.K.(3) | A manufacturing, warehouse and office building (leased) | 10,000 | ||||
Dunstable, U.K.(3) | An office building | 6,000 | ||||
Business Segment — Property Identification Legend
| (1) | Adhesive Dispensing and Nonwoven Fiber Systems |
| (2) | Finishing and Coating Systems |
| (3) | Advanced Technology Systems |
The facilities listed above have adequate, suitable and sufficient capacity (production and nonproduction) to meet present and foreseeable demand for the Company’s 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.
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In addition, the Company leases equipment under various operating and capitalized leases. Information about leases is reported in Note 7 of Notes to Consolidated Financial Statements that can be found in Part II, Item 8 of this document.
Item 3. Legal Proceedings
The Company has been identified as a potentially responsible party (PRP) at a Wisconsin municipal landfill and has voluntarily agreed with other PRP’s to share costs associated with (1) a feasibility study and remedial investigation (“FS/ RI”) for the site and (2) providing clean drinking water to the affected residential properties through completion of the FS/ RI phase of the project. The FS/ RI is expected to be completed in 2005. The Company is committing $829 towards completing the FS/ RI phase of the project and providing clean drinking water. This amount has been recorded in the Company’s financial statements. Against this commitment, the Company has made payments of $363 through the end of fiscal year 2004. The remaining amount of $466 is recorded in accrued liabilities in the October 31, 2004 Consolidated Balance Sheet. The total cost of the Company’s share for remediation efforts will not be ascertainable until the FS/ RI is completed and a remediation plan is approved by the Wisconsin Department of Natural Resources, which is anticipated to occur in 2006. However, based upon current information, the Company does not expect that the costs associated with remediation will have a material effect on its financial condition or results of operations.
The European Union (“EU”) has adopted two Directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste Electrical and Electronic Equipment (“WEEE”) Directive which directs EU Member States to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment provide for the financing of the collection, treatment, recovery and environmentally sound disposal of WEEE from products placed on the market after August 13, 2005 and from products in use prior to that date that are being replaced. The second of these Directives is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) Directive. The RoHS Directive addresses the restriction on use of certain hazardous substances such as mercury, lead, cadmium, and hexavalent cadmium in electrical and electronic equipment placed on the market after July 1, 2006. As of October 31, 2004, EU Member States continue to develop legislation to implement these Directives.
During the year, the Company established a project management team whose efforts are directed at assessing the impact of the Directives on the Company’s supply chain management and manufacturing processes and developing a strategy to permit the Company to react and comply with legislation enacted by Member States. The cost to the Company to comply with the Directives and Member States’ legislation will not be quantifiable until Member States have fully implemented the Directives.
In addition, the Company is involved in various other legal proceedings arising in the normal course of business. Based on current information, the Company does not expect that the ultimate resolution of pending and threatened legal proceedings will have a material adverse effect on its financial condition or results of operations. The Company is not involved in any other legal proceedings that would be required to be disclosed pursuant to Item 103 of Regulation S-K.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
The executive officers of the Company as of December 31, 2004 were as follows:
| Position or Office with The Company and Business | ||||||||||
| Name | Age | Officer Since | Experience During the Past Five (5) Year Period | |||||||
| Edward P. Campbell | 55 | 1988 | Chairman of the Board of Directors and Chief Executive Officer, 2004 | |||||||
| President and Chief Executive Officer, 1997 | ||||||||||
| Peter S. Hellman | 55 | 2000 | President, Chief Financial and Administrative Officer, 2004 | |||||||
| Executive Vice President, Chief Financial and Administrative Officer, 2000 | ||||||||||
| President and Chief Operating Officer, TRW, Inc. from 1995 through 1999 | ||||||||||
| Donald J. McLane | 61 | 1986 | Senior Vice President, 1999 | |||||||
| Robert A. Dunn, Jr. | 57 | 1997 | Vice President, 1997 | |||||||
| Bruce H. Fields | 53 | 1992 | Vice President, Human Resources, 1992 | |||||||
| Mark G. Gacka | 50 | 1998 | Vice President, 1998 | |||||||
| Michael Groos | 53 | 1995 | Vice President, 1995 | |||||||
| John J. Keane | 44 | 2003 | Vice President, 2003 | |||||||
| Vice President, Packaging and Product Assembly Systems from 2000 to 2003 | ||||||||||
| Manager, Business Operations from 1999 to 2000 | ||||||||||
| Nicholas D. Pellecchia | 59 | 1986 | Vice President, Finance and Controller, 1986 | |||||||
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PART II
| Item 5. | Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information and Dividends
| Common | |||||||||||||||||
| Stock Price | |||||||||||||||||
| Dividend | Price-Earnings | ||||||||||||||||
| Fiscal Quarters | Paid | High | Low | Ratio | |||||||||||||
2004: | |||||||||||||||||
| First | $ | .15 | 5 | $ | 37.98 | $ | 27.33 | 28.2 | |||||||||
| Second | .15 | 5 | 38.41 | 33.50 | 26.1 | ||||||||||||
| Third | .15 | 5 | 43.78 | 32.21 | 23.9 | ||||||||||||
| Fourth | .16 | 42.23 | 32.21 | 21.5 | |||||||||||||
| 2003: | |||||||||||||||||
| First | $ | .15 | $ | 27.86 | $ | 21.46 | 39.1 | ||||||||||
| Second | .15 | 27.03 | 20.52 | 37.1 | |||||||||||||
| Third | .15 | 26.05 | 22.28 | 35.0 | |||||||||||||
| Fourth | .15 | 5 | 28.53 | 22.65 | 24.6 | ||||||||||||
| (b) | Use of Proceeds. Not applicable. |
| (c) | Issuer Purchases of Equity Securities |
| Total Number of | Maximum Number | |||||||||||||||
| Total | Shares Repurchased | of Shares that | ||||||||||||||
| Number of | Average | as Part of Publicly | May Yet Be Purchased | |||||||||||||
| Shares | Price Paid | Announced Plans | Under the Plans | |||||||||||||
| Repurchased | per Share | or Programs (1) | or Programs | |||||||||||||
| August 2, 2004 to August 29, 2004 | — | — | 2,000 | |||||||||||||
| August 30, 2004 to September 26, 2004 | — | — | 2,000 | |||||||||||||
| September 27, 2004 to October 31, 2004 | 25 | $ | 33.95 | 25 | 1,975 | |||||||||||
| Total | 25 | 25 | ||||||||||||||
| (1) | In October 2003, the Board of Directors authorized the Company to repurchase, until October 2006, up to 2,000 shares of the Company’s common stock on the open market. In October 2004, the Company repurchased 25 shares in an open market transaction at a price of $33.95 per share. There were no shares repurchased prior to October 2004. |
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Item 6. Selected Financial Data
Five-Year Summary
| 2004 | 2003 | 2002(e) | 2001 | 2000 | ||||||||||||||||
| (In thousands except for per-share amounts) | ||||||||||||||||||||
Operating Data(a) | ||||||||||||||||||||
| Sales | $ | 793,544 | 667,347 | 647,756 | 731,416 | 740,568 | ||||||||||||||
| Cost of sales | $ | 354,313 | 301,566 | 310,542 | 337,129 | 332,597 | ||||||||||||||
| % of sales | 45 | 45 | 48 | 46 | 45 | |||||||||||||||
| Selling and administrative expenses | $ | 328,633 | 295,157 | 281,696 | 321,395 | 307,559 | ||||||||||||||
| % of sales | 41 | 44 | 43 | 44 | 42 | |||||||||||||||
| Severance and restructuring costs | $ | — | 2,028 | 2,499 | 13,355 | 8,960 | ||||||||||||||
| Operating profit | $ | 110,598 | 68,596 | 53,019 | 59,537 | 91,452 | ||||||||||||||
| % of sales | 14 | 10 | 8 | 8 | 12 | |||||||||||||||
| Net income | $ | 63,334 | 35,160 | 22,072 | 24,610 | 54,632 | ||||||||||||||
| % of sales | 8 | 5 | 3 | 3 | 7 | |||||||||||||||
Net income adjusted for goodwill amortization(b) | $ | 63,334 | 35,160 | 22,072 | 35,853 | 57,979 | ||||||||||||||
| % of sales | 8 | 5 | 3 | 5 | 8 | |||||||||||||||
Financial Data(a) | ||||||||||||||||||||
| Working capital | $ | 167,362 | 65,708 | 21,926 | 6,524 | 116,230 | ||||||||||||||
| Net property, plant and equipment and other non-current as | $ | 476,276 | 489,436 | 489,899 | 500,276 | 240,802 | ||||||||||||||
| Total invested capital | $ | 643,638 | 555,144 | 511,825 | 506,800 | 357,032 | ||||||||||||||
| Total assets | $ | 839,387 | 766,806 | 764,472 | 862,453 | 610,040 | ||||||||||||||
| Long-term obligations | $ | 240,305 | 255,035 | 242,935 | 243,074 | 109,809 | ||||||||||||||
| Shareholders’ equity | $ | 403,333 | 300,109 | 268,890 | 263,726 | 247,223 | ||||||||||||||
Return on average invested capital — %(c) | 13 | 7 | 4 | 6 | 16 | |||||||||||||||
Return on average shareholders’ equity — %(d) | 18 | 13 | 8 | 10 | 25 | |||||||||||||||
Per-Share Data(a) | ||||||||||||||||||||
| Basic earnings per share | $ | 1.78 | 1.04 | 0.66 | 0.75 | 1.68 | ||||||||||||||
| Diluted earnings per share | $ | 1.73 | 1.04 | 0.66 | 0.74 | 1.67 | ||||||||||||||
| Dividends per common share | $ | 0.625 | 0.605 | 0.57 | 0.56 | 0.52 | ||||||||||||||
| Book value per common share | $ | 11.12 | 8.82 | 8.00 | 7.96 | 7.62 | ||||||||||||||
| Average common shares | 35,489 | 33,703 | 33,383 | 32,727 | 32,455 | |||||||||||||||
| Average common shares and common share equivalents | 36,546 | 33,899 | 33,690 | 33,050 | 32,767 | |||||||||||||||
| (a) | See accompanying Notes to Consolidated Financial Statements. |
| (b) | In 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and as a result no longer amortizes goodwill. Amounts represent net income without goodwill amortization. |
| (c) | Net income plus interest on long-term obligations net of income taxes as a percentage of total assets less current liabilities. |
| (d) | Net income as a percentage of shareholders’ equity. |
| (e) | 2002 includes an inventory write-down of $11,388, which is included in cost of sales. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In this annual report, all amounts related to United States and foreign currency and to number of shares of Nordson Corporation stock, except for per share earnings and dividend amounts, are expressed in thousands.
Critical Accounting Policies and Estimates
Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position are discussed below. On a regular basis, the Company reviews critical accounting policies with the Audit Committee of the Board of Directors.
Revenue Recognition — Most of the Company’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 both installation and services, are recognized as each element is earned based on objective evidence of the relative fair value of each element. Amounts received in excess of revenue recognized are included as deferred revenue in the accompanying balance sheets. Revenues deferred in 2004 were not material. A limited number of the Company’s large engineered systems sales contracts are accounted for using the percentage-of-completion method. The amount of revenue recognized in any accounting period is based on the ratio of actual costs incurred through the end of the period to total estimated costs at completion. Cost estimates are updated on a quarterly basis. During 2004, 2003 and 2002, the Company recognized approximately $7,000, $5,000 and $20,000, respectively, of revenue under the percentage-of-completion method. The remaining revenues are recognized upon delivery.
Goodwill — Goodwill represents the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired. At October 31, 2004, goodwill represented approximately 40 percent of the Company’s total assets. The majority of the goodwill resulted from the acquisition of EFD, Inc. in fiscal 2001. In 2002, the Company adopted FASB Statement No. 142, “Goodwill and Other Intangible Assets,” which provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level. In accordance with No. 142, the Company completed a transitional goodwill impairment test that resulted in no impairment loss being recognized. Goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The estimated fair value of a reporting unit is determined by applying appropriate discount rates to estimated future cash flows and terminal value amounts for the reporting units. The results of the Company’s analyses indicated that no reduction of goodwill is required.
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Inventories — Inventories are valued at the lower of cost or market. Cost has been determined using the last-in, first-out method for 38 percent of the Company’s consolidated inventories at October 31, 2004, with the first-in, first-out method used for the remaining inventory. On an ongoing basis, the Company tests its inventory for technical obsolescence, as well as for future demand and changes in market conditions. The Company has historically maintained inventory reserves to reflect those conditions when the cost of inventory is not expected to be recovered. In the face of difficult economic conditions that accelerated the technical obsolescence of certain inventory and impacted the demand outlook for other inventory, the Company recognized an inventory write-down of $11,388 in the fourth quarter of 2002 ($7,630 on an after-tax basis, or $.23 per share). The addition of $11,388 to the inventory obsolescence reserve brought the reserve balance to $23,149. During 2003, $21,281 of inventory was disposed of and charged against the reserve, and $2,243 was added to the reserve. After a currency effect of $444, the balance in the inventory obsolescence reserve was $4,555 at November 2, 2003. During 2004, $3,066 of inventory was disposed of and charged against the reserve, and $2,782 was added to the reserve. After a currency effect of $130, the balance in the inventory obsolescence reserve was $4,401 at October 31, 2004.
Pension Plans and Postretirement Medical Plan — The measurement of liabilities related to the Company’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 and health care cost trend rates.
The weighted-average discount rate (based on AA quality fixed income investments) used to determine the present value of the Company’s aggregate pension plan obligation was 5.8 percent at October 31, 2004, compared to 5.9 percent at November 2, 2003. The average expected rate of return (long-term investment rate) on pension assets increased slightly from 8.1 percent in 2003 to 8.2 percent in 2004. The assumed rate of compensation increases was 3.4 percent in 2004, compared to 3.3 percent in 2003.
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.
With respect to the postretirement medical plan, the discount rate used to value the benefit obligation decreased from 6.25 percent at November 2, 2003 to 6.0 percent at October 31, 2004. The annual rate of increase in the per capita cost of covered benefits (the health care trend rate) is assumed to be 8.0 percent in 2005, decreasing gradually to 5.0 percent in 2009. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage point change in the assumed health care cost trend rate would have the following effects:
| 1% Point Increase | 1% Point Decrease | |||||||
| Effect on total service and interest cost components in 2004 | $ | 631 | $ | (496 | ) | |||
| Effect on postretirement obligation as of October 31, 2004 | $ | 6,506 | $ | (5,209 | ) | |||
Employees hired after January 1, 2002 are not eligible to participate in the postretirement medical plan.
The Company expects that pension and postretirement expenses in fiscal 2005 will be approximately $1,400 higher than fiscal 2004, reflecting among other things, changes in actuarial assumptions and plan design changes.
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. The Company 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 income (expense) on the Consolidated Statement of Income.
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Warranties — The Company provides customers with a product warranty that requires the Company 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, the Company relies primarily on historical warranty claims by product sold. At October 31, 2004, the warranty accrual was $4,121, while warranty costs for 2004 were $4,165.
