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EX-32 - EXHIBIT 32 - DOVER Corpa2016033110-qexhibit32.htm
EX-10.2 - EXHIBIT 10.2 - DOVER Corpa2016033110-qexhibit102.htm
EX-31.1 - EXHIBIT 31.1 - DOVER Corpa2016033110-qexhibit311.htm
EX-10.1 - EXHIBIT 10.1 - DOVER Corpa2016033110-qexhibit101.htm
EX-10.4 - EXHIBIT 10.4 - DOVER Corpa2016033110-qexhibit104.htm
EX-31.2 - EXHIBIT 31.2 - DOVER Corpa2016033110-qexhibit312.htm
EX-10.3 - EXHIBIT 10.3 - DOVER Corpa2016033110-qexhibit103.htm

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 March 31, 2016

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 April 14, 2016 was 155,148,745.



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 data)
(unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
Revenue
$
1,622,273

 
$
1,715,501

Cost of goods and services
1,033,009

 
1,088,342

Gross profit
589,264

 
627,159

Selling and administrative expenses
443,448

 
434,634

Operating earnings
145,816

 
192,525

Interest expense, net
31,714

 
32,037

Other income, net
(13,522
)
 
(4,187
)
Earnings before provision for income taxes and discontinued operations
127,624

 
164,675

Provision for income taxes
28,268

 
47,485

Earnings from continuing operations
99,356

 
117,190

Earnings from discontinued operations, net

 
92,320

Net earnings
$
99,356

 
$
209,510

 
 
 
 
Earnings per share from continuing operations:
 
 
 
Basic
$
0.64

 
$
0.72

Diluted
$
0.64

 
$
0.72

 
 
 
 
Earnings per share from discontinued operations:
 
 
 
Basic
$

 
$
0.57

Diluted
$

 
$
0.57

 
 
 
 
Net earnings per share:
 
 
 
Basic
$
0.64

 
$
1.30

Diluted
$
0.64

 
$
1.28

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
155,064

 
161,650

Diluted
156,161

 
163,323

 
 
 
 
Dividends paid per common share
$
0.42

 
$
0.40

 

See Notes to Condensed Consolidated Financial Statements



1


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

 
Three Months Ended March 31,
 
2016
 
2015
 
 
 
 
Net earnings
$
99,356

 
$
209,510

 
 
 
 
Other comprehensive earnings (loss), net of tax
 
 
 
Foreign currency translation adjustments:
 
 
 
Foreign currency translation gains (losses) during period
8,769

 
(83,829
)
Reclassification of foreign currency translation gains to earnings upon sale of subsidiaries

 
(280
)
Total foreign currency translation
8,769

 
(84,109
)
 
 
 
 
Pension and other postretirement benefit plans:
 
 
 
Amortization of actuarial losses included in net periodic pension cost
1,409

 
2,598

Amortization of prior service costs included in net periodic pension cost
1,041

 
1,228

Total pension and other postretirement benefit plans
2,450

 
3,826

 
 
 
 
Changes in fair value of cash flow hedges:
 
 
 
Unrealized net (losses) gains arising during period
(49
)
 
1,158

Net gains reclassified into earnings
(47
)
 
(99
)
Total cash flow hedges
(96
)
 
1,059

 
 
 
 
Other
1,839

 
214

 
 
 
 
Other comprehensive earnings (loss)
12,962

 
(79,010
)
 
 
 
 
Comprehensive earnings
$
112,318

 
$
130,500


See Notes to Condensed Consolidated Financial Statements.


2


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

 
March 31, 2016
 
December 31, 2015
Current assets:
 
 
 
Cash and cash equivalents
$
243,720

 
$
362,185

Receivables, net of allowances of $20,445 and $18,050
1,167,313

 
1,120,490

Inventories, net
849,830

 
802,895

Prepaid and other current assets
84,893

 
133,440

Total current assets
2,345,756

 
2,419,010

Property, plant and equipment, net
858,984

 
854,269

Goodwill
4,034,620

 
3,737,389

Intangible assets, net
1,543,397

 
1,413,223

Other assets and deferred charges
198,138

 
182,185

Total assets
$
8,980,895

 
$
8,606,076

 
 
 
 
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
405,858

 
$
151,122

Accounts payable
706,191

 
650,880

Accrued compensation and employee benefits
178,784

 
223,039

Accrued insurance
101,584

 
99,642

Other accrued expenses
247,033

 
235,971

Federal and other taxes on income
9,359

 
6,528

Total current liabilities
1,648,809

 
1,367,182

Long-term debt, net
2,610,642

 
2,603,655

Deferred income taxes
603,496

 
575,709

Other liabilities
419,815

 
414,955

Stockholders' equity:
 

 
 

Total stockholders' equity
3,698,133

 
3,644,575

Total liabilities and stockholders' equity
$
8,980,895

 
$
8,606,076



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, 2015
$
256,113

 
$
928,409

 
$
7,686,642

 
$
(254,573
)
 
$
(4,972,016
)
 
$
3,644,575

Net earnings

 

 
99,356

 

 

 
99,356

Dividends paid

 

 
(65,340
)
 

 

 
(65,340
)
Common stock issued for the exercise of share-based awards
138

 
(4,971
)
 

 

 

 
(4,833
)
Tax benefit from the exercise of share-based awards

 
26

 

 

 

 
26

Share-based compensation expense

 
11,387

 

 

 

 
11,387

Other comprehensive earnings, net of tax

 

 

 
12,962

 

 
12,962

Balance at March 31, 2016
$
256,251

 
$
934,851

 
$
7,720,658

 
$
(241,611
)
 
$
(4,972,016
)
 
$
3,698,133

 
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)
 
Three Months Ended March 31,
 
2016
 
2015
Operating Activities of Continuing Operations
 
 
 
Net earnings
$
99,356

 
$
209,510

 
 
 
 
Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Earnings from discontinued operations, net

 
(92,320
)
Depreciation and amortization
88,604

 
80,182

Share-based compensation
11,387

 
13,387

Gain on sale of business
(11,228
)
 

Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable
20,103

 
27,737

Inventories
(29,478
)
 
(18,861
)
Prepaid expenses and other assets
(1,522
)
 
(2,297
)
Accounts payable
(14,299
)
 
(18,876
)
Accrued compensation and employee benefits
(65,887
)
 
(98,493
)
Accrued expenses and other liabilities
3,202

 
(14,198
)
Accrued and deferred taxes, net
45,654

 
55,843

Other, net
(12,479
)
 
(10,282
)
Net cash provided by operating activities of continuing operations
133,413

