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EX-32 - EXHIBIT 32 - DOVER Corpa2017033110-qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - DOVER Corpa2017033110-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - DOVER Corpa2017033110-qexhibit311.htm
EX-10.4 - EXHIBIT 10.4 - DOVER Corpa2017033110-qexhibit104.htm
EX-10.3 - EXHIBIT 10.3 - DOVER Corpa2017033110-qexhibit103.htm
EX-10.2 - EXHIBIT 10.2 - DOVER Corpa2017033110-qexhibit102.htm
EX-10.1 - EXHIBIT 10.1 - DOVER Corpa2017033110-qexhibit101.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, 2017

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, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 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 13, 2017 was 155,669,697.



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,
 
2017
 
2016
Revenue
$
1,813,372

 
$
1,622,273

Cost of goods and services
1,152,198

 
1,033,009

Gross profit
661,174

 
589,264

Selling, general and administrative expenses
485,290

 
443,448

Operating earnings
175,884

 
145,816

Interest expense
36,409

 
33,318

Interest income
(2,580
)
 
(1,604
)
Gain on sale of businesses
(90,093
)
 
(11,228
)
Other expense (income), net
176

 
(2,294
)
Earnings before provision for income taxes
231,972

 
127,624

Provision for income taxes
59,725

 
28,268

Net earnings
$
172,247

 
$
99,356

Net earnings per share:
 
 
 
Basic
$
1.11

 
$
0.64

Diluted
$
1.09

 
$
0.64

Weighted average shares outstanding:
 
 
 
Basic
155,540

 
155,064

Diluted
157,399

 
156,161

Dividends paid per common share
$
0.44

 
$
0.42

 

See Notes to Condensed Consolidated Financial Statements



1


DOVER CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2017
 
2016
Net earnings
$
172,247

 
$
99,356

Other comprehensive earnings (loss), net of tax
 
 
 
Foreign currency translation adjustments:
 
 
 
Foreign currency translation gains during period
39,897

 
8,769

Reclassification of foreign currency translation losses to earnings upon sale of subsidiaries
3,875

 

Total foreign currency translation adjustments
43,772

 
8,769

Pension and other post-retirement benefit plans:
 
 
 
Amortization of actuarial losses included in net periodic pension cost
1,338

 
1,409

Amortization of prior service costs included in net periodic pension cost
702

 
1,041

Total pension and other post-retirement benefit plans
2,040

 
2,450

Changes in fair value of cash flow hedges:
 
 
 
Unrealized net gains (losses) arising during period
78

 
(49
)
Net gains reclassified into earnings
(217
)
 
(47
)
Total cash flow hedges
(139
)
 
(96
)
Other
337

 
1,839

Other comprehensive earnings
46,010

 
12,962

Comprehensive earnings
$
218,257

 
$
112,318



See Notes to Condensed Consolidated Financial Statements


2


DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

 
March 31, 2017
 
December 31, 2016
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
415,530

 
$
349,146

Receivables, net of allowances of $27,182 and $22,015
1,299,427

 
1,265,201

Inventories
942,176

 
870,487

Prepaid and other current assets
104,786

 
104,357

Total current assets
2,761,919

 
2,589,191

Property, plant and equipment, net
946,376

 
945,670

Goodwill
4,508,720

 
4,562,677

Intangible assets, net
1,782,107

 
1,802,923

Other assets and deferred charges
239,186

 
215,530

Total assets
$
10,238,308

 
$
10,115,991

Liabilities and Stockholders' Equity
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
748,426

 
$
414,550

Accounts payable
880,755

 
830,318

Accrued compensation and employee benefits
189,665

 
226,440

Accrued insurance
103,230

 
96,062

Other accrued expenses
320,555

 
332,595

Federal and other income taxes
76,572

 
40,353

Total current liabilities
2,319,203

 
1,940,318

Long-term debt
2,887,962

 
3,206,637

Deferred income taxes
643,363

 
710,173

Other liabilities
434,365

 
459,117

Stockholders' equity:
 

 
 

Total stockholders' equity
3,953,415

 
3,799,746

Total liabilities and stockholders' equity
$
10,238,308

 
$
10,115,991



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
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at December 31, 2016
$
256,538

 
$
946,755

 
$
(4,972,016
)
 
$
7,927,795

 
$
(359,326
)
 
$
3,799,746

Net earnings

 

 

 
172,247

 

 
172,247

Dividends paid

 

 

 
(68,516
)
 

 
(68,516
)
Common stock issued for the exercise of share-based awards
229

 
(9,106
)
 

 

 

 
(8,877
)
Share-based compensation expense

 
12,805

 

 

 

 
12,805

Other comprehensive earnings, net of tax

 

 

 

 
46,010

 
46,010

Balance at March 31, 2017
$
256,767

 
$
950,454

 
$
(4,972,016
)
 
$
8,031,526

 
$
(313,316
)
 
$
3,953,415

 

See Notes to Condensed Consolidated Financial Statements


4


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
172,247

 
$
99,356

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Depreciation and amortization
95,598

 
88,604

Stock-based compensation expense
12,805

 
11,387

Gain on sale of businesses
(90,093
)
 
(11,228
)
Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable, net
(23,207
)
 
20,103

Inventories
(75,485
)
 
(29,478
)
Prepaid expenses and other assets
(8,189
)
 
(1,522
)
Accounts payable
43,833

 
(14,299
)
Accrued compensation and employee benefits
(42,186
)
 
(65,887
)
Accrued expenses and other liabilities
(41,782
)
 
3,202

Accrued and deferred taxes, net
41,572

 
45,654

Other, net
(7,042
)
 
(12,479
)
Net cash provided by operating activities
78,071

 
133,413

Investing Activities:
 

 
 

Additions to property, plant and equipment
(42,259
)
 