Long-Term Incentive Compensation Plan (LTIP) — Under this plan officers are awarded a cash payment if predetermined performance measures are met over a three-year period. The value of this payment is based upon the share price of the Company’s stock at a predetermined date subsequent to the end of the third year of each plan. Over the period of each plan, costs are accrued based on progress against performance measures, along with changes in value of the Company’s stock. At October 31, 2004, the accrued liability for the 2002, 2003 and 2004 plans amounted to $11,064. The portion of these costs recognized in the income statement was $7,004 in 2004, $2,653 for 2003 and $1,406 for 2002.
Fiscal Years 2004 and 2003
Nordson’s sales outside the United States accounted for 66 percent of total 2004 sales, compared with 63 percent for 2003. During 2004, the Company realigned its geographic reporting. Previously, sales were reported in four regions, North America, Europe, Japan and Pacific South. The regions are now defined as United States, Americas (Canada and Latin America), Europe, Japan and Asia Pacific. Prior year amounts have been reclassified to conform to the new alignment. Sales volume in all five geographic regions increased in 2004 compared to 2003. Sales volume was up 8 percent in the United States, 19 percent in the Americas, 10 percent in Europe, 11 percent in Japan and 48 percent in Asia Pacific. The increase in Asia Pacific can be traced largely to the advanced technology segment and to higher fiber system sales.
Operating profit — Gross margins, expressed as a percent of sales, increased to 55.4 percent in 2004 from 54.8 percent in 2003. Currency changes had a ..9 percent favorable effect, with the effect of mix and absorption offsetting this gain.
Selling and administrative expenses were $328,633 in 2004, an increase of $33,476, or 11.3 percent from 2003. The increase is due to currency translation effects of 4.3 percent and to compensation increases and higher employee benefit costs. As a percent of sales these costs decreased to 41.4 percent in 2004 from 44.2 percent last year.
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Operating profit margins, expressed as a percentage of sales, were 13.9 percent in 2004 compared to 10.3 percent in 2003. Beginning in 2004, the method of measuring operating profit for segment reporting was modified. A larger portion of corporate expenses is now being charged to the three primary business segments. Prior year operating profit amounts have been adjusted to conform to the 2004 methodology. Segment operating profit margins in 2004 and 2003 were as follows:
| Segment | 2004 | 2003 | ||||||
| Adhesive Dispensing Systems | 20 | % | 17 | % | ||||
| Finishing and Coating Systems | 2 | % | 1 | % | ||||
| Advanced Technology Systems | 18 | % | 11 | % | ||||
The improvement in profit margins across all three segments can be traced to absorption of fixed operating expenses and to the effects of continuing cost controls related to lean initiatives.
In light of the difficult economic environment from 2000 to 2003, the Company embarked on a number of cost reduction initiatives. Consistent with these initiatives, the Company recognized $2,028 ($1,359 on an after-tax basis, or $.04 per share) of severance and restructuring costs in 2003.
Interest and other — Interest expense in 2004 was $15,432, a decrease of 15 percent from 2003. The decrease was due to lower borrowing levels. Other expense was $2,688 in 2004, compared to other income of $1,055 last year. The change was primarily due to a loss of $3,288 on the disposition of a minority equity investment. In addition, currency losses of $201 were incurred in 2004, compared to gains of $558 in 2003.
In 2004, the Company recorded a charge of $128 in other expense. The Company has been identified as a potentially responsible party (PRP) at a Wisconsin municipal landfill and has voluntarily agreed with other PRP’s to share costs associated with (1) a feasibility study and remedial investigation (“FS/ RI”) for the site and (2) providing clean drinking water to the affected residential properties through completion of the FS/ RI phase of the project. The FS/ RI is expected to be completed in 2005. The Company has committed $829 towards completing the FS/ RI phase of the project and providing clean drinking water. This amount has been recorded in the Company’s financial statements. Against this commitment, the Company has made payments of $363 through the end of fiscal year 2004. The remaining amount of $466 is recorded in accrued liabilities in the October 31, 2004 Consolidated Balance Sheet.
Net income — The Company’s effective income tax rate was 32.5 percent in 2004, down from 33.0 percent in 2003. The decrease was due to a refund related to a prior tax year. Net income was $63,334, or $1.73 per diluted share in 2004. This compares to net income of $35,160, or $1.04 per diluted share in 2003. This represents an 80 percent increase in net income and 66 percent increase in earnings per share.
Accounting changes — In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. There was no impact in 2004 on the Company’s consolidated financial position or results of operations as a result of the adoption of No. 146. During 2003, the Company recognized expense of $2,028 related to severance payments to approximately 70 employees of the finishing and coating and the advanced technology segments in North America.
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In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others.” This interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under guarantees and clarifies the requirements related to the recognition of liabilities by a guarantor for obligations undertaken in issuing guarantees. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements for periods ending after December 31, 2002 and are applicable for all outstanding guarantees subject to the interpretation.
The Company has issued guarantees to two banks to support the short-term borrowing facilities of a 49 percent-owned South Korean joint venture/distributor of the Company’s products. One guarantee is for Korean Won 3,000,000 (approximately $2,572) secured by land and building and expires on January 31, 2005. The other guarantee is for $2,300 and expires on October 31, 2005. As discussed below, the Company began consolidating this joint venture/distributor in the second quarter of fiscal 2004.
In 2004, the Company issued a guarantee to a U.S. bank related to a five-year trade financing agreement for a sale to a customer in Turkey. The loan is secured by collateral with a current value well in excess of the amount due. The guarantee could be called into play in the event of payment default by the customer to the bank. The amount of the guarantee at October 31, 2004 was Euro 2,000 (approximately $2,560) and will decline ratably as semi-annual principal payments are made by the customer beginning in 2005. The Company has recorded $1,161 in the allowance for doubtful accounts related to this guarantee. The recorded amount will be adjusted as the customer makes payments.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This Interpretation addresses consolidation by business enterprises of variable interest entities, which possess certain characteristics. The interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of operations of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest entities created prior to January 31, 2003, this interpretation is effective for the first year or interim period beginning after March 15, 2004. In the second quarter of 2004, the Company began consolidating a 49 percent-owned South Korean joint venture/distributor of the Company’s products. Real estate with a net book value of approximately $750 serves as collateral for one of the bank loans noted above. Other than the bank guarantees noted above, creditors of the joint venture/distributor have no recourse against the Company. The Company’s initial investment in this joint venture/distributor occurred in 1989. The effect of the consolidation on the Company’s financial statements was not material.
In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123.” No. 148 amends No. 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, No. 148 amends the disclosure requirements of No. 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results. The alternative methods of transition of No. 148 are effective for fiscal years ending after December 15, 2002. The disclosure provision of No. 148 is effective for interim periods beginning after December 15, 2002. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock option expense is reflected in net income, as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
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In December 2003, the FASB revised Statement of Financial Accounting Standard No. 132, “Employers’ Disclosures about Pensions and other Postretirement Benefits.” The revision established additional annual disclosures about plan assets, investment strategy, measurement date, plan obligations and cash flows. In addition, the revised standard established interim disclosure requirements related to the net periodic benefit cost recognized and contributions paid or expected to be paid during the current fiscal year. The new annual disclosures are effective for financial statements with fiscal years ending after December 15, 2003, and the interim-period disclosures are effective for interim periods beginning after December 15, 2003. The annual disclosures were adopted for the 2004 fiscal year (see Note 3). The adoption of No. 132 had no effect on the Company’s financial condition or results of operations.
In May 2004, the FASB issued Staff Position No. FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” in response to a new law that provides prescription drug benefits under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, Statement of Financial Accounting Standard No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“No. 106”) requires that changes in relevant law be considered in current measurement of postretirement benefit costs. The Company’s measures of the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost do not reflect the effects of the subsidy, because benefits under the Company’s plan are not actuarially equivalent to Medicare Part D. The adoption of FSP No. 106-2 had no effect on the Company’s financial condition or results of operations.
In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of No. 151 is effective for fiscal years beginning after June 15, 2005. The Company has not yet determined the impact of adoption on its consolidated financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. No. 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. No. 123(R) requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the Company’s financial statements. The Company will be required to adopt No. 123(R) in the fourth quarter of fiscal 2005 and has not yet determined the impact of adoption on its consolidated financial position or results of operations.
Fiscal Years 2003 and 2002
Sales within the adhesive segment increased 3 percent, with a 7 percent increase from currency effects offset by a 4 percent decline in volume. A drop-off in shipments of large engineered systems used in the production of nonwoven fabrics and in the assembly of durable goods accounted for virtually the entire volume decline. Advanced technology segment sales increased 7 percent, with volume up 4 percent and favorable currency effects contributing an additional 3 percent. Improved activity related to sales of plasma treatment systems and manual fluid dispensing systems to the electronics and medical industries as well as sales of UV curing systems to the graphic arts industry accounted for the higher volume within this segment. Finishing and coating segment revenue was down 1 percent in 2003. Sales volume was down 6 percent, offset by a 5 percent increase from favorable currency effects. The volume decline was influenced by lower engineered system sales in North America. It is estimated that the effect of pricing on total revenue was neutral relative to the prior year.
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Nordson’s sales outside the United States accounted for 63 percent of total 2003 sales, compared with 57 percent for 2002. Sales volume decreased 12 percent in the United States, 4 percent in Europe and 1 percent in the Americas. Offsetting these decreases were increases of 17 percent in Japan and 28 percent in the Asia Pacific regions. Volume was up in all segments in Japan, while advanced technology was primarily responsible for the increase in the Asia Pacific region.
Operating profit — Gross margins, expressed as a percentage of sales, were 54.8 percent in 2003 compared to 52.1 percent in 2002. In 2002, the Company recognized a pretax inventory write-down of $11,388. Excluding the effect of this write-down, the 2003 gross margin rate improved by 1.0 percent over 2002. Favorable currency effects accounted for approximately a 1.1 percent increase in the gross margin rate with the effect of product mix offsetting a portion of this improvement.
Selling and administrative expenses increased by 4.8 percent over 2002. Currency translation effects accounted for a 4.4 percent increase, with the balance of the increase traced to compensation adjustments and higher employee benefit costs. Selling and administrative expenses, excluding severance and restructuring costs, amounted to 44.2 percent of sales in 2003 compared to 43.5 percent of sales in 2002.
In light of the difficult economic environment over the last three years, the Company embarked on a number of cost reduction initiatives. Consistent with these initiatives, the Company recognized $2,028 ($1,359 on an after-tax basis, or $.04 per share) of severance and restructuring costs in 2003. In 2002 the Company recognized $2,690 ($1,802 million on an after-tax basis, or $.05 per share) of restructuring charges, consisting of severance and other costs associated with the combination of certain businesses. Of the total amount, $191 was included in cost of sales.
Operating profit margins, expressed as a percentage of sales, were 10.3 percent in 2003 compared to 8.2 percent in 2002. Segment operating profit margins in 2003 and 2002, after restatement for the allocation of a larger portion of corporate expenses, were as follows:
| Segment | 2003 | 2002 | ||||||
| Adhesive Dispensing Systems | 17 | % | 19 | % | ||||
| Finishing and Coating Systems | 1 | % | (1 | %) | ||||
| Advanced Technology Systems | 11 | % | 6 | % | ||||
The lower adhesive segment operating margin in 2003 compared to 2002 is traced primarily to absorption of fixed operating expenses related to a direct distribution organization in an environment where sales volume declined. In addition, higher initial manufacturing costs were incurred associated with the introduction of a new family of products. Operating margin increases in both the finishing and coating and the advanced technology segments are due to improved manufacturing cost absorption. The restructuring initiatives conducted over the last three years impacted all segments favorably.
Interest and other — Interest expense of $18,063 decreased $3,650 from 2002, due to lower borrowing levels and lower interest rates. Other income increased from $714 in 2002 to $1,055 in 2003, mainly due to currency gains of $558 in 2003.
In 2003, the Company recorded a charge of $375 in other expense related to the Wisconsin municipal landfill described above. Through the end of fiscal 2003 the Company had committed $700 towards completing the FS/RI phase of the project and providing clean drinking water. This amount was recorded in the Company’s financial statements. Against this commitment, the Company had made payments of $325 through the end of fiscal 2003. The remaining amount of $375 was recorded in accrued liabilities in the November 2, 2003 Consolidated Balance Sheet.
Net income — The Company’s effective tax rate was 33.0 percent for both 2003 and 2002. Net income in 2003 was $35,160, or $1.04 per share on a diluted basis compared with $22,072, or $.66 per share on a diluted basis, in 2002. As noted above, 2002 included a pretax inventory write-down of $11,388, or $.23 per share.
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Liquidity, Capital Expenditures and Sources of Capital
Cash used by investing activities was $15,328 in 2004. Capital expenditures, which were concentrated on information systems and production equipment, were $11,437. Cash of $4,013 was used for the acquisition of W. Puffe Technologie, a German manufacturer of hot melt adhesive dispensing systems for the textile, aerospace, life science, automotive, construction and baby diaper industries.
Cash used in financing activities in 2004 was $41,602. The Company repaid $72,024 of notes payable and long-term debt in 2004, bringing the debt to equity ratio down from .80 at November 2, 2003 to .44 at October 31, 2004. Dividend payments to shareholders totaled $22,128 in 2004, increasing 3 percent on a per-share basis from 2003. Issuance of common stock related to the exercise of stock options generated $56,758 of cash.
On May 18, 2004 the Company entered into an interest rate swap to convert $40,000 of 6.79 percent fixed rate debt due in May 2006 to variable rate debt. The variable rate is reset semi-annually, and at October 31, 2004 the rate was 5.34 percent.
The following table summarizes the Company’s obligations as of October 31, 2004:
| Payments Due by Period | ||||||||||||||||||||
| Less than | After 5 | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
| Obligations | ||||||||||||||||||||
| Long-term debt | $ | 160,323 | $ | 12,290 | $ | 100,903 | $ | 28,580 | $ | 18,550 | ||||||||||
| Capital lease obligations | 11,063 | 5,578 | 5,052 | 427 | 6 | |||||||||||||||
| Operating leases | 29,470 | 8,742 | 11,287 | 5,573 | 3,868 | |||||||||||||||
| Notes payable | 15,301 | 15,301 | ||||||||||||||||||
| Purchase obligations | 24,834 | 23,612 | 1,222 | |||||||||||||||||
| Total obligations | $ | 240,991 | $ | 65,523 | $ | 118,464 | $ | 34,580 | $ | 22,424 | ||||||||||
Nordson has various lines of credit with both domestic and foreign banks. At October 31, 2004, these lines totaled $277,958, of which $262,657 was unused. Included in the total amount of $277,958 is a $200,000 facility with a group of banks that expires in 2009. This facility was entered into on October 19, 2004 and replaced an existing facility that was scheduled to expire in 2006. The new facility may be increased from $200,000 to $400,000 under certain conditions. It was unused at the end of 2004. There are two covenants that the Company must meet under this facility. The first covenant limits the amount of additional debt the Company can incur. At the end of 2004, this covenant would not have limited the amount the Company could borrow under this facility. The other covenant requires EBIT (as defined in the credit agreement) to be at least three times interest expense. The actual interest coverage was 7.87 for 2004. The Company was in compliance with all debt covenants at October 31, 2004.