 
131,332

 
 
 
 
Investing Activities of Continuing Operations
 

 
 

Additions to property, plant and equipment
(37,230
)
 
(27,956
)
Acquisitions (net of cash and cash equivalents acquired)
(436,058
)
 
(6,500
)
Proceeds from the sale of property, plant and equipment
619

 
6,041

Proceeds from the sale of businesses
47,300

 
185,000

Other
(488
)
 

Net cash (used in) provided by investing activities of continuing operations
(425,857
)
 
156,585

 
 
 
 
Financing Activities of Continuing Operations
 

 
 

Purchase of common stock

 
(200,055
)
Proceeds from exercise of share-based awards, including tax benefits
2,181

 
2,786

Change in commercial paper and notes payable, net
247,099

 
(152,500
)
Dividends paid to stockholders
(65,940
)
 
(64,442
)
Payments to settle employee tax obligations on exercise of share-based awards
(4,833
)
 
(2,361
)
Reduction of long-term debt

 
(31
)
Net cash provided by (used in) financing activities of continuing operations
178,507

 
(416,603
)
 
 
 
 
Cash Flows from Discontinued Operations
 

 
 

Net cash provided by operating activities of discontinued operations

 
2,717

Net cash provided by investing activities of discontinued operations

 
800

Net cash provided by discontinued operations

 
3,517

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,528
)
 
(17,926
)
 
 
 
 
Net decrease in cash and cash equivalents
(118,465
)
 
(143,095
)
Cash and cash equivalents at beginning of period
362,185

 
681,581

Cash and cash equivalents at end of period
$
243,720

 
$
538,486


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, 2015, 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.  

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. Acquisitions

On January 7, 2016, the Company acquired the dispenser and system businesses of Tokheim Group S.A.S. ("Tokheim") within the Fluids segment for net cash consideration of $436,058. 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
$
96,436

Property, plant and equipment
24,319

Goodwill
281,903

Intangible assets
176,693

Other non-current assets
5,429

Current liabilities
(102,317
)
Non-current liabilities
(46,405
)
Net assets acquired
$
436,058


The amounts assigned to goodwill and major intangible asset classifications for the 2016 acquisition are as follows:
 
Amount allocated
 
Useful life (in years)
Goodwill - Non deductible
$
281,903

 
na
Customer intangibles
93,227

 
10
Trademarks
23,691

 
10
Other intangibles
59,775

 
11
 
$
458,596

 
 

The goodwill identified by this acquisition reflects the benefits expected to be derived from product line expansion and operational synergies. Upon consummation of the acquisition, with the exception of a minor noncontrolling interest in the Tokheim China subsidiary, this business is now wholly-owned by Dover.

The Company has completed the preliminary purchase price allocation for the acquisition of Tokheim.  As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company will refine its estimates of fair value to allocate the purchase price more accurately. Purchase price allocation adjustments may arise through working capital adjustments, asset appraisals or to reflect additional facts and circumstances in existence as of the acquisition date. Identified measurement period adjustments will be recorded, including any related impacts to net earnings, in the reporting period in which the adjustments are determined and may be significant. See Note 6 Goodwill and Other Intangible Assets for purchase price adjustments.

The unaudited Condensed Consolidated Statements of Earnings include the results of this business from the date of acquisition.  


6

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

Pro Forma Information

The following unaudited pro forma information illustrates the impact of both 2016 and 2015 acquisitions on the Company’s revenue and earnings from continuing operations for the three months ended March 31, 2016 and 2015. In 2015, the Company acquired four businesses in separate transactions for net cash consideration of $567,843.
 
The 2016 and 2015 pro forma information assumes that the 2016 and 2015 acquisitions had taken place at the beginning of the prior year. As such, the 2016 pro forma earnings exclude one-time adjustments made in 2016 for 2015 acquisitions. 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 2016 and 2015 acquisitions.
 
Three Months Ended March 31,
 
2016
 
2015
Revenue from continuing operations:
 
 
 
As reported
$
1,622,273

 
$
1,715,501

Pro forma
1,628,406

 
1,836,711

Earnings from continuing operations:
 
 
 
As reported
$
99,356

 
$
117,190

Pro forma
107,613

 
122,404

Basic earnings per share from continuing operations:
 
 
 
As reported
$
0.64

 
$
0.72

Pro forma
0.69

 
0.76

Diluted earnings per share from continuing operations:
 
 
 
As reported
$
0.64

 
$
0.72

Pro forma
0.69

 
0.75



3. Disposed and Discontinued Operations

Management evaluates Dover's businesses periodically for their strategic fit within its operations and may from time to time sell or discontinue certain operations for various reasons.

Disposed Businesses

On February 17, 2016, the company completed the sale of Texas Hydraulics. This disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as a discontinued operation. Upon disposal of the business the Company recognized total proceeds of $47,300, which resulted in a gain on sale of $11,228 included within Other income, net within the Condensed Consolidated Statements of Earnings.

Discontinued Operations

The results of discontinued operations for the three months ended March 31, 2015 reflect the net earnings of businesses held for sale, Datamax O'Neil and Sargent Aerospace, prior to their respective sale dates. On March 2, 2015, the Company completed the sale of Datamax O'Neil for total proceeds of $185,000, which resulted in a net gain on sale of $87,781.

7

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

Summarized results of the Company’s discontinued operations are as follows:
 
Three Months Ended March 31,
 
2015
Revenue
$
64,495

 
 
Gain on sale, net of tax
87,354

 
 
Earnings from operations before taxes
8,980

Provision for income taxes
(4,014
)
Earnings from operations, net of tax
4,966

 
 
Earnings from discontinued operations, net of tax
$
92,320


The Company had no assets or liabilities classified as held for sale as of March 31, 2016 and December 31, 2015.

4. Inventories, net
 
March 31, 2016
 
December 31, 2015
Raw materials
$
347,674

 
$
333,551

Work in progress
145,952

 
135,624

Finished goods
467,199

 
443,032

Subtotal
960,825

 
912,207

Less reserves
(110,995
)
 
(109,312
)
Total
$
849,830

 
$
802,895


5. Property, Plant and Equipment, net
 
March 31, 2016
 
December 31, 2015
Land
$
56,376

 
$
55,567

Buildings and improvements
543,292

 
546,809

Machinery, equipment and other
1,764,139

 
1,772,031

Subtotal
2,363,807

 
2,374,407

Less accumulated depreciation
(1,504,823
)
 
(1,520,138
)
Total
$
858,984

 
$
854,269


Depreciation expense totaled $45,029 and $40,208 for the three months ended March 31, 2016 and 2015, respectively.