(37,230
)
Acquisitions, net of cash and cash equivalents acquired

 
(436,058
)
Proceeds from sale of property, plant and equipment
1,273

 
619

Proceeds from sale of businesses
120,397

 
47,300

Other
2,369

 
(488
)
Net cash provided by (used in) investing activities
81,780

 
(425,857
)
Financing Activities:
 

 
 

Proceeds from exercise of share-based awards, including tax benefits

 
2,181

Change in commercial paper and notes payable
(15,900
)
 
247,099

Dividends paid to stockholders
(68,516
)
 
(65,940
)
Payments to settle employee tax obligations on exercise of share-based awards
(8,877
)
 
(4,833
)
Net cash (used in) provided by financing activities
(93,293
)
 
178,507

Effect of exchange rate changes on cash and cash equivalents
(174
)
 
(4,528
)
Net increase (decrease) in cash and cash equivalents
66,384

 
(118,465
)
Cash and cash equivalents at beginning of period
349,146

 
362,185

Cash and cash equivalents at end of period
$
415,530

 
$
243,720



See Notes to Condensed Consolidated Financial Statements

5

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


1. Basis of Presentation

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim periods and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. These unaudited Condensed Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes for Dover Corporation ("Dover" or the "Company") for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K filed with the SEC on February 10, 2017. 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.  

The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Condensed Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.

2. Acquisitions

During the three months ended March 31, 2017, the Company did not have any acquisitions. During the three months ended March 31, 2016, the Company acquired the dispenser and systems businesses of Tokheim Group S.A.S. ("Tokheim") within the Fluids segment for net cash consideration of $436,058. During the measurement period, we recorded working capital adjustments which resulted in final net cash consideration of $417,238.

See Note 6 — Goodwill and Other Intangible Assets for purchase price adjustments related to acquisitions made in 2016. 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.

Subsequent Event - Acquisition

On April 5, 2017, the Company purchased 100% of the voting stock of Caldera Graphics S.A.S. for approximately €35 million (approximately $37 million). At the date of issuance of the consolidated financial statements, the initial purchase price allocation was not complete for this acquisition. See Note 19 — Subsequent Event for additional information regarding the acquisition.

Pro Forma Information

The following unaudited pro forma information illustrates the impact of 2016 acquisitions on the Company’s revenue and earnings from operations for the three months ended March 31, 2017 and 2016, respectively. In 2016, the Company acquired six businesses in separate transactions for total net consideration of $1,562 million. During the measurement period, we recorded working capital adjustments which resulted in final net cash consideration of $1,559 million.
 
The pro forma information assumes that the 2016 acquisitions had taken place at the beginning of the prior year. 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 the year of acquisition.







6

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

The proforma effects for the three months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Revenue:
 
 
 
As reported
$
1,813,372

 
$
1,622,273

Pro forma
1,813,372

 
1,820,228

Earnings:
 
 
 
As reported
$
172,247

 
$
99,356

Pro forma
172,247

 
110,690

Basic earnings per share:
 
 
 
As reported
$
1.11

 
$
0.64

Pro forma
1.11

 
0.71

Diluted earnings per share:
 
 
 
As reported
$
1.09

 
$
0.64

Pro forma
1.09

 
0.71


3. Disposed Operations

On February 14, 2017, the Company completed the sale of Performance Motorsports International ("PMI"), a wholly-owned subsidiary of the Company that manufactures pistons and other engine related components serving the motorsports and powersports markets. Total consideration was $147,313 for the transaction, including cash proceeds of $118,706. We recognized a gain on sale of $88,402 for the three months ended March 31, 2017 within the Condensed Consolidated Statements of Earnings and recorded a 25% non-controlling interest at fair value of $18,607 as well as a subordinated note receivable of $10,000.

On February 17, 2016, the Company completed the sale of Texas Hydraulics, a custom manufacturer of fluid power components. Upon disposal of the business, the Company recognized total consideration of $47,300, which resulted in a gain on sale of $11,228 included within the Condensed Consolidated Statements of Earnings for the three months ended March 31, 2016.

These disposals did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.

4. Inventories
 
March 31, 2017
 
December 31, 2016
Raw materials
$
475,708

 
$
428,286

Work in progress
157,653

 
138,652

Finished goods
418,775

 
409,314

Subtotal
1,052,136

 
976,252

Less reserves
(109,960
)
 
(105,765
)
Total
$
942,176

 
$
870,487


5. Property, Plant and Equipment, net
 
March 31, 2017
 
December 31, 2016
Land
$
69,187

 
$
68,575

Buildings and improvements
601,612

 
597,523

Machinery, equipment and other
1,815,260

 
1,802,832

Property, plant and equipment, gross
2,486,059

 
2,468,930

Total accumulated depreciation
(1,539,683
)
 
(1,523,260
)
Property, plant and equipment, net
$
946,376

 
$
945,670


Depreciation expense totaled $44,718 and $45,029 for the three months ended March 31, 2017 and 2016, respectively.
 

7

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

6. Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill by reportable operating segments were as follows:
 
Energy
 
Engineered Systems
 
Fluids
 
Refrigeration & Food Equipment
 
Total
Balance at December 31, 2016
$
1,045,774

 
$
1,567,216

 
$
1,413,508

 
$
536,179

 
$
4,562,677

Purchase price adjustments

 
(5,313
)
 
(44,785
)
 

 
(50,098
)
Disposition of business

 
(27,793
)
 

 

 
(27,793
)
Foreign currency translation
941

 
22,030

 
765

 
198

 
23,934

Balance at March 31, 2017
$
1,046,715

 
$
1,556,140

 
$
1,369,488

 
$
536,377

 
$
4,508,720


As noted in Note 3 — Disposed Operations, the Company completed the sale of its PMI business during the three months ended March 31, 2017. As a result of this sale, the Engineered Systems goodwill balance was reduced by $27,793.

During the three months ended March 31, 2017, the Company recorded $50,098 in adjustments for goodwill related to purchase price adjustments principally for deferred tax liabilities and working capital adjustments for 2016 acquisitions.

