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EX-10.1 - EXHIBIT 10.1 - DOVER Corpa2014093010-qexhibit101.htm
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EXCEL - IDEA: XBRL DOCUMENT - DOVER CorpFinancial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

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: 1-4018

Dover Corporation
(Exact name of registrant as specified in its charter)

Delaware
53-0257888
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3005 Highland Parkway
 
Downers Grove, Illinois
60515
(Address of principal executive offices)
(Zip Code)

(630) 541-1540
(Registrant’s telephone number, including area code)

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.
Yes þ  No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company o

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

The number of shares outstanding of the Registrant’s common stock as of October 9, 2014 was 165,362,322.



Dover Corporation
Form 10-Q
Table of Contents

Page
 
 
 
 
 
 
 
 
 
 
 







Item 1. Financial Statements

DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share figures)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
2,092,467

 
$
1,940,211

 
$
6,024,852

 
$
5,636,599

Cost of goods and services
1,290,625

 
1,183,864

 
3,690,384

 
3,442,816

Gross profit
801,842

 
756,347

 
2,334,468

 
2,193,783

Selling and administrative expenses
442,709

 
408,264

 
1,351,106

 
1,260,321

Operating earnings
359,133

 
348,083

 
983,362

 
933,462

Interest expense, net
31,239

 
30,236

 
95,871

 
90,752

Other (income) expense, net
(803
)
 
177

 
(6,489
)
 
(1,065
)
Earnings before provision for income taxes and discontinued operations
328,697

 
317,670

 
893,980

 
843,775

Provision for income taxes
95,872

 
91,435

 
267,388

 
192,269

Earnings from continuing operations
232,825

 
226,235

 
626,592

 
651,506

(Loss) earnings from discontinued operations, net
(981
)
 
42,879

 
(20,651
)
 
157,660

Net earnings
$
231,844

 
$
269,114

 
$
605,941

 
$
809,166

 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
1.40

 
$
1.33

 
$
3.74

 
$
3.79

Diluted
$
1.38

 
$
1.31

 
$
3.69

 
$
3.75

 
 
 
 
 
 
 
 
(Loss) earnings per share from discontinued operations:
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.25

 
$
(0.12
)
 
$
0.92

Diluted
$
(0.01
)
 
$
0.25

 
$
(0.12
)
 
$
0.91

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
1.40

 
$
1.58

 
$
3.62

 
$
4.71

Diluted
$
1.38

 
$
1.56

 
$
3.57

 
$
4.65

 
 
 
 
 
 
 
 
Dividends paid per common share
$
0.40

 
$
0.375

 
$
1.15

 
$
1.075

 

See Notes to Condensed Consolidated Financial Statements



1


DOVER CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in thousands)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net earnings
$
231,844

 
$
269,114

 
$
605,941

 
$
809,166

 
 
 
 
 
 
 
 
Other comprehensive (loss) earnings, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation (losses) gains during period
(70,369
)
 
61,800

 
(76,771
)
 
19,605

Reclassification of foreign currency translation (gains) losses to earnings upon sale of subsidiaries
(8,406
)
 

 
(8,406
)
 
2,905

Total foreign currency translation
(78,775
)
 
61,800

 
(85,177
)
 
22,510

 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans:
 
 
 
 
 
 
 
Actuarial gains arising during period

 
80,455

 

 
80,455

Prior service cost arising during period

 
(121
)
 

 
(121
)
Amortization of actuarial losses included in net periodic pension cost
1,287

 
2,737

 
4,172

 
10,491

Amortization of prior service costs included in net periodic pension cost
1,516

 
1,436

 
4,300

 
4,286

Total pension and other postretirement benefit plans
2,803

 
84,507

 
8,472

 
95,111

 
 
 
 
 
 
 
 
Changes in fair value of cash flow hedges:
 
 
 
 
 
 
 
Unrealized net (losses) gains arising during period
(466
)
 
106

 
(861
)
 
200

Net losses (gains) reclassified into earnings
169

 
(401
)
 
(20
)
 
(313
)
Total cash flow hedges
(297
)
 
(295
)
 
(881
)
 
(113
)
 
 
 
 
 
 
 
 
Other
927

 
115

 
1,546

 
280

 
 
 
 
 
 
 
 
Other comprehensive (loss) earnings
(75,342
)
 
146,127

 
(76,040
)
 
117,788

 
 
 
 
 
 
 
 
Comprehensive earnings
$
156,502

 
$
415,241

 
$
529,901

 
$
926,954


See Notes to Condensed Consolidated Financial Statements.


2


DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

 
September 30, 2014
 
December 31, 2013
Current assets:
 
 
 
Cash and cash equivalents
$
706,234

 
$
803,882

Receivables, net of allowances of $18,240 and $18,677
1,338,586

 
1,133,694

Inventories, net
908,048

 
777,830

Prepaid and other current assets
105,299

 
63,747

Deferred tax assets
58,164

 
63,935

Total current assets
3,116,331

 
2,843,088

Property, plant and equipment, net
818,730

 
818,863

Goodwill
3,446,317

 
3,280,993

Intangible assets, net
1,327,232

 
1,294,177

Other assets and deferred charges
239,689

 
197,243

Assets of discontinued operations
10,887

 
2,432,286

Total assets
$
8,959,186

 
$
10,866,650

 
 
 
 
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
153,066

 
$
229,278

Accounts payable
649,805

 
548,715

Accrued compensation and employee benefits
254,607

 
273,404

Accrued insurance
98,781

 
92,600

Other accrued expenses
230,400

 
228,985

Federal and other taxes on income
7,305

 
49,661

Total current liabilities
1,393,964

 
1,422,643

Long-term debt
2,570,257

 
2,599,201

Deferred income taxes
533,994

 
485,344

Other liabilities
458,301

 
477,748

Liabilities of discontinued operations
80,731

 
504,318

Stockholders' equity:
 

 
 

Total stockholders' equity
3,921,939

 
5,377,396

Total liabilities and stockholders' equity
$
8,959,186

 
$
10,866,650



See Notes to Condensed Consolidated Financial Statements


3


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)