6. Goodwill and Other Intangible Assets

The following table provides the changes in carrying value of goodwill by segment for the three months ended March 31, 2016:
 
Energy
 
Engineered Systems
 
Fluids
 
Refrigeration & Food Equipment
 
Total
Balance at December 31, 2015
$
1,047,180

 
$
1,473,864

 
$
655,745

 
$
560,600

 
$
3,737,389

Acquisitions

 

 
281,903

 

 
281,903

Purchase price adjustments

 
363

 
4,781

 
580

 
5,724

Disposition of business

 
(9,615
)
 

 

 
(9,615
)
Foreign currency translation
1,580

 
6,916

 
9,968

 
755

 
19,219

Balance at March 31, 2016
$
1,048,760

 
$
1,471,528

 
$
952,397

 
$
561,935

 
$
4,034,620



8

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

As noted in Note 3 Disposed and Discontinued Operations, the Company completed the sale of its Texas Hydraulics business during the three months ended March 31, 2016. As a result of this sale, the Engineered Systems goodwill balance was reduced by $9,615.

During the three months ended March 31, 2016, the Company recorded adjustments totaling $5,724 to goodwill relating to the purchase price adjustments as a result of working capital adjustments and refinements of estimates to assets acquired and liabilities assumed for the 2015 acquisitions of Gemtron, JK Group, Gala Industries and Reduction Engineering Scheer.

In accordance with the applicable accounting standard, Dover performs its annual goodwill impairment testing in the fourth quarter of each year. In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company has considered the economic environments in which its businesses operate, particularly within those reporting units exposed to the decline in oil and gas markets, and the long-term outlook for those businesses. The Company has determined that a triggering event has not occurred which would require impairment testing at this time.

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
 
March 31, 2016
 
December 31, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Trademarks
$
172,554

 
$
49,245

 
$
150,926

 
$
45,536

Patents
155,225

 
117,441

 
150,570

 
112,399

Customer Intangibles
1,663,762

 
628,709

 
1,567,048

 
595,635

Unpatented Technologies
133,362

 
55,971

 
137,919

 
56,495

Drawings & Manuals
34,701

 
16,757

 
34,232

 
15,760

Distributor Relationships
120,957

 
39,592

 
64,614

 
37,610

Other
23,390

 
18,497

 
23,923

 
18,168

Total
2,303,951

 
926,212

 
2,129,232

 
881,603

Unamortized intangible assets:
 
 
 
 
 
 
 
Trademarks
165,658

 
 
 
165,594

 
 
Total intangible assets, net
$
1,543,397

 
 
 
$
1,413,223

 
 

For the three months ended March 31, 2016 and 2015, amortization expense was $43,574 and $39,974, respectively.

7. Restructuring Activities

The following table details restructuring charges incurred by segment for the periods presented:
 
Three Months Ended March 31,
 
2016
 
2015
Energy
$
6,416

 
$
17,822

Engineered Systems
1,967

 
4,355

Fluids
5,226

 
2,097

Refrigeration & Food Equipment
21

 
(282
)
Corporate
757

 
111

Total
$
14,387

 
$
24,103

 
 
 
 
These amounts are classified in the unaudited Condensed Consolidated Statements of Earnings as follows:
 
 
 
 
Cost of goods and services
$
5,851

 
$
7,454

Selling and administrative expenses
8,536

 
16,649

Total
$
14,387

 
$
24,103


9

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


The restructuring expenses of $14,387 incurred in the three months ended March 31, 2016 related to restructuring programs initiated during 2016 and 2015. These programs are designed to better align the Company's costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures to further optimize operations. The Company expects the programs currently underway to be substantially completed in the next twelve to eighteen months.

The $14,387 of restructuring charges incurred during the first quarter of 2016 primarily included the following items:

The Energy segment incurred restructuring charges of $6,416 related to various programs across the segment focused on workforce reductions and field and service consolidations. These programs were initiated to better align cost base with the anticipated demand environment.

The Engineered Systems segment recorded $1,967 of restructuring charges relating to headcount reductions across various businesses primarily related to optimization of administrative functions within the Printing & Identification platform and U.S. manufacturing consolidation within the Industrial platform.

The Fluids segment recorded $5,226 of restructuring charges principally related to headcount reductions and facility consolidations at various businesses across the segment.

The Refrigeration and Food Equipment segment and corporate incurred restructuring charges related to headcount reductions.

The following table details the Company’s severance and other restructuring accrual activity:
 
Severance
 
Exit
 
Total
Balance at December 31, 2015
$
11,036

 
$
2,955

 
$
13,991

Restructuring charges
10,681

 
3,706

 
14,387

Payments
(8,234
)
 
(1,491
)
 
(9,725
)
Foreign currency translation
121

 
40

 
161

Other, including write-offs of fixed assets and acquired balances
2,458

 
(1,119
)
 
1,339

Balance at March 31, 2016
$
16,062

 
$
4,091

 
$
20,153


The accrual balance at March 31, 2016 primarily reflects restructuring plans initiated during the year, as well as ongoing lease commitment obligations for facilities closed in earlier periods.


10

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

8. Borrowings

Borrowings consist of the following:
 
March 31, 2016
 
December 31, 2015
Short-term
 
 
 
Current portion of long-term debt
$
4,558

 
$
122

Commercial paper
401,300

 
151,000

 
$
405,858

 
$
151,122


 
March 31, 2016
 
December 31, 2015
Long-term
 
 
 
5.45% 10-year notes due March 15, 2018
349,340

 
349,258

2.125% 7-year notes due December 1, 2020 (Euro-denominated)
334,783

 
328,592

4.30% 10-year notes due March 1, 2021
449,872

 
449,865

3.150% 10-year notes due November 15, 2025
397,028

 
396,951

6.65% 30-year debentures due June 1, 2028
199,560

 
199,552

5.375% 30-year debentures due October 15, 2035
296,884

 
296,844

6.60% 30-year notes due March 15, 2038
248,058

 
248,036

5.375% 30-year notes due March 1, 2041
346,029

 
345,989

Other, less current installments
2,233

 
2,255

Total long-term debt
2,623,787

 
2,617,342

Unamortized debt issuance costs
(13,145
)
 
(13,687
)
Long-term debt, net of debt issuance costs
$
2,610,642

 
$
2,603,655


The Company adopted new accounting guidance effective January 1, 2016 which requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of the related debt. Upon adoption, the Company reclassified $13,687 from assets to long-term debt to reflect this guidance in the comparable balance as of December 31, 2015.
 