The Company tests goodwill for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate an impairment may have occurred. In the first quarter of 2017, the Company re-aligned its reporting units after acquiring four companies in the retail fueling market in 2016, increasing its reporting units from nine to ten. The Company performed the goodwill impairment test for the three reporting units within the Fluids segment impacted by the change, concluding that the fair values of the reporting units were in excess of their carrying values.

The Company’s definite-lived and indefinite-lived intangible assets by major asset class were as follows:
 
March 31, 2017
 
December 31, 2016
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer intangibles
$
1,967,835

 
$
759,061

 
$
1,208,774

 
$
1,942,974

 
$
718,135

 
$
1,224,839

Trademarks
247,013

 
60,910

 
186,103

 
246,619

 
56,455

 
190,164

Patents
158,538

 
122,633

 
35,905

 
157,491

 
119,828

 
37,663

Unpatented technologies
157,146

 
68,791

 
88,355

 
155,752

 
64,648

 
91,104

Distributor relationships
119,267

 
47,344

 
71,923

 
113,463

 
44,914

 
68,549

Drawings & manuals
38,803

 
24,518

 
14,285

 
37,744

 
23,114

 
14,630

Other
33,037

 
21,866

 
11,171

 
31,632

 
21,184

 
10,448

Total
2,721,639

 
1,105,123

 
1,616,516

 
2,685,675

 
1,048,278

 
1,637,397

Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
165,591

 

 
165,591

 
165,526

 

 
165,526

Total intangible assets, net
$
2,887,230

 
$
1,105,123

 
$
1,782,107

 
$
2,851,201

 
$
1,048,278

 
$
1,802,923


Amortization expense was $50,880 and $43,574 for the three months ended March 31, 2017 and 2016, respectively.


8

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

7. Restructuring Activities

The Company's restructuring charges by segment were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Energy
$
185

 
$
6,416

Engineered Systems
1,064

 
1,967

Fluids
3,251

 
5,226

Refrigeration & Food Equipment
1,513

 
21

Corporate

 
757

Total
$
6,013

 
$
14,387

 
 
 
 
These amounts are classified in the unaudited Condensed Consolidated Statements of Earnings as follows:
Cost of goods and services
$
4,071

 
$
5,851

Selling, general and administrative expenses
1,942

 
8,536

Total
$
6,013

 
$
14,387


The restructuring expenses of $6,013 incurred during the three months ended March 31, 2017 were related to restructuring programs initiated during 2017 and 2016. 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 12 to 18 months.

The $6,013 of restructuring charges incurred during the first quarter of 2017 primarily included the following items:

The Engineered Systems segment recorded $1,064 of restructuring charges related to headcount reduction and facility consolidations primarily within the Industrial platform.

The Fluids segment recorded $3,251 of restructuring charges principally related to operational synergies, headcount reductions and facility consolidations at various businesses across the segment.

The Refrigeration & Food Equipment segment recorded $1,513 of restructuring charges related primarily to facility consolidations.

The Company’s severance and exit accrual activities were as follows:
 
Severance
 
Exit
 
Total
Balance at December 31, 2016
$
10,908

 
$
1,439

 
$
12,347

Restructuring charges
4,686

 
1,327

 
6,013

Payments
(7,514
)
 
(1,196
)
 
(8,710
)
Foreign currency translation
212

 
35

 
247

Other, including write-offs of fixed assets
(627
)
 
(301
)
 
(928
)
Balance at March 31, 2017
$
7,665

 
$
1,304

 
$
8,969



9

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

8. Borrowings

Borrowings consisted of the following:
 
March 31, 2017
 
December 31, 2016
Short-term
 
 
 
Current portion of long-term debt and short-term borrowings
$
357,126

 
$
6,950

Commercial paper
391,300

 
407,600

Notes payable and current maturities of long-term debt
$
748,426

 
$
414,550


 
 
 
Carrying amount (1)
 
Principal
 
March 31, 2017
 
December 31, 2016
Long-term
 
 
 
 
 
5.45% 10-year notes due March 15, 2018
$
350,000

 
$
349,623

 
$
349,502

2.125% 7-year notes due December 1, 2020 (euro-denominated)
323,957

 
322,207

 
311,851

4.30% 10-year notes due March 1, 2021
450,000

 
448,554

 
448,458

3.150% 10-year notes due November 15, 2025
400,000

 
394,189

 
394,042

1.25% 10-year notes due November 9, 2026 (euro-denominated)
647,913

 
637,200

 
616,893

6.65% 30-year debentures due June 1, 2028
200,000

 
198,879

 
198,830

5.375% 30-year debentures due October 15, 2035
300,000

 
295,374

 
295,316

6.60% 30-year notes due March 15, 2038
250,000

 
247,628

 
247,593

5.375% 30-year notes due March 1, 2041
350,000

 
343,393

 
343,323

Other


 
1,716

 
1,969

Total debt


 
3,238,763

 
3,207,777

Less long-term debt current portion
 
 
(350,801
)
 
(1,140
)
Net long-term debt


 
$
2,887,962

 
$
3,206,637

(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were $18.2 million and $18.8 million as of March 31, 2017 and December 31, 2016, respectively. Total deferred debt issuance costs were $16.3 million and $16.5 million as of March 31, 2017 and December 31, 2016, respectively.

On March 15, 2018, the outstanding 5.45% notes with a principal value of $350.0 million will mature. These notes have been classified as a current maturity of long-term debt as of March 31, 2017.

The Company maintains a $1.0 billion five-year unsecured revolving credit facility (the "Credit Agreement") with a syndicate of banks which expires on November 10, 2020. The Company was in compliance with all covenants in the Credit Agreement and other long-term debt covenants at March 31, 2017 and had a coverage ratio of 10.1 to 1.0. The Company primarily uses the Credit Agreement 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 repurchases of its common stock.