 
Common Stock $1 Par Value
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Earnings (Loss)
 
Treasury Stock
 
Total Stockholders' Equity
Balance at December 31, 2013
$
255,320

 
$
871,575

 
$
7,954,536

 
$
67,723

 
$
(3,771,758
)
 
$
5,377,396

Net earnings

 

 
605,941

 

 

 
605,941

Dividends paid

 

 
(192,633
)
 

 

 
(192,633
)
Separation of Knowles Corporation

 

 
(1,396,620
)
 
(26,695
)
 

 
(1,423,315
)
Common stock issued for the exercise of stock options and SARs
511

 
(15,746
)
 

 

 

 
(15,235
)
Tax benefit from the exercise of stock options and SARs

 
13,703

 

 

 

 
13,703

Share-based compensation expense

 
24,710

 

 

 

 
24,710

Common stock acquired

 
(983
)
 

 

 
(391,605
)
 
(392,588
)
Other comprehensive loss, net of tax

 

 

 
(76,040
)
 

 
(76,040
)
Balance at September 30, 2014
$
255,831

 
$
893,259

 
$
6,971,224

 
$
(35,012
)
 
$
(4,163,363
)
 
$
3,921,939

 
Preferred Stock: $100 par value per share; 100,000 shares authorized; no shares issued.


See Notes to Condensed Consolidated Financial Statements


4


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating Activities of Continuing Operations
 
 
 
Net earnings
$
605,941

 
$
809,166

 
 
 
 
Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Loss (earnings) from discontinued operations, net
20,651

 
(157,660
)
Depreciation and amortization
235,142

 
215,110

Share-based compensation
24,710

 
23,384

Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable
(205,484
)
 
(188,601
)
Inventories
(106,468
)
 
(50,740
)
Prepaid expenses and other assets
(16,566
)
 
(4,610
)
Accounts payable
87,284

 
61,273

Accrued compensation and employee benefits
(23,886
)
 
(36,634
)
Accrued expenses and other liabilities
2,689

 
(12,749
)
Contributions to domestic employee benefit plans

 
(9,000
)
Accrued and deferred taxes, net
(67,423
)
 
(59,811
)
Other, net
(24,454
)
 
(691
)
Net cash provided by operating activities of continuing operations
532,136

 
588,437

 
 
 
 
Investing Activities of Continuing Operations
 

 
 

Additions to property, plant and equipment
(112,639
)
 
(97,987
)
Acquisitions (net of cash and cash equivalents acquired)
(365,550
)
 
(118,990
)
Proceeds from the sale of property, plant and equipment
10,053

 
8,406

Proceeds from the sale of businesses
178,112

 
3,756

Other
(21,766
)
 
2,001

Net cash used in investing activities of continuing operations
(311,790
)
 
(202,814
)
 
 
 
 
Financing Activities of Continuing Operations
 

 
 

Cash received from Knowles Corporation, net of cash distributed
359,837

 

Purchase of common stock
(392,588
)
 
(407,862
)
Proceeds from exercise of share-based awards, including tax benefits
18,268

 
35,308

Payments to settle employee tax obligations on exercise of share-based awards
(19,800
)
 
(28,478
)
Dividends paid to stockholders
(192,633
)
 
(184,111
)
Change in commercial paper and notes payable, net
(75,980
)
 
61,308

Reduction of long-term debt
(1,613
)
 

Net cash used in financing activities of continuing operations
(304,509
)
 
(523,835
)
 
 
 
 
Cash Flows from Discontinued Operations
 

 
 

Net cash provided by operating activities of discontinued operations
18,728

 
142,373

Net cash used in investing activities of discontinued operations
(13,596
)
 
(64,244
)
Net cash provided by discontinued operations
5,132

 
78,129

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(18,617
)
 
(169
)
 
 
 
 
Net decrease in cash and cash equivalents
(97,648
)
 
(60,252
)
Cash and cash equivalents at beginning of period
803,882

 
800,076

Cash and cash equivalents at end of period
$
706,234

 
$
739,824


See Notes to Condensed Consolidated Financial Statements

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)


1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes for complete financial statements as required by accounting principles generally accepted in the United States of America. As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Dover Corporation (“Dover” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2013, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business, properties, and other matters.  The year-end condensed consolidated balance sheet was derived from audited financial statements.  Certain amounts in the prior year have been reclassified to conform to the current year presentation.  

During the first quarter of 2014, the Company announced the realignment of its businesses into a new segment structure, consisting of four segments, organized around its key end markets to better focus on growth strategies. See Note 16 Segment Information for additional information about the new segments, including segment results for the three and nine months ended September 30, 2014 and 2013.  

As discussed in Note 4 Discontinued Operations, the Company sold a business in the third quarter of 2014.  Therefore, the Company has classified the results of operations of this business as discontinued operations for all periods presented. In addition, as described in Note 2 Spin-Off of Knowles Corporation below, the historical results of Knowles, including the results of operations, cash flows, and related assets and liabilities have been reclassified to discontinued operations for all periods presented herein.

It is the opinion of management that these financial statements reflect all adjustments necessary for a fair statement of the interim results.  The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.

2. Spin-off of Knowles Corporation ("Knowles")

On February 28, 2014, Dover completed the distribution of Knowles to its stockholders. The transaction was completed through the pro rata distribution of 100% of the common stock of Knowles to Dover's shareholders of record as of the close of business on February 19, 2014. Each Dover shareholder received one share of Knowles common stock for every two shares of Dover common stock held as of the record date.

The following is a summary of the assets and liabilities distributed to Knowles as part of the separation on February 28, 2014:
Assets:
 
Cash and cash equivalents
$
40,163

Other current assets
340,945

Non-current assets
1,678,820

 
$
2,059,928

 
 
Liabilities:
 
Current liabilities
$
252,673

Non-current liabilities
383,940

 
$
636,613

 
 
Net assets distributed to Knowles Corporation
$
1,423,315


Knowles incurred $100,000 of borrowings under its revolving credit facility and $300,000 of borrowings under its term loan facility to finance a cash payment of $400,000 to Dover immediately prior to the distribution. Dover received net cash of $359,837 upon separation, which reflects $40,163 of cash held by Knowles on the distribution date and retained by it in connection with its separation from Dover. Dover utilized the net proceeds from Knowles to pay down commercial paper and to repurchase shares of its common stock in the first quarter of 2014.