The Company maintains a $1.0 billion five-year unsecured revolving credit facility with a syndicate of banks (the "Credit Agreement") which expires on November 10, 2020The Company was in compliance with its revolving credit and other long-term debt covenants at March 31, 2016 and had a coverage ratio of 12.3 to 1. The Company primarily uses this facility as liquidity back-up for its commercial paper program and has not drawn down any loans under the 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.

Interest expense and interest income for the three months ended March 31, 2016 and 2015 were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Interest expense
$
33,318

 
$
33,005

Interest income
(1,604
)
 
(968
)
Interest expense, net
$
31,714

 
$
32,037

 
Letters of Credit

As of March 31, 2016, the Company had approximately $91,840 outstanding in letters of credit and guarantees with financial institutions which expire at various dates within 2016 through 2020. These letters of credit are primarily maintained as security for insurance, warranty, and other performance obligations.  


11

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

9. 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 to occur within the next twelve months that are denominated in non-functional currencies, with currency forward or collar contracts designated as cash flow hedges. At March 31, 2016 and December 31, 2015, the Company had contracts with U.S. dollar equivalent notional amounts of $30,859 and $37,735, respectively, to exchange foreign currencies, principally the U.S. dollar, Chinese Yuan, 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 $66,310 and $51,369 at March 31, 2016 and December 31, 2015, 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 following table sets forth the fair values of derivative instruments held by the Company as of March 31, 2016 and December 31, 2015 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
March 31, 2016
 
December 31, 2015
 
Balance Sheet Caption
Foreign currency forward / collar contracts
$
113

 
$
170

 
Prepaid / Other assets
Foreign currency forward / collar contracts
(416
)
 
(452
)
 
Other accrued expenses

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 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 value of the net investment in Euro-denominated operations.

Amounts recognized in other comprehensive earnings (loss) for the gains (losses) on its net investment hedges were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
(Loss) gain on Euro-denominated debt
$
(6,165
)
 
$
35,350

Loss on Swiss franc cross-currency swap

 
(1,333
)
Total (loss) gain on net investment hedges before tax
(6,165
)
 
34,017

Tax benefit (expense)
2,158

 
(11,906
)
Net (loss) gain on net investment hedges, net of tax
$
(4,007
)
 
$
22,111


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.


12

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 March 31, 2016 and December 31, 2015:
 
March 31, 2016
 
December 31, 2015
 
Level 2
 
Level 2
Assets:
 
 
 
Foreign currency cash flow hedges
$
113

 
$
170

Liabilities:
 
 
 
Foreign currency cash flow hedges
416

 
452


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, net of unamortized debt issuance costs at March 31, 2016 and December 31, 2015 was $3,024,157 and $2,880,734, respectively, compared to the carrying value of $2,610,642 and $2,603,655, 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 fair value 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 March 31, 2016 and December 31, 2015 due to the short-term nature of these instruments.

10. Income Taxes

The effective tax rates for continuing operations for the three months ended March 31, 2016 and 2015 were 22.1% and 28.8%, respectively. Reflected in the effective tax rate for the three months ended March 31, 2016 and 2015 are favorable discrete items of $7,348 and $703, respectively. Excluding these discrete items, the effective tax rates for the three months ended March 31, 2016 and 2015 were 27.9% and 29.3%, respectively. The 2016 discrete items resulted primarily from the impact on deferred tax balances of a tax rate reduction in a non-US jurisdiction. The 2015 discrete items principally resulted from the conclusion of certain state tax audits and an adjustment of our tax accounts to the return filed. The reduction in the effective tax rate year over year is principally due to a change in the geographic mix of earnings as well as restructuring of foreign operations.

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. The Company believes 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 $19,649. A portion of these unrecognized tax benefits relate to companies previously reported as discontinued operations.

11. Equity Incentive Program

The Company typically grants equity awards annually at its regularly scheduled first quarter Compensation Committee meeting. In the first quarter of 2016, the Company issued stock-settled appreciation rights ("SARs") covering 1,346,354 shares, performance share awards of 79,561 and restricted stock units of 215,181.


13

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

The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. 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.

The assumptions used in determining the fair value of the SARs awarded during the respective periods are as follows:
 
SARs
 
2016
 
2015
Risk-free interest rate
1.05
%
 
1.51
%
Dividend yield
3.09
%
 
2.24
%
Expected life (years)
4.6

 
5.1

Volatility
26.17
%
 
27.19
%
 
 
 
 
Grant price
$
57.25

 
$
73.28

Fair value per share at date of grant
$
9.25

 
$
14.55


The performance share awards granted in 2015 and 2016 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in compensation cost in the period of change.  

The fair value and average attainment used in determining compensation cost for the performance shares issued in 2015 and 2016 is as follows for the three months ended March 31, 2016:
 
Performance shares
 
2016
 
2015
Fair value per share at date of grant
$
57.25

 
$
73.28

Average attainment rate reflected in expense
87.75
%
 
43.83
%

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:
 
Three Months Ended March 31,
 
2016
 
2015
Pre-tax compensation expense
$
11,387

 
$
13,387

Tax benefit
(4,050
)
 
(4,764
)
Total stock-based compensation expense, net of tax
$
7,337

 
$
8,623

 
12. 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 March 31, 2016 and December 31, 2015, the Company has reserves totaling $32,453 and $30,595, respectively, for environmental and other matters, including private party claims for exposure to hazardous substances, that are probable and estimable.


14

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

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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 and 2015 are as follows:
 
2016
 
2015
Beginning Balance, January 1
$
44,466

 
$
49,388

Provision for warranties
14,031

 
11,075

Settlements made
(12,462
)
 
(13,395
)
Other adjustments, including acquisitions and currency translation
4,666

 
(630
)
Ending balance, March 31
$
50,701

 
$
46,438



13. 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.