As of March 31, 2017, the Company had approximately $136,523 outstanding in letters of credit and performance and other guarantees which expire on various dates in 2017 through 2039. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.


10

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

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 contracts designated as cash flow hedges. At March 31, 2017 and December 31, 2016, the Company had contracts with U.S. dollar equivalent notional amounts of $104,133 and $59,932, respectively, to exchange foreign currencies, principally the Chinese Yuan, Pound Sterling, Swedish Krona, Euro, Canadian Dollar and Swiss Franc. 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 $56,987 and $56,189 as of March 31, 2017 and December 31, 2016, 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. Gains and losses on these contracts are recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.

The following table sets forth the fair values of derivative instruments held by the Company as of March 31, 2017, and December 31, 2016 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
March 31, 2017
 
December 31, 2016
 
Balance Sheet Caption
Foreign currency forward
$
665

 
$
1,058

 
Prepaid / Other assets
Foreign currency forward
(700
)
 
(705
)
 
Other accrued expenses

For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in Accumulated other comprehensive loss as a separate component of the Condensed Consolidated Statements of Stockholders' Equity and is reclassified into Cost of goods and services in the Condensed Consolidated Statements of Earnings during the period in which the hedged transaction is recognized. 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.

The Company has designated the €600,000 and €300,000 of euro-denominated notes issued November 9, 2016 and December 4, 2013, respectively, as hedges of a portion of its net investment in euro-denominated operations. Changes in the value of the euro-denominated debt are recognized in foreign currency translation adjustments within Other comprehensive earnings (loss) of the Condensed Consolidated Statements of Comprehensive Earnings 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 net investment hedges were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Loss on euro-denominated debt
$
(30,521
)
 
$
(6,165
)
Tax benefit
10,682

 
2,158

Net loss on net investment hedges, net of tax
$
(19,839
)
 
$
(4,007
)


11

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

Fair Value Measurements

Accounting Standards Codification ("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.

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, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
 
Level 2
 
Level 2
Assets:
 
 
 
Foreign currency cash flow hedges
$
665

 
$
1,058

Liabilities:
 
 
 
Foreign currency cash flow hedges
700

 
705


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 at March 31, 2017, and December 31, 2016 was $3,189,216 and $3,534,553, respectively, compared to the carrying value of $3,238,763 and $3,207,777, 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, 2017, and December 31, 2016 due to the short-term nature of these instruments.

10. Income Taxes

The effective tax rates for the three months ended March 31, 2017 and 2016 were 25.7% and 22.1%, respectively. The increase in the effective tax rate for the three months ended March 31, 2017 relative to the prior comparable period is principally due to the larger benefit from the discrete items in 2016 compared to 2017.

The discrete items for the three months ended March 31, 2017 primarily resulted from the gain on the sale of PMI. The discrete items for the three months ended March 31, 2016 principally resulted from the impact on deferred tax balances of a tax rate reduction in a non-US jurisdiction.

In the first quarter of 2017, stock-based compensation excess tax benefits of $3,346 were reflected in the Condensed Consolidated Statement of Earnings as a component of the provision for income taxes as a result of adopting Accounting Standards Update ("ASU") 2016-09, Compensation Stock Compensation (Topic 718). See Note 18 — Recent Accounting Pronouncements regarding the adoption of the standard.

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

12

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

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 $17,905.

11. Equity Incentive Program

The Company typically grants equity awards annually at its regularly scheduled first quarter meeting of the Compensation Committee of the Board of Directors. During the first quarter of 2017, the Company issued stock-settled appreciation rights ("SARs") covering 1,028,116 shares, performance share awards of 57,958 and restricted stock units ("RSUs") of 170,310.

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 were as follows:
 
SARs
 
2017
 
2016
Risk-free interest rate
1.80
%
 
1.05
%
Dividend yield
2.27
%
 
3.09
%
Expected life (years)
4.6

 
4.6

Volatility
21.90
%
 
26.17
%
 
 
 
 
Grant price
$
79.28

 
$
57.25

Fair value per share at date of grant
$
12.63

 
$
9.25


The performance share awards granted in 2017 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 selling, general and administrative expenses in the unaudited Condensed Consolidated Statements of Earnings in the period of change.  

The fair value and average attainment used in determining stock-based compensation cost for the performance shares issued in 2017 and 2016 is as follows for the three months ended March 31, 2017:
 
Performance shares
 
2017
 
2016
Fair value per share at date of grant
$
79.28

 
$
57.25

Average attainment rate reflected in expense
169.95
%
 
39.91
%

The Company also has granted RSUs, and the fair value of these awards was determined using Dover's closing stock price on the date of grant.

Stock-based compensation is reported within selling, general 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,
 
2017
 
2016
Pre-tax stock-based compensation expense
$
12,805

 
$
11,387

Tax benefit
(4,554
)
 
(4,050
)
Total stock-based compensation expense, net of tax
$
8,251

 
$
7,337



13

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

On January 1, 2017, the Company adopted ASU 2016-09, Compensation: Stock Compensation (Topic 718). See Note 18 — Recent Accounting Pronouncements for further details.
 
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, 2017, and December 31, 2016, the Company has reserves totaling $30,018 and $29,959, 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 March 31, 2017 and December 31, 2016, these reserves were 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 for new claims. The changes in the carrying amount of product warranties through March 31, 2017 and 2016 were as follows:
 
2017
 
2016
Beginning Balance, December 31 of the Prior Year
$
84,997

 
$
44,466

Provision for warranties
18,202

 
14,031

Settlements made
(17,633
)
 
(12,462
)
Other adjustments, including acquisitions and currency translation
805

 
4,666

Ending Balance, March 31
$
86,371

 
$
50,701


During the fourth quarter of 2016, the Company determined that there was a quality issue with a product component part in the Fluids segment and voluntarily reported this issue to the U.S. Consumer Product Safety Commission (“CPSC”). During the first quarter of 2017, the Company announced a voluntary recall of the product in collaboration with the CPSC. Based on the currently available information, at December 31, 2016, the Company recorded a warranty accrual of $23,150 in Other liabilities in the Consolidated Balance Sheet to cover the estimated costs of the recall. At March 31, 2017, the warranty accrual was reduced to $21,750 reflecting payments made against the accrual and was also reclassed from a non-current liability to a current liability.