In addition to the net assets reflected above, the Company also allocated approximately $26,695 of accumulated other comprehensive earnings to Knowles, relating primarily to foreign currency translation gains, offset by unrecognized losses on pension obligations. Also, the Company was required to reallocate a portion of its goodwill from continuing operations to a reporting unit included in

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

the Knowles distribution. The reallocation of $19,749 of goodwill was determined using a relative fair value approach. See Note 7 Goodwill and Other Intangible Assets for additional information.

The historical results of Knowles, including the results of operations, cash flows, and related assets and liabilities have been reclassified to discontinued operations for all periods presented herein. See Note 4 Discontinued Operations. Pursuant to the separation of Knowles from Dover, and the related separation and distribution agreements, any liabilities due from Dover to Knowles are not significant and will be paid in the near future.

3. Acquisitions

The following acquisitions were made during the nine months ended September 30, 2014.
2014 Acquisitions
 
 
Date
Type
Company / Product Line Acquired
Location (Near)
Segment
January 1
Stock
Heidelberg CSAT GmbH
Germany
Engineered Systems
Manufacturer of digital printing systems that are installed in-packaging-line for the identification of pharmaceutical and medical products.
 
 
 
 
 
February 3
Stock
MS Printing Solutions
Italy
Engineered Systems
Manufacturer of innovative digital ink jet printing systems for the textile and specialty material industries.
 
 
 
 
 
June 11
Asset
Timberline Manufacturing Company
Beaumont, Texas
Energy
Manufacturer of chemical injection and metering solutions for oil and gas producers.
 
 
 
 
 
July 30
Stock
WellMark Holdings, Inc.
Oklahoma City, Oklahoma
Energy
Manufacturer of valves, instrumentation, and chemical injection pumps serving the oil and gas industry.
 
 
 
 
 
July 31
Asset
SweatMiser
McDonough, Georgia
Refrigeration & Food Equipment
Manufacturer of anti-sweat controllers for doors in the refrigeration industry.
 
 
 
 
 
August 25
Stock / Asset
Liquip International
Australia
Fluids
Manufacturer of fluid handling solutions, loading arms, tank truck valves and fittings, electronic measurement systems for tank trucks, fuel filtration systems, and aviation fueling components and services.

The Company acquired these businesses in six separate transactions for net cash consideration of $365,550. The following presents the allocation of acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:
Current assets, net of cash acquired
$
72,619

Property, plant and equipment
6,610

Goodwill
205,656

Intangible assets
166,685

Current liabilities
(34,103
)
Non-current liabilities
(51,917
)
Net assets acquired
$
365,550


The amounts assigned to goodwill and major intangible asset classifications for the 2014 acquisitions are as follows:
 
Amount allocated
 
Useful life (in years)
Goodwill - Tax deductible
$
12,042

 
na
Goodwill - Non deductible
193,614

 
na
Customer intangibles
134,116

 
13
Trademarks
14,087

 
12
Technology
3,267

 
10
Other intangibles
15,215

 
7
 
$
372,341

 
 

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)


The businesses were acquired to complement and expand upon existing operations within the Energy, Fluids and Refrigeration & Food Equipment segments and the Printing & Identification platform of the Engineered Systems segment. The goodwill identified by these acquisitions reflects the benefits expected to be derived from product line expansion and operational synergies.  Upon consummation of the acquisitions, each of these entities is now wholly-owned by Dover.

The Company has substantially completed the purchase price allocations for the 2014 acquisitions.  However, if additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including through asset appraisals and learning more about the newly acquired businesses, the Company will refine its estimates of fair value to allocate the purchase price more accurately; any such revisions are not expected to be significant.

The unaudited condensed consolidated statements of earnings include the results of these businesses from the dates of acquisition.  The aggregate revenue of the 2014 acquisitions included in the Company’s consolidated revenue totaled $43,500 and $79,900 for the three and nine months ended September 30, 2014, respectively. The aggregate earnings of the 2014 acquisitions included in the Company’s consolidated pre-tax earnings totaled $4,200 and $3,100 for the three and nine months ended September 30, 2014, respectively.

Pro Forma Information

The following unaudited pro forma information illustrates the effect on the Company’s revenue and earnings from continuing operations for the three and nine months ended September 30, 2014 and 2013, assuming that the 2014 and 2013 acquisitions had taken place at the beginning of the prior year. As a result, the supplemental pro forma earnings for the three and nine months ended September 30, 2014 reflect adjustments to earnings from continuing operations as reported in the Unaudited Condensed Consolidated Statements of Earnings to exclude $2,527 and $3,723 for nonrecurring expense related to the fair value adjustments to acquisition-date inventory (after-tax) and $874 and $2,432 of acquisition-related costs (after tax) and to reflect such items in 2013. The 2014 and 2013 supplemental pro forma earnings are also adjusted to reflect the comparable impact of additional depreciation and amortization expense (net of tax) resulting from the fair value measurement of tangible and intangible assets relating to 2014 and 2013 acquisitions.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue from continuing operations:
 
 
 
 
 
 
 
As reported
$
2,092,467

 
$
1,940,211

 
$
6,024,852

 
$
5,636,599

Pro forma
2,103,041

 
2,017,881

 
6,093,575

 
5,887,229

Earnings from continuing operations:
 
 
 
 
As reported
$
232,825

 
$
226,235

 
$
626,592

 
$
651,506

Pro forma
237,010

 
230,382

 
638,159

 
654,180

Basic earnings per share from continuing operations:
 
 
 
 
As reported
$
1.40

 
$
1.33

 
$
3.74

 
$
3.79

Pro forma
1.43

 
1.35

 
3.81

 
3.81

Diluted earnings per share from continuing operations:
 
 
 
 
As reported
$
1.38

 
$
1.31

 
$
3.69

 
$
3.75

Pro forma
1.41

 
1.33

 
3.76

 
3.76



8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

4. Discontinued Operations

The results of discontinued operations for the nine months ended September 30, 2014 and the three and nine months ended September 30, 2013 include the historical results of Knowles prior to its distribution on February 28, 2014. Costs incurred by Dover to complete the spin-off of Knowles totaled $327 and $10,637 for the three months ended September 30, 2014 and 2013, respectively, and $27,055 and $13,959 for the nine months ended September 30, 2014 and 2013, respectively. See also Note 2 Spin-off of Knowles Corporation.