The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for 2005. There are no significant restrictions limiting the transfer of funds from international subsidiaries to the parent Company.
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In October 2003, the Board of Directors authorized the Company to repurchase up to 2,000 shares of the Company’s common stock on the open market. Expected uses for repurchased shares include the funding of benefit programs including stock options, restricted stock and 401(k) matching. Shares purchased will be treated as treasury shares until used for such purposes. The repurchase program will be funded using the Company’s working capital. During October 2004, the Company repurchased approximately 1 percent of the shares authorized to be repurchased under this program.
Outlook
Effects of Foreign Currency
In 2004 compared with 2003, the U.S. dollar was generally weaker against foreign currencies. If 2003 exchange rates had been in effect during 2004, sales would have been approximately $37,146 lower and third-party costs would have been approximately $22,471 lower. In 2003 compared with 2002, the U.S. dollar was also generally weaker against foreign currencies. If 2002 exchange rates had been in effect during 2003, sales would have been approximately $37,685 lower and third-party costs would have been approximately $22,408 lower. These effects on reported sales do not include the impact of local price adjustments made in response to changes in currency exchange rates.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company operates internationally and enters into transactions denominated in foreign currencies. Consequently, the Company is subject to market risk arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. Nordson regularly uses foreign exchange contracts to reduce its risks related to most of these transactions. These contracts, primarily Euro and Yen, usually have maturities of 90 days or less, and generally require the Company 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. The balance of transactions denominated in foreign currencies are designated as hedges of the Company’s net investments in foreign subsidiaries or are intercompany transactions of a long-term investment nature. As a result of the Company’s use of foreign exchange contracts on a routine basis to reduce the risks related to nearly all of the Company’s transactions denominated in foreign currencies as of October 31, 2004, the Company did not have a material foreign currency risk related to its derivatives or other financial instruments.
Note 10 to the financial statements contains additional information about the Company’s foreign currency transactions and the methods and assumptions used by the Company to record these transactions.
The Company finances a portion of its operations with short-term and long-term borrowings and is subject to market risk arising from changes in interest rates for most of its long-term debt.
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The tables that follow present principal cash flows and related weighted-average interest rates by expected maturity dates of fixed-rate, long-term debt.
Expected maturity date October 31, 2004
| There- | Total | Fair | ||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | after | Value | Value | |||||||||||||||||||||||||
| Long-term debt, including current portion | $ | 12,290 | $ | 4,290 | $ | 54,290 | $ | 24,290 | $ | 4,290 | $ | 18,550 | $ | 118,000 | $ | 128,026 | ||||||||||||||||
| Average interest rate | 7.03 | % | 6.99 | % | 6.99 | % | 7.20 | % | 7.29 | % | 7.29 | % | 7.03 | % | ||||||||||||||||||
Expected maturity date November 2, 2003
| There- | Total | Fair | ||||||||||||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | after | Value | Value | |||||||||||||||||||||||||
| Long-term debt, including current portion | $ | 8,000 | $ | 12,290 | $ | 44,290 | $ | 54,290 | $ | 24,290 | $ | 22,840 | $ | 166,000 | $ | 177,574 | ||||||||||||||||
| Average interest rate | 7.04 | % | 7.00 | % | 6.94 | % | 6.99 | % | 6.60 | % | 7.29 | % | 7.05 | % | ||||||||||||||||||
The tables that follow present principal cash flows and related weighted-average interest rates by expected maturity dates of variable-rate, long-term debt.
Expected maturity date October 31, 2004
| There- | Total | |||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | after | Value | ||||||||||||||||||||||
| Long-term debt, including current portion | — | $ | 42,323 | — | — | — | — | $ | 42,323 | |||||||||||||||||||
Expected maturity date November 2, 2003
| There- | Total | |||||||||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | after | Value | ||||||||||||||||||||||
| Long-term debt, including current portion | $ | 1,097 | $1,144 | $ | 3,062 | $ | 1,251 | $ | 1,312 | $ | 7,850 | $ | 15,716 | |||||||||||||||
Included in the variable-rate tables above is long-term debt in the amount of Japanese Yen 200,000. This debt was converted from fixed rate to variable rate through an interest rate swap agreement. Included in the October 31, 2004 table above is long-term debt in the amount of $40,000. This debt was converted from fixed rate to variable rate through an interest rate swap agreement. These swaps are discussed in Notes 9 and 10 to the Company’s financial statements. The weighted-average interest rate of the Company’s variable-rate debt was 5.08 percent at the end of fiscal 2004, compared to .97 percent at the end of 2003. A 1 percent increase in interest rates would have resulted in approximately $312 of additional interest expense in fiscal 2004.
The company also has variable-rate notes payable. The weighted average interest rate of this debt was 2.7 percent at the end of 2004, compared to 2.5 percent at the end of 2003. A 1 percent increase in interest rates would have resulted in additional interest expense of approximately $228 on the notes payable in fiscal 2004.
Inflation
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Trends
Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995
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Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Income
Years ended October 31, 2004, November 2, 2003 and November 3, 2002
| 2004 | 2003 | 2002 | |||||||||||
| (In thousands except for per-share amounts) | |||||||||||||
Sales | $ | 793,544 | $ | 667,347 | $ | 647,756 | |||||||
Operating costs and expenses: | |||||||||||||
| Cost of sales | 354,313 | 301,566 | 310,542 | ||||||||||
| Selling and administrative expenses | 328,633 | 295,157 | 281,696 | ||||||||||
| Severance and restructuring costs | — | 2,028 | 2,499 | ||||||||||
| 682,946 | 598,751 | 594,737 | |||||||||||
Operating profit | 110,598 | 68,596 | 53,019 | ||||||||||
| Other income (expense): | |||||||||||||
| Interest expense | (15,432 | ) | (18,063 | ) | (21,713 | ) | |||||||
| Interest and investment income | 1,350 | 889 | 924 | ||||||||||
| Other — net | (2,688 | ) | 1,055 | 714 | |||||||||
| (16,770 | ) | (16,119 | ) | (20,075 | ) | ||||||||
| Income before income taxes | 93,828 | 52,477 | 32,944 | ||||||||||
| Income tax (benefit)/provision: | |||||||||||||
| Current | 21,192 | 11,537 | 11,545 | ||||||||||
| Deferred | 9,302 | 5,780 | (673 | ) | |||||||||
| 30,494 | 17,317 | 10,872 | |||||||||||
Net income | $ | 63,334 | $ | 35,160 | $ | 22,072 | |||||||
Average common shares | 35,489 | 33,703 | 33,383 | ||||||||||
| Incremental common shares attributable to outstanding stock options, nonvested stock, and deferred stock-based compensation | 1,057 | 196 | 307 | ||||||||||
Average common shares and common share equivalents | 36,546 | 33,899 | 33,690 | ||||||||||
Basic earnings per share | $ | 1.78 | $ | 1.04 | $ | 0.66 | |||||||
Diluted earnings per share | $ | 1.73 | $ | 1.04 | $ | 0.66 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Balance Sheets
October 31, 2004 and November 2, 2003
| 2004 | 2003 | ||||||||
| (In thousands) | |||||||||
Assets | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 60,251 | $ | 6,945 | |||||
| Marketable securities | 328 | 27 | |||||||
| Receivables — net | 173,852 | 151,740 | |||||||
| Inventories — net | 85,330 | 78,557 | |||||||
| Deferred income taxes | 37,093 | 33,722 | |||||||
| Prepaid expenses | 6,257 | 6,379 | |||||||
Total current assets | 363,111 | 277,370 | |||||||
| Property, plant and equipment — net | 111,607 | 115,255 | |||||||
| Goodwill — net | 331,659 | 328,572 | |||||||
| Intangible assets — net | 17,331 | 15,363 | |||||||
| Deferred income taxes | — | 11,238 | |||||||
| Other assets | 15,679 | 19,008 | |||||||
| $ | 839,387 | $ | 766,806 | ||||||
Liabilities and shareholders’ equity | |||||||||
| Current liabilities: | |||||||||
| Notes payable | $ | 15,301 | $ | 58,227 | |||||
| Accounts payable | 58,740 | 47,976 | |||||||
| Income taxes payable | 4,873 | 2,666 | |||||||
| Accrued liabilities | 91,244 | 83,574 | |||||||
| Customer advance payments | 8,921 | 6,229 | |||||||
| Current maturities of long-term debt | 12,290 | 9,097 | |||||||
| Current obligations under capital leases | 4,380 | 3,893 | |||||||
Total current liabilities | 195,749 | 211,662 | |||||||
| Long-term debt | 148,033 | 172,619 | |||||||
| Obligations under capital leases | 4,446 | 4,106 | |||||||
| Pension and retirement obligations | 76,874 | 70,661 | |||||||
| Deferred income taxes | 666 | — | |||||||
| Other liabilities | 10,286 | 7,649 | |||||||
| Shareholders’ equity: | |||||||||
| Preferred shares, no par value; 10,000 shares authorized; none issued | — | — | |||||||
| Common shares, no par value; 80,000 shares authorized; 49,011 shares issued | 12,253 | 12,253 | |||||||
| Capital in excess of stated value | 174,440 | 131,573 | |||||||
| Retained earnings | 558,620 | 517,414 | |||||||
| Accumulated other comprehensive loss | (16,471 | ) | (20,296 | ) | |||||
| Common shares in treasury, at cost | (323,531 | ) | (339,815 | ) | |||||
| Deferred stock-based compensation | (1,978 | ) | (1,020 | ) | |||||
Total shareholders’ equity | 403,333 | 300,109 | |||||||
| $ | 839,387 | $ | 766,806 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Statements of Shareholders’ Equity
Years ended October 31, 2004, November 2, 2003 and November 3, 2002
| Common Shares in | Accumulated | |||||||||||||||||||||||||||||||||
| Treasury | Capital in | Other | Deferred | |||||||||||||||||||||||||||||||
| Common | Excess of | Retained | Comprehensive | Stock-based | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Stated Value | Earnings | Loss | Compensation | Total | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||
Balance at October 28, 2001 | 15,874 | $ | (344,194 | ) | $ | 12,253 | $ | 114,889 | $ | 499,570 | $ | (18,358 | ) | $ | (434 | ) | $ | 263,726 | ||||||||||||||||
| Net income | 22,072 | 22,072 | ||||||||||||||||||||||||||||||||
| Translation adjustments | 3,539 | 3,539 | ||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment net of taxes of $8,008 | (12,499 | ) | (12,499 | ) | ||||||||||||||||||||||||||||||
| Total comprehensive income | 13,112 | |||||||||||||||||||||||||||||||||
| Shares issued under company stock and employee benefit plans | (622 | ) | 6,918 | 8,289 | (108 | ) | 15,099 | |||||||||||||||||||||||||||
| Amortization of deferred stock-based compensation | 294 | 294 | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | 146 | (4,330 | ) | (4,330 | ) | |||||||||||||||||||||||||||||
| Dividends — $.57 per share | (19,011 | ) | (19,011 | ) | ||||||||||||||||||||||||||||||
Balance at November 3, 2002 | 15,398 | (341,606 | ) | 12,253 | 123,178 | 502,631 | (27,318 | ) | (248 | ) | 268,890 | |||||||||||||||||||||||
| Net income | 35,160 | 35,160 | ||||||||||||||||||||||||||||||||
| Translation adjustments | 12,655 | 12,655 | ||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment net of taxes of $3,626 | (5,633 | ) | (5,633 | ) | ||||||||||||||||||||||||||||||
| Total comprehensive income | 42,182 | |||||||||||||||||||||||||||||||||
| Shares issued under company stock and employee benefit plans | (601 | ) | 6,658 | 8,395 | (1,347 | ) | 13,706 | |||||||||||||||||||||||||||
| Amortization of deferred stock-based compensation | 575 | 575 | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | 179 | (4,867 | ) | (4,867 | ) | |||||||||||||||||||||||||||||
| Dividends — $.605 per share | (20,377 | ) | (20,377 | ) | ||||||||||||||||||||||||||||||
Balance at November 2, 2003 | 14,976 | (339,815 | ) | 12,253 | 131,573 | 517,414 | (20,296 | ) | (1,020 | ) | 300,109 | |||||||||||||||||||||||
| Net income | 63,334 | 63,334 | ||||||||||||||||||||||||||||||||
| Translation adjustments | 6,476 | 6,476 | ||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment net of taxes of $1,773 | (2,651 | ) | (2,651 | ) | ||||||||||||||||||||||||||||||
| Total comprehensive income | 67,159 | |||||||||||||||||||||||||||||||||
| Shares issued under company stock and employee benefits plans | (2,625 | ) | 30,481 | 39,262 | (1,904 | ) | 67,839 | |||||||||||||||||||||||||||
| Tax benefit from stock option and restricted stock transactions | 3,605 | 3,605 | ||||||||||||||||||||||||||||||||
| Amortization of deferred stock-based compensation | 946 | 946 | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | 382 | (14,197 | ) | (14,197 | ) | |||||||||||||||||||||||||||||
| Dividends — $.625 per share | (22,128 | ) | (22,128 | ) | ||||||||||||||||||||||||||||||
Balance at October 31, 2004 | 12,733 | $ | (323,531 | ) | $ | 12,253 | $ | 174,440 | $ | 558,620 | $ | (16,471 | ) | $ | (1,978 | ) | $ | 403,333 | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Statements of Cash Flows
Years ended October 31, 2004, November 2, 2003 and November 3, 2002
| 2004 | 2003 | 2002 | |||||||||||||
| (In thousands) | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||
| Net income | $ | 63,334 | $ | 35,160 | $ | 22,072 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Severance and restructuring costs | — | — | 1,749 | ||||||||||||
| Depreciation | 24,083 | 27,296 | 27,995 | ||||||||||||
| Amortization | 2,793 | 1,944 | 1,492 | ||||||||||||
| Inventory write-down | — | — | 11,388 | ||||||||||||
| Provision for losses on receivables | 2,429 | 1,581 | 2,216 | ||||||||||||
| Deferred income taxes | 10,344 | 7,553 | 854 | ||||||||||||
| Other | 6,898 | 6,150 | 2,243 | ||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||
| Receivables | (18,236 | ) | (6,893 | ) | 32,873 | ||||||||||
| Inventories | (2,433 | ) | 12,501 | 41,567 | |||||||||||
| Other current assets | 326 | (329 | ) | 4,221 | |||||||||||
| Other noncurrent assets | 431 | (373 | ) | 800 | |||||||||||
| Accounts payable | 9,125 | (2,499 | ) | (6,916 | ) | ||||||||||
| Income taxes payable | 2,126 | (1,944 | ) | 1,381 | |||||||||||
| Accrued liabilities | 5,643 | 5,759 | (8,947 | ) | |||||||||||
| Customer advance payments | 2,534 | 961 | (8,055 | ) | |||||||||||
| Other noncurrent liabilities | (79 | ) | 680 | 3,461 | |||||||||||
| Net cash provided by operating activities | 109,318 | 87,547 | 130,394 | ||||||||||||
Cash flows from investing activities: | |||||||||||||||
| Additions to property, plant and equipment | (11,437 | ) | (7,563 | ) | (11,397 | ) | |||||||||
| Proceeds from sale of property, plant and equipment | 128 | 228 | 2,113 | ||||||||||||
| Consolidation of joint venture | 295 | — | — | ||||||||||||
| Acquisition of businesses | (4,013 | ) | 544 | (1,223 | ) | ||||||||||
| Proceeds from sale of (purchases of) marketable securities | (301 | ) | (2 | ) | 37 | ||||||||||
| Net cash used in investing activities | (15,328 | ) | (6,793 | ) | (10,470 | ) | |||||||||
Cash flows from financing activities: | |||||||||||||||
| Repayment of short-term borrowings | (50,102 | ) | (55,727 | ) | (87,566 | ) | |||||||||
| Repayment of long-term debt | (21,922 | ) | (9,055 | ) | (22,678 | ) | |||||||||
| Repayment of capital lease obligations | (4,698 | ) | (4,241 | ) | (3,884 | ) | |||||||||
| Issuance of common shares | 56,758 | 8,907 | 11,024 | ||||||||||||
| Purchase of treasury shares | (3,115 | ) | (73 | ) | (300 | ) | |||||||||
| Tax benefit from the exercise of stock options | 3,605 | — | — | ||||||||||||
| Dividends paid | (22,128 | ) | (20,377 | ) | (19,011 | ) | |||||||||
| Net cash used in financing activities | (41,602 | ) | (80,566 | ) | (122,415 | ) | |||||||||
| Effect of exchange rate changes on cash | 918 | 885 | 482 | ||||||||||||
Increase (decrease) in cash and cash equivalents | 53,306 | 1,073 | (2,009 | ) | |||||||||||
| Cash and cash equivalents at beginning of year | 6,945 | 5,872 | 7,881 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 60,251 | $ | 6,945 | $ | 5,872 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Notes to Consolidated Financial Statements
Note 1 — Significant accounting policies
Consolidation — The consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Ownership interests of 20 percent or more in noncontrolled affiliates are accounted for by the equity method. Other investments are recorded at cost.
