Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

NOTE REGARDING AMOUNTS AND FISCAL YEAR REFERENCES

In this annual report, all amounts related to United States dollars and foreign currency and to the number of Nordson Corporation’s common shares, except for per share earnings and dividend amounts, are expressed in thousands. Unless the context otherwise indicates, all references to “we,” “us,” “our,” or the “Company” mean Nordson Corporation.

Unless otherwise noted, all references to years relate to our fiscal year ending October 31.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. We base our estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the board of directors.

Revenue recognition – Most of our revenues are recognized upon shipment, provided that persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectibility is reasonably assured, and title and risk of loss have passed to the customer. Certain arrangements may include installation, installation supervision, training, and spare parts, which tend to be completed in a short period of time, at an insignificant cost, and utilizing skills not unique to us, and, therefore, are typically regarded as inconsequential or perfunctory. Revenue for undelivered items is deferred and included within accrued liabilities in the accompanying balance sheet. Revenues deferred in 2017, 2016 and 2015 were not material.

Business combinations – The acquisitions of our businesses are accounted for under the acquisition method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder, if any, recorded as goodwill. The fair values are determined by management, taking into consideration information supplied by the management of the acquired entities, and other relevant information. Such information typically includes valuations obtained from independent appraisal experts, which management reviews and considers in its estimates of fair values. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values requires significant judgment by management, particularly with respect to the value of identifiable intangible assets. This judgment could result in either a higher or lower value assigned to amortizable or depreciable assets. The impact could result in either higher or lower amortization and/or depreciation expense.

Goodwill – Goodwill is the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired in various business combinations. Goodwill is not amortized but is tested for impairment annually at the reporting unit level, or more often if indications of impairment exist. Our reporting units are the Adhesive Dispensing Systems segment, the Industrial Coating Systems segment and one level below the Advanced Technology Systems segment.

We test goodwill in accordance with Accounting Standards Codification (ASC) 350. Under a new accounting standard adopted this year (See Note 2 for additional information), a goodwill impairment charge is recorded for the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit, as calculated in the quantitative analysis described below. We did not record any goodwill impairment charges in 2017. We use an independent valuation specialist to assist with refining our assumptions and methods used to determine fair values using these methods. In step one, the discounted cash flow method uses assumptions for revenue growth, operating margin, and working capital turnover that are based on management’s strategic plans tempered by performance trends and reasonable expectations about those trends. Terminal value calculations employ a published formula known as the Gordon Growth Model Method that essentially captures the present value of perpetual cash flows beyond the last projected period assuming a constant Weighted Average Cost of Capital (WACC) methodology and growth rate. For each reporting unit, a sensitivity analysis is performed to vary the discount and terminal growth rates in order to provide a range of reasonableness for detecting impairment.

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Discount rates are developed using a WACC methodology. The WACC represents the blended average required rate of return for equity and debt capital based on observed market return data and company specific risk factors. For 2017, the discount rates used ranged from 9 percent to 12 percent depending upon the reporting unit's size, end market volatility, and projection risk. The calculated internal rate of return for the discounted cash flow method was 9 percent, the same as the calculated WACC for total Nordson. In the application of the guideline public company method, fair value is determined using transactional evidence for similar publicly traded equity. The comparable company guideline group is determined based on relative similarities to each reporting unit since exact correlations are not available. An indication of fair value for each reporting unit is based on the placement of each reporting unit within a range of multiples determined for its comparable guideline company group. Valuation multiples are derived by dividing latest twelve month performance for revenues and EBITDA into total invested capital, which is the sum of traded equity plus interest bearing debt less cash. These multiples are applied against the revenue and EBITDA of each reporting unit. While the implied indications of fair value using the guideline public company method yield meaningful results, the discounted cash flow method of the income approach includes management’s thoughtful projections and insights as to what the reporting units will accomplish in the near future. Accordingly, the reasonable, implied fair value of each reporting unit is a blend based on the relative strength of the approaches employed.

To test the reasonableness of the aggregate fair value, we performed the control premium test, which compares the sum of the implied fair values calculated for our reporting units (net of debt) to the market value of equity. The control premium was negative 3 percent as of the test date of August 1, 2017 and a slight discount to the market value of equity as of October 31, 2017. The control premium indicated that the discounted cash flow valuation was reasonable.

In 2017 and 2016, the results of our annual impairment tests indicated no impairment.

The excess of fair value (FV) over carrying value (CV) was compared to the carrying value for each reporting unit. Based on the results shown in the table below and based on our measurement date of August 1, 2017, our conclusion is that no goodwill was impaired in 2017. Potential events or circumstances, such as a sustained downturn in global economies, could have a negative effect on estimated fair values.

		WACC				Excess of FV over CV				Goodwill
Adhesive Dispensing Systems Segment			9%				489%			$	394,234
Industrial Coating Systems Segment			11%				503%			$	24,058
Advanced Technology Systems Segment - Electronics Systems			10%				329%			$	27,224
Advanced Technology Systems Segment - Fluid Management			9%				83%			$	1,092,940
Advanced Technology Systems Segment - Test & Inspection			12%				51%			$	48,499

Pension plans and postretirement medical plans - The measurement of liabilities related to our pension plans and postretirement medical plans is based on management’s assumptions related to future factors, including interest rates, return on pension plan assets, compensation increases, mortality and turnover assumptions, and health care cost trend rates.

The weighted-average discount rate used to determine the present value of our domestic pension plan obligations was 3.80 percent at October 31, 2017 and 3.94 percent at October 31, 2016. The weighted-average discount rate used to determine the present value of our various international pension plan obligations was 2.07 percent at October 31, 2017, compared to 1.86 percent at October 31, 2016. The discount rates used for all plans were determined by using quality fixed income investments with a duration period approximately equal to the period over which pension obligations are expected to be settled.