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 March 31,
 
U.S. Plan
 
Non-U.S. Plans
 
2016
 
2015
 
2016
 
2015
Service Cost
$
3,478

 
$
3,915

 
$
1,373

 
$
1,688

Interest Cost
5,762

 
5,791

 
1,375

 
1,486

Expected return on plan assets
(9,698
)
 
(10,393
)
 
(1,948
)
 
(2,019
)
Amortization:
 
 
 
 
 
 
 
Prior service cost
183

 
224

 
(99
)
 
23

Recognized actuarial loss
1,609

 
3,155

 
665

 
675

Transition obligation

 

 
1

 
9

Curtailments, special termination benefits, and settlements

 
810

 

 
2

Net periodic expense
$
1,334

 
$
3,502

 
$
1,367

 
$
1,864



15

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

Non-Qualified Supplemental Benefits
 
Three Months Ended March 31,
 
2016
 
2015
Service Cost
$
740

 
$
935

Interest Cost
1,317

 
1,266

Amortization:
 
 
 
   Prior service cost
1,567

 
1,732

   Recognized actuarial (gain) loss
(140
)
 
71

Net periodic expense
$
3,484

 
$
4,004


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 March 31,
 
2016
 
2015
Service Cost
$
13

 
$
41

Interest Cost
105

 
128

Amortization:
 
 
 
   Prior service cost
(36
)
 
(93
)
   Recognized actuarial gain
(59
)
 
(8
)
Net periodic expense
$
23

 
$
68


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 $9,808, and $9,006 for the three months ended March 31, 2016 and 2015, respectively.

14. Other Comprehensive Earnings (Loss)

The amounts recognized in other comprehensive earnings (loss) were as follows:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
6,611

 
$
2,158

 
$
8,769

 
$
(72,203
)
 
$
(11,906
)
 
$
(84,109
)
Pension and other postretirement benefit plans
3,691

 
(1,241
)
 
2,450

 
5,788

 
(1,962
)
 
3,826

Changes in fair value of cash flow hedges
(147
)
 
51

 
(96
)
 
1,629

 
(570
)
 
1,059

Other
2,090

 
(251
)
 
1,839

 
241

 
(27
)
 
214

Total other comprehensive earnings (loss)
$
12,245

 
$
717

 
$
12,962

 
$
(64,545
)
 
$
(14,465
)
 
$
(79,010
)

Total comprehensive earnings were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Net earnings
$
99,356

 
$
209,510

Other comprehensive earnings (loss)
12,962

 
(79,010
)
Comprehensive earnings
$
112,318

 
$
130,500



16

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

Amounts reclassified from accumulated other comprehensive earnings (loss) to earnings (loss) during the three months ended March 31, 2016 and 2015 were as follows:
 
Three Months Ended March 31,
 
2016

2015
Pension and postretirement benefit plans:
 
 
 
Amortization of actuarial losses
$
2,076

 
$
3,902

Amortization of prior service costs
1,615

 
1,886

Total before tax
3,691

 
5,788

Tax provision
(1,241
)
 
(1,962
)
Net of tax
$
2,450

 
$
3,826

 
 
 
 
Cash flow hedges:
 
 
 
Net gains reclassified into earnings
$
(72
)
 
$
(153
)
Tax benefit
25

 
54

Net of tax
$
(47
)
 
$
(99
)

The Company recognizes net periodic pension cost, which includes amortization of net actuarial losses and prior service costs, in both selling and administrative expenses and cost of goods and services, depending on the functional area of the underlying employees included in the plans.

Cash flow hedges consist mainly of foreign currency forward contracts. The Company recognizes the realized gains and losses on its cash flow hedges in the same line item as the hedged transaction, such as revenue, cost of goods and services, or selling & administrative expenses.


17

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

15. Segment Information

For management reporting and performance evaluation purposes, the Company categorizes its operating companies into four distinct reportable segments. Segment financial information and a reconciliation of segment results to consolidated results is as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Revenue:
 
 
 
Energy
$
283,230

 
$
430,423

Engineered Systems
576,995

 
573,196

Fluids
399,062

 
340,236

Refrigeration & Food Equipment
363,252

 
372,097

Intra-segment eliminations
(266
)
 
(451
)
Total consolidated revenue
$
1,622,273

 
$
1,715,501

 
 
 
 
Earnings from continuing operations:
 
 
 
Segment earnings:
 
 
 
Energy
$
11,244

 
$
52,305

Engineered Systems
93,748

 
88,149

Fluids
46,047

 
54,634

Refrigeration & Food Equipment
38,161

 
36,150

Total segments
189,200

 
231,238

Corporate expense / other (1)
29,862

 
34,526

Net interest expense
31,714

 
32,037

Earnings before provision for income taxes and discontinued operations
127,624

 
164,675

Provision for taxes
28,268

 
47,485

Earnings from continuing operations
$
99,356

 
$
117,190

(1)  
Certain expenses are maintained at the corporate level and not allocated to the segments. These expenses include executive and functional compensation costs, non-service pension costs, non-operating insurance expenses, and various administrative expenses relating to the corporate headquarters.

16. Share Repurchases

In January 2015, the Board of Directors approved a standing share repurchase authorization, whereby the Company may repurchase up to 15,000,000 shares of its common stock over the following three years. This plan replaced all previously authorized repurchase programs. During the three months ended March 31, 2016, the Company repurchased no shares of common stock under the January 2015 authorization. As of March 31, 2016, there were 6,771,458 shares available for repurchase under this plan.

A summary of share repurchase activity during the three months ended March 31, 2015 is as follows:
Shares of common stock repurchased
2,753,165

Spending on share repurchases (in thousands)
$
200,055

Average price paid per share
$
72.66



18

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

17. Earnings per Share

The following table sets forth a reconciliation of the information used in computing basic and diluted earnings per share:
 
Three Months Ended March 31,
 
2016
 
2015
Earnings from continuing operations
$
99,356

 
$
117,190

Earnings from discontinued operations, net

 
92,320

Net earnings
$
99,356

 
$
209,510

 
 
 
 
Basic earnings per common share:
 
 
 
Earnings from continuing operations
$
0.64

 
$
0.72

Earnings from discontinued operations, net
$

 
$
0.57

Net earnings
$
0.64

 
$
1.30

 
 
 
 
Weighted average shares outstanding
155,064,000

 
161,650,000

 
 
 
 
Diluted earnings per common share:
 
 
 
Earnings from continuing operations
$
0.64

 
$
0.72

Earnings from discontinued operations, net
$

 
$
0.57

Net earnings
$
0.64

 
$
1.28

 
 
 
 
Weighted average shares outstanding
156,161,000

 
163,323,000

 
The following table is a reconciliation of the share amounts used in computing earnings per share:
 
Three Months Ended March 31,
 
2016
 
2015
Weighted average shares outstanding - Basic
155,064,000

 
161,650,000

Dilutive effect of assumed exercise of employee stock options and SARs and vesting of performance shares
1,097,000

 
1,673,000

Weighted average shares outstanding - Diluted
156,161,000

 
163,323,000


Diluted per share amounts are computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period.  Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and SARs, and vesting of performance shares and restricted shares, as determined using the treasury stock method.  

The weighted average number of anti-dilutive potential common shares excluded from the calculation above were approximately 27,000 and 56,000 for the three months ended March 31, 2016 and 2015, respectively.


