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EX-32 - EXHIBIT 32 - DOVER Corpa2017063010-qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - DOVER Corpa2017063010-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - DOVER Corpa2017063010-qexhibit311.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 June 30, 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 July 13, 2017 was 155,734,275.



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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
1,993,351

 
$
1,686,345

 
$
3,806,723

 
$
3,308,618

Cost of goods and services
1,243,905

 
1,055,132

 
2,396,103

 
2,088,141

Gross profit
749,446

 
631,213

 
1,410,620

 
1,220,477

Selling, general and administrative expenses
484,046

 
437,411

 
969,336

 
880,859

Operating earnings
265,400

 
193,802

 
441,284

 
339,618

Interest expense
36,932

 
33,779

 
73,341

 
67,097

Interest income
(2,338
)
 
(1,622
)
 
(4,918
)
 
(3,226
)
Gain on sale of businesses

 
(801
)
 
(90,093
)
 
(12,029
)
Other expense (income), net
15

 
(2,053
)
 
191

 
(4,347
)
Earnings before provision for income taxes
230,791

 
164,499

 
462,763

 
292,123

Provision for income taxes
66,733

 
46,209

 
126,458

 
74,477

Net earnings
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
1.05

 
$
0.76

 
$
2.16

 
$
1.40

Diluted
$
1.04

 
$
0.76

 
$
2.14

 
$
1.39

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
155,703

 
155,180

 
155,622

 
155,122

Diluted
157,513

 
156,595

 
157,457

 
156,414

Dividends paid per common share
$
0.44

 
$
0.42

 
$
0.88

 
$
0.84

 

See Notes to Condensed Consolidated Financial Statements



1


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

Other comprehensive earnings (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation gains (losses) during period
26,174

 
(41,992
)
 
66,071

 
(33,223
)
Reclassification of foreign currency translation losses to earnings upon sale of subsidiaries

 

 
3,875

 

Total foreign currency translation adjustments
26,174

 
(41,992
)
 
69,946

 
(33,223
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
 
Amortization of actuarial losses included in net periodic pension cost
1,353

 
1,416

 
2,691

 
2,825

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

 
1,040

 
1,404

 
2,081

Total pension and other post-retirement benefit plans
2,055

 
2,456

 
4,095

 
4,906

Changes in fair value of cash flow hedges:
 
 
 
 
 
 
 
Unrealized net (losses) arising during period
(1,876
)
 
(162
)
 
(1,798
)
 
(211
)
Net losses (gains) reclassified into earnings
159

 
213

 
(58
)
 
166

Total cash flow hedges
(1,717
)
 
51

 
(1,856
)
 
(45
)
Other
(578
)
 
(448
)
 
(241
)
 
1,392

Other comprehensive earnings (loss)
25,934

 
(39,933
)
 
71,944

 
(26,970
)
Comprehensive earnings
$
189,992

 
$
78,357

 
$
408,249

 
$
190,676



See Notes to Condensed Consolidated Financial Statements


2


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

 
June 30, 2017
 
December 31, 2016
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
301,588

 
$
349,146

Receivables, net of allowances of $33,176 and $22,015
1,395,745

 
1,265,201

Inventories
962,070

 
870,487

Prepaid and other current assets
100,181

 
104,357

Total current assets
2,759,584

 
2,589,191

Property, plant and equipment, net
978,621

 
945,670

Goodwill
4,564,266

 
4,562,677

Intangible assets, net
1,757,675

 
1,802,923

Other assets and deferred charges
232,277

 
215,530

Total assets
$
10,292,423

 
$
10,115,991

Liabilities and Stockholders' Equity
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
606,965

 
$
414,550

Accounts payable
954,115

 
830,318

Accrued compensation and employee benefits
211,728

 
226,440

Accrued insurance
106,186

 
96,062

Other accrued expenses
322,347

 
332,595

Federal and other income taxes
14,005

 
40,353

Total current liabilities
2,215,346

 
1,940,318

Long-term debt
2,925,472

 
3,206,637

Deferred income taxes
630,079

 
710,173

Other liabilities
449,092

 
459,117

Stockholders' equity:
 

 
 