Additionally, the results of discontinued operations reflect the net earnings of certain non-core businesses serving the electronic assembly and test markets that have been previously sold. The Company completed the sale of one of these businesses, Everett Charles Technologies ("ECT"), in the fourth quarter of 2013. Earnings from discontinued operations for the nine months ended September 30, 2014 include an after-tax gain of $3,224 on the sale of ECT upon receipt of a working capital settlement of $4,482 in the second quarter. Earnings from discontinued operations for the nine months ended September 30, 2013 include net earnings of ECT prior to disposal, as well as a goodwill impairment charge of $54,532 ($44,188 after tax) to write down the carrying value of ECT to its estimated fair value at the time, based on the current sales price. Additionally, the Company recognized a benefit of $25,520 in 2013 as a result of the elimination of certain deferred tax liabilities in connection with a change in the expected manner of disposing of the electronic test and assembly businesses.

On July 2, 2014, the Company completed the sale of DEK International, the remaining business classified as held for sale, for total proceeds of $174,897, of which $173,630 has been received to date in cash. The sale of this business resulted in an after-tax loss on sale of $6,885, of which a loss of $7,201was recorded in the second quarter of 2014 to write down the carrying value of this business to fair value, based on estimated net proceeds at the time.

The benefit from income taxes for the three and nine months ended September 30, 2013 includes $1,971 and $54,425, respectively, of discrete tax benefits principally related to the conclusion of certain federal, state, and international tax audits.

Summarized results of the Company’s discontinued operations are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$

 
$
419,527

 
$
239,237

 
$
1,195,277

 
 
 
 
 
 
 
 
Gain (loss) on sale and impairments, net of tax
512

 

 
(3,661
)
 
(18,668
)
 
 
 
 
 
 
 
 
(Loss) earnings from operations before taxes
(355
)
 
53,020

 
(16,118
)
 
129,669

(Provision for) benefit from income taxes
(1,138
)
 
(10,141
)
 
(872
)
 
46,659

(Loss) earnings from operations, net of tax
(1,493
)
 
42,879

 
(16,990
)
 
176,328

 
 
 
 
 
 
 
 
(Loss) earnings from discontinued operations, net of tax
$
(981
)
 
$
42,879

 
$
(20,651
)
 
$
157,660



9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

Assets and liabilities of discontinued operations are summarized below:
 
September 30, 2014
 
December 31, 2013
Assets of Discontinued Operations:
 
 
 
Accounts receivable
$

 
$
346,486

Inventories, net

 
166,948

Prepaid and other current assets
8,512

 
79,356

       Total current assets
8,512

 
592,790

Property, plant and equipment, net
297

 
370,586

Goodwill and intangible assets, net

 
1,425,909

Other assets and deferred charges
2,078

 
43,001

Total assets
$
10,887

 
$
2,432,286

 
 
 
 
Liabilities of Discontinued Operations:
 

 
 

Accounts payable
$
17,498

 
$
252,605

Other current liabilities
12,297

 
99,009

       Total current liabilities
29,795

 
351,614

Deferred income taxes
19,217

 
78,723

Other liabilities
31,719

 
73,981

Total liabilities
$
80,731

 
$
504,318


At September 30, 2014, the assets and liabilities of discontinued operations relate to tax-related accruals and unrecognized benefits, as well as other accruals for compensation, legal, environmental, and warranty contingencies, relating to businesses that were sold in prior years, none of which are individually significant. At December 31, 2013, these balances also reflect the historical assets and liabilities of Knowles, which was spun off in the first quarter of 2014, and DEK, which was sold in the third quarter of 2014.

5. Inventories, net
 
September 30, 2014
 
December 31, 2013
Raw materials
$
389,530

 
$
361,880

Work in progress
184,980

 
145,789

Finished goods
463,145

 
400,281

Subtotal
1,037,655

 
907,950

Less reserves
(129,607
)
 
(130,120
)
Total
$
908,048

 
$
777,830


6. Property, Plant and Equipment, net
 
September 30, 2014
 
December 31, 2013
Land
$
57,023

 
$
58,407

Buildings and improvements
558,102

 
536,143

Machinery, equipment and other
1,742,897

 
1,696,070

 
2,358,022

 
2,290,620

Less accumulated depreciation
(1,539,292
)
 
(1,471,757
)
Total
$
818,730

 
$
818,863


7. Goodwill and Other Intangible Assets

Accounting Standards Codification ("ASC") 350, “Intangibles - Goodwill and Other Intangibles” provides guidance on an entity's subsequent measurement and subsequent recognition of goodwill and other intangibles, including subsequent changes to carrying amounts, including impairment and fair value adjustments. In accordance with the guidance set forth in ASC 350, and in connection with the realignment of its businesses, the Company reallocated goodwill among its reporting units based on their current relative fair value and tested goodwill for impairment in the first quarter of 2014. The Company concluded that no impairment indicators exist.


10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

Additionally, due to the separation of Knowles in the first quarter of 2014, the Company was required to reallocate a portion of its goodwill from continuing operations to a reporting unit included in the Knowles distribution, and therefore reported within discontinued operations. The reallocation of $19,749 of goodwill was determined using a relative fair value approach.