19

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

18. Recent Accounting Standards

Recently Issued Accounting Standards

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. The update is effective for the Company in the first quarter of 2017. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cashflows. This guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating this new guidance to determine the impact it will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance will be effective for the Company January 1, 2018. The Company is currently evaluating this guidance to determine the impact it will have on its consolidated financial statements.

Recently Adopted Accounting Standards

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30):Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct reduction from the carrying amount of the related debt, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. The Company adopted this guidance January 1, 2016. As a result of adoption, debt issuance costs of $13,687 were reclassified from assets to reduce long-term-debt as of December 31, 2015.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. Under this guidance the cumulative impact of purchase accounting adjustments arising during the one year measurement period from the date of acquisition will be recognized, in full, in the period identified. This guidance was effective for the Company January 1, 2016 and will be applied prospectively to adjustments arising after that date. There was no impact of adopting this standard in the current period.






20


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Refer to the section below entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of factors that could cause our actual results to differ from the forward-looking statements contained below and throughout this quarterly report.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we refer to measures used by management to evaluate performance, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). These include organic revenue, organic revenue growth, free cash flow and adjusted working capital. Organic revenue and organic revenue growth refer to revenue and revenue growth excluding the impacts of foreign exchange, acquisitions and divestitures. Free cash flow is operating cash flow less capital spending, while adjusted working capital refers to accounts receivable, plus inventory, less accounts payable. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Reconciliations within this MD&A provide more details on the use and derivation of these measures.

OVERVIEW AND OUTLOOK

Dover is a diversified global manufacturer delivering innovative equipment and components, specialty systems and support services through four major operating segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. The Company's entrepreneurial business model encourages, promotes, and fosters deep customer engagement and collaboration, which has led to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation. Unless the context indicates otherwise, references herein to "Dover," "the Company," and words such as "we," "us," and "our" include Dover Corporation and its subsidiaries.

Dover's four segments are as follows:

Our Energy segment, serving the Drilling & Production, Bearings & Compression, and Automation end markets, is a provider of customer-driven solutions and services for safe and efficient production and processing of fuels worldwide and has a strong presence in the bearings and compression components and automation markets.

Our Engineered Systems segment is comprised of two platforms, Printing & Identification and Industrials, and is focused on the design, manufacture and service of critical equipment and components serving the fast-moving consumer goods, digital textile printing, vehicle service, environmental solutions and industrial end markets.

Our Fluids segment, serving the Fluid Transfer and Pumps end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas, and industrial end markets.

Our Refrigeration & Food Equipment segment is a provider of innovative and energy efficient equipment and systems serving the commercial refrigeration and food service end markets.

The following table shows the percentage of total revenue and segment earnings generated by each of our four segments for the three months ended March 31, 2016 and 2015:
 
Revenue
 
Segment Earnings
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
Energy
17.5
%
 
25.1
%
 
5.9
%
 
22.6
%
Engineered Systems
35.6
%
 
33.4
%
 
49.5
%
 
38.1
%
Fluids
24.5
%
 
19.8
%
 
24.4
%
 
23.7
%
Refrigeration & Food Equipment
22.4
%
 
21.7
%
 
20.2
%
 
15.6
%

First quarter 2016 consolidated revenue of $1.6 billion decreased $93.2 million, or 5.4%, as compared to the first quarter 2015, reflecting an organic decline of 7.4%, a 2.5% decline due to dispositions, and an unfavorable impact of 1.4% due to foreign currency translation, offset, in part, by growth from acquisitions of 5.9%.


21


The organic revenue decline was primarily driven by our Energy, and to a lesser extent, Fluids segments as a result of severe weakness in U.S. oil and gas related end-markets. This decline in organic revenue was partially offset by organic revenue growth of 3% in both our Engineered Systems and Refrigeration & Food Equipment segments.

From a geographic perspective, North America results decreased largely driven by organic declines in the U.S. as a result of exposure to oil and gas markets. Excluding Energy, our U.S. industrial activity remained solid, growing organically by low single digits year-over-year. Asia and Europe both decreased on an organic basis.

We continue to adjust our cost structure to better align with the current economic environment. During the first quarter of 2016, we implemented previously announced restructuring plans and initiated new actions. These actions resulted in first quarter 2016 restructuring charges of $14.4 million. These actions were primarily within our Energy and Fluids segments with charges of $6.4 million and $5.2 million, respectively. We currently expect full year 2016 restructuring expenses of approximately $40.0 million, principally within our Energy and Fluids segments. We expect to realize cost savings of approximately $95.0 million to $105.0 million in 2016 as a result of programs previously initiated as well as those enacted in 2016.

During the first quarter of 2016, we completed the acquisition of the dispenser and system businesses of Tokheim Group S.A.S ("Tokheim") for an aggregate purchase price, net of cash acquired, of $436.1 million. Tokheim joins our Fluids Transfer platform within the Fluids segment and enables us to provide the most complete solutions available for our retail fueling customers.

In response to the weakness in the oil and gas markets, we have lowered our full year revenue growth expectations for our Energy and Fluids segments and have reduced our full year EPS guidance. We now expect full year revenue to decline 2% to 5%. Within this revenue forecast, organic growth is anticipated to decline 5% to 8%, acquisitions, net of dispositions, are expected to contribute 4% growth, and foreign currency is expected to result in an unfavorable impact of 1%. We anticipate full year EPS in the range of $3.51 to $3.66. This revised EPS range includes approximately $0.18 of restructuring charges, $0.05 of discrete tax benefits, and a $0.07 gain due to a disposition.

22


CONSOLIDATED RESULTS OF OPERATIONS

 
Three Months Ended March 31,
(dollars in thousands, except per share figures)
2016
 
2015
 
% Change
Revenue
$
1,622,273

 
$
1,715,501

 
(5.4
)%
Cost of goods and services
1,033,009

 
1,088,342

 
(5.1
)%
Gross profit
589,264

 
627,159

 
(6.0
)%
Gross profit margin
36.3
%
 
36.6
%
 
(0.3
)
 
 
 
 
 
 
Selling and administrative expenses
443,448

 
434,634

 
2.0
 %
Selling and administrative as a percent of revenue
27.3
%
 
25.3
%
 
2.0

 
 
 
 
 
 
Interest expense, net
31,714

 
32,037

 
(1.0
)%
Other income, net
(13,522
)
 
(4,187
)
 
nm*
 
 
 
 
 
 
Provision for income taxes
28,268

 
47,485

 
(40.5
)%
Effective tax rate
22.1
%
 
28.8
%
 
(6.7
)
 
 
 
 
 
 
Earnings from continuing operations
99,356

 
117,190

 
(15.2
)%
Earnings from discontinued operations, net

 
92,320

 
nm*
Earnings from continuing operations per common share - diluted
$
0.64

 
$
0.72

 
(11.1
)%
* nm - not meaningful 

Revenue

First quarter revenue decreased $93.2 million, or 5.4%, as compared to the first quarter of 2015. Results were driven by an organic revenue decline of 7.4%, a decrease due to disposed businesses of 2.5%, and an unfavorable impact from foreign currency translation of 1.4%. This decline was partially offset by acquisition-related revenue growth of 5.9%. The organic revenue decline was primarily the result of historic lows in Energy activity, most notably U.S. rig counts and capital spending within the oil and gas markets. Customer pricing was favorable to revenue by approximately 0.2% in the first quarter of 2016.