In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plans. We consult with and consider the opinions of financial and actuarial experts in developing appropriate return assumptions. The expected rate of return (long-term investment rate) on domestic pension assets used to determine net benefit costs was 6.25 percent in 2017 and 6.72 percent in 2016. The average expected rate of return on international pension assets used to determine net benefit costs was 3.51 percent in 2017 and 4.22 percent in 2016.

The assumed rate of compensation increases used to determine the present value of our domestic pension plan obligations was 3.61 percent at October 31, 2017, compared to 3.61 percent at October 31, 2016. The assumed rate of compensation increases used to determine the present value of our international pension plan obligations was 3.13 percent at October 31, 2017, compared to 3.12 percent at October 31, 2016.

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Annual expense amounts are determined based on the discount rate used at the end of the prior year. Differences between actual and assumed investment returns on pension plan assets result in actuarial gains or losses that are amortized into expense over a period of years.

Economic assumptions have a significant effect on the amounts reported. The effect of a one percent change in the discount rate, expected return on assets and compensation increase is shown in the table below. Bracketed numbers represent decreases in expense and obligation amounts.

		United States								International
		1% Point Increase				1% Point Decrease				1% Point Increase				1% Point Decrease
Discount rate:
Effect on total service and interest cost components in 2017		$	(5,320	)		$	6,490			$	(1,417	)		$	1,766
Effect on pension obligation as of October 31, 2017		$	(56,644	)		$	71,919			$	(14,440	)		$	17,356
Expected return on assets:
Effect on total service and interest cost components in 2017		$	(3,326	)		$	3,326			$	(375	)		$	375
Compensation increase:
Effect on total service and interest cost components in 2017		$	4,127			$	(2,755	)		$	635			$	(511	)
Effect on pension obligation as of October 31, 2017		$	23,174			$	(14,753	)		$	3,261			$	(3,062	)

With respect to the domestic postretirement medical plan, the discount rate used to value the benefit plan was 3.86 percent at October 31, 2017 and 4.05 percent at October 31, 2016. The annual rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is assumed to be 3.70 percent in 2018, decreasing gradually to 3.23 percent in 2026.

For the international postretirement plan, the discount rate used to value the benefit obligation was 3.52 percent at October 31, 2017 and 3.40 percent at October 31, 2016. The annual rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is assumed to be 6.50 percent in 2018, decreasing gradually to 3.50 percent in 2037.

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

		United States								International
		1% Point Increase				1% Point Decrease				1% Point Increase				1% Point Decrease
Discount rate:
Effect on total service and interest cost components in 2017		$	(585	)		$	696			$	(3	)		$	3
Effect on postretirement obligation as of October 31, 2017		$	(10,504	)		$	13,327			$	(119	)		$	159
Health care trend rate:
Effect on total service and interest cost components in 2017		$	562			$	(446	)		$	10			$	(8	)
Effect on postretirement obligation as of October 31, 2017		$	10,637			$	(8,650	)		$	150			$	(115	)

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

In the fourth quarter of 2016, we adopted a change in the method to be used to estimate the service and interest cost components of net periodic benefit cost for defined benefit pension plans. Historically, for the vast majority of our plans, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2017, we used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the estimation of the service and interest components of benefit cost, resulting in a more precise measurement. This change did not affect the measurement of total benefit obligations. The change was accounted for as a change in estimate that is inseparable from a change in accounting principle and, accordingly, was accounted for prospectively

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starting in 2017. The reductions in service and interest costs for 2017 associated with this change were $1,200 and $3,100, respectively.

Pension and postretirement expenses in 2018 are expected to be approximately $474 higher than 2017.

Income taxes – Income taxes are estimated based on income for financial reporting purposes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Management believes the valuation allowances are adequate after considering future taxable income, allowable carryforward periods and ongoing prudent and feasible tax planning strategies. In the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount (including the valuation allowance), an adjustment to the valuation allowance would increase income in the period such determination was made. Conversely, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the valuation allowance would be expensed in the period such determination was made.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual effective income tax rates and related income tax liabilities may differ materially from our estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

2017 compared to 2016

Sales – Worldwide sales for 2017 were $2,066,982, an increase of 14.3 percent from 2016 sales of $1,808,994. Sales volume increased 14.8 percent and unfavorable currency translation effects reduced sales by 0.5 percent. The volume increase consisted of 7.9 percent from organic growth and 6.9 percent from acquisitions. We had four acquisitions during 2017, ACE Production Technologies, Inc. (“ACE”), Plas-Pak Industries, Inc. (“Plas-Pak), InterSelect GmbH (“InterSelect”), and Vention Medical’s Advanced Technologies business (“Vention”), which are all included within the Advanced Technology Systems segment. We had one acquisition during 2016, LinkTech, which is also included within the Advanced Technology Systems segment. As used throughout this Form 10-K, geographic regions include the Americas (Canada, Mexico and Central and South America), Asia Pacific (excluding Japan), Europe, Japan, and the United States.

Sales of the Adhesive Dispensing Systems segment were $916,019 in 2017, an increase of $36,446, or 4.1 percent, from 2016 sales of $879,573. The increase was the net result of a sales volume increase of 4.3 percent partially offset by unfavorable currency effects that reduced sales by 0.2 percent. Within this segment, sales volume increased in all geographic regions with the exception of Europe. Growth in product lines serving rigid packaging, consumer non-durable, disposable hygiene and general product assembly end markets, was offset by softness in product lines serving polymer processing end markets.