The following table provides the changes in carrying value of goodwill by segment for the nine months ended September 30, 2014:
 
Energy
 
Engineered Systems
 
Fluids
 
Refrigeration & Food Equipment
 
Total
Balance at December 31, 2013
$
727,972

 
$
1,374,036

 
$
721,577

 
$
457,408

 
$
3,280,993

Reallocation due to realignment and separation

 
(10,754
)
 
(117,419
)
 
108,424

 
(19,749
)
Acquisitions
101,697

 
77,670

 
25,267

 
1,022

 
205,656

Purchase price adjustments
2,474

 

 
8,877

 

 
11,351

Foreign currency translation and other
(3,343
)
 
(11,680
)
 
(14,502
)
 
(2,409
)
 
(31,934
)
Balance at September 30, 2014
$
828,800

 
$
1,429,272

 
$
623,800

 
$
564,445

 
$
3,446,317

 
During the nine months ended September 30, 2014, the Company recorded adjustments totaling $11,351 to goodwill relating to the finalization of the purchase price allocation to assets acquired and liabilities assumed for the 2013 acquisitions. The Company will continue to refine its estimates of fair value to allocate the purchase price more accurately; however, any such revisions are not expected to be significant.

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
 
September 30, 2014
 
December 31, 2013
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Trademarks
$
138,540

 
$
41,920

 
$
126,634

 
$
34,232

Patents
155,319

 
107,888

 
154,236

 
102,804

Customer Intangibles
1,410,036

 
515,009

 
1,288,483

 
433,179

Unpatented Technologies
93,672

 
43,708

 
80,483

 
35,891

Drawings & Manuals
37,848

 
12,575

 
41,800

 
10,462

Distributor Relationships
72,514

 
38,295

 
72,514

 
35,447

Other
32,085

 
23,070

 
33,832

 
21,664

Total
1,940,014

 
782,465

 
1,797,982

 
673,679

Unamortized intangible assets:
 
 
 
 
 
 
 
Trademarks
169,683

 
 
 
169,874

 
 
Total intangible assets, net
$
1,327,232

 
 
 
$
1,294,177

 
 

Amortization expense totaled $38,372 and $34,969 for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, amortization expense was $118,201 and $103,509, respectively.


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

8. Restructuring Activities

The following table details restructuring charges incurred by segment for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Energy
$
214

 
$
124

 
$
1,704

 
$
1,250

Engineered Systems
813

 
1,969

 
4,024

 
2,661

Fluids
457

 
30

 
995

 
356

Refrigeration & Food Equipment

 
455

 
10

 
4,320

Corporate
603

 

 
1,760

 

Total
$
2,087

 
$
2,578

 
$
8,493

 
$
8,587

 
 
 
 
 
 
 
 
These amounts are classified in the unaudited Condensed Consolidated Statements of Earnings as follows:
 
 
 
 
 
 
 
 
Cost of goods and services
$
(881
)
 
$
(1,197
)
 
$
1,888

 
$
3,801

Selling and administrative expenses
2,968

 
3,775

 
6,605

 
4,786

Total
$
2,087

 
$
2,578

 
$
8,493

 
$
8,587


The restructuring expenses of $2,087 and $8,493 incurred in the three and nine months ended September 30, 2014, respectively, related to restructuring programs initiated during 2014 and 2013. These programs are designed to better align the Company's operations with current market conditions through targeted facility consolidations, headcount reductions and other measures to further optimize operations. The Company currently expects full-year 2014 restructuring expenses of approximately $10.0 million related to these programs. We expect the programs currently underway to be substantially completed in the next twelve to eighteen months.

The $2,087 of restructuring charges incurred during the third quarter of 2014 included the following items:

The Energy segment incurred restructuring charges of $214 related principally to a facility consolidation in its businesses serving the compression markets.

The Engineered Systems segment recorded $813 of restructuring charges relating to facility consolidations within the Industrials platform, as well as actions taken to optimize costs related to marketing and administrative functions within the Printing & Identification platform.

The Fluids segment recorded $457 of restructuring charges principally related to severance for those businesses serving the fluid transfer markets.

Corporate restructuring charges of $603 resulted from the Company's decision to realign its businesses into a new segment structure in the first quarter of 2014 following the spin-off of Knowles. Nonrecurring charges related to this realignment, primarily severance expense, are not expected to be significant in total.

The following table details the Company’s severance and other restructuring accrual activity:
 
Severance
 
Exit
 
Total
Balance at December 31, 2013
$
2,918

 
$
2,466

 
$
5,384

Restructuring charges
4,522

 
3,971

 
8,493

Payments
(5,623
)
 
(5,119
)
 
(10,742
)
Other, including foreign currency
(573
)
 
205

 
(368
)
Balance at September 30, 2014
$
1,244

 
$
1,523

 
$
2,767


The accrual balance at September 30, 2014 primarily reflects restructuring plans initiated during the year, as well as ongoing lease commitment obligations for facilities closed in earlier periods.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

9. Borrowings

Borrowings consist of the following:
 
September 30, 2014
 
December 31, 2013
Short-term
 
 
 
Current portion of long-term debt
$
2,566

 
$
2,778

Commercial paper
150,500

 
226,500

 
$
153,066

 
$
229,278


 
September 30, 2014
 
December 31, 2013
Long-term
 
 
 
4.875% 10-year notes due October 15, 2015
$
299,786

 
$
299,638

5.45% 10-year notes due March 15, 2018
348,845

 
348,598

2.125% 7-year notes due December 1, 2020 (euro-denominated)
381,856

 
411,500

4.30% 10-year notes due March 1, 2021
449,833

 
449,813

6.65% 30-year debentures due June 1, 2028
199,509

 
199,483

5.375% 30-year debentures due October 15, 2035
296,645

 
296,526

6.60% 30-year notes due March 15, 2038
247,926

 
247,859

5.375% 30-year notes due March 1, 2041
345,790

 
345,671

Other
2,633

 
2,891

Total long-term debt
2,572,823

 
2,601,979

Less current installments
(2,566
)
 
(2,778
)
 
$
2,570,257

 
$
2,599,201


The Company maintains a $1.0 billion unsecured revolving credit facility that expires on November 10, 2016.  The Company primarily uses this facility as liquidity back-up for its commercial paper program and has not drawn down any loans under the $1.0 billion facility and does not anticipate doing so. The Company generally uses commercial paper borrowings for general corporate purposes, funding of acquisitions and the repurchases of its common stock. Under the credit facility, the Company is required to maintain an interest coverage ratio of EBITDA to consolidated net interest expense of not less than 3.0 to 1.  The Company was in compliance with this covenant and its other long-term debt covenants at September 30, 2014, and it expects to remain in compliance with all of its debt covenants.