Use of estimates — The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Actual amounts could differ from these estimates.
Fiscal year — The fiscal year for the Company’s domestic operations ends on the Sunday closest to October 31 and contained 52 weeks in 2004 and 2003 and 53 weeks in 2002. To facilitate reporting of consolidated accounts, the fiscal year for most of the Company’s international operations ends on September 30.
Revenue recognition — Most of the Company’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 both installation and services, are recognized as each element is earned based on objective evidence of the relative fair value of each element. Revenues deferred in 2004 were not material. Amounts received in excess of revenue recognized are included as deferred revenue in the accompanying balance sheets. A limited number of the Company’s large engineered systems sales contracts are accounted for using the percentage-of-completion method. The amount of revenue recognized in any accounting period is based on the ratio of actual costs incurred through the end of the period to total estimated costs at completion. Cost estimates are updated on a quarterly basis. During 2004, 2003 and 2002, the Company recognized approximately $7,000, $5,000 and $20,000, respectively, of revenue under the percentage-of-completion method. The remaining revenues are recognized upon delivery.
Shipping and handling costs — The Company records amounts billed to customers for shipping and handling as revenue. Shipping and handling expenses are included in cost of sales.
Advertising costs — Advertising costs are expensed as incurred and amounted to $4,651 in 2004 ($4,195 in 2003 and $3,780 in 2002).
Research and development — Research and development costs are expensed as incurred and amounted to $22,947 in 2004 ($22,341 in 2003 and $26,554 in 2002).
Earnings per share — Basic earnings per share are computed based on the weighted-average number of common shares outstanding during each year, while diluted earnings per share are based on the weighted-average number of common shares and common share equivalents outstanding. Common share equivalents consist of shares issuable upon exercise of the Company’s stock options, computed using the treasury stock method, as well as nonvested stock and deferred stock-based compensation. Options whose exercise price is higher than the average market price are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive.
Cash and cash equivalents — Highly liquid instruments with a maturity of 90 days or less at date of purchase are considered to be cash equivalents. Cash and cash equivalents are carried at cost.
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Marketable securities — Marketable securities consist primarily of municipal and other short-term notes with maturities greater than 90 days at date of purchase. At October 31, 2004, all contractual maturities were within one year or could be callable within one year. The Company’s marketable securities are classified as available for sale and recorded at quoted market prices that approximate cost.
Allowance for doubtful accounts — The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The amount of the allowance is determined principally on the basis of past collection experience and known factors regarding specific customers. Accounts are written off against the allowance when it becomes evident that collection will not occur.
Inventories — Inventories are valued at the lower of cost or market. Cost has been determined using the last-in, first-out (LIFO) method for 38 percent of consolidated inventories at October 31, 2004 and 39 percent at November 2, 2003. The first-in, first-out (FIFO) method is used for all other inventories. Liquidations decreased cost of goods sold by $63 in 2003 and increased cost of sales by $573 in 2002. Consolidated inventories would have been $8,762 and $8,790 higher than reported at October 31, 2004 and November 2, 2003, respectively, had the Company used the FIFO method, which approximates current cost, for valuation of all inventories.
Property, plant and equipment and depreciation— Property, plant and equipment are carried at cost. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Plant and equipment are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets or, in the case of property under capital leases, over the terms of the leases. Leasehold improvements are depreciated over the term of the lease or their useful lives, which is shorter. Useful lives are as follows:
| Land Improvements | 15-25 years | |||
| Buildings | 20-40 years | |||
| Machinery and Equipment | 3-12 years | |||
| Enterprise Management System | 10 years |
The Company capitalizes costs associated with the development and installation of internal use software in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Accordingly, internal use software costs are expensed or capitalized depending on whether they are incurred in the preliminary project stage, application development stage, or the post-implementation stage. Amounts capitalized are amortized over the estimated useful lives of the software beginning with the project’s completion. All re-engineering costs are expensed as incurred. The Company capitalizes interest costs on significant capital projects. No interest was capitalized in 2004.
Goodwill and intangible assets — Goodwill assets are subject to impairment testing. Other intangible assets, which consist primarily of core/developed technology, noncompete agreements and patent costs, are amortized over their useful lives. At present, these lives range from five to 21 years. The useful life of an asset related to core/developed technology was reduced from 30 to 15 years in 2004, resulting in additional annual amortization expense of $529.
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Foreign currency translation — The financial statements of the Company’s subsidiaries outside the United States, except for those subsidiaries located in highly inflationary economies, are generally measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet dates. Income and expense items are translated at average monthly rates of exchange. The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Generally, gains and losses from foreign currency transactions, including forward contracts, of these subsidiaries and the United States parent are included in net income. Premiums and discounts on forward contracts are amortized over the lives of the contracts. Gains and losses from foreign currency transactions which hedge a net investment in a foreign subsidiary and from intercompany foreign currency transactions of a long-term investment nature are included in accumulated other comprehensive income (loss). For subsidiaries operating in highly inflationary economies, gains and losses from foreign currency transactions and translation adjustments are included in net income.
Comprehensive income— Accumulated other comprehensive loss at October 31, 2004 and November 2, 2003 consisted of:
| 2004 | 2003 | |||||||
| Net foreign currency translation adjustments | $ | 8,983 | $ | 2,508 | ||||
| Minimum pension liability adjustments | (25,454 | ) | (22,804 | ) | ||||
| $ | (16,471 | ) | $ | (20,296 | ) | |||
Warranties — The Company offers warranties to its customers depending on the specific product and terms of the customer purchase agreement. Most of the Company’s product warranties are customer specific. A typical warranty program requires that the Company repair or replace defective products within a specified time period from the date of delivery or first use. The Company records an estimate for future warranty-related costs based on actual historical return rates. Based on analysis of return rates and other factors, the adequacy of the Company’s warranty provisions are adjusted as necessary. The liability for warranty costs is included in other accrued liabilities in the Consolidated Balance Sheet.
Following is reconciliation of the product warranty liability for 2004 and 2003:
| 2004 | 2003 | |||||||
| Balance at beginning of year | $ | 3,030 | $ | 2,767 | ||||
| Accruals for warranties | 4,165 | 2,942 | ||||||
| Warranty payments | (3,145 | ) | (2,779 | ) | ||||
| Currency adjustments | 71 | 120 | ||||||
| Balance at end of year | $ | 4,121 | $ | 3,030 | ||||
Presentation — Certain 2003 amounts have been reclassified to conform to 2004 presentation.
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Note 2 — Accounting changes
In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. There was no impact in 2004 on the Company’s consolidated financial position or results of operations as a result of the adoption of No. 146. During 2003, the Company recognized expense of $2,028 related to severance payments to approximately 70 employees of the finishing and coating and the advanced technology segments in North America.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others.” This interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under guarantees and clarifies the requirements related to the recognition of liabilities by a guarantor for obligations undertaken in issuing guarantees. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements for periods ending after December 31, 2002 and are applicable for all outstanding guarantees subject to the interpretation.
The Company has issued guarantees to two banks to support the short-term borrowing facilities of a 49 percent-owned South Korean joint venture/distributor of the Company’s products. One guarantee is for Korean Won 3,000,000 (approximately $2,572) secured by land and building and expires on January 31, 2005. The other guarantee is for $2,300 and expires on October 31, 2005. As discussed below, the Company began consolidating this joint venture/distributor in the second quarter of fiscal 2004.
In 2004, the Company issued a guarantee to a U.S. bank related to a five-year trade financing agreement for a sale to a customer in Turkey. The loan is secured by collateral with a current value well in excess of the amount due. The guarantee could be called into play in the event of payment default by the customer to the bank. The amount of the guarantee at October 31, 2004 was Euro 2,000 (approximately $2,560) and will decline ratably as semi-annual principal payments are made by the customer beginning in 2005. The Company has recorded $1,161 in the allowance for doubtful accounts related to this guarantee. The recorded amount will be adjusted as the customer makes payments.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This Interpretation addresses consolidation by business enterprises of variable interest entities, which possess certain characteristics. The interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of operations of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest entities created prior to January 31, 2003, this interpretation is effective for the first year or interim period beginning after March 15, 2004. In the second quarter of 2004, the Company began consolidating a 49 percent-owned South Korean joint venture/distributor of the Company’s products. Real estate with a net book value of approximately $750 serves as collateral for one of the bank loans noted above. Other than the bank guarantees noted above, creditors of the joint venture/distributor have no recourse against the Company. The Company’s initial investment in this joint venture/distributor occurred in 1989. The effect of the consolidation on the Company’s financial statements was not material.
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In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123.” No. 148 amends No. 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation. In addition, No. 148 amends the disclosure requirements of No. 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results. The alternative methods of transition of No. 148 are effective for fiscal years ending after December 15, 2002. The disclosure provision of No. 148 is effective for interim periods beginning after December 15, 2002. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock option expense is reflected in net income, as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
In December 2003, the FASB revised Statement of Financial Accounting Standard No. 132, “Employers’ Disclosures about Pensions and other Postretirement Benefits.” The revision established additional annual disclosures about plan assets, investment strategy, measurement date, plan obligations and cash flows. In addition, the revised standard established interim disclosure requirements related to the net periodic benefit cost recognized and contributions paid or expected to be paid during the current fiscal year. The new annual disclosures are effective for financial statements with fiscal years ending after December 15, 2003, and the interim-period disclosures are effective for interim periods beginning after December 15, 2003. The annual disclosures were adopted for the 2004 fiscal year (see Note 3). The adoption of No. 132 had no effect on the Company’s financial condition or results of operations.
In May 2004, the FASB issued Staff Position No. FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” in response to a new law that provides prescription drug benefits under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, Statement of Financial Accounting Standard No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“No. 106”) requires that changes in relevant law be considered in current measurement of postretirement benefit costs. The Company’s measures of the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost do not reflect the effects of the subsidy, because benefits under the Company’s plan are not actuarially equivalent to Medicare Part D. The adoption of FSP No. 106-2 had no effect on the Company’s financial condition or results of operations.
In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of No. 151 is effective for fiscal years beginning after June 15, 2005. The Company has not yet determined the impact of adoption on its consolidated financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. No. 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. No. 123(R) requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the Company’s financial statements. The Company will be required to adopt No. 123(R) in the fourth quarter of fiscal 2005 and has not yet determined the impact of adoption on its consolidated financial position or results of operations.
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Note 3 — Retirement, pension and other postretirement plans
Retirement plans — The parent company and certain subsidiaries have funded contributory retirement plans covering certain employees. The Company’s contributions are primarily determined by the terms of the plans subject to the limitation that they shall not exceed the amounts deductible for income tax purposes. The Company also sponsors unfunded contributory supplemental retirement plans for certain employees. Generally, benefits under these plans vest gradually over a period of approximately five years from date of employment, and are based on the employee’s contribution. The expense applicable to retirement plans for 2004, 2003 and 2002 was approximately $4,552, $4,084 and $3,712, respectively.
Pension and other postretirement plans — The Company has various pension plans that cover substantially all employees. Pension plan benefits are generally based on years of employment and, for salaried employees, the level of compensation. The Company contributes actuarially determined amounts to domestic plans to provide sufficient assets to meet future benefit payment requirements. The Company also sponsors an unfunded supplemental pension plan for certain employees. The Company’s international subsidiaries fund their pension plans according to local requirements.
The Company also has an unfunded postretirement benefit plan covering most of its domestic employees. Employees hired after January 1, 2002 are not eligible to participate in this plan. The plan provides medical and life insurance benefits. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance.
The Company uses a measurement date of October 31 for the domestic pension and postretirement plans and September 30 for the international pension plans.
