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EX-32 - EXHIBIT 32 - DOVER Corpa2017093010-qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - DOVER Corpa2017093010-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - DOVER Corpa2017093010-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 September 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 October 12, 2017 was 155,791,090.



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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
2,006,275

 
$
1,707,763

 
$
5,812,998

 
$
5,016,381

Cost of goods and services
1,261,942

 
1,075,975

 
3,658,045

 
3,164,116

Gross profit
744,333

 
631,788

 
2,154,953

 
1,852,265

Selling, general and administrative expenses
470,516

 
421,042

 
1,439,852

 
1,301,901

Operating earnings
273,817

 
210,746

 
715,101

 
550,364

Interest expense
35,453

 
33,789

 
108,794

 
100,886

Interest income
(1,761
)
 
(795
)
 
(6,679
)
 
(4,021
)
Gain on sale of businesses

 

 
(90,093
)
 
(12,061
)
Other expense (income), net
2,697

 
(3,424
)
 
2,888

 
(7,739
)
Earnings before provision for income taxes
237,428

 
181,176

 
700,191

 
473,299

Provision for income taxes
58,516

 
51,092

 
184,974

 
125,569

Net earnings
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
1.15

 
$
0.84

 
$
3.31

 
$
2.24

Diluted
$
1.14

 
$
0.83

 
$
3.27

 
$
2.22

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
155,757

 
155,300

 
155,668

 
155,182

Diluted
157,555

 
156,798

 
157,565

 
156,562

Dividends paid per common share
$
0.47

 
$
0.44

 
$
1.35

 
$
1.28

 

See Notes to Condensed Consolidated Financial Statements



1


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

Other comprehensive earnings (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation gains (losses) during period
93,269

 
11,489

 
159,340

 
(21,734
)
Reclassification of foreign currency translation losses to earnings upon sale of subsidiaries

 

 
3,875

 

Total foreign currency translation adjustments
93,269

 
11,489

 
163,215

 
(21,734
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
 
Amortization of actuarial losses included in net periodic pension cost
1,375

 
1,414

 
4,066

 
4,240

Amortization of prior service costs included in net periodic pension cost
700

 
1,042

 
2,104

 
3,122

Total pension and other post-retirement benefit plans
2,075

 
2,456

 
6,170

 
7,362

Changes in fair value of cash flow hedges:
 
 
 
 
 
 
 
Unrealized net losses arising during period
(192
)
 
(282
)
 
(1,989
)
 
(493
)
Net (gains) losses reclassified into earnings
(271
)
 
(36
)
 
(329
)
 
131

Total cash flow hedges
(463
)
 
(318
)
 
(2,318
)
 
(362
)
Other
272

 
240

 
31

 
1,632

Other comprehensive earnings (loss)
95,153

 
13,867

 
167,098

 
(13,102
)
Comprehensive earnings
$
274,065

 
$
143,951

 
$
682,315

 
$
334,628



See Notes to Condensed Consolidated Financial Statements


2


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

 
September 30, 2017
 
December 31, 2016
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
322,039

 
$
349,146

Receivables, net of allowances of $35,565 and $22,015
1,446,556

 
1,265,201

Inventories
982,196

 
870,487

Prepaid and other current assets
117,980

 
104,357

Total current assets
2,868,771

 
2,589,191

Property, plant and equipment, net
1,012,765

 
945,670

Goodwill
4,633,749

 
4,562,677

Intangible assets, net
1,741,130

 
1,802,923

Other assets and deferred charges
236,975

 
215,530

Total assets
$
10,493,390

 
$
10,115,991

Liabilities and Stockholders' Equity
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
484,088

 
$
414,550

Accounts payable
976,257

 
830,318

Accrued compensation and employee benefits
250,780

 
226,440

Accrued insurance
102,113

 
96,062

Other accrued expenses
335,239

 
332,595

Federal and other income taxes
18,779

 
40,353

Total current liabilities
2,167,256

 
1,940,318

Long-term debt
2,985,048

 
3,206,637

Deferred income taxes
610,495

 
710,173

Other liabilities
454,901

 
459,117

Stockholders' equity:
 

 
 

Total stockholders' equity
4,275,690

 
3,799,746

Total liabilities and stockholders' equity
$
10,493,390

 
$
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

 

 

 
515,217

 

 
515,217

Dividends paid

 

 

 
(210,549
)
 

 
(210,549
)
Common stock issued for the exercise of share-based awards
358

 
(14,170
)
 

 

 

 
(13,812
)
Stock-based compensation expense

 
21,810

 

 

 

 
21,810

Other comprehensive earnings, net of tax

 

 

 

 
167,098

 
167,098

Other, net

 
(3,820
)
 

 

 

 
(3,820
)
Balance at September 30, 2017
$
256,896

 
$
950,575

 
$
(4,972,016
)
 
$
8,232,463

 
$
(192,228
)
 
$
4,275,690

 

See Notes to Condensed Consolidated Financial Statements


4


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
515,217

 
$
347,730

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Depreciation and amortization
293,880