Total stockholders' equity
4,072,434

 
3,799,746

Total liabilities and stockholders' equity
$
10,292,423

 
$
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

 

 

 
336,305

 

 
336,305

Dividends paid

 

 

 
(137,182
)
 

 
(137,182
)
Common stock issued for the exercise of share-based awards
308

 
(12,336
)
 

 

 

 
(12,028
)
Share-based compensation expense

 
17,469

 

 

 

 
17,469

Other comprehensive earnings, net of tax

 

 

 

 
71,944

 
71,944

Other, net

 
(3,820
)
 

 

 

 
(3,820
)
Balance at June 30, 2017
$
256,846

 
$
948,068

 
$
(4,972,016
)
 
$
8,126,918

 
$
(287,382
)
 
$
4,072,434

 

See Notes to Condensed Consolidated Financial Statements


4


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
336,305

 
$
217,646

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Depreciation and amortization
193,016

 
176,698

Stock-based compensation expense
17,469

 
14,360

Gain on sale of assets
(910
)
 
(1,530
)
Gain on sale of businesses
(90,093
)
 
(11,228
)
Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable, net
(106,927
)
 
429

Inventories
(93,132
)
 
(16,429
)
Prepaid expenses and other assets
(7,238
)
 
(5,449
)
Accounts payable
97,677

 
5,377

Accrued compensation and employee benefits
(21,399
)
 
(42,534
)
Accrued expenses and other liabilities
(38,169
)
 
16,135

Accrued and deferred taxes, net
(28,420
)
 
11,746

Other, net
(24,231
)
 
(23,940
)
Net cash provided by operating activities
233,948

 
341,281

Investing Activities:
 

 
 

Additions to property, plant and equipment
(90,594
)
 
(72,652
)
Acquisitions, net of cash and cash equivalents acquired
(25,568
)
 
(475,236
)
Proceeds from sale of property, plant and equipment
4,479

 
5,804

Proceeds from sale of businesses
121,175

 
47,300

Other
21,151

 
(488
)
Net cash provided by (used in) investing activities
30,643

 
(495,272
)
Financing Activities:
 

 
 

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

 
3,966

Change in commercial paper and notes payable
(157,444
)
 
185,556

Dividends paid to stockholders
(137,182
)
 
(131,253
)
Payments to settle employee tax obligations on exercise of share-based awards
(12,028
)
 
(7,440
)
Other
(2,912
)
 

Net cash (used in) provided by financing activities
(309,566
)
 
50,829

Effect of exchange rate changes on cash and cash equivalents
(2,583
)
 
(3,883
)
Net decrease in cash and cash equivalents
(47,558
)
 
(107,045
)
Cash and cash equivalents at beginning of period
349,146

 
362,185

Cash and cash equivalents at end of period
$
301,588

 
$
255,140



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 interim 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 Condensed 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

2017 Acquisitions

On April 5, 2017, the Company purchased 100% of the voting stock of Caldera Graphics S.A.S. ("Caldera") within the Engineered Systems segment for $32,680, net of cash acquired and including contingent consideration. In connection with this acquisition, the Company recorded goodwill of $24,649 and intangible assets of $8,169, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 7 to 15 years. The pro forma effects of this acquisition on the Company’s operations are disclosed in this footnote.

2016 Acquisitions

During the six months ended June 30, 2016, the Company acquired three business within the Fluids segment for $475,236, net of cash. The Company recorded goodwill of $301,577 and intangible assets of $192,065, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 10 to 15 years.

The goodwill identified by these acquisitions reflect the benefits expected to be derived from product line expansion and operational synergies.

The Company has substantially completed the purchase price allocations for the 2017 and 2016 acquisitions. 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.

Pro Forma Information

The following unaudited pro forma information illustrates the impact of 2017 and 2016 acquisitions on the Company’s revenue and earnings from operations for the three and six months ended June 30, 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 $1,554 million.
 

6

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

The pro forma information assumes that the 2017 and 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.