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.


14

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

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
 
2017
 
2016
 
2017
 
2016
Service cost
$
3,021

 
$
3,478

 
$
1,317

 
$
1,373

Interest cost
5,429

 
5,762

 
1,264

 
1,375

Expected return on plan assets
(9,953
)
 
(9,698
)
 
(1,804
)
 
(1,948
)
Amortization:
 
 
 
 
 
 
 
Prior service cost (credit)
107

 
183

 
(110
)
 
(99
)
Recognized actuarial loss
1,396

 
1,609

 
841

 
665

Transition obligation

 

 
1

 
1

Net periodic expense
$

 
$
1,334

 
$
1,509

 
$
1,367


Non-Qualified Supplemental Benefits
 
Three Months Ended March 31,
 
2017
 
2016
Service cost
$
618

 
$
740

Interest cost
1,019

 
1,317

Amortization:
 
 
 
   Prior service cost
1,102

 
1,567

   Recognized actuarial gain
(298
)
 
(140
)
Net periodic expense
$
2,441

 
$
3,484


Post-Retirement Benefit Plans

The Company also maintains post-retirement benefit plans, although these plans are 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,
 
2017
 
2016
Service cost
$
8

 
$
13

Interest cost
73

 
105

Amortization:
 
 
 
   Prior service cost (credit)
2

 
(36
)
   Recognized actuarial gain
(40
)
 
(59
)
Net periodic expense
$
43

 
$
23


The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $3,001 and $3,691 for the three months ended March 31, 2017 and 2016, respectively.

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 $11,358, and $9,808 for the three months ended March 31, 2017 and 2016, respectively.


15

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

14. Other Comprehensive Earnings

The amounts recognized in other comprehensive earnings (loss) were as follows:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
33,090

 
$
10,682

 
$
43,772

 
$
6,611

 
$
2,158

 
$
8,769

Pension and other postretirement benefit plans
3,001

 
(961
)
 
2,040

 
3,691

 
(1,241
)
 
2,450

Changes in fair value of cash flow hedges
(213
)
 
74

 
(139
)
 
(147
)
 
51

 
(96
)
Other
383

 
(46
)
 
337

 
2,090

 
(251
)
 
1,839

Total other comprehensive earnings
$
36,261

 
$
9,749

 
$
46,010

 
$
12,245

 
$
717

 
$
12,962


Total comprehensive earnings were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Net earnings
$
172,247

 
$
99,356

Other comprehensive earnings
46,010

 
12,962

Comprehensive earnings
$
218,257

 
$
112,318


Amounts reclassified from accumulated other comprehensive (loss) to earnings during the three months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended March 31,
 
2017

2016
Foreign currency translation:
 
 
 
Reclassification of foreign currency translation losses to earnings from sale of subsidiary
$
3,875

 
$

Tax benefit

 

Net of tax
$
3,875

 
$

Pension and other postretirement benefit plans:
 
 
 
Amortization of actuarial losses
$
1,899

 
$
2,076

Amortization of prior service costs
1,102

 
1,615

Total before tax
3,001

 
3,691

Tax benefit
(961
)
 
(1,241
)
Net of tax
$
2,040

 
$
2,450

Cash flow hedges:
 
 
 
Net gains reclassified into earnings
$
(334
)
 
$
(72
)
Tax benefit
117

 
25

Net of tax
$
(217
)
 
$
(47
)

The Company recognizes net periodic pension cost, which includes amortization of net actuarial losses and prior service costs, in both selling, general 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, general and administrative expenses.


16

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

15. Segment Information

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,
 
2017
 
2016
Revenue:
 
 
 
Energy
$
324,088

 
$
283,230

Engineered Systems
607,635

 
576,995

Fluids
525,195

 
399,062

Refrigeration & Food Equipment
356,834

 
363,252

Intra-segment eliminations
(380
)
 
(266
)
Total consolidated revenue
$
1,813,372

 
$
1,622,273

Earnings:
 
 
 
Segment earnings: (1)
 
 
 
Energy
$
41,691

 
$
11,244

Engineered Systems
174,398

 
93,748

Fluids
52,639

 
46,047

Refrigeration & Food Equipment
33,562

 
38,161

Total segment earnings
302,290

 
189,200

Corporate expense / other (2)
36,489

 
29,862

Interest expense
36,409

 
33,318

Interest income
(2,580
)
 
(1,604
)
Earnings before provision for income taxes
231,972

 
127,624

Provision for income taxes
59,725

 
28,268

Net earnings
$
172,247

 
$
99,356

(1)  
Segment earnings includes non-operating income and expense directly attributable to the segments. Non-operating income and expense includes gain on sale of businesses and other income, net.
(2)
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, 2017 and 2016, the Company repurchased no shares of common stock under the January 2015 authorization. As of March 31, 2017, there were 6,771,458 shares available for repurchase under the authorization.

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,
 
2017
 
2016
Net earnings
$
172,247

 
$
99,356

Basic earnings per common share:
 
 
 
Net earnings
$
1.11

 
$
0.64

Weighted average shares outstanding
155,540,000

 
155,064,000

Diluted earnings per common share:
 
 
 
Net earnings
$
1.09

 
$
0.64

Weighted average shares outstanding
157,399,000

 
156,161,000


17

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

The following table is a reconciliation of the share amounts used in computing earnings per share:
 
Three Months Ended March 31,
 
2017
 
2016
Weighted average shares outstanding - Basic
155,540,000

 
155,064,000

Dilutive effect of assumed exercise of employee stock options and SARs and vesting of performance shares
1,859,000

 
1,097,000

Weighted average shares outstanding - Diluted
157,399,000

 
156,161,000


Diluted earnings per share amounts are computed using the weighted average number of common shares outstanding and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of 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 are excluded from the calculation above. There were no anti-dilutive shares for the three months ended March 31, 2017, and 27,000 for the three months ended March 31, 2016.