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A reconciliation of the benefit obligations, plan assets, accrued benefit cost and the amount recognized in financial statements for these plans is as follows:
| Other Postretirement | |||||||||||||||||
| Pension Benefits | Benefits | ||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||||||
| Change in benefit obligation: | |||||||||||||||||
| Benefit obligation at beginning of year | $ | 150,310 | $ | 127,272 | $ | 33,412 | $ | 23,636 | |||||||||
| Service cost | 5,056 | 4,305 | 1,147 | 1,026 | |||||||||||||
| Interest cost | 8,925 | 8,301 | 2,030 | 1,931 | |||||||||||||
| Participant contributions | 141 | 110 | — | — | |||||||||||||
| Amendments | 3,354 | — | (303 | ) | — | ||||||||||||
| Foreign currency exchange rate change | 1,960 | 2,451 | — | — | |||||||||||||
| Actuarial loss | 4,399 | 12,851 | 2,382 | 8,168 | |||||||||||||
| Benefits paid | (5,506 | ) | (4,980 | ) | (1,636 | ) | (1,349 | ) | |||||||||
| Benefit obligation at end of year | $ | 168,639 | $ | 150,310 | $ | 37,032 | $ | 33,412 | |||||||||
| Change in plan assets: | |||||||||||||||||
| Beginning fair value of plan assets | $ | 82,041 | $ | 65,844 | $ | — | $ | — | |||||||||
| Actual return on plan assets | 8,049 | 9,474 | — | — | |||||||||||||
| Company contributions | 21,533 | 10,662 | 1,636 | 1,349 | |||||||||||||
| Participant contributions | 141 | 110 | — | — | |||||||||||||
| Foreign currency exchange rate change | 911 | 931 | — | — | |||||||||||||
| Benefits paid | (5,506 | ) | (4,980 | ) | (1,636 | ) | (1,349 | ) | |||||||||
| Ending fair value of plan assets | $ | 107,169 | $ | 82,041 | $ | — | $ | — | |||||||||
| Reconciliation of accrued cost: | |||||||||||||||||
| Funded status of the plan | $ | (61,470 | ) | $ | (68,269 | ) | $ | (37,032 | ) | $ | (33,412 | ) | |||||
| Unrecognized actuarial loss | 50,728 | 45,289 | 20,199 | 18,896 | |||||||||||||
| Unamortized prior service cost | 5,002 | 1,954 | (4,146 | ) | (4,431 | ) | |||||||||||
| Unrecognized net transition obligation | — | 1,840 | — | — | |||||||||||||
| Accrued benefit cost | $ | (5,740 | ) | $ | (19,186 | ) | $ | (20,979 | ) | $ | (18,947 | ) | |||||
| Reconciliation of amount recognized in financial statements: | |||||||||||||||||
| Accrued benefit liability | $ | (52,505 | ) | $ | (58,789 | ) | $ | (20,979 | ) | $ | (18,947 | ) | |||||
| Intangible asset | 4,891 | 2,152 | — | — | |||||||||||||
| Accumulated other comprehensive income | 41,874 | 37,451 | — | — | |||||||||||||
| Total amount recognized in financial statements | $ | (5,740 | ) | $ | (19,186 | ) | $ | (20,979 | ) | $ | (18,947 | ) | |||||
The accumulated benefit obligations for all pension plans was $158,921 at October 31, 2004 and $140,641 at November 2, 2003. Benefit obligations exceeded plan assets for all pension plans at October 31, 2004 and November 2, 2003.
During 2004 and 2003, the Company recorded an additional minimum pension liability so that the recorded pension liability was at least equal to the accumulated benefit obligation. Amounts recorded in other comprehensive income (loss) related to the minimum pension liability, net of tax, were ($2,650) in 2004 and ($5,633) in 2003.
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Net pension and other postretirement benefit costs include the following components:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
| Service cost | $ | 5,056 | $ | 4,305 | $ | 4,111 | $ | 1,147 | $ | 1,026 | $ | 881 | ||||||||||||
| Interest cost | 8,925 | 8,301 | 7,888 | 2,030 | 1,931 | 1,529 | ||||||||||||||||||
| Expected return on plan assets | (8,353 | ) | (7,683 | ) | (8,203 | ) | — | — | — | |||||||||||||||
| Amortization of prior service cost | 395 | 242 | 224 | (589 | ) | (553 | ) | (369 | ) | |||||||||||||||
| Amortization of transition obligation | 50 | 130 | 315 | — | — | — | ||||||||||||||||||
| Recognized net actuarial loss | 1,513 | 455 | 267 | 1,079 | 941 | 396 | ||||||||||||||||||
| Curtailment | — | — | 513 | — | — | — | ||||||||||||||||||
| Total benefit cost | $ | 7,586 | $ | 5,750 | $ | 5,115 | $ | 3,667 | $ | 3,345 | $ | 2,437 | ||||||||||||
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
| Discount rate | 5.8 | % | 5.9 | % | 6.5 | % | 6.0 | % | 6.3 | % | 6.8 | % | ||||||||||||
| Expected return on plan assets | 8.2 | 8.1 | 8.6 | — | — | — | ||||||||||||||||||
| Rate of compensation increase | 3.4 | 3.3 | 3.7 | — | — | — | ||||||||||||||||||
| Health care trend rate | 8.0 | 7.8 | 8.5 | |||||||||||||||||||||
| Rate to which health care trend rate is assumed to decline (ultimate trend rate) | 5.0 | 5.0 | 5.0 | |||||||||||||||||||||
| Year the rate reaches the ultimate trend rate | 2009 | 2008 | 2008 | |||||||||||||||||||||
The amortization of prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plans.
In determining the expected return on plan assets, the Company considers both historical performance and an estimate of future long-term rates of return on assets similar to those in the Company’s plans. The Company consults with and considers the opinions of financial and other professionals in developing appropriate return assumptions.
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage point change in the assumed health care cost trend rate would have the following effects:
| 1% Point Increase | 1% Point Decrease | |||||||
| Effect on total service and interest cost components in 2004 | $ | 631 | $ | (496 | ) | |||
| Effect on postretirement obligation as of October 31, 2004 | $ | 6,506 | $ | (5,209 | ) | |||
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The allocation of pension plan assets as of October 31, 2004 and November 2, 2003 is as follows:
| Actual Asset | ||||||||||
| Allocation | ||||||||||
| 2004 | 2003 | |||||||||
| Asset Category | ||||||||||
| Equity securities | 54.5 | % | 60.4 | % | ||||||
| Debt securities | 31.3 | 27.0 | ||||||||
| Real estate | 1.4 | 1.5 | ||||||||
| Other | 12.8 | 11.1 | ||||||||
| Total | 100.0 | % | 100.0 | % | ||||||
The Company’s investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required Company plan contributions. Investment policies and strategies are developed on a country-specific basis.
For the domestic plans, which comprise 87 percent of worldwide pension assets, the investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. The target allocation is 50 to 70 percent equity securities and 30 to 50 percent debt securities. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and continual monitoring of investment managers’ performance relative to the investment guidelines established with each investment manager.
International plans comprise 13 percent of worldwide pension assets. The allocation of these assets in 2004 was: 31 percent equity securities, 20 percent debt securities, 11 percent real estate and 38 percent other assets.
At October 31, 2004, the pension plans did not have any investment in the Company’s stock. During 2004, the domestic plans sold 135 shares of the Company���s stock that had been acquired in 2003. The plans received dividends on the Company’s stock of $63 in 2004 and $75 in 2003.
It is estimated that the Company’s contributions to the pension and postretirement plans in 2005 will be approximately $4,253.
Retiree benefit payments, which reflect expected future service, are anticipated to be paid as follows:
| Pension | Other | ||||||||
| Fiscal Year | Benefits | Benefits | |||||||
| 2005 | $ | 4,955 | $ | 1,388 | |||||
| 2006 | 5,319 | 1,439 | |||||||
| 2007 | 5,655 | 1,452 | |||||||
| 2008 | 5,832 | 1,519 | |||||||
| 2009 | 6,880 | 1,615 | |||||||
| 2010-2014 | 40,184 | 9,631 | |||||||
| Total | $ | 68,825 | $ | 17,044 | |||||
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Note 4 — Income taxes
Income tax expense includes the following:
| 2004 | 2003 | 2002 | ||||||||||||
| Current: | ||||||||||||||
| U.S. federal | $ | 5,285 | $ | 1,131 | $ | 13 | ||||||||
| State and local | 44 | (143 | ) | (59 | ) | |||||||||
| Foreign | 15,863 | 10,549 | 11,591 | |||||||||||
| Total current | 21,192 | 11,537 | 11,545 | |||||||||||
| Deferred: | ||||||||||||||
| U.S. federal | 7,246 | 5,540 | 232 | |||||||||||
| State and local | 2,065 | 202 | (655 | ) | ||||||||||
| Foreign | (9 | ) | 38 | (250 | ) | |||||||||
| Total deferred | 9,302 | 5,780 | (673 | ) | ||||||||||
| $ | 30,494 | $ | 17,317 | $ | 10,872 | |||||||||
Foreign income tax expense includes a benefit related to the utilization of loss carryforwards of $395, $266 and $539 in 2004, 2003 and 2002, respectively.
The reconciliation of the United States statutory federal income tax rate to the worldwide consolidated effective tax rate follows:
| 2004 | 2003 | 2002 | |||||||||||
| Statutory federal income tax rate | 35.00 | % | 35.00 | % | 35.00 | % | |||||||
| Extraterritorial income exclusion | (3.73 | ) | (3.33 | ) | (7.14 | ) | |||||||
| Foreign tax rate variances, net of foreign tax credits | (0.52 | ) | 0.34 | 10.07 | |||||||||
| State and local taxes, net of federal income tax benefit | 2.20 | 0.08 | (2.68 | ) | |||||||||
| Amounts related to prior years | (0.54 | ) | 0.01 | (1.14 | ) | ||||||||
| Other — net | 0.09 | 0.90 | (1.11 | ) | |||||||||
| Effective tax rate | 32.50 | % | 33.00 | % | 33.00 | % | |||||||
The extraterritorial income exclusion allows a portion of certain income from export sales of goods manufactured in the U.S. to be excluded from taxable income.
Earnings before income taxes of international operations, which are calculated before intercompany profit elimination entries, were $40,739, $25,992 and $27,038 in 2004, 2003 and 2002, respectively. Deferred income taxes are not provided on undistributed earnings of international subsidiaries that are intended to be permanently invested in those operations. These undistributed earnings aggregated approximately $81,346 and $69,618 at October 31, 2004 and November 2, 2003, respectively. Should these earnings be distributed, applicable foreign tax credits would substantially offset U.S. taxes due upon the distribution.
In October 2004, Congress passed the American Jobs Creation Act. The new law contains numerous changes to existing tax laws. Among other things, the Act will provide a deduction with respect to income of certain U.S. manufacturing activities and allow for favorable taxing on repatriation of certain offshore earnings. The Company has not yet determined what impact, if any, the new law may have on its future results of operations and financial condition.
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
| 2004 | 2003 | |||||||||
| Deferred tax assets: | ||||||||||
| Sales to international subsidiaries and related consolidation adjust | $ | 7,148 | $ | 7,560 | ||||||
| Employee benefits | 20,091 | 24,362 | ||||||||
| Other accruals not currently deductible for taxes | 25,148 | 19,504 | ||||||||
| Tax credit and loss carryforwards | 11,991 | 13,406 | ||||||||
| Inventory adjustments | 4,573 | 6,060 | ||||||||
| Translation of foreign currency accounts | — | 875 | ||||||||
| Other — net | 200 | 589 | ||||||||
| Total deferred tax assets | 69,151 | 72,356 | ||||||||
| Valuation allowance | (10,757 | ) | (10,116 | ) | ||||||
| Total deferred tax assets | 58,394 | 62,240 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Depreciation | 20,626 | 16,108 | ||||||||
| Translation of foreign currency accounts | 282 | — | ||||||||
| Other — net | 1,059 | 1,172 | ||||||||
| Total deferred tax liabilities | 21,967 | 17,280 | ||||||||
| Net deferred tax assets | $ | 36,427 | $ | 44,960 | ||||||
At October 31, 2004, the Company had $10,172 of tax credit carryforwards. Of that total, $10,056 will expire in years 2011 through 2012, and $116 has no expiration date. At October 31, 2004, the Company had $6,350 of foreign operating loss carryforwards, of which $1,663 will expire in years 2005 through 2014, and $4,687 has an indefinite carryforward period. The net change in the valuation allowance was $641 in 2004 and $876 in 2003. The valuation allowance of $10,757 at October 31, 2004 relates to tax credits and loss carryforwards that may expire before being realized.
Note 5 — Incentive compensation plans
The Company has two incentive compensation plans for executive officers. The Compensation Committee of the Board of Directors, composed of independent directors, approves participants in the plans and payments under the plans.
The annual awards under the management incentive compensation plan are based upon corporate and individual performance and are calculated as a percentage of base salary for each executive officer. In making awards under this plan for any particular year, the Committee may, however, choose to modify measures, change payment levels or otherwise exercise discretion to reflect the external economic environment and individual or Company performance. Compensation expense attributable to this plan was $3,965 in 2004, $3,684 in 2003, and $1,100 in 2002.
Under the long-term incentive compensation plan, executive officers receive cash awards based solely on corporate performance measures over three-year performance periods. Cash awards vary based on the degree to which corporate performance exceeds predetermined threshold, target and maximum performance levels at the end of a performance period. No payout will occur unless the Company achieves certain threshold performance objectives. The Committee may, however, choose to modify measures, change payment levels or otherwise exercise discretion to reflect the external economic environment and individual or Company performance. Compensation expense attributable to this plan was $7,004 in 2004, $2,653 in 2003, and $1,406 in 2002.
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Note 6 — Details of balance sheet
| 2004 | 2003 | ||||||||
| Receivables: | |||||||||
| Accounts | $ | 161,361 | $ | 136,288 | |||||
| Notes | 13,004 | 11,686 | |||||||
| Other | 4,817 | 8,018 | |||||||
| 179,182 | 155,992 | ||||||||
| Allowance for doubtful accounts | (5,330 | ) | (4,252 | ) | |||||
| $ | 173,852 | $ | 151,740 | ||||||
| Inventories: | |||||||||
| Finished goods | $ | 42,929 | $ | 38,583 | |||||
| Work-in-process | 12,310 | 10,662 | |||||||
| Raw materials and finished parts | 43,254 | 42,657 | |||||||
| 98,493 | 91,902 | ||||||||
| Obsolescence reserve | (4,401 | ) | (4,555 | ) | |||||
| LIFO reserve | (8,762 | ) | (8,790 | ) | |||||
| $ | 85,330 | $ | 78,557 | ||||||
| Property, plant and equipment: | |||||||||
| Land | $ | 6,384 | $ | 5,865 | |||||
| Land improvements | 2,792 | 2,764 | |||||||
| Buildings | 93,928 | 90,200 | |||||||
| Machinery and equipment | 165,315 | 158,133 | |||||||
| Enterprise management system | 27,809 | 27,664 | |||||||
| Construction-in-progress | 2,478 | 1,137 | |||||||
| Leased property under capitalized leases | 16,924 | 14,846 | |||||||
| 315,630 | 300,609 | ||||||||
| Accumulated depreciation and amortization | (204,023 | ) | (185,354 | ) | |||||
| $ | 111,607 | $ | 115,255 | ||||||
| Accrued liabilities: | |||||||||
| Salaries and other compensation | $ | 41,562 | $ | 32,946 | |||||
| Pension and retirement | 4,092 | 13,981 | |||||||
| Taxes other than income taxes | 7,724 | 4,597 | |||||||
| Other | 37,866 | 32,050 | |||||||
| $ | 91,244 | $ | 83,574 | ||||||
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Note 7 — Leases
The Company has lease commitments expiring at various dates, principally for manufacturing, warehouse and office space, automobiles and office equipment. Many leases contain renewal options and some contain purchase options and residual guarantees.
Rent expense for all operating leases was approximately $10,462 in 2004, $10,154 in 2003, and $10,611 in 2002. Amortization of assets recorded under capital leases is recorded in depreciation expense.