The proforma effects for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
As reported
$
1,993,351

 
$
1,686,345

 
$
3,806,723

 
$
3,308,618

Pro forma
1,993,483

 
1,877,659

 
3,809,834

 
3,698,831

Earnings:
 
 
 
 
As reported
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

Pro forma
164,209

 
124,926

 
336,756

 
235,219

Basic earnings per share:
 
 
 
 
As reported
$
1.05

 
$
0.76

 
$
2.16

 
$
1.40

Pro forma
1.05

 
0.81

 
2.16

 
1.52

Diluted earnings per share:
 
 
 
 
As reported
$
1.04

 
$
0.76

 
$
2.14

 
$
1.39

Pro forma
1.04

 
0.80

 
2.14

 
1.50


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 six months ended June 30, 2017 within the Condensed Consolidated Statements of Earnings and recorded a 25% equity method investment 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 wholly owned subsidiary of the Company, 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 $11,853 included within the Condensed Consolidated Statements of Earnings for the six months ended June 30, 2016.

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

4. Inventories
 
June 30, 2017
 
December 31, 2016
Raw materials
$
485,699

 
$
428,286

Work in progress
161,840

 
138,652

Finished goods
437,387

 
409,314

Subtotal
1,084,926

 
976,252

Less reserves
(122,856
)
 
(105,765
)
Total
$
962,070

 
$
870,487



7

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

5. Property, Plant and Equipment, net
 
June 30, 2017
 
December 31, 2016
Land
$
70,914

 
$
68,575

Buildings and improvements
615,387

 
597,523

Machinery, equipment and other
1,861,665

 
1,802,832

Property, plant and equipment, gross
2,547,966

 
2,468,930

Total accumulated depreciation
(1,569,345
)
 
(1,523,260
)
Property, plant and equipment, net
$
978,621

 
$
945,670


Depreciation expense totaled $46,325 and $44,501 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, depreciation expense was $91,043 and $89,530, respectively.
 
6. Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill by reportable operating segments were as follows:
 
Engineered Systems
 
Fluids
 
Refrigeration & Food Equipment
 
Energy
 
Total
Balance at December 31, 2016
$
1,567,216

 
$
1,413,508

 
$
536,179

 
$
1,045,774

 
$
4,562,677

Acquisitions
24,649

 

 

 

 
24,649

Purchase price adjustments
(1,299
)
 
(41,474
)
 

 

 
(42,773
)
Disposition of business
(27,793
)
 

 

 

 
(27,793
)
Foreign currency translation
31,537

 
13,933

 
430

 
1,606

 
47,506

Balance at June 30, 2017
$
1,594,310

 
$
1,385,967

 
$
536,609

 
$
1,047,380

 
$
4,564,266


The Company recognized additions of $24,649 to goodwill as a result of the Caldera acquisition discussed in Note 2 — Acquisitions. During the six months ended June 30, 2017, the Company recorded $42,773 in adjustments for goodwill related to purchase price adjustments principally for deferred tax liabilities and working capital adjustments for the 2016 acquisitions.

As noted in Note 3 — Disposed Operations, the Company completed the sale of its PMI business during the six months ended June 30, 2017. As a result of this sale, the Engineered Systems goodwill balance was reduced by $27,793.

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. Additionally, the Company has considered the economic environments in which its businesses operate, particularly those reporting units exposed to the 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.


8

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

The Company’s definite-lived and indefinite-lived intangible assets by major asset class were as follows:
 
June 30, 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
$
1,988,836

 
$
799,314

 
$
1,189,522

 
$
1,942,974

 
$
718,135

 
$
1,224,839

Trademarks
250,555

 
66,079

 
184,476

 
246,619

 
56,455

 
190,164

Patents
159,655

 
125,440

 
34,215

 
157,491

 
119,828

 
37,663

Unpatented technologies
160,239

 
72,921

 
87,318

 
155,752

 
64,648

 
91,104

Distributor relationships
120,915

 
49,480

 
71,435

 
113,463

 
44,914

 
68,549

Drawings & manuals
34,749

 
20,853

 
13,896

 
37,744

 
23,114

 
14,630

Other
33,120

 
21,967

 
11,153

 
31,632

 
21,184

 
10,448

Total
2,748,069

 
1,156,054

 
1,592,015

 
2,685,675

 
1,048,278

 
1,637,397

Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
165,660

 

 
165,660

 
165,526

 

 
165,526

Total intangible assets, net
$
2,913,729

 
$
1,156,054

 
$
1,757,675

 
$
2,851,201

 
$
1,048,278

 
$
1,802,923


Amortization expense was $51,093 and $43,593 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, amortization expense was $101,973 and $87,168, respectively.