18. Recent Accounting Pronouncements

Recently Issued Accounting Standards

The following standards, issued by the Financial Accounting Standards Board ("FASB"), will, or are expected to, result in a change in practice and/or have a financial impact to the Company’s Consolidated Financial Statements:

In January 2017, the FASB issued ASU 2017-01, Business combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods for the Company on January 1, 2018, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 cash flows. This guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating this guidance and the impact it will have on its Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance 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 on January 1, 2018.

The Company commenced its assessment of ASU 2014-09 during the second half of 2015 and developed a project plan to guide the implementation. This project plan includes analyzing the ASU’s impact on the Company's contract portfolio, comparing its historical accounting policies and practices to the requirements of the new guidance and identifying potential differences from applying the requirements of the new guidance to its contracts. The Company is also in the process of drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance. The Company expects to adopt this new guidance using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating this guidance and the impact it will have on its Consolidated Financial Statements.

18

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

Recently Adopted Accounting Standards

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amended guidance simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. The Company early adopted this guidance on January 1, 2017 as its annual impairment test is performed after January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU 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 adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes within the Condensed Consolidated Statements of Earnings rather than paid-in capital of $3,346 for the three months ended March 31, 2017. Additionally, our Condensed Consolidated Statement of Cash Flows now present excess tax benefits as an operating activity, adjusted prospectively. Finally, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award. The Company adopted this guidance on January 1, 2017.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 340): Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance on January 1, 2017. The adoption of this ASU did not have a material impact to the Company's Consolidated Financial Statements.

19. Subsequent Event

On April 5, 2017, the Company acquired Caldera Graphics S.A.S., a company with experience in the digital printing industry, for approximately €35.0 million (approximately $37.0 million). The acquisition enhances the Company's ability to serve the global digital textile printing market with its experience in developing, marketing and supporting high-quality technical software for the digital printing industry. Caldera will be included in the Printing and Identification platform within the Engineered Systems segment.
 





19


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 as well as liquidity, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). We believe these measures provide investors with important information that is useful in understanding our business results and trends. Explanations 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, consumable supplies, software and digital solutions and support services through four 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," or "our" include Dover Corporation and its consolidated 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 Fueling & Transport, Pumps and Hygienic & Pharma end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas and industrial markets. In the first quarter of 2017, we aligned our financial reporting around these key end markets to provide more detailed information after acquiring four companies in the retail fueling market in 2016.

Our Refrigeration & Food Equipment segment is a provider of innovative and energy efficient equipment and systems serving the commercial refrigeration and food equipment 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, 2017 and 2016:
 
Revenue
 
Segment Earnings
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Energy
17.9
%
 
17.5
%
 
13.8
%
 
5.9
%
Engineered Systems
33.5
%
 
35.6
%
 
57.7
%
 
49.5
%
Fluids
28.9
%
 
24.5
%
 
17.4
%
 
24.4
%
Refrigeration & Food Equipment
19.7
%
 
22.4
%
 
11.1
%
 
20.2
%

In the first quarter of 2017, revenue of $1.8 billion increased 11.8% from $1.6 billion, as compared to the first quarter of 2016. Results were driven by organic revenue growth of 3.8%, primarily led by our Energy segment, and acquisition-related revenue growth of 11.8% due to our Fluids and Engineered Systems segments, partially offset by a revenue decline of 3.0%, due to disposed businesses, and an unfavorable impact from foreign currency translation of 0.8%.

The growth in organic revenue was primarily led by our Energy segment, in which growth of 14.9% was driven by improvement in shorter cycle U.S. oil and gas markets. Organic growth in our Refrigeration & Food Equipment segment increased 5.1%, primarily due to higher demand in the retail refrigeration market. Engineered Systems segment organic revenue increased 1.9%, reflecting

20


continued growth in our Printing & Identification platform, and general increases in our Industrial platform with the exception of our environmental solutions business. Fluids segment organic revenue declined 2.4%, principally reflecting continued weakness in longer cycle oil and gas markets, especially transport end markets.

From a geographic perspective, the substantial majority of our geographic markets grew organically. Our U.S., Europe and China activities all improved organically year over year.

During the first quarter of 2017, we completed the sale of Performance Motorsports International ("PMI") in our Engineered Systems segment, a manufacturer of pistons and other engine related components serving the motorsports and powersports markets. Total consideration was $147.3 million for the transaction, including cash proceeds of $118.7 million. We recognized a pre-tax gain on sale of $88.4 million (net of tax gain on sale of $61.7 million) and recorded a 25% non-controlling interest at fair value as well as a note receivable.

Due to our favorable first quarter 2017 results and overall strong bookings activity, along with the net benefit from our first quarter disposition, we have increased our full-year expectations for revenue and earnings per share. We now expect full year revenue to increase approximately 11% to 13%. This forecast includes expected organic revenue growth of 4% to 6%. In total, full year earnings per share is expected to be in the range of $4.05 to $4.20.