Assets held under capitalized leases and included in property, plant and equipment are as follows:
| 2004 | 2003 | ||||||||
| Transportation equipment | $ | 16,095 | $ | 14,203 | |||||
| Other | 829 | 643 | |||||||
| Total capitalized leases | 16,924 | 14,846 | |||||||
| Accumulated amortization | (8,098 | ) | (6,847 | ) | |||||
| Net capitalized leases | $ | 8,826 | $ | 7,999 | |||||
At October 31, 2004, future minimum lease payments under non-cancelable capitalized and operating leases are as follows:
| Capitalized | Operating | ||||||||
| Leases | Leases | ||||||||
| Fiscal year ending: | |||||||||
| 2005 | $ | 5,578 | $ | 8,742 | |||||
| 2006 | 3,499 | 6,556 | |||||||
| 2007 | 1,553 | 4,731 | |||||||
| 2008 | 386 | 3,285 | |||||||
| 2009 | 41 | 2,288 | |||||||
| Later years | 6 | 3,868 | |||||||
| Total minimum lease payments | 11,063 | $ | 29,470 | ||||||
| Less amount representing executory costs | 1,123 | ||||||||
| Net minimum lease payments | 9,940 | ||||||||
| Less amount representing interest | 1,114 | ||||||||
| Present value of net minimum lease payments | 8,826 | ||||||||
| Less current portion | 4,380 | ||||||||
| Long-term obligations at October 31, 2004 | $ | 4,446 | |||||||
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Note 8 — Notes payable
Bank lines of credit and notes payable are summarized as follows:
| 2004 | 2003 | |||||||||
| Available bank lines of credit: | ||||||||||
| Domestic banks | $ | 210,000 | $ | 260,000 | ||||||
| Foreign banks | 67,958 | 56,597 | ||||||||
| Total | $ | 277,958 | $ | 316,597 | ||||||
| Outstanding notes payable: | ||||||||||
| Domestic bank debt | $ | — | $ | 41,775 | ||||||
| Foreign bank debt | 15,301 | 16,452 | ||||||||
| Total | $ | 15,301 | $ | 58,227 | ||||||
| Weighted-average interest rate on notes payable | 2.7 | % | 2.5 | % | ||||||
| Unused bank lines of credit | $ | 262,657 | $ | 258,370 | ||||||
Included in the domestic available amount above is a $200,000 revolving credit agreement with a group of banks that began in 2004 and expires in 2009. Payment of commitment fees is required. Other lines of credit obtained by the Company can generally be withdrawn at the option of the banks and do not require material compensating balances or commitment fees.
Note 9 — Long-term debt
The long-term debt of the Company is as follows:
| 2004 | 2003 | ||||||||
| Senior note, due 2007 | $ | 50,000 | $ | 50,000 | |||||
| Senior notes, due 2005-2011 | 100,384 | 100,000 | |||||||
| Five-year term loan | 8,000 | 16,000 | |||||||
| Floating rate option notes | — | 10,249 | |||||||
| Industrial revenue bonds — Gwinnett County, Georgia | — | 3,600 | |||||||
| Leasehold improvements financing note, due 2006 | 1,939 | 1,867 | |||||||
| 160,323 | 181,716 | ||||||||
| Less current maturities | 12,290 | 9,097 | |||||||
| Total | $ | 148,033 | $ | 172,619 | |||||
Senior note, due 2007 — This note is payable in one installment and bears interest at a fixed rate of 6.78 percent.
Senior notes, due 2005-2011 — These notes with a group of insurance companies have a weighted-average, fixed-interest rate of 7.02 percent and had an original weighted-average life of 6.5 years at the time of issuance in 2001. During 2004 the Company entered into an interest rate swap to convert $40,000 of 6.79 percent fixed rate debt due in May 2006 to variable rate debt. The variable rate is reset semi-annually, and at October 31, 2004 the rate was 5.34 percent.
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Five-year term loan — This loan is payable in five annual installments of $8,000 beginning on October 31, 2001 with interest payable quarterly. The interest rate, which can be adjusted based on the Company’s performance, was 7.52 percent at October 31, 2004.
Floating rate option notes — These notes were issued to finance real estate owned by the Company and were paid off in 2004.
Industrial revenue bonds —Gwinnett County, Georgia— These bonds were issued in connection with the acquisition and renovation of the Norcross manufacturing facility in Gwinnett County, Georgia and were paid off in 2004.
Leasehold improvements financing note, due 2006 — This note partially funded the leasehold improvements for a sales and demonstration facility in Japan built in 1996. The principal balance is Japanese Yen 200,000 and is payable in one installment in 2006. Interest, payable at a fixed rate of 3.10 percent, was converted to a variable rate through an interest rate swap. The variable rate is reset semi-annually, and at October 31, 2004 the Company’s effective borrowing rate was negative ..30 percent.
Annual maturities — The annual maturities of long-term debt for the five fiscal years subsequent to October 31, 2004 are as follows: $12,290 in 2005; $46,613 in 2006; $54,290 in 2007; $24,290 in 2008; and $4,290 in 2009.
Note 10 — Financial instruments
The Company enters into foreign currency forward contracts, which are derivative financial instruments, to reduce the risk of foreign currency exposures resulting from receivables, payables, intercompany receivables, intercompany 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 income (expense) in the Consolidated Statement of Income. A gain of $807 was recognized from changes in fair value of these contracts for the year ended October 31, 2004. A loss of $105 and a gain of $130 were recognized from changes in fair value of these contracts for the years ended November 2, 2003 and November 3, 2002, respectively.
At October 31, 2004, the Company had outstanding forward exchange contracts that mature at various dates through January 2005. The following table summarizes, by currency, the Company’s forward exchange contracts at October 31, 2004 and November 2, 2003:
| Sell | Buy | ||||||||||||||||
| Notional | Fair Market | Notional | Fair Market | ||||||||||||||
| Amount | Value | Amount | Value | ||||||||||||||
October 31, 2004 contract amounts: | |||||||||||||||||
| Euro | $ | 8,001 | $ | 8,209 | $ | 50,347 | $ | 51,433 | |||||||||
| British pound | 1,831 | 1,839 | 8,435 | 8,489 | |||||||||||||
| Japanese yen | 3,195 | 3,182 | 14,737 | 14,657 | |||||||||||||
| Others | 3,939 | 4,055 | 11,933 | 11,965 | |||||||||||||
| Total | $ | 16,966 | $ | 17,285 | $ | 85,452 | $ | 86,544 | |||||||||
November 2, 2003 contract amounts: | |||||||||||||||||
| Euro | $ | 10,782 | $ | 10,691 | $ | 41,398 | $ | 42,106 | |||||||||
| British pound | 979 | 998 | 5,547 | 5,640 | |||||||||||||
| Japanese yen | 4,779 | 4,934 | 12,973 | 12,973 | |||||||||||||
| Others | 2,400 | 2,440 | 9,632 | 9,767 | |||||||||||||
| Total | $ | 18,940 | $ | 19,063 | $ | 69,550 | $ | 70,486 | |||||||||
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The Company also uses foreign denominated fixed-rate debt and intercompany foreign currency transactions of a long-term investment nature to hedge the value of its investment in its wholly owned subsidiaries. For hedges of the net investment in foreign operations, realized and unrealized gains and losses are shown in the cumulative translation adjustment account included in total comprehensive income. For the years ended October 31, 2004 and November 2, 2003, net gains of $1,175 and $2,360, respectively, were included in the cumulative translation adjustment account related to foreign denominated fixed-rate debt designated as a hedge of net investment in foreign operations.
The Company has entered into two interest rate swaps that convert fixed rate debt to variable rate debt. A swap related to a Japanese Yen 200,000 leasehold improvement note was entered into in 1996, and a swap related to a $40,000 senior note was entered into in 2004. The swaps have been designated as fair-value hedges, and the derivatives qualify for the short-cut method. The swaps are recorded with a fair market value of $505 in the October 31, 2004 Consolidated Balance Sheet and $73 in the November 2, 2003 Consolidated Balance Sheet.
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments. The Company uses major banks throughout the world for cash deposits, forward exchange contracts and interest rate swaps. The Company’s customers represent a wide variety of industries and geographic regions.
As of October 31, 2004, there were no significant concentrations of credit risk. The Company does not use financial instruments for trading or speculative purposes.
The carrying amounts and fair values of the Company’s financial instruments, other than receivables and accounts payable, are as follows:
| 2004 | ||||||||
| Carrying | ||||||||
| Amount | Fair Value | |||||||
| Cash and cash equivalents | $ | 60,251 | $ | 60,251 | ||||
| Marketable securities | 328 | 328 | ||||||
| Notes payable | (15,301 | ) | (15,301 | ) | ||||
| Long-term debt | (160,323 | ) | (172,369 | ) | ||||
| Forward exchange contracts | 1,086 | 1,086 | ||||||
| Interest rate swaps | 505 | 505 | ||||||
| 2003 | ||||||||
| Carrying | ||||||||
| Amount | Fair Value | |||||||
| Cash and cash equivalents | $ | 6,945 | $ | 6,945 | ||||
| Marketable securities | 27 | 27 | ||||||
| Notes payable | (58,227 | ) | (58,227 | ) | ||||
| Long-term debt | (181,716 | ) | (193,494 | ) | ||||
| Forward exchange contracts | 278 | 278 | ||||||
| Interest rate swaps | 73 | 73 | ||||||
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The Company used the following methods and assumptions in estimating the fair value of financial instruments:
| • | Cash, cash equivalents and notes payable are valued at their carrying amounts due to the relatively short period to maturity of the instruments. | ||
| • | Marketable securities are valued at quoted market prices. | ||
| • | Long-term debt is valued by discounting future cash flows at currently available rates for borrowing arrangements with similar terms and conditions. | ||
| • | The fair value of forward exchange contracts is estimated using quoted exchange rates of comparable contracts. | ||
| • | The fair value of interest rate swaps is estimated using valuation techniques based on discounted future cash flows. |
Note 11 — Capital shares
Preferred — The Company has authorized 10,000 Series A convertible preferred shares without par value. No preferred shares were outstanding in 2004, 2003, or 2002.
Common — The Company has 80,000 authorized common shares without par value. In March 1992, the shareholders adopted an amendment to the Company’s articles of incorporation which, when filed with the State of Ohio, would increase the number of authorized common shares to 160,000. At October 31, 2004 and November 2, 2003, there were 49,011 common shares issued. At October 31, 2004 and November 2, 2003, the number of outstanding common shares, net of treasury shares, was 36,279 and 34,035, respectively. Treasury shares are reissued using the first-in, first-out method.
Note 12 — Company stock plans
Long-term performance plan — The Company’s long-term performance plan, approved by the Company’s shareholders in 2004, provides for the granting of stock options, stock appreciation rights, restricted stock, stock purchase rights, stock equivalent units, cash awards, and other stock or performance-based incentives. The number of common shares available for grant of awards is 3.0 percent of the number of common shares outstanding as of the first day of each fiscal year, plus up to an additional 0.5 percent, consisting of shares available, but not granted, in prior years. At the end of fiscal 2004, there were 1,270 shares available for grant in 2005.
Stock options — Nonqualified or incentive stock options may be granted to employees and directors of the Company. Generally, the options may be exercised beginning one year from the date of grant at a rate not exceeding 25 percent per year and expire 10 years from the date of grant. Vesting accelerates upon the occurrence of events that involve or may result in a change of control of the Company.
The Company uses the intrinsic value method to account for employee stock options. No compensation expense has been recognized because the exercise price of the Company’s stock options equals the market price of the underlying common shares on the date of grant. Tax benefits arising from the exercise of nonqualified stock options are recognized when realized and credited to capital in excess of stated value.
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Summarized transactions are as follows:
| Weighted-Average | |||||||||
| Number of | Exercise Price | ||||||||
| Options | Per Share | ||||||||
| Outstanding at October 28, 2001 | 5,998 | $ | 25.82 | ||||||
| Granted | 777 | $ | 23.42 | ||||||
| Exercised | (527 | ) | $ | 24.44 | |||||
| Forfeited or expired | (226 | ) | $ | 25.90 | |||||
| Outstanding at November 3, 2002 | 6,022 | $ | 25.63 | ||||||
| Granted | 473 | $ | 26.78 | ||||||
| Exercised | (333 | ) | $ | 26.28 | |||||
| Forfeited or expired | (207 | ) | $ | 26.49 | |||||
| Outstanding at November 2, 2003 | 5,955 | $ | 25.65 | ||||||
| Granted | 441 | $ | 27.71 | ||||||
| Exercised | (2,547 | ) | $ | 26.50 | |||||
| Forfeited or expired | (26 | ) | $ | 26.56 | |||||
| Outstanding at October 31, 2004 | 3,823 | $ | 25.33 | ||||||
| Exercisable at November 3, 2002 | 4,278 | $ | 25.91 | ||||||
| Exercisable at November 2, 2003 | 4,424 | $ | 25.74 | ||||||
| Exercisable at October 31, 2004 | 2,483 | $ | 24.79 | ||||||
Summarized information on currently outstanding options follows:
| Range of Exercise Price | ||||||||||||
| $20 - $25 | $26 - $30 | $31 - $35 | ||||||||||
| Number outstanding | 2,064 | 1,703 | 56 | |||||||||
| Weighted-average remaining contractual life, in years | 5.1 | 7.1 | 2.2 | |||||||||
| Weighted-average exercise price | $ | 22.96 | $ | 27.99 | $ | 31.88 | ||||||
| Number exercisable | 1,648 | 800 | 35 | |||||||||
| Weighted-average exercise price | $ | 22.90 | $ | 28.39 | $ | 31.88 | ||||||
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As discussed in Note 2, the Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock option expense is reflected in net income, as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The following table shows pro forma information regarding net income and earnings per share as if the Company had accounted for stock options granted since 1996 under the fair value method. Under this method, the estimated fair value of the options is amortized to expense over the options’ vesting period. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model.
| 2004 | 2003 | 2002 | |||||||||||
| Net income, as reported | $63,334 | $35,160 | $22,072 | ||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax | (1,533) | (3,612) | (3,187) | ||||||||||
| Pro forma net income | $61,801 | $31,548 | $18,885 | ||||||||||
| Earnings per share: | |||||||||||||
| Basic — as reported | $1.78 | $1.04 | $0.66 | ||||||||||
| Basic — pro forma | $1.74 | $0.93 | $0.57 | ||||||||||
| Diluted — as reported | $1.73 | $1.04 | $0.66 | ||||||||||
| Diluted — pro forma | $1.69 | $0.93 | $0.57 | ||||||||||
| Weighted-average fair value of options granted during the year | $8.57 | $6.98 | $6.04 | ||||||||||
| Risk-free interest rate | 3.88 | % | 3.18-3.68 | % | 4.07-5.07 | % | |||||||
| Expected life of option, in years | 7 | 7 | 7 | ||||||||||
| Expected dividend yield | 2.19 | % | 2.26 | % | 2.60 | % | |||||||
| Expected volatility | 0.30 | 0.29 | 0.26 | ||||||||||
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Stock appreciation rights — The Company may grant stock appreciation rights to employees. A stock appreciation right provides for a payment equal to the excess of the fair market value of a common share when the right is exercised, over its value when the right was granted. There were no stock appreciation rights outstanding during 2004, 2003 and 2002.
Limited stock appreciation rights that become exercisable upon the occurrence of events that involve or may result in a change of control of the Company have been granted with respect to 3,823 shares.