Sales of the Advanced Technology Systems segment were $897,623 in 2017, an increase of $221,294 or 32.7 percent, from 2016 sales of $676,329. The increase was the result of a sales volume increase of 33.4 percent partially offset by unfavorable currency effects that reduced sales by 0.7 percent. The sales volume increase consisted of 15.1 percent from organic volume and 18.3 percent from the first-year effect of acquisitions. Within the segment, sales volume, inclusive of acquisitions, increased in all geographic regions. Organic volume increased in most product lines, and was driven by demand in electronics and medical end markets.

Sales of the Industrial Coating Systems segment were $253,340 in 2017, an increase of $248, or 0.1 percent, from 2016 sales of $253,092. The increase was the result of a sales volume increase of 0.8 percent partially offset by unfavorable currency effects that reduced sales by 0.7 percent. Within this segment, sales volume increased in Europe, Japan and the Americas regions. Sales volume increased in most product lines, and was driven by demand for liquid and UV curing, powder coating and container product lines serving industrial end markets.

Sales outside the United States accounted for 68.7 percent of our sales in 2017, as compared to 70.6 percent in 2016. On a geographic basis, sales in the United States were $647,657, an increase of 21.9 percent from 2016. The increase in sales volume consisted of 5.3 percent from organic volume and 16.6 percent from acquisitions. In the Americas region, sales were $147,026, an increase of 17.9 percent from 2016, with volume increasing 18.0 percent partially offset by unfavorable currency effects of 0.1 percent. The increase in sales volume consisted of 7.7 percent from organic volume and 10.3 percent from acquisitions. Sales in Europe were $530,812, an

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increase of 5.3 percent from 2016, with volume increasing 5.5 percent partially offset by unfavorable currency effects of 0.2 percent. The increase in sales volume consisted of 2.2 percent from organic volume and 3.3 percent from acquisitions. Sales in Japan were $147,189, an increase of 20.6 percent from 2016, with volume increasing 24.5 percent partially offset by unfavorable currency effects of 3.9 percent. The increase in sales volume consisted of 23.1 percent from organic volume and 1.4 percent from acquisitions. Sales in the Asia Pacific region were $594,298, an increase of 12.7 percent from the prior year, with volume increasing 13.2 percent partially offset by unfavorable currency effects of 0.5 percent. The increase in sales volume consisted of 12.3 percent from organic growth and 0.9 percent from acquisitions.

It is estimated that the effect of pricing on 2017 total sales was not material relative to 2016.

Operating profit – Cost of sales were $927,981 in 2017, up 13.8 percent from $815,495 in 2016. Gross profit, expressed as a percentage of sales, increased to 55.1 percent in 2017 from 54.9 percent in 2016. Of the 0.2 percentage point improvement in gross margin, favorable product mix added 0.3 percentage points primarily related to higher sales growth in our Adhesive Dispensing Systems and Advanced Technology Systems segments, which have higher margins than the Industrial Coating Systems segment. The 0.1 percentage point offset is primarily due to unfavorable currency translation effects.

Selling and administrative expenses were $678,861 in 2017, compared to $594,293 in 2016. The 14.2 percentage point increase includes 6.1 percent primarily in support of higher sales growth, 6.1 percent related to the first year effect of acquisitions and 2.5 percent of corporate charges related to acquisition transaction costs, offset by 0.5 percentage points due to currency translation effects.

Selling and administrative expenses as a percentage of sales decreased to 32.8 percent in 2017 from 32.9 percent in 2016. Of the 0.1 percentage point improvement, 2.5 percentage points is due to leveraging higher sales growth in our Adhesive Dispensing Systems and Advanced Technology Systems segments. This improvement was partially offset by 1.7 percentage points due to the first year effect of acquisitions and 0.7 percentage points due to corporate charges related to acquisition transaction costs.

Severance and restructuring costs of $2,438 were recorded in 2017. Within the Adhesives Dispensing Systems segment, restructuring initiatives to optimize operations in the U.S. and Belgium and consolidate certain polymer processing product line facilities in the U.S. resulted in severance and restructuring costs of $2,618. Within the Advanced Technology Systems segment, costs of $180 were reversed during 2017 related to a 2015 restructuring initiative. No costs related to severance and restructuring were recorded in the Industrial Coating Systems segment in 2017. Additional costs related to these initiatives are not expected to be material in future periods. All severance and restructuring costs are included in selling and administrative expenses in the Consolidated Statements of Income.

Operating capacity for each of our segments can support fluctuations in order activity without significant changes in operating costs. Also, currency translation affects reported operating margins. Operating margins for each segment were unfavorably impacted by a stronger dollar primarily against the Euro during 2017 as compared to 2016.

Operating profit as a percentage of sales increased to 22.1 percent in 2017 compared to 21.5 percent in 2016. Of the 0.6 percentage point improvement in operating margin, favorable leverage of our selling and administrative expenses contributed 2.4 percentage points, lower severance and restructuring expenses added 0.5 percentage points, and favorable product mix added 0.2 percentage points primarily related to higher sales growth in our Adhesives Dispensing Systems and Advanced Technology Systems segments. This improvement was offset by 1.7 percentage points due to the first year effect of acquisitions, 0.7 percentage points due to corporate charges related to acquisition transaction costs, and 0.1 percentage points due to short term purchase price accounting charges for acquired inventory.

For the Adhesive Dispensing Systems segment, operating profit as a percentage of sales increased to 27.7 percent in 2017 compared to 26.1 percent in 2016. Of the 1.6 percentage point improvement in operating margin, favorable product mix added 0.7 percentage points due to increased sales to consumer non-durable, disposable hygiene and rigid packaging end markets, lower severance and restructuring expenses added 0.6 percentage points, favorable foreign currency translation effects added 0.2 percentage points and favorable leverage of selling and administrative expenses added 0.1 percentage points.