On December 4, 2013, the Company issued €300.0 million of 2.125% euro-denominated notes due 2020. The proceeds of $403,776 from the sale of the notes, net of discounts and issuance costs, were used to repay commercial paper.

Interest expense and interest income for the three and nine months ended September 30, 2014 and 2013 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest expense
$
32,509

 
$
30,994

 
$
99,150

 
$
92,852

Interest income
(1,270
)
 
(758
)
 
(3,279
)
 
(2,100
)
Interest expense, net
$
31,239

 
$
30,236

 
$
95,871

 
$
90,752

 
Letters of Credit

As of September 30, 2014, the Company had approximately $152,743 outstanding in letters of credit and guarantees with financial institutions, which expire at various dates in the last quarter of 2014 through 2020. These letters of credit are primarily maintained as security for insurance, warranty, and other performance obligations.  


13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

10. Financial Instruments

Derivatives

The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations and certain commodity risks. In order to manage these risks the Company has hedged portions of its forecasted sales and purchases that occur within the next twelve months and are denominated in non-functional currencies, with currency forward or collar contracts designated as cash flow hedges. At September 30, 2014 and December 31, 2013, the Company had contracts with U.S. dollar equivalent notional amounts of $25,111 and $33,216, respectively, to exchange foreign currencies, principally the U.S. dollar, Canadian dollar, euro, and pound sterling. The Company believes it is probable that all forecasted cash flow transactions will occur.

In addition, the Company had outstanding contracts with a total notional amount of $56,005 and $104,688 at September 30, 2014 and December 31, 2013, respectively, that are not designated as hedging instruments. These instruments are used to reduce the Company's exposure for operating receivables and payables that are denominated in non-functional currencies.

The Company also has an outstanding floating-to-floating cross currency swap agreement for a total notional amount of $50,000 in exchange for CHF 65,100, which expires on October 15, 2015. This transaction continues to hedge a portion of the Company’s net investment in CHF-denominated operations. The agreement qualifies as a net investment hedge and the effective portion of the change in fair value is reported within the cumulative translation adjustment section of other comprehensive income. The fair values at September 30, 2014 and December 31, 2013 reflected losses of $18,250 and $23,716, respectively, due to the strengthening of the Swiss franc relative to the U.S. dollar over the term of the arrangement.

The following table sets forth the fair values of derivative instruments held by the Company as of September 30, 2014 and December 31, 2013 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
September 30, 2014
 
December 31, 2013
 
Balance Sheet Caption
Foreign currency forward / collar contracts
$
814

 
$
879

 
Prepaid / Other assets
Foreign currency forward / collar contracts
(822
)
 
(168
)
 
Other accrued expenses
Net investment hedge - cross currency swap
(18,250
)
 
(23,716
)
 
Other liabilities

The amount of gains or losses from hedging activity recorded in earnings is not significant, and the amount of unrealized gains and losses from cash flow hedges that are expected to be reclassified to earnings in the next twelve months is not significant; therefore, additional tabular disclosures are not presented. There are no amounts excluded from the assessment of hedge effectiveness, and the Company's derivative instruments that are subject to credit risk contingent features were not significant.

The Company is exposed to credit loss in the event of nonperformance by counterparties to the financial instrument contracts held by the Company; however, nonperformance by these counterparties is considered unlikely as the Company’s policy is to contract with highly-rated, diversified counterparties.

Additionally, the Company has designated the €300.0 million of euro-denominated notes issued December 4, 2013 as a hedge of a portion of its net investment in euro-denominated operations. Due to the high degree of effectiveness between the hedging instruments and the exposure being hedged, fluctuations in the U.S. dollar value of the euro-denominated debt due to exchange rate changes are offset by changes in the net investment. Accordingly, changes in the value of the euro-denominated debt are recognized in the cumulative translation adjustment section of other comprehensive income to offset changes in the U.S. dollar value of the net investment in euro-denominated operations. The gain recognized from the euro net investment hedge in other comprehensive income totaled $26,357 ($17,132 after tax) and $29,722 ($19,319 after tax) for the three and nine months ended September 30, 2014, respectively.

Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency cash flow hedges
$

 
$
814

 
$

 
$

 
$
879

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency cash flow hedges

 
822

 

 

 
168

 

Net investment hedge derivative

 
18,250

 

 

 
23,716

 


In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.

The estimated fair value of long-term debt at September 30, 2014 and December 31, 2013 was $2,968,163 and $2,872,454, respectively, compared to the carrying value of $2,572,823 and $2,601,979, respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy.

The carrying values of cash and cash equivalents, trade receivables, accounts payable, and notes payable are reasonable estimates of their fair values as of September 30, 2014 and December 31, 2013 due to the short-term nature of these instruments.

11. Income Taxes

The effective tax rates for continuing operations for the three and nine months ended September 30, 2014 were 29.2% and 29.9%, respectively. Impacting these rates were favorable discrete tax items of $5,524 and $7,429 for the three and nine months ended September 30, 2014, respectively. These discrete tax items relate to the release of certain non-U.S. valuation allowances and the reassessment of the deductibility of certain non-U.S. expenses. Effective tax rates for continuing operations were 28.8% and 22.8% for the three and nine months ended September 30, 2013, respectively. These rates were impacted by favorable net discrete items totaling $7,751 and $73,571 for the three and nine months ended September 30, 2013, respectively, principally resulting from the conclusion of certain U.S. federal tax audits, as well as certain state and international tax audits, and the effect of the American Tax Relief Act of 2012 signed into law on January 2, 2013.