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Restricted stock — The Company may grant restricted stock to employees and directors of the Company. These shares may not be disposed of for a designated period of time defined at the date of grant and are to be returned to the Company if the recipient’s employment terminates during the restriction period. As shares are issued, deferred stock-based compensation equivalent to the fair market value on the date of grant is charged to shareholders’ equity and subsequently amortized over the restriction period. Tax benefits arising from the lapse of restrictions on the stock are recognized when realized and credited to capital in excess of stated value. In 2004, there were 66 restricted shares granted at a weighted-average fair value of $29.00 per share (58 and $23.41 in 2003 and 4 and $24.17 in 2002). Net amortization was $946 in 2004 ($575 in 2003 and $294 in 2002).
Employee stock purchase rights — The Company may grant stock purchase rights to employees. These rights permit eligible employees to purchase a limited number of common shares at a discount from fair market value. No stock purchase rights were outstanding during 2004, 2003, and 2002.
Shareholder rights plan — In August 1988, the Board of Directors declared a dividend of one common share purchase right for each common share outstanding on September 9, 1988. Rights are also distributed with common shares issued by the Company after that date. The rights may only be exercised if a party acquires 15 percent or more of the Company’s common shares. The exercise price of each right is $175.00 per share. The rights trade with the shares until the rights become exercisable, unless the Board of Directors sets an earlier date for the distribution of separate right certificates. The rights plan was amended and restated in May 2003.
If a party acquires at least 15 percent of the Company’s common shares (a “flip-in” event), each right then becomes the right to purchase two common shares of the Company for $1.00 per share.
The rights may be redeemed by the Company at a price of $.01 per right at any time prior to a “flip-in” event, or expiration of the rights on October 31, 2007.
Shares reserved for future issuance — At October 31, 2004, there were 87,205 shares reserved for future issuance through the exercise of outstanding options or rights, including 82,322 shares under the shareholder rights plan.
Note 13 — Nonrecurring charges
During the fourth quarter of 2004, the Company disposed of a minority equity investment that resulted in a pretax loss of $3,288 ($2,257 after tax), which was recorded in other expense.
During 2003, the Company recognized severance and restructuring costs of $2,028 ($1,359 after tax, or $.04 per share), primarily related to severance payments to approximately 70 employees of the finishing and coating and the advanced technology segments in North America. The unpaid balance of $183 at November 2, 2003 was paid in 2004.
In the face of difficult economic conditions during 2002 that accelerated the technical obsolescence of certain inventory and impacted the demand for other inventory, the Company recognized an inventory write-down in the fourth quarter of 2002 of $11,388 ($7,630 on an after-tax basis, or $.23 per share). This amount was recorded in cost of sales. The addition of $11,388 to the inventory obsolescence reserve brought the reserve balance to $23,149. During 2003, $21,281 of inventory was disposed of and charged against the reserve, leaving a balance of $1,868 in this reserve at November 2, 2003. The remaining inventory was disposed of in 2004.
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Also, during 2002, the Company recognized severance and restructuring costs of $2,690 ($1,802 on an after-tax basis, or $.05 per share). Of this amount, $2,499 related to workforce reduction actions involving approximately 130 employees. This amount was recorded below selling and administrative expenses in the Consolidated Statement of Income. The remaining amount of $191 related to the combination of two of the Company’s businesses and was included in cost of sales. Of the total amount, $657 was unpaid at November 3, 2002 and paid in 2003. Total severance, restructuring and inventory write-down costs in 2002 were $14,078 ($9,432 on an after-tax basis, or $.28 per share).
Note 14 — Acquisitions
Business acquisitions have been accounted for as purchases, with the acquired assets and liabilities recorded at their estimated fair value at the dates of acquisition. The cost in excess of the net assets of the business acquired is included in goodwill. Operating results of acquisitions are included in the Consolidated Statement of Income from the respective dates of acquisition.
In April 2004, the Company acquired full ownership of W. Puffe Technologie, a German manufacturer of hot melt adhesive dispensing systems for the textile, aerospace, life science, automotive, construction and baby diaper industries, with annual sales of approximately $6,000. The cost of the acquisition was $4,473, which was allocated to net tangible assets of $1,498, intangible assets of $570 and tax-deductible goodwill of $2,405. The intangible assets consist of patents, which are being amortized over an average of 14 years, and a noncompete agreement, which will be amortized over two years.
In March 2003, the Company acquired full ownership interest in land and a building owned by a partnership that leased office and manufacturing space to the Company. The real estate is located in Duluth, Georgia and serves as the worldwide headquarters for the Company’s adhesives businesses. As a result, the Company assumed $10,704 of debt owed by the partnership, real estate with a net book value of $10,270, cash and other current liabilities. Previously, the Company had leased the property under an operating lease with a partnership in which the Company was a partner.
In February 2002, the Company acquired a distributor of EFD equipment for $1,223.
Assuming these acquisitions had taken place at the beginning of 2002, pro forma results would not have been materially different.
Note 15 — Supplemental information for the statement of cash flows
| 2004 | 2003 | 2002 | |||||||||||
| Cash operating activities: | |||||||||||||
| Interest paid | $ | 15,654 | $ | 18,188 | $ | 22,232 | |||||||
| Income taxes paid | 15,555 | 12,749 | 6,522 | ||||||||||
| Non-cash investing and financing activities: | |||||||||||||
| Capitalized lease obligations incurred | $ | 5,614 | $ | 5,223 | $ | 4,295 | |||||||
| Capitalized lease obligations terminated | 424 | 864 | 635 | ||||||||||
| Shares acquired and issued through exercise of stock options | 11,081 | 4,794 | 4,030 | ||||||||||
| Non-cash assets and liabilities of businesses acquired: | |||||||||||||
| Working capital | $ | 145 | $ | (147 | ) | $ | 253 | ||||||
| Property, plant and equipment | 1,615 | 10,297 | — | ||||||||||
| Intangibles and other | 2,975 | 10 | 970 | ||||||||||
| Long-term debt and other liabilities | (722 | ) | (10,704 | ) | — | ||||||||
| $ | 4,013 | $ | (544 | ) | $ | 1,223 | |||||||
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Note 16 — Operating segments and geographic area data
The Company conducts business across three primary business segments: adhesive dispensing and nonwoven fiber systems, finishing and coating systems and advanced technology systems. The composition of segments and measure of segment profitability is consistent with that used by the Company’s chief operating decision maker. The primary focus is operating profit, which equals sales less operating costs and expenses. Beginning in 2004, the method of measuring segment operating profit was modified. A larger portion of corporate expenses is now being allocated to the three primary business segments. Additional corporate expenses of $17,304 were allocated to the three business segments compared to the prior method of measuring segment profit. These expenses represent costs incurred to support all business segments, including human resources, legal, finance and certain employee benefit costs. Prior year segment results have been reclassified to conform to the new measurement of segment operating profit. Additional expense amounts of $14,972 and $9,629 for 2003 and 2002, respectively, were allocated to the three business segments. Operating profit excludes interest income (expense), investment income (net) and other income (expense). Items below the operating income line of the Condensed Consolidated Statement of Income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. The accounting policies of the segments are generally the same as those described in Note 1, Significant Accounting Policies.
In 2004, the Company realigned its geographic reporting. Previously, sales were reported in four regions, North America, Europe, Japan and Pacific South. The regions are now United States, Americas (Canada and Latin America), Europe, Japan and Asia Pacific. Prior year amounts have been reclassified to conform to the new alignment.
Nordson products are used in a diverse range of industries, including appliance, automotive, bookbinding, circuit board assembly, electronics, food and beverage, furniture, medical, metal finishing, nonwoven products, packaging, semiconductor and telecommunications. Nordson sells its products primarily through a direct, geographically dispersed sales force.
No single customer accounted for more than 5 percent of the Company’s sales in 2004, 2003, or 2002.
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The following table presents information about Nordson’s reportable segments:
| Adhesive | Finishing | ||||||||||||||||||||
| Dispensing and | and | Advanced | |||||||||||||||||||
| Nonwoven Fiber | Coating | Technology | Corporate | Total | |||||||||||||||||
Year ended October 31, 2004 | |||||||||||||||||||||
| Net external sales | $ | 497,699 | $ | 130,944 | $ | 164,901 | $ | — | $ | 793,544 | |||||||||||
| Depreciation | 11,508 | 3,871 | 3,851 | 4,853 | 24,083 | ||||||||||||||||
| Operating profit | 97,904 | 2,466 | 30,229 | (20,001 | ) | 110,598 | |||||||||||||||
Identifiable assets(c) | 220,647 | 58,161 | 53,920 | 537,443 | (b) | 870,171 | |||||||||||||||
Expenditures for long-lived assets(d) | 5,292 | 1,587 | 1,808 | 2,750 | 11,437 | ||||||||||||||||
Year ended November 2, 2003 | |||||||||||||||||||||
| Net external sales | $ | 426,204 | $ | 112,722 | $ | 128,421 | $ | — | $ | 667,347 | |||||||||||
| Depreciation | 12,019 | 4,000 | 4,731 | 6,546 | 27,296 | ||||||||||||||||
| Operating profit | 73,302 | 707 | 14,502 | (19,915 | )(a) | 68,596 | |||||||||||||||
Identifiable assets(c) | 203,634 | 49,438 | 55,968 | 482,185 | (b) | 791,225 | |||||||||||||||
Expenditures for long-lived assets(d) | 4,417 | 1,133 | 1,329 | 684 | 7,563 | ||||||||||||||||
Year ended November 3, 2002 | |||||||||||||||||||||
| Net external sales | $ | 413,082 | $ | 114,196 | $ | 120,478 | $ | — | $ | 647,756 | |||||||||||
| Depreciation | 11,416 | 4,447 | 4,623 | 7,509 | 27,995 | ||||||||||||||||
| Operating profit | 79,033 | (1,531 | ) | 6,899 | (31,382 | )(a) | 53,019 | ||||||||||||||
Identifiable assets(c) | 205,040 | 56,343 | 61,778 | 459,671 | (b) | 782,832 | |||||||||||||||
Expenditures for long-lived assets(d) | 5,219 | 1,070 | 4,222 | 886 | 11,397 | ||||||||||||||||
| (a) | Includes $2,028 of severance and restructuring charges in 2003 and $14,078 of severance and restructuring charges and inventory write-downs in 2002. These charges were not allocated to reportable segments for management reporting purposes. |
| (b) | Corporate assets are principally cash and cash equivalents, domestic deferred income taxes, investments, capital leases, headquarter facilities, the major portion of the Company’s domestic enterprise management system and intangible assets. |
| (c) | Includes notes and accounts receivable net of customer advance payments and allowance for doubtful accounts, inventories net of reserves and property, plant and equipment net of accumulated depreciation. |
| (d) | Long-lived assets consist of property, plant and equipment and capital lease assets. |
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The Company has significant sales and long-lived assets in the following geographic areas:
| 2004 | 2003 | 2002 | |||||||||||
| Net external sales | |||||||||||||
| United States | $ | 266,050 | $ | 245,918 | $ | 279,034 | |||||||
| Americas | 51,390 | 42,340 | 42,580 | ||||||||||
| Europe | 296,067 | 244,709 | 219,846 | ||||||||||
| Japan | 87,477 | 73,333 | 59,993 | ||||||||||
| Asia Pacific | 92,560 | 61,047 | 46,303 | ||||||||||
| Total net external sales | $ | 793,544 | $ | 667,347 | $ | 647,756 | |||||||
| Long-lived assets | |||||||||||||
| United States | $ | 86,832 | $ | 94,044 | $ | 98,728 | |||||||
| Americas | 1,329 | 1,356 | 1,204 | ||||||||||
| Europe | 15,979 | 13,848 | 13,125 | ||||||||||
| Japan | 3,559 | 3,675 | 3,867 | ||||||||||
| Asia Pacific | 3,908 | 2,332 | 1,849 | ||||||||||
| Total long-lived assets | $ | 111,607 | $ | 115,255 | $ | 118,773 | |||||||
A reconciliation of total segment operating income to total consolidated income before income taxes is as follows:
| 2004 | 2003 | 2002 | ||||||||||
| Total profit for reportable segments | $ | 110,598 | $ | 68,596 | $ | 53,019 | ||||||
| Interest expense | (15,432 | ) | (18,063 | ) | (21,713 | ) | ||||||
| Interest and investment income | 1,350 | 889 | 924 | |||||||||
| Other-net | (2,688 | ) | 1,055 | 714 | ||||||||
| Consolidated income before income taxes | $ | 93,828 | $ | 52,477 | $ | 32,944 | ||||||
A reconciliation of total assets for reportable segments to total consolidated assets is as follows:
| 2004 | 2003 | 2002 | ||||||||||
| Total assets for reportable segments | $ | 870,171 | $ | 791,225 | $ | 782,832 | ||||||
| Plus: customer advance payments | 8,921 | 6,229 | 5,012 | |||||||||
| Eliminations | (39,705 | ) | (30,648 | ) | (23,372 | ) | ||||||
| Total consolidated assets | $ | 839,387 | $ | 766,806 | $ | 764,472 | ||||||
Note 17 — Goodwill and other intangible assets
In 2002, the Company adopted FASB Statements No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” No. 141 requires that all business combinations be accounted for by the purchase method and that certain acquired intangible assets be recognized as assets apart from goodwill. No. 142 provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level. In accordance with No. 142, the Company completed a transitional goodwill impairment test that resulted in no impairment loss being recognized. Goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. Estimates of future cash flows, discount rates and terminal value amounts are used to determine the estimated fair value of the reporting units. The results of the Company’s analyses indicated that no reduction of goodwill is required.
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Changes in the carrying amount of goodwill for 2004 by operating segment are as follows:
| Adhesive | |||||||||||||||||
| Dispensing | |||||||||||||||||
| and | Finishing | ||||||||||||||||
| Nonwoven | and | Advanced | |||||||||||||||
| Fiber | Coating | Technology | |||||||||||||||
| Systems | Systems | Systems | Total | ||||||||||||||
| Balance at November 2, 2003 | $ | 27,998 | $ | 3,387 | $ | 297,187 | $ | 328,572 | |||||||||
| Acquisition of new business | 2,405 | — | — | 2,405 | |||||||||||||
| Consolidation of joint venture | 88 | 8 | 29 | 125 | |||||||||||||
| Currency effect | 224 | 43 | 290 | 557 | |||||||||||||
| Balance at October 31, 2004 | $ | 30,715 | $ | 3,438 | $ | 297,506 | $ | 331,659 | |||||||||
Information regarding the Company’s intangible assets subject to amortization is as follows:
| October 31, 2004 | |||||||||||||
| Carrying | Accumulated | ||||||||||||
| Amount | Amortization | Net Book Value | |||||||||||
| Core/developed technology | $ | 10,400 | $ | 2,667 | $ | 7,733 | |||||||
| Noncompete agreements | 4,079 | 1,430 | 2,649 | ||||||||||
| Patent costs | 2,966 | 1,628 | 1,338 | ||||||||||
| Other | 6,332 | 5,612 | 720 | ||||||||||
| Total | $ | 23,777 | $ | 11,337 | $ | 12,440 | |||||||
| November 2, 2003 | |||||||||||||
| Carrying | Accumulated | ||||||||||||
| Amount | Amortization | Net Book Value | |||||||||||
| Core/developed technology | $ | 10,400 | $ | 1,792 | $ | 8,608 | |||||||
| Noncompete agreements | 3,935 | 1,331 | 2,604 | ||||||||||
| Patent costs | 2,236 | 1,295 | 941 | ||||||||||
| Other | 6,189 | 5,131 | 1,058 | ||||||||||
| Total | $ | 22,760 | $ | 9,549 | $ | 13,211 | |||||||
At October 31, 2004, $4,891 of intangible assets related to a minimum pension liability for the Company’s pension plans were not subject to amortization. The amount at November 2, 2003 was $2,152.