For the Advanced Technology Systems segment, operating profit as a percentage of sales increased to 25.4 percent in 2017 compared to 23.6 percent in 2016. Of the 1.8 percentage point improvement in operating margin, favorable leverage of our selling and administrative expenses due to higher sales contributed 5.6 percentage points, favorable product mix added 0.4 percentage points, and lower severance and restructuring expenses contributed 0.2 percentage points. These increases were partially offset by 4.0 percentage points due to the first year effect of acquisitions, 0.3 percentage points due to unfavorable currency translation effects, and 0.1 percentage points due to short term purchase price accounting charges for acquired inventory.

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For the Industrial Coating Systems segment, operating profit as a percentage of sales increased to 17.4 percent in 2017 compared to 17.2 percent in 2016. Of the 0.2 percentage point improvement in operating margin, lower severance and restructuring expenses added 0.8 percentage points and favorable leverage of our selling and administrative expenses added 0.4 percentage points. These increases were offset by 0.7 percentage points related to unfavorable product mix and 0.3 percentage points related to unfavorable foreign currency translation effects.

Interest and other income (expense) - Interest expense in 2017 was $36,601, an increase of $15,279, or 71.7 percent, from 2016. The increase was due to higher average borrowing levels between periods. Other expense in 2017 was $1,934 compared to other income of $657 in 2016. Included in the current year’s other expense are foreign currency losses of $686. Included in the prior year’s other income were a litigation settlement of $800 and foreign currency gains of $2,004. These gains were partially offset by $1,530 of net unfavorable adjustments primarily related to the reversal of an indemnification asset resulting from the effective settlement of a tax exam.

Income taxes – Income tax expense in 2017 was $124,489, or 29.6 percent of pre-tax income, as compared to $96,651, or 26.2 percent of pre-tax income in 2016.

Our income tax provision for 2017 includes a discrete tax expense of $1,070 related to nondeductible acquisition costs.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was enacted which retroactively reinstated the Federal Research and Development Tax Credit (Federal R&D Tax Credit) as of January 1, 2015, and made it permanent. As a result, our income tax provision for 2016 includes a discrete tax benefit of $2,200 related to 2015. The tax rate for 2016 also includes a discrete tax benefit of $6,154 related to dividends paid from previously taxed foreign earnings generated prior to 2015, and a benefit of $2,682 related to the effective settlement of a tax exam.

Net income – Net income was $295,802, or $5.08 per diluted share, in 2017, compared to net income of $271,843, or $4.73 per diluted share, in 2016. This represents an 8.8 percent increase in net income and a 7.4 percent increase in diluted earnings per share.

2016 compared to 2015

Sales – Worldwide sales for 2016 were $1,808,994, an increase of 7.1 percent from 2015 sales of $1,688,666. Sales volume increased 8.5 percent and unfavorable currency translation effects reduced sales by 1.4 percent. The volume increase consisted of 6.5 percent from organic growth and 2.0 percent from acquisitions. We had one acquisition during 2016, LinkTech, which is included within the Advanced Technology Systems segment. Three acquisitions were made during 2015: Liquidyn GmbH (“Liquidyn”) and MatriX Technologies GmbH (“MatriX”), which were included within the Advanced Technology Systems segment, and WAFO Produktionsgesellschaft GmbH (“WAFO”), which was included in the Adhesives Dispensing Systems segment. As used throughout this Form 10-K, geographic regions include the Americas (Canada, Mexico and Central and South America), Asia Pacific (excluding Japan), Europe, Japan, and the United States.

Sales of the Adhesive Dispensing Systems segment were $879,573 in 2016, an increase of $43,507, or 5.2 percent, from 2015 sales of $836,066. The increase was the net result of a sales volume increase of 6.9 percent partially offset by unfavorable currency effects that reduced sales by 1.7 percent. The sales volume increase consisted of 0.7 percent from the WAFO acquisition and 6.2 percent from organic volume. Within this segment, sales volume increased in all geographic regions except for the Americas and Japan, and was particularly strong in Europe. Organic growth was driven by product lines serving consumer non-durable, disposable hygiene, general product assembly, rigid packaging and polymer processing end markets.

Sales of the Advanced Technology Systems segment were $676,329 in 2016, an increase of $82,471, or 13.9 percent, from 2015 sales of $593,858. The increase was the result of a sales volume increase of 14.7 percent partially offset by unfavorable currency effects that reduced sales by 0.8 percent. The sales volume increase consisted of 10.1 percent from organic volume and 4.6 percent from the first-year effect of acquisitions. Within the segment, sales volume, inclusive of acquisitions, increased in all geographic regions, and was most pronounced in Japan and Asia Pacific. Growth was driven by increased demand for test and inspection and automated dispensing solutions serving electronics end markets, as well continued strength in fluid management product lines serving medical and industrial end markets.

Sales of the Industrial Coating Systems segment were $253,092 in 2016, a decrease of $5,650, or 2.2 percent, from 2015 sales of $258,742. The decrease was the result of a sales volume decrease of 0.6 percent and unfavorable currency effects that reduced sales by 1.6 percent. Within this segment, sales volume increased in the Americas and Asia Pacific regions, and was offset by decreases in the United States, Europe and Japan. Growth in cold material product lines serving automotive end markets was offset by softness in powder coating and container product lines serving industrial end markets.