Gross Profit

Gross profit for the first quarter of 2016 decreased $37.9 million, or 6.0%, in connection with the declining revenues for the period. Gross profit margin declined 30 basis points primarily due to revenue declines in those businesses with historically higher margin contributions, due to an unfavorable product mix. In addition, reduced leverage on fixed overhead contributed to the decline in gross profit margin for the three months ended March 31, 2016 relative to the prior year.

Selling and Administrative Expenses

Selling and administrative expenses increased $8.8 million, or 2.0%, as compared to the prior year quarter, reflecting the impact of recent acquisitions, including the related depreciation and amortization expense, partially offset by lower restructuring charges, and the benefits of previously implemented cost reduction actions. As a percentage of revenue, selling and administrative expenses increased 200 basis points in 2016 to 27.3%, reflecting deleveraging of fixed administrative costs and acquisition-related costs.

Non-Operating Items

Interest expense, net

Net interest expense decreased $0.3 million, or 1.0%, as compared to the prior year quarter, primarily due to lower interest on the $400.0 million notes, issued during the fourth quarter of 2015, that replaced the $300.0 million notes with a higher interest rate. This was offset by higher interest on higher average balances of commercial paper for the first quarter of 2016 relative to the first quarter of 2015.

23


Other income, net

Other income of $13.5 million for the three months ended March 31, 2016 primarily consists of the $11.2 million pre-tax gain on the sale of Texas Hydraulics, $1.2 million of foreign currency exchange gains resulting from the remeasurement of foreign currency denominated balances and earnings from minority investments of $0.8 million. The prior year income of $4.2 million primarily reflects a one-time favorable insurance settlement of $3.6 million.

Income Taxes

The effective tax rates for continuing operations for the three months ended March 31, 2016 and 2015 were 22.1% and 28.8%, respectively. Reflected in the effective tax rate for the three months ended March 31, 2016 and 2015 are favorable discrete items of $7.3 million and $0.7 million, respectively. Excluding these discrete items, the effective tax rates for the three months ended March 31, 2016 and 2015 were 27.9% and 29.3%, respectively. The 2016 discrete items principally resulted primarily from the impact on deferred tax balances of a tax rate reduction in a non-US jurisdiction. The 2015 discrete items principally resulted from the conclusion of certain state tax audits and an adjustment of our tax accounts to the return filed. The reduction in the effective tax rate year over year is primarily due to a change in the geographic mix of earnings as well as restructuring of foreign operations.

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. We are routinely audited by taxing authorities in our 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 $19.6 million. A portion of these unrecognized tax benefits relate to companies previously reported as discontinued operations.

Earnings from Continuing Operations

Earnings from continuing operations for the three months ended March 31, 2016 decreased 15.2% to $99.4 million, or $0.64 diluted earnings per share. The decrease in earnings is primarily the result of the declines in the U.S. rig count and reduced capital spending within the energy market. The decrease in earnings per share reflects the decrease in earnings, offset by lower weighted average shares outstanding for the 2016 period relative to the prior year.

Discontinued Operations

The results of discontinued operations for the three months ended March 31, 2015 reflect the net earnings of businesses that were held for sale until their disposition date. We completed the sale of Datamax O'Neil in the first quarter of 2015 for a gain on sale of $87.8 million which is also included in earnings from discontinued operations for that period.

Restructuring Activities

The restructuring expenses of $14.4 million incurred in the three months ended March 31, 2016 relate to restructuring programs initiated during 2016 and 2015. These programs are designed to better align our costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures. We currently expect full year 2016 restructuring expenses of approximately $40.0 million, inclusive of our actions taken to date, principally within our Energy and Fluids segments. We expect the programs currently underway to be substantially completed in the next twelve to eighteen months.

The $14.4 million of restructuring charges incurred during the first quarter of 2016 primarily included the following items:

The Energy segment incurred restructuring charges of $6.4 million related to various programs across the segment focused on workforce reductions and field and service consolidations. These programs were initiated to better align cost base with the anticipated demand environment.

The Engineered Systems segment recorded $2.0 million of restructuring charges relating to headcount reductions across various businesses primarily related to optimization of administrative functions within the Printing & Identification platform and U.S. manufacturing consolidation within the Industrial platform.

The Fluids segment recorded $5.2 million of restructuring charges principally related to headcount reductions and facility consolidations at various businesses across the segment.

24



The Refrigeration and Food Equipment segment and corporate incurred restructuring charges related to headcount reductions.

For the three months ended March 31, 2015, we incurred restructuring charges of $24.1 million for programs at several targeted facilities to optimize cost structure, across several of the segments. See Note 7 Restructuring Activities in our Condensed Consolidated Financial Statements for additional information related to our restructuring programs.

25


SEGMENT RESULTS OF OPERATIONS

Energy
Our Energy segment, serving the Drilling & Production, Bearings & Compression, and Automation end markets, is a provider of customer-driven solutions and services for safe and efficient production and processing of fuels worldwide and has a strong presence in the bearings and compression components and automation markets.
 