Excluding discrete tax items, the effective tax rates were 30.8% and 30.7% for the three and nine months ended September 30, 2014, and 31.2% and 31.5% for the three and nine months ended September 30, 2013, respectively.

Dover and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other foreign jurisdictions.  We believe adequate provision has been made for all income tax uncertainties. The Company is routinely audited by taxing authorities in its filing jurisdictions, and a number of these audits are currently underway. We believe that within the next twelve months uncertain tax positions may be resolved and statutes of limitations will expire, which could result in a decrease in the gross amount of unrecognized tax benefits of approximately zero to $37,800, of which a portion will be reported as discontinued operations.

12. Equity Incentive Program

The Company typically grants equity awards annually at its regularly scheduled first quarter Compensation Committee meeting. In the first quarter of 2014, the Company issued stock-settled appreciation rights ("SARs") covering 1,043,734 shares, performance share awards of 58,206 and restricted stock units of 131,719.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)


In addition, in connection with the separation of Knowles on February 28, 2014, the Company modified the outstanding equity awards for its employees. The awards were modified such that all individuals received an equivalent fair value both before and after the separation of Knowles. This modification resulted in the issuance of an additional 933,845 SARs, 20,523 stock options, 11,480 performance shares and 5,389 restricted stock units. The exercise price of these outstanding awards, where applicable, was adjusted to preserve the value of the awards immediately prior to the separation. As no incremental fair value was awarded as a result of the issuance of these additional shares, the modification did not result in additional compensation expense.

The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. The assumptions used in determining the fair value of the SARs awarded during the respective periods are shown below. Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.
 
SARs
 
2014
 
2013
Risk-free interest rate
1.70
%
 
1.39
%
Dividend yield
1.98
%
 
2.06
%
Expected life (years)
5.3

 
7.1

Volatility
30.81
%
 
33.78
%
 
 
 
 
Grant price (1)
$
82.51

 
$
63.33

Fair value per share at date of grant (1)
$
19.84

 
$
18.17


(1)
Updated to reflect the modification of grants issued prior to 2014 in connection with the separation of Knowles on February 28, 2014.

The performance share awards granted in 2014 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these 58,206 awards was determined using Dover's closing stock price on the date of grant of $82.51. For the nine months ended September 30, 2014, we have assumed an average attainment rate of the internal metrics of 108.6%. The expected attainment of the internal metrics for these awards will be analyzed each reporting period, and the related expense will be adjusted up or down based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment will be recognized in compensation cost in the period of change.
 
The performance share awards granted in 2013 are market condition awards as attainment is based on Dover's three-year performance relative to its peer group for the relevant performance period. These awards were valued on the date of grant using a Monte Carlo simulation model (a binomial lattice-based valuation model) with the following assumptions, and are generally recognized ratably over the vesting period:
 
Performance shares
 
2013
Risk-free interest rate
0.40
%
Dividend yield
2.06
%
Expected life (years)
2.9

Volatility
30.36
%
Fair value per share at date of grant (2)
$
70.92


(2)
Updated to reflect the modification of grants in connection with the separation of Knowles on February 28, 2014.

Stock-based compensation is reported within selling and administrative expenses in the accompanying unaudited Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Pre-tax compensation expense
$
8,297

 
$
7,081

 
$
24,710

 
$
23,384

Tax benefit
(2,914
)
 
(2,493
)
 
(8,749
)
 
(8,241
)
Total stock-based compensation expense, net of tax
$
5,383

 
$
4,588

 
$
15,961

 
$
15,143


13. Commitments and Contingent Liabilities

Litigation

A few of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under federal and state statutes that provide for the allocation of such costs among “potentially responsible parties.” In each instance, the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other “potentially responsible parties” involved and is anticipated to be immaterial to the Company. In addition, a few of the Company’s subsidiaries are involved in ongoing remedial activities at certain current and former plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established. At September 30, 2014 and December 31, 2013, the Company has reserves totaling $29,310 and $29,786, respectively, for environmental and other matters, including private party claims for exposure to hazardous substances, that are probable and estimable.

The Company and certain of its subsidiaries are also parties to a number of other legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of the Company’s products, patent infringement, employment matters, and commercial disputes. Management and legal counsel, at least quarterly, review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and currently accrued to-date, and the availability and extent of insurance coverage. The Company has reserves for legal matters that are probable and estimable and not otherwise covered by insurance, and at September 30, 2014 and December 31, 2013, these reserves are not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.

Warranty Accruals

Estimated warranty program claims are provided for at the time of sale. Amounts provided for are based on historical costs and adjusted new claims. The changes in the carrying amount of product warranties through September 30, 2014 and 2013 are as follows:
 
2014
 
2013
Beginning Balance, January 1
$
43,651

 
$
40,398

Provision for warranties
42,743

 
39,118

Settlements made
(42,298
)
 
(36,181
)
Other adjustments, including acquisitions and currency translation
2,779

 
(1,241
)
Ending balance, September 30
$
46,875

 
$
42,094


14. Employee Benefit Plans

Retirement Plans

The Company offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. In addition, the Company sponsors qualified defined benefit pension plans covering certain employees of the Company and its subsidiaries. The plans’ benefits are generally based on years of service and employee compensation.  The Company also provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law.

In July 2013, the Company announced that, after December 31, 2013, the U.S. qualified and non-qualified defined benefit plans will be closed to new employees. All pension-eligible employees as of December 31, 2013 will continue to earn a pension benefit through December 31, 2023 as long as they remain employed by an operating company participating in the plan. The Company

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

also announced that effective, January 1, 2024, the plans would be frozen to any future benefit accruals.