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Sales outside the United States accounted for 70.6 percent of our sales in 2016, as compared to 68.6 percent in 2015. On a geographic basis, sales in the United States were $531,117, an increase of 0.2 percent from 2015. The increase in sales volume consisted of 0.4 percent from acquisitions, offset by an organic volume decline of 0.2 percent. In the Americas region, sales were $124,657, a decrease of 3.6 percent from 2015, with volume increasing 2.5 percent offset by unfavorable currency effects of 6.1 percent. The increase in sales volume consisted of 1.7 percent from organic volume and 0.8 percent from acquisitions. Sales in Europe were $503,869, an increase of 8.9 percent from 2015, with volume increasing 12.3 percent partially offset by unfavorable currency effects of 3.4 percent. The increase in sales volume consisted of 9.2 percent from organic volume and 3.1 percent from acquisitions. Sales in Japan were $122,054, an increase of 13.2 percent from 2015, with volume increasing 2.2 percent and favorable currency effects of 11.0 percent. The increase in sales volume consisted of 1.9 percent from organic volume and 0.3 percent from acquisitions. Sales in the Asia Pacific region were $527,297, an increase of 14.9 percent from the prior year, with volume increasing 17.4 percent partially offset by unfavorable currency effects of 2.5 percent. The increase in sales volume consisted of 14.0 percent from organic growth and 3.4 percent from acquisitions.

It is estimated that the effect of pricing on 2016 total sales was not material relative to 2015.

Operating profit – Cost of sales were $815,495 in 2016, up 5.3 percent from 2015. Gross profit, expressed as a percentage of sales, increased to 54.9 percent in 2016 from 54.1 percent in 2015. Of the 0.8 percentage point improvement in gross margin, favorable product mix added 1.3 percentage points primarily related to higher sales growth in our Adhesive Dispensing Systems and Advanced Technology Systems segments, which have higher margins relative to our Industrial Coating Systems segment. The 0.5 percentage point offset is primarily due to unfavorable currency translation effects.

Selling and administrative expenses were $594,293 in 2016, compared to $584,823 in 2015. The 1.6 percent increase includes 2.9 percent primarily in support of higher sales growth, offset by 1.3 percent due to currency translation effects.

Selling and administrative expenses as a percentage of sales decreased to 32.9 percent in 2016 from 34.6 percent in 2015. The 1.7 percentage point improvement is primarily due to leveraging higher sales growth in our Adhesive Dispensing Systems and Advanced Technology Systems segments.

Severance and restructuring costs of $10,775 were recorded in 2016. Within the Adhesives Dispensing Systems segment, restructuring initiatives to optimize operations in the U.S. and Belgium and consolidate certain polymer processing product line facilities in the U.S. resulted in severance and restructuring costs of $7,800. To enhance operational efficiency and customer service within the Advanced Technology Systems segment, a restructuring initiative resulted in severance and restructuring costs of $1,054. Within the Industrial Coatings Systems segment, a restructuring program to enhance operational efficiency and customer service resulted in severance costs of $1,921. Additional costs related to these initiatives are not expected to be material in future periods. All severance and restructuring costs are included in selling and administrative expenses in the Consolidated Statements of Income.

Operating capacity for each of our segments can support fluctuations in order activity without significant changes in operating costs. Also, currency translation affects reported operating margins. Operating margins for each segment were unfavorably impacted by a stronger dollar primarily against the British Pound and Chinese Yuan during 2016 as compared to 2015.

Operating profit as a percentage of sales increased to 21.5 percent in 2016 compared to 18.8 percent in 2015. Of the 2.7 percentage point improvement in operating margin, favorable leverage of our selling and administrative expenses contributed 1.8 percentage points, favorable product mix added 1.3 percentage points primarily related to higher sales growth in our Adhesives Dispensing Systems and Advanced Technology Systems segments, which have higher margins relative to our Industrial Coating Systems segment, and lower severance and restructuring expenses contributed 0.1 percentage points. The 0.5 percentage point offset is primarily due to unfavorable currency translation effects.

For the Adhesive Dispensing Systems segment, operating profit as a percentage of sales increased to 26.1 percent in 2016 compared to 23.4 percent in 2015. Of the 2.7 percentage point improvement in operating margin, favorable leverage of our selling and administrative expenses contributed 2.0 percentage points, favorable product mix added 1.2 percentage points due to increased sales to consumer non-durable, disposable hygiene, general product assembly and rigid packaging end markets, and lower severance and restructuring expense added 0.1 percentage points. The 0.6 percentage point offset is primarily due to unfavorable currency translation effects.

For the Advanced Technology Systems segment, operating profit as a percentage of sales increased to 23.6 percent in 2016 compared to 20.4 percent in 2015. Of the 3.2 percentage point improvement in operating margin, favorable leverage of our selling and administrative expenses contributed 2.2 percentage points, favorable product mix added 0.9 percentage points, and lower severance and restructuring expenses contributed 0.3 percentage points. The 0.2 percentage point offset is primarily due to unfavorable currency translation effects.

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For the Industrial Coating Systems segment, operating profit as a percentage of sales increased to 17.2 percent in 2016 compared to 16.0 percent in 2015. Of the 1.2 percentage point improvement in operating margin, favorable product mix added 2.3 percentage points, primarily related to sales of engineered systems for which margins vary depending on the type of customer application, and favorable leverage of our selling and administrative expenses contributed 0.2 percentage points. The remaining 1.3 percentage point offset was primarily due to severance and restructuring expenses and unfavorable currency translation effects.

Interest and other income (expense) - Interest expense in 2016 was $21,322, an increase of $3,218, or 17.8 percent, from 2015. The increase was due to higher average borrowing levels between periods, offset by reversals of interest accruals related to the effective settlement of a tax exam. Other income in 2016 was $657 compared to $678 in 2015. Included in the current year’s other income were a litigation settlement of $800 and $2,004 of foreign currency gains. These gains were partially offset by $1,530 of charges primarily related to the reversal of an indemnification asset resulting from the effective settlement of a tax exam. Significant items in 2015 were proceeds from a favorable litigation settlement of $1,608 and loss on disposal of fixed assets of $653.