7. Restructuring Activities

The Company's restructuring charges by segment were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Engineered Systems
$
755

 
$
773

 
$
1,819

 
$
2,740

Fluids
1,046

 
2,764

 
4,297

 
7,990

Refrigeration & Food Equipment
36

 
52

 
1,549

 
73

Energy
6

 
5,610

 
191

 
12,026

Corporate

 

 

 
757

Total
$
1,843

 
$
9,199

 
$
7,856

 
$
23,586

 
 
 
 
 
 
 
 
These amounts are classified in the Condensed Consolidated Statements of Earnings as follows:
Cost of goods and services
$
163

 
$
4,329

 
$
4,234

 
$
10,180

Selling, general and administrative expenses
1,680

 
4,870

 
3,622

 
13,406

Total
$
1,843

 
$
9,199

 
$
7,856

 
$
23,586


The restructuring expenses of $1,843 and $7,856 incurred during the three and six months ended June 30, 2017, respectively, 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 $1,843 of restructuring charges incurred during the second quarter of 2017 primarily included the following items:

The Engineered Systems segment recorded $755 of restructuring charges related to headcount reductions primarily within the Printing and Identification platform.

The Fluids segment recorded $1,046 of restructuring charges principally related to headcount reductions and facility consolidations primarily within its Fueling & Transport businesses.



9

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

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
6,351

 
1,505

 
7,856

Payments
(10,382
)
 
(1,386
)
 
(11,768
)
Foreign currency translation
408

 
53

 
461

Other, including write-offs of fixed assets
(458
)
 
265

 
(193
)
Balance at June 30, 2017
$
6,827

 
$
1,876

 
$
8,703


8. Borrowings

Borrowings consisted of the following:
 
June 30, 2017
 
December 31, 2016
Short-term
 
 
 
Current portion of long-term debt and short-term borrowings
$
353,065

 
$
6,950

Commercial paper
253,900

 
407,600

Notes payable and current maturities of long-term debt
$
606,965

 
$
414,550


 
 
 
Carrying amount (1)
 
Principal
 
June 30, 2017
 
December 31, 2016
Long-term
 
 
 
 
 
5.45% 10-year notes due March 15, 2018
$
350,000

 
$
349,721

 
$
349,502

2.125% 7-year notes due December 1, 2020 (euro-denominated)
300,000

 
334,173

 
311,851

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

 
448,647

 
448,458

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

 
394,358

 
394,042

1.25% 10-year notes due November 9, 2026 (euro-denominated)
600,000

 
660,931

 
616,893

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

 
198,904

 
198,830

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

 
295,436

 
295,316

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

 
247,657

 
247,593

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

 
343,462

 
343,323

Other


 
3,021

 
1,969

Total debt


 
3,276,310

 
3,207,777

Less long-term debt current portion
 
 
(350,838
)
 
(1,140
)
Net long-term debt


 
$
2,925,472

 
$
3,206,637

(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were
$18.0 million and $18.8 million as of June 30, 2017 and December 31, 2016, respectively. Total deferred debt issuance costs were $15.9 million and $16.5 million as of June 30, 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 June 30, 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 June 30, 2017 and had a coverage ratio of 10.4 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.


10

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

As of June 30, 2017, the Company had approximately $136,066 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.

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 June 30, 2017 and December 31, 2016, the Company had contracts with U.S. dollar equivalent notional amounts of $122,065 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 $43,482 and $56,189 as of June 30, 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 June 30, 2017, and December 31, 2016 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
June 30, 2017
 
December 31, 2016
 
Balance Sheet Caption
Foreign currency forward
$
242

 
$
1,058

 
Prepaid / Other assets
Foreign currency forward
(1,658
)
 
(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 Statement 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.