The following tables set forth the components of the Company’s net periodic expense relating to retirement benefit plans:

Qualified Defined Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
U.S. Plan
 
Non-U.S. Plans
 
U.S. Plan
 
Non-U.S. Plans
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service Cost
$
3,722

 
$
4,088

 
$
1,282

 
$
1,356

 
$
11,164

 
$
13,290

 
$
4,327

 
$
4,046

Interest Cost
6,314

 
6,247

 
1,710

 
1,664

 
18,943

 
18,491

 
5,716

 
4,957

Expected return on plan assets
(10,398
)
 
(10,106
)
 
(1,771
)
 
(1,776
)
 
(31,195
)
 
(30,011
)
 
(5,882
)
 
(5,294
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
271

 
256

 
22

 
26

 
812

 
769

 
76

 
80

Recognized actuarial loss
2,073

 
3,771

 
183

 
311

 
6,217

 
14,741

 
626

 
926

Transition obligation

 

 
1

 
(3
)
 

 

 
3

 
(10
)
Other

 

 
2

 
2

 

 

 
5

 
4

Net periodic expense
$
1,982

 
$
4,256

 
$
1,429

 
$
1,580

 
$
5,941

 
$
17,280

 
$
4,871

 
$
4,709


The net periodic expense reflected above for non-U.S. plans for the three and nine months ended September 30, 2014 and 2013 excludes certain non-U.S. plans sponsored by Knowles that were reallocated as part of the separation on February 28, 2014. The historical expense relating to these plans was $0 and $59 for the three and nine months ended September 30, 2014 and $550 and $946 for the three and nine months ended September 30, 2013, respectively. The expense relating to these plans is reflected in earnings from discontinued operations.

In connection with the recent separation of Knowles, the Company offered one-time lump sum payments to Knowles employees that participated in Dover's qualified defined benefit pension plan. As of October 1, 2014, the Company had made total lump sum payments to participants in this plan during the year of $46,100. Based on the total of the lump sum payments expected to be made to both Knowles and other participants in the plan through the remainder of the year, the Company expects to record a settlement charge of approximately $9,500 in the fourth quarter of 2014. $6,000 of this settlement charge is attributable to Knowles participants and, therefore, will be included in the results of discontinued operations in the fourth quarter of 2014, with the remaining $3,500 included in the results of continuing operations. These estimates may vary based on changes in economic conditions in the fourth quarter of 2014.

Non-Qualified Supplemental Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Service Cost
$
830

 
$
1,246

 
$
2,490

 
$
4,604

Interest Cost
1,537

 
1,633

 
4,611

 
5,180

Amortization:
 
 
 
 
 
 
 
   Prior service cost
1,944

 
2,045

 
5,831

 
6,040

   Recognized actuarial (gain) loss
(107
)
 
(32
)
 
(320
)
 
52

Settlement and curtailment gain

 
(4,411
)
 

 
(4,411
)
Net periodic expense
$
4,204

 
$
481

 
$
12,612

 
$
11,465


As a result of the non-qualified defined benefit plan being frozen to any future benefit accruals, effective January 1, 2024, the Company re-measured the related liability as of the interim effective date of the change (July 31, 2013). This re-measurement resulted in a decrease in the 2013 pension expense of $7,348, of which $4,411 reflected a one-time curtailment gain in the Company's non-qualified benefit plan.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)

Post-Retirement Plans

The Company also maintains post retirement benefit plans, although these plans are effectively closed to new entrants. The supplemental and post retirement benefit plans are supported by the general assets of the Company. The following table sets forth the components of the Company’s net periodic expense relating to its post-retirement benefit plans:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Service Cost
$
63

 
$
59

 
$
187

 
$
176

Interest Cost
156

 
130

 
470

 
392

Amortization:
 
 
 
 
 
 
 
   Prior service cost
(103
)
 
(104
)
 
(307
)
 
(312
)
   Recognized actuarial loss
14

 
34

 
40

 
102

Net periodic expense
$
130

 
$
119

 
$
390

 
$
358


The total amount amortized out of accumulated other comprehensive income into net periodic benefit expense for the three months ended September 30, 2014 and 2013 totaled $4,298 and $6,368, respectively. For the nine months ended September 30, 2014 and 2013, the total amount amortized totaled $12,978 and $22,579, respectively. The amortization included in other comprehensive income for the three and nine months ended September 30, 2013 includes $61 and $191, respectively, relating to plans sponsored by Knowles that were transfered as part of the separation in 2014.

Defined Contribution Retirement Plans

The Company also offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. The Company’s expense relating to defined contribution plans was $8,644, and $6,195 for the three months ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, expense relating to these plans was $26,571 and $21,136, respectively.

15. Other Comprehensive (Loss) Earnings

The amounts recognized in other comprehensive (loss) earnings were as follows:
 
Three Months Ended
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
(67,629
)
 
$
(11,146
)
 
$
(78,775
)
 
$
60,802

 
$
998

 
$
61,800

Pension and other postretirement benefit plans
4,298

 
(1,495
)
 
2,803

 
129,959

 
(45,452
)
 
84,507

Changes in fair value of cash flow hedges
(457
)
 
160

 
(297
)
 
(453
)
 
158

 
(295
)
Other
941

 
(14
)
 
927

 
132

 
(17
)
 
115

Total other comprehensive (loss) earnings
$
(62,847
)
 
$
(12,495
)
 
$
(75,342
)
 
$
190,440

 
$
(44,313
)
 
$
146,127


 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
(72,861
)
 
$
(12,316
)
 
$
(85,177
)
 
$
22,510

 
$

 
$
22,510

Pension and other postretirement benefit plans
12,978

 
(4,506
)
 
8,472

 
146,170

 
(51,059
)
 
95,111

Changes in fair value of cash flow hedges
(1,355
)
 
474

 
(881
)
 
(174
)
 
61

 
(113
)
Other
1,708

 
(162
)
 
1,546

 
319

 
(39
)
 
280

Total other comprehensive (loss) earnings
$
(59,530
)
 
$
(16,510
)
 
$
(76,040
)
 
$
168,825

 
$
(51,037
)
 
$
117,788


19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)


Total comprehensive earnings were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
231,844

 
$
269,114

 
$
605,941

 
$
809,166