Income taxes – Income tax expense in 2016 was $96,651, or 26.2 percent of pre-tax income, as compared to $89,751, or 29.8 percent of pre-tax income in 2015.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was enacted which retroactively reinstated the Federal Research and Development Tax Credit (Federal R&D Tax Credit) as of January 1, 2015, and made it permanent. As a result, our income tax provision for 2016 includes a discrete tax benefit of $2,200 related to 2015. The tax rate for 2016 also includes a discrete tax benefit of $6,154 related to dividends paid from previously taxed foreign earnings generated prior to 2015, and a benefit of $2,682 related to the effective settlement of a tax exam.

Net income – Net income was $271,843, or $4.73 per diluted share, in 2016, compared to net income of $211,111, or $3.45 per diluted share, in 2015. This represents a 28.8 percent increase in net income and a 37.1 percent increase in diluted earnings per share. The percentage change in earnings per share is more than the percentage change in net income due to a lower number of shares outstanding in the current year as a result of share repurchases.

Liquidity and Capital Resources

Cash and cash equivalents increased $23,144 in 2017. Cash provided by operating activities was $349,673 in 2017, compared to $331,158 in 2016. The primary sources were net income adjusted for non-cash income and expenses (consisting of depreciation and amortization, non-cash stock compensation, provision for losses on receivables, deferred income taxes, other non-cash expense, and loss on sale of property, plant and equipment) and the tax benefit from the exercise of stock options, the sum of which was $406,262 in 2017, compared to $358,984 in 2016. The increase in cash provided by operating activities was primarily due to higher net income. Operating assets and liabilities used $56,589 of cash in 2017, compared to $27,826 in 2016.

Cash used in investing activities was $877,964 in 2017, compared to $102,201 in 2016. In the current year, cash of $805,943 was used for the ACE, InterSelect GmbH, Plas-Pak, and Vention acquisitions and $4,470 was used for equity investments, partially offset by cash received of $4,007 which was primarily due to the sale of a building in the U.S. Capital expenditures were $71,558 in 2017 compared to $60,851 in 2016.

Cash of $547,829 was provided by financing activities in 2017, compared to cash of $210,280 used in 2016. Net proceeds from long-term debt and short-term borrowings provided $602,221 in 2017, compared to net short and long-term repayments of $130,217 in 2016. The increase in net proceeds is primarily due to our new $705,000 term loan facility used for the Vention acquisition during the second quarter of 2017, partially offset by current year repayments. Issuance of common shares related to employee benefit plans generated $14,086 of cash in 2017, up from $11,476 in 2016. This increase was the result of higher stock option exercises. In 2017 cash of $3,216 was used for the purchase of treasury shares, down from $33,421 in 2016. Dividend payments were $63,840 in 2017, up from $56,436 in 2016 due to an increase in the annual dividend to $1.11 per share from $0.99 per share.

The following is a summary of significant changes by balance sheet caption from October 31, 2016 to October 31, 2017. Receivables increased $76,527 primarily due to higher sales volume. Inventories increased $43,905 due to acquisitions completed during 2017 and higher level of business activity in the second half of 2017 as compared to 2016. Net property, plant and equipment increased $73,282 due to capital expenditures of $71,558 and acquisitions of $42,496, offset by depreciation expense and the sale of a building during the first quarter of 2017. Goodwill increased $482,073 due primarily to acquisitions completed during 2017. Net intangible assets increased $286,878, primarily due to acquisitions completed during 2017, partially offset by amortization expense.

The increase of $10,568 in accrued liabilities was primarily due to higher compensation-related accruals. Current maturities of long-term debt increased $288,494 primarily as a result of the $326,460 reclassification from long-term debt to current maturities related to our 2015 and 2017 term loan facilities, certain of our 2012 senior notes, and our New York Life credit facility, partially offset by

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$27,400 in repayments of certain of our 2012 senior notes, and $10,556 in repayments made under our New York Life credit facility. The long-term debt increase of $313,626 was primarily due to the new $705,000 term loan facility used for the Vention acquisition during the second quarter of 2017, partially offset by loan repayments and the $326,460 reclassification from long-term debt to current maturities as noted above. The $18,710 decrease in long-term pension obligations and the $3,192 increase in postretirement obligations were primarily the result of changes to global weighted-average discount rates.

In December 2014, the board of directors authorized a new $300,000 common share repurchase program. This program replaced the $200,000 program approved by the board in August 2013. In August 2015, the board of directors authorized the repurchase of up to an additional $200,000 of the Company’s common shares. This new authorization added capacity to the board’s December 2014 authorization to repurchase $300,000 of shares. Approximately $118,971 remained available for share repurchases at October 31, 2017. Uses for repurchased shares include the funding of benefit programs including stock options, restricted stock and 401(k) matching. Shares purchased are treated as treasury shares until used for such purposes. The repurchase program is being funded using cash from operations and proceeds from borrowings under our credit facilities.

As of October 31, 2017, approximately 94 percent of our consolidated cash and cash equivalents were held at various foreign subsidiaries. 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 represent the post-income tax earnings under U.S. GAAP not adjusted for previously taxed income which aggregated approximately $1,026,793 and $757,501 at October 31, 2017 and 2016, respectively. Should these earnings be distributed, applicable foreign tax credits, distributions of previously taxed income, and utilization of other attributes would substantially offset taxes due upon the distribution. It is not practical to estimate the amount of additional taxes that might be payable on such undistributed earnings.