 
263,421

Stock-based compensation expense
21,810

 
17,791

Gain on sale of assets
(1,214
)
 
(3,466
)
Gain on sale of businesses
(90,093
)
 
(11,228
)
Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable, net
(127,004
)
 
(31,791
)
Inventories
(92,853
)
 
(21,223
)
Prepaid expenses and other assets
(7,534
)
 
(15,932
)
Accounts payable
103,926

 
38,582

Accrued compensation and employee benefits
8,008

 
(15,999
)
Accrued expenses and other liabilities
(41,136
)
 
23,076

Accrued and deferred taxes, net
(51,106
)
 
8,565

Other, net
(29,936
)
 
(26,580
)
Net cash provided by operating activities
501,965

 
572,946

Investing Activities:
 

 
 

Additions to property, plant and equipment
(150,149
)
 
(115,768
)
Acquisitions, net of cash and cash equivalents acquired
(25,568
)
 
(501,828
)
Proceeds from sale of property, plant and equipment
8,606

 
9,971

Proceeds from sale of businesses
121,175

 
47,300

Other
21,151

 
(1,057
)
Net cash used in investing activities
(24,785
)
 
(561,382
)
Financing Activities:
 

 
 

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

 
6,828

Change in commercial paper and notes payable
(279,927
)
 
355,275

Dividends paid to stockholders
(210,549
)
 
(199,759
)
Payments to settle employee tax obligations on exercise of share-based awards
(13,812
)
 
(13,024
)
Other
(2,912
)
 

Net cash (used in) provided by financing activities
(507,200
)
 
149,320

Effect of exchange rate changes on cash and cash equivalents
2,913

 
(8,314
)
Net (decrease) increase in cash and cash equivalents
(27,107
)
 
152,570

Cash and cash equivalents at beginning of period
349,146

 
362,185

Cash and cash equivalents at end of period
$
322,039

 
$
514,755



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 nine months ended September 30, 2016, the Company acquired four businesses within the Fluids and Engineered Systems segments for $501,828, net of cash acquired. The Company recorded goodwill of $314,633 and intangible assets of $208,838, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 8 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 allocation 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 nine months ended September 30, 2017 and 2016, respectively. In the year 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 nine months ended September 30, 2017 and 2016 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
As reported
$
2,006,275

 
$
1,707,763

 
$
5,812,998

 
$
5,016,381

Pro forma
2,006,275

 
1,897,781

 
5,816,109

 
5,596,612

Earnings:
 
 
 
 
As reported
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

Pro forma
178,912

 
136,681

 
515,668

 
371,900

Basic earnings per share:
 
 
 
 
As reported
$
1.15

 
$
0.84

 
$
3.31

 
$
2.24

Pro forma
1.15

 
0.88

 
3.31

 
2.40

Diluted earnings per share:
 
 
 
 
As reported
$
1.14

 
$
0.83

 
$
3.27

 
$
2.22

Pro forma
1.14

 
0.87

 
3.27

 
2.38


3. Disposed Operations

2017

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 for the transaction was $147,313, including cash proceeds of $118,706. We recognized a pre-tax gain on sale of $88,402 for the nine months ended September 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.

2016

On February 17, 2016, the Company completed the sale of Texas Hydraulics ("THI"), a wholly owned subsidiary of the Company, a custom manufacturer of fluid power components. Upon disposal of THI, the Company recognized total consideration of $47,300, which resulted in a pre-tax gain on sale of $11,853 included within the Condensed Consolidated Statements of Earnings and within the Engineered Systems Segment for the nine months ended September 30, 2016.

On September 30, 2016, the Company entered into a definitive agreement to sell Tipper Tie, a wholly owned subsidiary, for total consideration of approximately $160,000. Tipper Tie was subsequently sold in the fourth quarter. Tipper Tie is a global supplier of processing and clip packaging machines and was included in the results of the Refrigeration & Food Equipment segment.

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


7

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

4. Inventories
 
September 30, 2017
 
December 31, 2016
Raw materials
$
476,158

 
$
428,286

Work in progress
170,026

 
138,652

Finished goods
461,522

 
409,314

Subtotal
1,107,706

 
976,252

Less reserves
(125,510
)
 
(105,765
)
Total
$
982,196

 
$
870,487


5. Property, Plant and Equipment, net
 
September 30, 2017
 
December 31, 2016
Land
$
72,514

 
$
68,575

Buildings and improvements
633,137

 
597,523

Machinery, equipment and other
1,930,667

 
1,802,832

Property, plant and equipment, gross
2,636,318

 
2,468,930

Total accumulated depreciation
(1,623,553
)
 
(1,523,260
)
Property, plant and equipment, net
$
1,012,765

 
$
945,670


Depreciation expense totaled $49,986 and $42,786 for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense was $141,029 and $132,316, 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
6,826

 
(40,985
)
 

 

 
(34,159
)
Disposition of business
(27,793
)
 

 

 