11

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

Amounts recognized in Other comprehensive earnings (loss) for the gains (losses) on net investment hedges were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
(Loss) gain on euro-denominated debt
$
(35,318
)
 
$
4,500

 
$
(65,839
)
 
$
(1,665
)
Tax benefit (expense)
12,362

 
(1,575
)
 
23,044

 
583

Net (loss) gain on net investment hedges, net of tax
$
(22,956
)
 
$
2,925

 
$
(42,795
)
 
$
(1,082
)

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 June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
 
Level 2
 
Level 2
Assets:
 
 
 
Foreign currency cash flow hedges
$
242

 
$
1,058

Liabilities:
 
 
 
Foreign currency cash flow hedges
1,658

 
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 June 30, 2017, and December 31, 2016 was $3,273,628 and $3,534,553, respectively, compared to the carrying value of $3,276,310 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 June 30, 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 June 30, 2017 and 2016 were 28.9% and 28.1%, respectively. The increase in the effective tax rate for the three months ended June 30, 2017 relative to the prior comparable period is principally due to an increase in tax expense from discrete items in 2017 compared to 2016.

The discrete items for the three months ended June 30, 2017 primarily resulted from the provision to return adjustments in foreign jurisdictions and the effect of the settlement of the 2013 IRS audit. The discrete items for the three months ended June 30, 2016 principally resulted from reassessment of the realizable benefits of certain state credits.


12

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

The effective tax rates for the six months ended June 30, 2017 and 2016 were 27.3% and 25.5%, respectively. The increase in the effective tax rate for the six months ended June 30, 2017 relative to the prior comparable period is primarily due to the benefit in the prior year from the revaluation of deferred tax balances as a result of a tax rate reduction in a non-U.S. jurisdiction, as well as the current year recognition of foreign adjustments to filed tax returns.

For the six months ended June 30, 2017, stock-based compensation excess tax benefits of $4,623 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 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 $27,899.

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 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 174,203.

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 Condensed Consolidated Statements of Earnings in the period of change.  


13

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

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 six months ended June 30, 2017:
 
Performance shares
 
2017
 
2016
Fair value per share at date of grant
$
79.28

 
$
57.25

Average attainment rate reflected in expense
167.04
%
 
20.96
%

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 Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Pre-tax stock-based compensation expense
$
4,664

 
$
2,973

 
$
17,469

 
$
14,360

Tax benefit
(1,633
)
 
(1,030
)
 
(6,187
)
 
(5,080
)
Total stock-based compensation expense, net of tax
$
3,031

 
$
1,943

 
$
11,282

 
$
9,280


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 June 30, 2017, and December 31, 2016, the Company has reserves totaling $29,840 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 June 30, 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.


14

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

Warranty Accruals

Estimated warranty program claims are provided for at the time of sale of the Company's products. Amounts provided for are based on historical costs and adjusted for new claims. The changes in the carrying amount of product warranties through June 30, 2017 and 2016 were as follows:
 
2017
 
2016
Beginning Balance, December 31 of the Prior Year
$
84,997

 
$
44,466

Provision for warranties
32,967

 
29,148

Settlements made
(38,527
)
 
(26,649
)
Other adjustments, including acquisitions and currency translation
145

 
3,011

Ending Balance, June 30
$
79,582

 
$
49,976


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 information that was available during the fourth quarter 2016, 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 June 30, 2017, the warranty accrual is included in Other acrrued expenses and was reduced to $16,230 reflecting payments made against the accrual.

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 June 30,
 
Six Months Ended June 30,
 
U.S. Plan
 
Non-U.S. Plans
 
U.S. Plan
 
Non-U.S. Plans
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
3,021

 
$
3,479

 
$
1,343

 
$
1,405

 
$
6,042

 
$
6,957

 
$
2,660

 
$
2,778

Interest cost
5,430

 
5,761

 
1,285

 
1,394

 
10,859

 
11,523

 
2,549

 
2,769

Expected return on plan assets
(9,953
)
 
(9,699
)
 
(1,833
)
 
(1,974
)
 
(19,906
)
 
(19,397
)
 
(3,637
)
 
(3,922
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
106

 
183

 
(112
)
 
(100
)
 
213

 
366

 
(222
)
 