Contractual Obligations

The following table summarizes contractual obligations as of October 31, 2017:

		Payments Due by Period
						Less than				1-3				4-5				After 5
		Total				1 Year				Years				Years				Years
Long-term debt (1)		$	1,586,813			$	326,587			$	658,800			$	373,978			$	227,448
Interest payments on long-term debt (1)			45,148				11,173				15,628				10,366				7,981
Capital lease obligations (2)			19,358				6,353				6,849				1,501				4,655
Operating leases (2)			74,117				17,337				23,500				15,560				17,720
Contributions related to pension and postretirement benefits (3)			25,000				25,000				—				—				—
Purchase obligations (4)			74,425				72,751				1,674				—				—
Total obligations		$	1,824,861			$	459,201			$	706,451			$	401,405			$	257,804

(1)

In March 2017, we entered into a $705,000 term loan facility with a group of banks. The Term Loan Agreement provides for the following term loans in three tranches: $200,000 due in October 2018, $200,000 due in March 2020, and $305,000 due in March 2022. The weighted average interest rate for borrowings under this agreement was 2.33 percent at October 31, 2017. Borrowings under this agreement were used for the single purpose of acquiring Vention during the second quarter of 2017. We were in compliance with all covenants at October 31, 2017.

In February 2015, we increased, amended and extended our existing syndicated revolving credit agreement that was scheduled to expire in December 2016. We entered into a $600,000 unsecured, multicurrency credit facility with a group of banks. This facility has a five-year term and includes a $50,000 subfacility for swing-line loans and may be increased from $600,000 to $850,000 under certain conditions. It expires in February 2020. Balances outstanding under the prior facility were transferred to the new facility. At October 31, 2017, $249,138 was outstanding under this facility, compared to $244,680 outstanding at October 31, 2016. Balances outstanding under the prior credit agreement were transferred to the new credit agreement. The weighted average interest rate for borrowings under this agreement was 2.24 perecnt at October 31, 2017. We were in compliance with all covenants at October 31, 2017, and the amount we could borrow under the facility would not have been limited by any debt covenants.

We entered into a $150,000 three-year Note Purchase and Private Shelf agreement with New York Life Investment Management LLC in 2011. In 2015, the amount of the facility was increased to $180,000, and in 2016 it was increased to $200,000. Notes issued under the agreement may have a maturity of up to 12 years, with an average life of up to 10 years, and are unsecured. The interest rate on each note can be fixed or floating and is based upon the market rate at the borrowing date. At October 31, 2017, there was $146,666 outstanding under this facility, compared to $157,222 at October 31, 2016. Existing notes

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mature between September 2018 and September 2026. The interest rate on each borrowing is fixed based upon the market rate at the borrowing date or is variable based upon the LIBOR rate. At October 31, 2017, the amount outstanding under this facility was at fixed rates of 2.21 percent and 2.56 percent and at variable rates of 2.49 percent and 2.60 percent.This agreement contains customary events of default and covenants related to limitations on indebtedness and the maintenance of certain financial ratios. We were in compliance with all covenants at October 31, 2017, and the amount we could borrow would not have been limited by any debt covenants.

In 2012, we entered into a Note Purchase Agreement with a group of insurance companies under which we sold $200,000 of Senior Notes. At October 31, 2017, $172,600 was outstanding under this agreement. Existing notes mature between July 2018 and July 2025 and bear interest at fixed rates between 2.62 percent and 3.13 percent. We were in compliance with all covenants at October 31, 2017.

In April 2015, we entered into a $200,000 term loan facility with a group of banks. $100,000 is due in April 2018 and has a weighted average interest rate of 2.24 percent and $100,000 is due in April 2020 and has a weighted average interest rate of 2.34 percent. This loan was used to pay down $100,000 of our previous 364-day unsecured credit facility and $100,000 of our revolving credit facility. We were in compliance with all covenants at October 31, 2017.

In July 2015, we entered into a Note Purchase Agreement under which $100,000 of Senior Unsecured Notes were purchased primarily by a group of insurance companies. The notes mature in July 2019 and July 2027 and bear interest at fixed rates of 2.89 percent and 3.19 percent. We were in compliance with all covenants at October 31, 2017.

In October 2015, we entered into a €70,000 agreement with Bank of America Merrill Lynch International Limited. The term of the agreement is three years and can be extended by one year on two annual occasions if notice is given between 180 days and 30 days before the maturity date. The interest rate is variable based on the EUR LIBOR rate plus applicable margin based on our leverage ratio. In September 2016 this Agreement was increased to €110,000, and amended and extended to September 2019. At October 31, 2016, the balance outstanding was €72,300 ($79,389). At October 31, 2017, the balance outstanding was €10,467 ($12,191) and the weighted average interest rate was 1.00 percent. We were in compliance with all covenants at October 31, 2017.

See Note 10 for additional information.

(2)	See Note 11 for additional information.

(3)	Pension and postretirement plan funding amounts after 2017 will be determined based on the future funded status of the plans and therefore cannot be estimated at this time. See Note 7 for additional information.

(4)	Purchase obligations primarily represent commitments for materials used in our manufacturing processes that are not recorded in our Consolidated Balance Sheet.

We believe that the combination of present capital resources, cash from operations and unused financing sources are more than adequate to meet cash requirements for 2018. There are no significant restrictions limiting the transfer of funds from international subsidiaries to the parent company.

Outlook

Our operating performance, balance sheet position, and financial ratios for 2017 remained strong relative to recent years, although uncertainties persisted in global financial markets and the general economic environment. Going forward, we are well-positioned to manage our liquidity needs that arise from working capital requirements, capital expenditures, contributions related to pension and postretirement obligations, and principal and interest payments on indebtedness. Primary sources of capital to meet these needs as well as other opportunistic investments are cash provided by operations and borrowings under our loan agreements. In 2017, cash from operations was 16.9 percent of revenue. With respect to borrowings under existing loan agreements, as of October 31, 2017, we had $350,862 available capacity under our five-year term, $600,000 unsecured, multicurrency credit facility which may be increased to $850,000 under certain conditions. This credit facility expires in February 2020. In addition, we had $53,334 borrowing capacity remaining on our $200,000 three-year Private Shelf agreement with New York Life Investment Management LLC. While these facilities provide the contractual terms for any borrowing, we cannot be assured that these facilities would be available in the event that these financial institutions failed to remain sufficiently capitalized.