Amortization expense for 2004 and 2003 was $1,846 and $1,369, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows:
| Fiscal Year | Amounts | |||
| 2005 | $ | 1,772 | ||
| 2006 | $ | 1,533 | ||
| 2007 | $ | 1,456 | ||
| 2008 | $ | 1,485 | ||
| 2009 | $ | 1,212 | ||
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Note 18 — Quarterly financial data (unaudited)
| First | Second | Third | Fourth | |||||||||||||
2004: | ||||||||||||||||
| Sales | $ | 170,640 | $ | 196,602 | $ | 197,949 | $ | 228,353 | ||||||||
| Cost of sales | 77,767 | 83,976 | 85,835 | 106,735 | ||||||||||||
| Net income | 9,664 | 16,673 | 17,274 | 19,723 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | .28 | $ | .47 | $ | .48 | $ | .55 | ||||||||
| Diluted | .27 | .46 | .47 | .53 | ||||||||||||
2003: | ||||||||||||||||
| Sales | $ | 145,323 | $ | 166,679 | $ | 166,272 | $ | 189,073 | ||||||||
| Cost of sales | 66,066 | 73,582 | 74,749 | 87,169 | ||||||||||||
| Net income | 4,989 | 8,090 | 8,745 | 13,336 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | .15 | $ | .24 | $ | .26 | $ | .39 | ||||||||
| Diluted | .15 | .24 | .26 | .39 | ||||||||||||
Domestic operations report results using four 13-week quarters. International subsidiaries report results using calendar quarters.
During the fourth quarter of 2004, the Company disposed of a minority equity investment that resulted in a pre-tax loss of $3,288 ($2,257 after tax), which was recorded in other expense.
During 2003, the Company recognized severance and restructuring pretax charges of $22 in the first quarter ($15 after tax), $1,446 in the second quarter ($969 after tax), $157 in the third quarter ($105 after tax), and $403 in the fourth quarter ($270 after tax).
Note 19 — Contingencies
The Company 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 the Company’s opinion, after consultation with legal counsel, that resolutions of these matters are not expected to result in a material effect on its financial condition, quarterly or annual operating results, and cash flows.
Environmental –The Company has been identified as a potentially responsible party (PRP) at a Wisconsin municipal landfill and has voluntarily agreed with other PRP’s to share costs associated with (1) a feasibility study and remedial investigation (“FS/ RI”) for the site and (2) providing clean drinking water to the affected residential properties through completion of the FS/ RI phase of the project. The FS/ RI is expected to be completed in 2005. The Company is committing $829 towards completing the FS/ RI phase of the project and providing clean drinking water. This amount has been recorded in the Company’s financial statements. Against this commitment, the Company has made payments of $363 through the end of fiscal year 2004. The remaining amount of $466 is recorded in accrued liabilities in the October 31, 2004 Consolidated Balance Sheet. The total cost of the Company’s share for remediation efforts will not be ascertainable until the FS/ RI is completed and a remediation plan is approved by the Wisconsin Department of Natural Resources, which is anticipated to occur in 2006. However, based upon current information, the Company does not expect that the costs associated with remediation will have a material effect on its financial condition or results of operations.
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The European Union (“EU”) has adopted two Directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste Electrical and Electronic Equipment (“WEEE”) Directive which directs EU Member States to enact laws, regulations, and administrative provisions to ensure that producers of electrical and electronic equipment provide for the financing of the collection, treatment, recovery and environmentally sound disposal of WEEE from products placed on the market after August 13, 2005 and from products in use prior to that date that are being replaced. The second of these Directives is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) Directive. The RoHS Directive addresses the restriction on use of certain hazardous substances such as mercury, lead, cadmium, and hexavalent cadmium in electrical and electronic equipment placed on the market after July 1, 2006. As of October 31, 2004, EU Member States continue to develop legislation to implement these Directives.
During the year, the Company established a project management team whose efforts are directed at assessing the impact of the Directives on the Company’s supply chain management and manufacturing processes and developing a strategy to permit the Company to react and comply with legislation enacted by Member States. The cost to the Company to comply with the Directives and Member States’ legislation will not be quantifiable until Member States have fully implemented the Directives.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Nordson Corporation
We have audited the accompanying consolidated balance sheets of Nordson Corporation as of October 31, 2004 and November 2, 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2) and (d). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nordson Corporation at October 31, 2004 and November 2, 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
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| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Item 9a. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the Company’s disclosure controls and procedures as of October 31, 2004. Based on that evaluation, the Company’s management, including its CEO and CFO, have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in the Company’s internal controls over financial reporting or in other factors identified in connection with this evaluation that occurred during the fourth quarter of the fiscal year ended October 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9b. Other Information
None.
PART III
| Item 10. | Directors and Executive Officers of the Company |
The Company incorporates herein by reference the information appearing under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive Proxy Statement for the 2005 Annual Meeting. Information regarding the Company’s audit committee financial expert is incorporated by reference to the caption “Election of Directors” of the definitive Proxy Statement for the 2005 Annual Meeting.
Executive officers of the Company serve for a term of one year from date of election to the next organizational meeting of the Board of Directors and until their respective successors are elected and qualified, except in the case of death, resignation or removal. Information concerning executive officers of the Company is contained in Part I of this report under the caption “Executive Officers of the Company.”
The Company has adopted a code of ethics for all employees and directors, including the principal executive officer, other executive officers, principal finance officer and other finance personnel. A copy of the code of ethics is available free of charge on the Company’s Web site atwww.nordson.com. All material changes to the code will be posted to the Web site.
| Item 11. | Executive Compensation |
The Company incorporates herein by reference the information appearing under the caption “Compensation of Directors,” and information pertaining to compensation of executive officers appearing under the captions “Summary Compensation Table,” “Option/ SAR Grants in Last Fiscal Year,” “Long-Term Incentive Compensation,” “Aggregated Option/ SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/ SAR Values,” “Salaried Employees’ Pension Plan,” and “Excess Defined Benefit Pension Plan and Excess Defined Contribution Retirement Plan” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting.
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The Company incorporates herein by reference the information appearing under the caption “Ownership of Nordson Common Shares” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting.
Equity Compensation Table
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| future issuance under | ||||||||||||
| Number of securities to be | Weighted-average | equity compensation plans | ||||||||||
| issued upon exercise of | exercise price of | (excluding securities | ||||||||||
| outstanding options, | outstanding options, | reflected in first reporting | ||||||||||
| Plan category | warrants and rights | warrants and rights | column) | |||||||||
| Equity compensation plans approved by security holders | 3,283 | $ | 25.33 | 1,270 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 3,283 | $ | 25.33 | 1,270 | ||||||||
| Item 13. | Certain Relationships and Related Transactions |
The Company incorporates herein by reference the information appearing under the caption “Agreements with Officers and Directors” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting. There are no other transactions that require disclosure pursuant to Item 404 of Regulation S-K.
William D. Ginn, a director of the Company, is a retired partner with the law firm of Thompson Hine LLP. Thompson Hine LLP has in the past provided and continues to provide legal services to the Company.
| Item 14. | Principal Accounting Fees and Services |
The Company incorporates herein by reference the information appearing under the caption “Independent Auditors” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1). Financial Statements
(a)(2) and (d). Financial Statement Schedules
No other consolidated financial statement schedules are presented because the schedules are not required, because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto.
(a)(3) and (c). Exhibits
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORDSON CORPORATION |
Date: January 14, 2005
| By: /s/ PETER S. HELLMAN | |
| Peter S. Hellman | |
| President, Chief Financial and Administrative Officer | |
| /s/ NICHOLAS D. PELLECCHIA | |
| Nicholas D. Pellecchia | |
| Vice President, Finance and Controller |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ EDWARD P. CAMPBELL Edward P. Campbell Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | January 14, 2005 | |
| /s/ PETER S. HELLMAN Peter S. Hellman Director, President, Chief Financial and Administrative Officer (Chief Financial Officer) | January 14, 2005 | |
| /s/ NICHOLAS D. PELLECCHIA Nicholas D. Pellecchia Vice President, Finance and Controller (Chief Accounting Officer) | January 14, 2005 | |
| /s/ DR. GLENN R. BROWN Dr. Glenn R. Brown Director | January 14, 2005 | |
| /s/ WILLIAM W. COLVILLE William W. Colville Director | January 14, 2005 | |
| /s/ WILLIAM D. GINN William D. Ginn Director | January 14, 2005 | |
| /s/ STEPHEN R. HARDIS Stephen R. Hardis Director | January 14, 2005 | |
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| /s/ DR. DAVID W. IGNAT Dr. David W. Ignat Director | January 14, 2005 | |
| /s/ JOSEPH P. KEITHLEY Joseph P. Keithley Director | January 14, 2005 | |
| /s/ WILLIAM P. MADAR William P. Madar Director | January 14, 2005 | |
| /s/ MARY G. PUMA Mary G. Puma Director | January 14, 2005 | |
| /s/ WILLIAM L. ROBINSON William L. Robinson Director | January 14, 2005 | |
| /s/ BENEDICT P. ROSEN Benedict P. Rosen Director | January 14, 2005 | |
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Schedule II — Valuation and Qualifying Accounts and Reserves
| Balance at | Balance | |||||||||||||||||||
| Beginning | Charged to | Currency | at End | |||||||||||||||||
| of Year | Expense | Deductions | Effects | of Year | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Allowance for Doubtful Accounts | ||||||||||||||||||||
| Fiscal 2002 | $ | 4,018 | 2,216 | 2,594 | 141 | $ | 3,781 | |||||||||||||
| Fiscal 2003 | $ | 3,781 | 1,581 | 1,462 | 352 | $ | 4,252 | |||||||||||||
| Fiscal 2004 | $ | 4,252 | 2,429 | 1,538 | 187 | $ | 5,330 | |||||||||||||
Inventory Obsolescence Reserve | ||||||||||||||||||||
| Fiscal 2002 | $ | 10,570 | 16,902 | 4,566 | 243 | $ | 23,149 | |||||||||||||
| Fiscal 2003 | $ | 23,149 | 2,243 | 21,281 | 444 | $ | 4,555 | |||||||||||||
| Fiscal 2004 | $ | 4,555 | 2,782 | 3,066 | 130 | $ | 4,401 | |||||||||||||
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NORDSON CORPORATION
| Exhibit | ||
| Number | Description | |
| (3) | Articles of Incorporation and By-Laws | |
| 3-a | 1989 Amended Articles of Incorporation (incorporated herein by reference to Exhibit 3-a to Registrant’s Annual Report on Form 10-K for the year-ended October 31, 1999) | |
| 3-b | 1998 Amended Regulations | |
| (4) | Instruments Defining the Rights of Security Holders, including indentures | |
| 4-a | $200 million Credit Agreement between Nordson Corporation and various financial institutions (incorporated herein by reference to Exhibit 10.1 to Registrant’s Form 8-K dated October 19, 2004) | |
| 4-b | Second Restated Rights Agreement between Nordson Corporation and National City Bank, Rights Agent (incorporated herein by reference to Exhibit 4-b to Registrant’s Annual Report on Form 10-K for the year-ended November 2, 2003) | |
| 4-c | $100 million Senior Note Purchase Agreement between Nordson Corporation and various insurance companies (incorporated herein by reference to Exhibit 4b to Registrant’s Form 10-Q for the quarter-ended July 29, 2001) | |
| (10) | Material Contracts | |
| 10-a | Nordson Corporation 2004 Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.2 to Registrant’s Form 8-K dated November 8, 2004)* | |
| 10-b | Nordson Corporation Deferred Compensation Plan (incorporated herein by reference to Exhibit 10-b to Registrant’s Annual Report on Form 10-K for the year-ended October 29, 2000)* | |
| 10-c | Indemnity Agreement (incorporated herein by reference to Exhibit 10-c to Registrant’s Annual Report on Form 10-K for the year-ended October 28, 2001)* | |
| 10-d | Restated Nordson Corporation Excess Defined Contribution Retirement Plan (incorporated herein by reference to Exhibit 10-d to Registrant’s Annual Report on Form 10-K for the year-ended November 2, 2003)* | |
| 10-d-1 | First Amendment to Nordson Corporation Excess Defined Contribution Retirement Plan (incorporated herein by reference to Exhibit 10-e-1 to Registrant’s Annual Report on Form 10-K for the year-ended October 29, 2000)* | |
| 10-e | Nordson Corporation Excess Defined Benefit Pension Plan (incorporated herein by reference to Exhibit 10-e to Registrant’s Annual Report on Form 10-K for the year-ended November 2, 2003)* | |
| 10-e-1 | First Amendment to Nordson Corporation Excess Defined Benefit Pension Plan (incorporated herein by reference to Exhibit 10-f-1 to Registrant’s Annual Report on Form 10-K for the year-ended October 29, 2000)* | |
| 10-e-2 | Second Amendment to Nordson Corporation Excess Defined Benefit Retirement Plan (incorporated herein by reference to Exhibit 10-f-2 to Registrant’s Annual Report on Form 10-K for the year-ended October 29, 2000)* | |
| 10-f | Employment Agreement between the Registrant and Edward P. Campbell* | |
| 10-g | Nordson Corporation 1993 Long-Term Performance Plan, as amended March 12, 1998 (incorporated herein by reference to Exhibit 10-j-1 to Registrant’s Annual Report on Form 10-K for the year-ended October 29, 2000)* | |
| 10-g-1 | Nordson Corporation 2004 Long-Term Performance Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s Form 8-K dated November 8, 2004)* | |
| 10-h | Nordson Corporation Assurance Trust Agreement* | |
| 10-h-1 | Employment Agreement (Change in Control) between the Registrant and Edward P. Campbell* | |
| 10-h-2 | Form of Employment Agreement (Change in Control) between the Registrant and Officers – excluding Edward P. Campbell* | |
| (21) | Subsidiaries of the Registrant | |
| (23) | Consent of Independent Auditors |
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| Exhibit | ||
| Number | Description | |
| 31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 by the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 by the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (99) | Additional Exhibits | |
| 99-a | Form S-8 Undertakings (Nos. 33-18309 and 33-33481) | |
| 99-b | Form S-8 Undertakings (No. 2-66776) |
| * | Indicates management contract or compensatory plan, contract or arrangement in which one or more directors and/or executive officers of Nordson Corporation may be participants |
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