(199
)
Recognized actuarial loss
1,395

 
1,610

 
864

 
675

 
2,791

 
3,219

 
1,705

 
1,340

Transition obligation

 

 
1

 
1

 

 

 
2

 
2

Net periodic expense
$
(1
)
 
$
1,334

 
$
1,548

 
$
1,401

 
$
(1
)
 
$
2,668

 
$
3,057

 
$
2,768



15

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

Non-Qualified Supplemental Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
618

 
$
739

 
$
1,236

 
$
1,479

Interest cost
1,019

 
1,317

 
2,038

 
2,634

Amortization:
 
 
 
 
 
 
 
   Prior service cost
1,103

 
1,566

 
2,205

 
3,133

   Recognized actuarial gain
(298
)
 
(140
)
 
(596
)
 
(280
)
Net periodic expense
$
2,442

 
$
3,482

 
$
4,883

 
$
6,966


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
9

 
$
13

 
$
17

 
$
26

Interest cost
73

 
104

 
146

 
209

Amortization:
 
 
 
 
 
 
 
   Prior service cost (credit)
2

 
(35
)
 
4

 
(71
)
   Recognized actuarial gain
(40
)
 
(59
)
 
(80
)
 
(118
)
Net periodic expense
$
44

 
$
23

 
$
87

 
$
46


The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $3,021 and $3,701 for the three months ended June 30, 2017 and 2016, respectively, and $6,022 and $7,392 for the six months ended June 30, 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 $10,839 and $8,349 for the three months ended June 30, 2017 and 2016, respectively, and $22,197 and $18,157 for the six months ended June 30, 2017 and 2016.


16

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
 
June 30, 2017
 
June 30, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
13,812

 
$
12,362

 
$
26,174

 
$
(40,417
)
 
$
(1,575
)
 
$
(41,992
)
Pension and other post-retirement benefit plans
3,021

 
(966
)
 
2,055

 
3,701

 
(1,245
)
 
2,456

Changes in fair value of cash flow hedges
(2,642
)
 
925

 
(1,717
)
 
78

 
(27
)
 
51

Other
(657
)
 
79

 
(578
)
 
(507
)
 
59

 
(448
)
Total other comprehensive earnings (loss)
$
13,534

 
$
12,400

 
$
25,934

 
$
(37,145
)
 
$
(2,788
)
 
$
(39,933
)

 
Six Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
46,902

 
$
23,044

 
$
69,946

 
$
(33,806
)
 
$
583

 
$
(33,223
)
Pension and other post-retirement benefit plans
6,022

 
(1,927
)
 
4,095

 
7,392

 
(2,486
)
 
4,906

Changes in fair value of cash flow hedges
(2,855
)
 
999

 
(1,856
)
 
(69
)
 
24

 
(45
)
Other
(274
)
 
33

 
(241
)
 
1,584

 
(192
)
 
1,392

Total other comprehensive earnings (loss)
$
49,795

 
$
22,149

 
$
71,944

 
$
(24,899
)
 
$
(2,071
)
 
$
(26,970
)

Total comprehensive earnings were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

Other comprehensive earnings (loss)
25,934

 
(39,933
)
 
71,944

 
(26,970
)
Comprehensive earnings
$
189,992

 
$
78,357

 
$
408,249

 
$
190,676


Amounts reclassified from accumulated other comprehensive (loss) to earnings during the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017

2016
Foreign currency translation:
 
 
 
 
 
 
 
Reclassification of foreign currency translation losses to earnings from sale of a subsidiary
$

 
$

 
$
3,875

 
$

Tax benefit



 

 

Net of tax
$

 
$

 
$
3,875

 
$

Pension and other postretirement benefit plans:
 
 
 
 
 
 
 
Amortization of actuarial losses
$
1,921

 
$
2,087

 
$
3,820

 
$
4,163

Amortization of prior service costs
1,100

 
1,614

 
2,202

 
3,229

Total before tax
3,021

 
3,701

 
6,022

 
7,392

Tax benefit
(966
)
 
(1,245
)
 
(1,927
)
 
(2,486
)
Net of tax
$
2,055

 
$
2,456

 
$
4,095

 
$
4,906

Cash flow hedges:
 
 
 
 
 
 
 
Net losses (gains) reclassified into earnings
$
245

 
$
328

 
$
(89
)
 
$
256

Tax (expense) benefit
(86
)
 
(115
)
 
31

 
(90
)
Net of tax
$
159

 
$
213

 
$
(58
)
 
$
166



17

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

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.