Other loan agreements exist with no remaining borrowing capacity, but factor into debt covenant calculations that affect future borrowing capacity. In July 2012, we entered into a note purchase agreement with a group of insurance companies under which we sold $200,000 of senior notes. The notes mature between July 2017 and July 2025 and bear interest at fixed rates between 2.62 percent and 3.13 percent. As of April 2015, we entered into a $200,000 term loan facility with PNC Bank. $100,000 is due in April 2018 and has a weighted average interest rate of 2.24 percent, and $100,000 is due in April 2020 and has a weighted average interest rate of 2.34 percent. In July 2015, we entered into a Note Purchase Agreement under which $100,000 of senior unsecured notes were

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purchased primarily by a group of insurance companies. The notes consist of two tranches, Series A and B at $50,000 each, maturing in July 2025 and July 2027, and bearing interest at fixed rates of 2.89 percent and 3.19 percent, respectively. In October 2015, we entered into a €70,000 three year term loan agreement with Bank of America Merrill Lynch International in London. This agreement was amended in September 2016 to extend the term by one year and increase the principal balance. The balance of this loan at October 31, 2017 was €10,467. The interest rate is variable based on the LIBOR rate plus applicable margin based on our leverage ratio, and the weighted average interest rate was 1.00 percent at October 31, 2017. In March 2017, we entered into a $705,000 term loan facility with a group of banks. The Term Agreement provides for terms loans in three tranches: $200,000 due in October 2018, $200,000 due in March 2020 and $305,000 due in March 2022. The weighted average interest rate for borrowings under this agreement was 2.33 percent at October 31, 2017.

Respective to all of these loans are two primary covenants, the leverage ratio that restricts indebtedness (net of cash) to a maximum 3.50 times consolidated four-quarter trailing EBITDA and the interest coverage ratio that requires four-quarter trailing EBITDA to be at minimum 3.0 times consolidated trailing four-quarter interest expense. (Debt, EBITDA, and interest expense are as defined in respective credit agreements.)

Regarding expectations for 2018, we are optimistic about longer term growth opportunities in the diverse consumer durable, non-durable, medical, electronics and industrial end markets we serve. For the first quarter of 2018, sales are expected to increase 30 percent to 34 percent compared to the first quarter a year ago. This growth includes organic volume up 15 percent to 19 percent, 11 percent growth from the first year effect of acquisitions, and a positive currency effect of 4 percent based on the current exchange rate environment. The short cycle nature of our end markets does not provide much visibility beyond a fiscal quarter, however, we do expect growth rates to moderate beyond our first quarter, particularly when considering our challenging comparisons to the prior year. We move forward with caution given continued slow growth in emerging markets, expectations for global GDP indicating a low-growth macroeconomic environment, tax reform and trade agreement implications, and marketplace effects of political instability in certain areas of the world.

Though the pace of improvement in the global economy remains unclear, our growth potential has been demonstrated over time from our capacity to build and enhance our core businesses by entering emerging markets and pursuing market adjacencies. We drive value for our customers through our application expertise, differentiated technology, and direct sales and service support. Our priorities also are focused on operational efficiencies by employing continuous improvement methodologies in our business processes. We expect our efforts will continue to provide more than sufficient cash from operations for meeting our liquidity needs and paying dividends to common shareholders, as well as enabling us to invest in the development of new applications and markets for our technologies. Cash from operations have been 16 to 18 percent of revenues over the past five years, resulting in more than sufficient cash for our ordinary business requirements. We believe cash provided from operations, our available borrowing capacity and ready access to capital markets is more than adequate to fund our liquidity needs within the next year.

With respect to contractual spending, the table above presents our financial obligations as $1,824,861, of which $459,201 is payable in 2018. In August 2015, the board of directors approved a $200,000 common share repurchase program that added capacity to the board’s December 2014 approval authorizing management at its discretion to repurchase up to $300,000 of common shares, thereby increasing the total repurchase authorization to $500,000. Approximately $118,971 remained available for share repurchases as of October 31, 2017. The repurchase program is funded using cash from operations and proceeds from borrowings under our credit facilities. Timing and actual number of shares subject to repurchase are contingent on a number of factors including levels of cash generation from operations, cash requirements for acquisitions, repayment of debt and our share price. We intend to focus on capital expenditures for 2018 on continued investments in our information systems and projects that improve both capacity and efficiency of manufacturing and distribution operations.

Effects of Foreign Currency

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

In 2017, as compared with 2016, the United States dollar was generally stronger against foreign currencies. If 2016 exchange rates had been in effect during 2017, sales would have been approximately $8,210 higher and third-party costs would have been approximately $5,791 higher. In 2016, as compared with 2015, the United States dollar was generally stronger against foreign currencies. If 2015 exchange rates had been in effect during 2016, sales would have been approximately $23,249 higher and third-party costs would have been approximately $8,332 higher. These effects on reported sales do not include the impact of local price adjustments made in response to changes in currency exchange rates.

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Inflation

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

Trends

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

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

This Form 10-K, particularly “Management’s Discussion and Analysis,” contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income, earnings, cash flows, changes in operations, operating improvements, businesses in which we operate and the United States and global economies. Statements in this 10-K that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” use of the future tense and similar words or phrases.

In light of these risks and uncertainties, actual events and results may vary significantly from those included in or contemplated or implied by such statements. Readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Factors that could cause our actual results to differ materially from the expected results are discussed in Item 1A, Risk Factors.