Three Months Ended March 31,
(dollars in thousands)
2016
 
2015
 
% Change
Revenue:
 
 
 
 
 
Drilling & Production
$
188,360

 
$
299,158

 
(37.0
)%
Bearings & Compression
64,444

 
77,591

 
(16.9
)%
Automation
30,426

 
53,674

 
(43.3
)%
Total
$
283,230

 
$
430,423

 
(34.2
)%
 
 
 
 
 
 
Segment earnings
$
11,244

 
$
52,305

 
(78.5
)%
Operating margin
4.0
%
 
12.2
%
 
 
 
 
 
 
 
 
Segment EBITDA
$
45,404

 
$
86,732

 
(47.7
)%
Segment EBITDA margin
16.0
%
 
20.2
%
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
Depreciation and amortization
$
34,160

 
$
34,427

 
(0.8
)%
Bookings
273,445

 
416,628

 
(34.4
)%
Backlog
144,828

 
212,060

 
(31.7
)%
 
 
 
 
 
 
Components of revenue decline:
 
 
 
 
YTD 2016 vs. 2015
Organic decline
 
 
 
 
(32.9
)%
Acquisitions
 
 
 
 
 %
Foreign currency translation
 
 
 
 
(1.3
)%
 
 
 
 
 
(34.2
)%

First Quarter 2016 Compared to the First Quarter 2015

Energy revenue decreased $147.2 million, or 34.2%, in the first quarter of 2016 as compared to the first quarter of 2015, comprised of an organic revenue decline of 32.9% and an unfavorable impact from foreign currency translation of 1.3%. Within the Energy segment, market activity levels, which began in the fourth quarter of 2015, reached new lows on declines in the U.S. rig count and reduced capital spending. These reductions were seen broadly across our end markets. Customer pricing unfavorably impacted revenue by approximately 0.8% in the first quarter of 2016.

Drilling & Production end market revenue (representing 66.5% of segment revenue) decreased $110.8 million, or 37.0%, due to declines in U.S. rig count and capital spending in our North American markets. Our customers continue to delay and significantly limit their capital spending due to uncertainty within the oil and gas markets they serve and to conserve cash.

Bearings & Compression end market revenue (representing 22.8% of segment revenue) decreased $13.1 million, or 16.9%, as U.S. OEM end-user demand weakened within its end markets, especially with oil and gas customers.

Automation end market revenue (representing approximately 10.7% of segment revenue) decreased $23.2 million, or 43.3%. This decrease was driven by customer project delays, as low oil prices and market uncertainties continued to drive reduced capital spending by well service and exploration and production companies.



26



Segment earnings decreased $41.1 million, or 78.5%, for our Energy segment, as compared to the prior year quarter, primarily driven by lower volume across our Energy businesses, most significantly within the Drilling & Production and Automation end markets. These decreases were partially offset by restructuring charges of $6.4 million as the segment continued targeted workforce reductions and consolidation of field and service operations as compared to $17.8 million in the prior year.

Operating margin declined from 12.2% to 4.0%, as compared to the prior year quarter, mainly due to the aforementioned impact of weak market dynamics resulting in significantly decreased volumes.

Bookings for the first quarter decreased 34.4% from the prior year quarter, reflecting ongoing market weakness. Book-to-bill was 0.97.



27


Engineered Systems
Our Engineered Systems segment is comprised of two platforms, Printing & Identification and Industrials, and is focused on the design, manufacture and service of critical equipment and components serving the fast-moving consumer goods, digital textile printing, vehicle service, environmental solutions and industrial end markets.
 
Three Months Ended March 31,
(dollars in thousands)
2016
 
2015
 
% Change
Revenue:
 
 
 
 
 
Printing & Identification
$
239,681

 
$
230,181

 
4.1
 %
Industrials
337,314

 
343,015

 
(1.7
)%
Total
$
576,995

 
$
573,196

 
0.7
 %
 
 
 
 
 
 
Segment earnings
$
93,748

 
$
88,149

 
6.4
 %
Operating margin
16.2
%
 
15.4
%
 
 
 
 
 
 
 
 
Segment EBITDA
$
109,784

 
$
102,675

 
6.9
 %
Segment EBITDA margin
19.0
%
 
17.9
%
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
Depreciation and amortization
$
16,036

 
$
14,526

 
10.4
 %
 
 
 
 
 
 
Bookings:
 
 
 
 
 
Printing & Identification
$
242,569

 
$
235,617

 
3.0
 %
Industrials
329,957

 
337,070

 
(2.1
)%
 
$
572,526

 
$
572,687

 
 %
Backlog:
 
 
 
 
 
Printing & Identification
$
102,640

 
$
108,151

 
(5.1
)%
Industrials
235,384

 
276,598

 
(14.9
)%
 
$
338,024

 
$
384,749

 
(12.1
)%
 
 
 
 
 
 
Components of revenue decline:
 
 
 
 
YTD 2016 vs. 2015
Organic growth
 
 
 
 
2.7
 %
Acquisitions
 
 
 
 
3.0
 %
Dispositions
 
 
 
 
(2.8
)%
Foreign currency translation
 
 
 
 
(2.2
)%
 
 
 
 
 
0.7
 %

First Quarter 2016 Compared to the First Quarter 2015

Engineered Systems revenue for the first quarter of 2016 increased $3.8 million, or 0.7%, as compared to the first quarter of 2015 primarily driven by organic growth of 2.7%, and acquisition-related growth of 3.0%, offset by dispositions of 2.8% and an unfavorable impact from foreign currency of 2.2%. Customer pricing favorably impacted revenue by approximately 0.6% in the first quarter of 2016.

Revenue of our Printing & Identification platform (representing 41.5% of segment revenue) increased $9.5 million, or 4.1%, primarily driven by acquisition-related growth of 7.5% and organic growth of 1.4%, offset by the negative impact of foreign currency translation of 4.8%. Organic revenue growth was primarily driven by solid marking and coding sales.

Revenue of our Industrials platform (representing 58.5% of segment revenue), decreased $5.7 million, or 1.7%, as compared to the prior year quarter. Broad-based organic growth of 3.5% across the platform was led by strong results in our Environmental Solutions business. This organic growth was offset by the impact of the disposition of Texas Hydraulics of 4.8% and a minimal unfavorable foreign currency translation impact.

28



Engineered Systems segment earnings increased $5.6 million, or 6.4%, as compared to the prior year quarter, reflecting leverage of organic revenue growth and productivity improvements. The gain on sale of a business was more than offset by acquisition-related depreciation and amortization expense, facility consolidation costs, an insurance settlement gain in the prior period and a one-time charge related to an environmental matter in the current quarter. Operating margin primarily improved as a result of organic revenue growth and productivity gains.
 
Segment bookings were flat to the prior year period. Book-to-bill for Printing & Identification was 1.01, while Industrials was 0.98. Overall, book-to-bill was 0.99.


29


Fluids
Our Fluids segment, serving the Fluid Transfer and Pumps end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas, and industrial end markets.
 
Three Months Ended March 31,
(dollars in thousands)
2016
 
2015
 
% Change
Revenue:
 
 
 
 
 
Fluid Transfer
$
238,157

 
$
195,171

 
22.0
 %
Pumps
160,905