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Engineered Systems
$
655,430

 
$
592,432

 
$
1,263,065

 
$
1,169,427

Fluids
553,259

 
405,838

 
1,078,454

 
804,900

Refrigeration & Food Equipment
426,304

 
429,386

 
783,138

 
792,638

Energy
359,168

 
259,008

 
683,256

 
542,238

Intra-segment eliminations
(810
)
 
(319
)
 
(1,190
)
 
(585
)
Total consolidated revenue
$
1,993,351

 
$
1,686,345

 
$
3,806,723

 
$
3,308,618

Earnings:
 
 

 
 
 
 
Segment earnings (loss): (1)
 

 
 

 
 
 
 
Engineered Systems
$
106,820

 
$
104,034

 
$
281,218

 
$
197,782

Fluids
73,558

 
54,033

 
126,197

 
100,080

Refrigeration & Food Equipment
65,829

 
63,230

 
99,391

 
101,391

Energy
53,368

 
(75
)
 
95,059

 
11,169

Total segment earnings
299,575

 
221,222

 
601,865

 
410,422

Corporate expense / other (2)
34,190

 
24,566

 
70,679

 
54,428

Interest expense
36,932

 
33,779

 
73,341

 
67,097

Interest income
(2,338
)
 
(1,622
)
 
(4,918
)
 
(3,226
)
Earnings before provision for income taxes
230,791

 
164,499

 
462,763

 
292,123

Provision for income taxes
66,733

 
46,209

 
126,458

 
74,477

Net earnings
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

(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, shared business services costs 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 six months ended June 30, 2017 and 2016, the Company repurchased no shares of common stock under the January 2015 authorization. As of June 30, 2017, there were 6,771,458 shares available for repurchase under the authorization.


18

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

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
164,058

 
$
118,290

 
$
336,305

 
$
217,646

Basic earnings per common share:
 

 
 

 
 
 
 
Net earnings
$
1.05

 
$
0.76

 
$
2.16

 
$
1.40

Weighted average shares outstanding
155,703,000

 
155,180,000

 
155,622,000

 
155,122,000

Diluted earnings per common share:
 

 
 

 
 
 
 
Net earnings
$
1.04

 
$
0.76

 
$
2.14

 
$
1.39

Weighted average shares outstanding
157,513,000

 
156,595,000

 
157,457,000

 
156,414,000

The following table is a reconciliation of the share amounts used in computing earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average shares outstanding - Basic
155,703,000

 
155,180,000

 
155,622,000

 
155,122,000

Dilutive effect of assumed exercise of SARs and vesting of performance shares and RSUs
1,810,000

 
1,415,000

 
1,835,000

 
1,292,000

Weighted average shares outstanding - Diluted
157,513,000

 
156,595,000

 
157,457,000

 
156,414,000


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 RSUs, as determined using the treasury stock method.  

The weighted average number of anti-dilutive potential common shares excluded from the calculation above were approximately 33,000 and 60,000 for the three months ended June 30, 2017 and 2016, respectively, and 20,000 and 65,000 for the six months ended June 30, 2017 and 2016, respectively.

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 March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes the income statement presentation of defined benefit and post-retirement benefit plan expense by requiring separation between operating expense (service cost component of net periodic benefit expense) and non-operating expense (all other components of net periodic benefit expense, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported outside of operating income. The Company does not expect the adoption of this ASU to have a material impact on its 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.

19

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

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. We made progress on this project plan including analyzing the ASU’s impact on the Company's contract portfolio, surveying the Company's businesses and discussing the various revenue streams, completing contract reviews, 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 has also made progress in 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.

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 $4,623 for the six months ended June 30, 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.



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 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: Engineered Systems, Fluids, Refrigeration & Food Equipment and Energy. 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 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.