21


CONSOLIDATED RESULTS OF OPERATIONS

 
Three Months Ended March 31,
(dollars in thousands, except per share data)
2017
 
2016
 
% Change
Revenue
$
1,813,372

 
$
1,622,273

 
11.8
 %
Cost of goods and services
1,152,198

 
1,033,009

 
11.5
 %
Gross profit
661,174

 
589,264

 
12.2
 %
Gross profit margin
36.5
%
 
36.3
%
 
0.2

 
 
 
 
 
 
Selling, general and administrative expenses
485,290

 
443,448

 
9.4
 %
Selling, general and administrative expenses as a percent of revenue
26.8
%
 
27.3
%
 
(0.5
)
 
 
 
 
 
 
Interest expense
36,409

 
33,318

 
9.3
 %
Interest income
(2,580
)
 
(1,604
)
 
60.8
 %
Gain on sale of businesses
(90,093
)
 
(11,228
)
 
nm*
Other income, net
176

 
(2,294
)
 
nm*
 
 
 
 
 
 
Provision for income taxes
59,725

 
28,268

 
111.3
 %
Effective tax rate
25.7
%
 
22.1
%
 
3.6

 
 
 
 
 
 
Net earnings
172,247

 
99,356

 
73.4
 %
Net earnings per common share - diluted
$
1.09

 
$
0.64

 
70.3
 %
* nm - not meaningful 

Revenue

Revenue for the three months ended March 31, 2017 increased $191.1 million, or 11.8%, from the comparable period. Results were driven by organic revenue growth of 3.8%, primarily led by our Energy segment, and acquisition-related revenue growth of 11.8% due to our Fluids and Engineered Systems segments, partially offset by a revenue decline of 3.0%, due to disposed businesses, and an unfavorable impact from foreign currency translation of 0.8%.

Gross Profit

Gross profit for the three months ended March 31, 2017 increased $71.9 million, or 12.2%, from the comparable period, consistent with the increase in revenue for the period. Gross profit margin remained flat for the three months ended March 31, 2017 from the comparable period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2017 increased $41.8 million, or 9.4%, from the comparable period, reflecting the impact of acquisitions in 2016, including the related depreciation and amortization expense, as well as increased compensation costs, offset by lower restructuring charges. As a percentage of revenue, selling, general and administrative expenses remained relatively flat for the three months ended March 31, 2017 from the comparable period.

Non-Operating Items

Interest expense

Interest expense for the three months ended March 31, 2017 increased $3.1 million, or 9.3%, from the comparable period. This increase was primarily due to interest expense on the €600.0 million notes issued in the fourth quarter of 2016.

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Gain on sale of businesses

Gain on sale of businesses of $90,093 for the three months ended March 31, 2017 is due to the sale of PMI in which we recognized a gain on sale of $88,402, as well as a working capital adjustment for our sale of Tipper Tie in the fourth quarter of 2016. Gain on sale of businesses of $11,228 for the three months ended March 31, 2016 is due to the sale of Texas Hydraulics.

Income Taxes

The effective tax rates for the three months ended March 31, 2017 and 2016 were 25.7% and 22.1%, respectively. The increase in the effective tax rate for the three months ended March 31, 2017 relative to the prior comparable period is principally due to the larger benefit from the discrete items in 2016 compared to 2017.

The discrete items for the three months ended March 31, 2017 primarily resulted from the gain on the sale of PMI. The discrete items for the three months ended March 31, 2016 principally resulted from the impact on deferred tax balances of a tax rate reduction in a non-US jurisdiction.

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 $17.9 million.

Net Earnings

Net earnings for the three months ended March 31, 2017 increased 73.4% to $172.2 million, or $1.09 diluted earnings per share from $99.4 million, or $0.64 diluted earnings per share. The increase in earnings is primarily due to the gain on sale of PMI, which was $61.7 million, net of tax, or $0.39 diluted earnings per share, as well as an increase in revenue as a result of the improvement in the U.S. oil and gas markets and acquisitions completed in 2016.

23


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)
 
2017
 
2016
 
% Change
Revenue:
 
 
 
 
 
 
Drilling & Production
 
$
215,457

 
$
188,360

 
14.4
 %
Bearings & Compression
 
72,561

 
64,444

 
12.6
 %
Automation
 
36,070

 
30,426

 
18.5
 %
Total
 
$
324,088

 
$
283,230

 
14.4
 %
 
 
 
 
 
 
 
Segment earnings
 
$
41,691

 
$
11,244

 
270.8
 %
Segment margin
 
12.9
%
 
4.0
%
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
73,056

 
$
45,404

 
60.9
 %
Segment EBITDA margin
 
22.5
%
 
16.0
%
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
Depreciation and amortization
 
$
31,365

 
$
34,160

 
(8.2
)%
Bookings
 
348,317

 
273,445

 
27.4
 %
Backlog
 
156,255

 
144,828

 
7.9
 %
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
Organic growth
 
 
 
 
 
14.9
 %
Foreign currency translation
 
 
 
 
 
(0.5
)%
 
 
 
 
 
 
14.4
 %

First Quarter 2017 Compared to the First Quarter 2016

Energy revenue increased $40.9 million, or 14.4%, in the first quarter of 2017 as compared to the first quarter of 2016, comprised of organic revenue growth of 14.9%, partially offset by an unfavorable impact from foreign currency translation of 0.5%. The increase is driven by improved market conditions and increases in U.S. rig count and well completions. Customer pricing has stabilized sequentially and decreased 0.6% on a year-over-year basis.

Drilling & Production revenue (representing 66.5% of segment revenue) increased $27.1 million, or 14.4%, as compared to the prior year quarter, due to increased U.S. rig count and well completions.

Bearings & Compression revenue (representing 22.4% of segment revenue) increased $8.1 million, or 12.6%, as compared to the prior year quarter, as a result of increased original equipment manufacturer (OEM) demand.

Automation revenue (representing 11.1% of segment revenue) increased $5.6 million, or 18.5%, as compared to the prior year quarter. This increase was driven by higher demand from well service and exploration and production companies.

Segment earnings increased $30.4 million, or 270.8%, as compared to the prior year quarter, primarily driven by higher volume across our business and a reduction in restructuring expenses of $6.2 million to $0.2 million during the first quarter of 2017 from $6.4 million for the prior year quarter. Segment margin increased from 4.0% to 12.9%, as compared to the prior year quarter, mainly due to strong conversion on increased volumes.


24


Bookings for the first quarter of 2017 increased 27.4% from the prior year quarter, reflecting the impact of market strength. Book-to-bill was 1.07.

25


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)
 
2017
 
2016
 
% Change
Revenue:
 
 
 
 
 
 
Printing & Identification
 
$
249,238

 
$
239,681

 
4.0
 %
Industrials
 
358,397

 
337,314

 
6.3
 %
Total
 
$
607,635

 
$
576,995

 
5.3
 %
 
 
 
 
 
 
 
Segment earnings (1)
 
$
174,398

 
$
93,748

 
86.0
 %
Segment margin (1)
 
28.7
%
 
16.2
%
 
 
 
 
 
 
 
 
 
Segment EBITDA (2)
 
$
193,973

 
$
109,784

 
76.7
 %
Segment EBITDA margin (2)
 
31.9
%
 
19.0
%
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
Depreciation and amortization
 
$
19,575

 
$
16,036

 
22.1
 %
 
 
 
 
 
 
 
Bookings:
 
 
 
 
 
 
Printing & Identification
 
$
256,665

 
$
242,569

 
5.8
 %
Industrials
 
419,455

 
329,957

 
27.1
 %
 
 
$
676,120

 
$
572,526

 
18.1
 %
Backlog:
 
 
 
 
 
 
Printing & Identification
 
$
109,347

 
$
102,640

 
6.5
 %
Industrials
 
310,008

 
235,384

 
31.7
 %
 
 
$
419,355

 
$
338,024

 
24.1
 %
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
Organic growth
 
 
 
 
 
1.9
 %
Acquisitions
 
 
 
 
 
8.7
 %
Dispositions
 
 
 
 
 
(4.2
)%
Foreign currency translation
 
 
 
 
 
(1.1
)%
 
 
 
 
 
 
5.3
 %
(1) Excluding gain on sale of businesses, segment earnings was $86.0 million and $82.5 million for the three months ended March 31, 2017 and 2016, respectively. Segment margin was 14.2% and 14.3% for the three months ended March 31, 2017 and 2016, respectively.
(2) Excluding gain on sale of businesses, segment EBITDA was $105.6 million and $98.6 million for the three months ended March 31, 2017 and 2016, respectively. Segment EBITDA margin was 17.4% and 17.1% for the three months ended March 31, 2017 and 2016, respectively.

First Quarter 2017 Compared to the First Quarter 2016

Engineered Systems revenue for the first quarter of 2017 increased $30.6 million, or 5.3%, as compared to the first quarter of 2016, primarily driven by organic growth of 1.9% and acquisition-related growth of 8.7% due to Alliance Wireless Technologies, Inc. ("AWTI") in the third quarter of 2016 and Ravaglioli S.p.A. Group ("RAV") in the fourth quarter of 2016. This growth was partially offset by a 4.2% impact from two dispositions and an unfavorable impact from foreign currency translation of 1.1%. Customer pricing did not have a significant impact to revenue in the first quarter of 2017.
 
Printing & Identification revenue (representing 41.0% of segment revenue) increased $9.6 million, or 4.0%, as compared to the prior year quarter. The growth in organic revenue of 5.4% was partially offset by an unfavorable impact from foreign currency translation of 1.4%. Organic revenue growth was primarily driven by strong activity in our global marking and coding and digital printing businesses.

26



Industrials revenue (representing 59.0% of segment revenue) increased $21.1 million, or 6.3%, as compared to the prior year quarter. The increase was due to acquisition-related growth of 14.8% from AWTI and RAV. This increase was partially offset by organic decline of 0.6%, the impact of dispositions of 7.2%, and an unfavorable impact of foreign currency translation of 0.8%. The organic revenue decline was primarily driven by reduced shipments in our environmental solutions business primarily reflecting chassis availability issues. This decrease was partially offset by strong growth in our vehicle service business and general industrial markets.

Engineered Systems segment earnings increased $80.7 million, or 86.0%, as compared to the prior year quarter, driven by gain on sale of businesses. Excluding the gains, segment earnings increased $3.5 million, or 4.2%, due to strong activity in our global marking and coding and digital printing businesses and growth in the vehicle service business. Segment margin also increased primarily due to the gain on sale of businesses. Excluding the gains, margin remained relatively flat.
 
Bookings for our Industrials platform increased 27.1%, compared to the prior year quarter, due to acquisition-related growth and broad-based organic gains. Our Printing & Identification bookings increased 5.8% compared to the prior year quarter, due to strong activity in our global marking and coding and digital printing businesses. Segment book-to-bill was 1.11.



27


Fluids
Our Fluids segment, serving the Fueling & Transport, Pumps and Hygienic & Pharma end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas and industrial markets. In the first quarter of 2017, we aligned our financial reporting around these key end markets to provide more detailed information after acquiring four companies in the retail fueling market in 2016.
 
 
Three Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
 
% Change
Revenue:
 
 
 
 
 
 
Fueling & Transport
 
$
316,101

 
$
186,598

 
69.4
 %
Pumps
 
150,831

 
156,600

 
(3.7
)%
Hygienic & Pharma
 
58,263

 
55,864

 
4.3
 %
 
 
$
525,195

 
$
399,062

 
31.6
 %
 
 
 
 
 
 
 
Segment earnings
 
$
52,639

 
$
46,047

 
14.3
 %
Segment margin
 
10.0
%
 
11.5
%
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
81,142

 
$
66,558

 
21.9
 %
Segment EBITDA margin
 
15.4
%
 
16.7
%
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
Depreciation and amortization
 
$
28,503

 
$
20,511

 
39.0
 %
Bookings
 
565,987

 
418,345

 
35.3
 %
Backlog
 
371,717

 
286,457

 
29.8
 %
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
Organic decline
 
 
 
 
 
(2.4
)%
Acquisitions
 
 
 
 
 
35.4
 %
Foreign currency translation
 
 
 
 
 
(1.4
)%