 
(27,793
)
Foreign currency translation
60,241

 
41,191

 
811

 
6,132

 
108,375

Balance at September 30, 2017
$
1,631,139

 
$
1,413,714

 
$
536,990

 
$
1,051,906

 
$
4,633,749


During the nine months ended September 30, 2017, the Company recognized additions of $24,649 to goodwill as a result of the Caldera acquisition as discussed in Note 2 — Acquisitions. The Company recorded $34,159 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 PMI during the nine months ended September 30, 2017. As a result of this sale, the Engineered Systems segment 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:
 
September 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
$
2,019,947

 
$
843,825

 
$
1,176,122

 
$
1,942,974

 
$
718,135

 
$
1,224,839

Trademarks
254,217

 
71,640

 
182,577

 
246,619

 
56,455

 
190,164

Patents
161,904

 
129,174

 
32,730

 
157,491

 
119,828

 
37,663

Unpatented technologies
163,034

 
77,561

 
85,473

 
155,752

 
64,648

 
91,104

Distributor relationships
124,215

 
51,918

 
72,297

 
113,463

 
44,914

 
68,549

Drawings & manuals
35,967

 
22,202

 
13,765

 
37,744

 
23,114

 
14,630

Other
34,803

 
22,455

 
12,348

 
31,632

 
21,184

 
10,448

Total
2,794,087

 
1,218,775

 
1,575,312

 
2,685,675

 
1,048,278

 
1,637,397

Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
165,818

 

 
165,818

 
165,526

 

 
165,526

Total intangible assets, net
$
2,959,905

 
$
1,218,775

 
$
1,741,130

 
$
2,851,201

 
$
1,048,278

 
$
1,802,923


Amortization expense was $50,878 and $43,937 for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, amortization expense was $152,851 and $131,105, respectively.

7. Restructuring Activities

The Company's restructuring charges by segment were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Engineered Systems
$
792

 
$
1,293

 
$
2,611

 
$
4,033

Fluids
2,346

 
1,139

 
6,643

 
9,129

Refrigeration & Food Equipment
1,161

 
146

 
2,710

 
219

Energy
231

 
5,170

 
422

 
17,196

Corporate

 

 

 
757

Total
$
4,530

 
$
7,748

 
$
12,386

 
$
31,334

 
 
 
 
 
 
 
 
These amounts are classified in the Condensed Consolidated Statements of Earnings as follows:
Cost of goods and services
$
1,824

 
$
2,771

 
$
6,058

 
$
12,951

Selling, general and administrative expenses
2,706

 
4,977

 
6,328

 
18,383

Total
$
4,530

 
$
7,748

 
$
12,386

 
$
31,334


The restructuring expenses of $4,530 and $12,386 incurred during the three and nine months ended September 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.


9

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

The $4,530 of restructuring charges incurred during the third quarter of 2017 primarily included the following items:

The Engineered Systems segment recorded $792 of restructuring charges related to headcount reductions primarily within the Printing and Identification platform.

The Fluids segment recorded $2,346 of restructuring charges principally related to headcount reductions and facility consolidations primarily within its Fueling & Transport businesses.

The Refrigeration & Food Equipment segment recorded $1,161 of restructuring charges principally related to headcount reductions primarily within its Refrigeration businesses.

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
10,617

 
1,769

 
12,386

Payments
(13,358
)
 
(2,812
)
 
(16,170
)
Foreign currency translation
890

 
91

 
981

Other, including write-offs of fixed assets
(470
)
 
166

 
(304
)
Balance at September 30, 2017
$
8,587

 
$
653

 
$
9,240


8. Borrowings

Borrowings consisted of the following:
 
September 30, 2017
 
December 31, 2016
Short-term
 
 
 
Current portion of long-term debt and short-term borrowings
$
351,588

 
$
6,950

Commercial paper
132,500

 
407,600

Notes payable and current maturities of long-term debt
$
484,088

 
$
414,550


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

 
$
349,820

 
$
349,502

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

 
353,891

 
311,851

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

 
448,739

 
448,458

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

 
394,526

 
394,042

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

 
700,094

 
616,893

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

 
198,929

 
198,830

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

 
295,499

 
295,316

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

 
247,685

 
247,593

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

 
343,531

 
343,323

Other


 
2,777

 
1,969

Total debt


 
3,335,491

 
3,207,777

Less long-term debt current portion
 
 
(350,443
)
 
(1,140
)
Net long-term debt


 
$
2,985,048

 
$
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 September 30, 2017 and December 31, 2016, respectively. Total deferred debt issuance costs were $15.4 million and $16.5 million as of September 30, 2017 and December 31, 2016, respectively.


10

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

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 September 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 September 30, 2017 and had a coverage ratio of 10.8 to 1.0. The Company 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 September 30, 2017, the Company had approximately $138,355 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 September 30, 2017 and December 31, 2016, the Company had contracts with U.S. dollar equivalent notional amounts of $90,647 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 $67,243 and $56,189 as of September 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 September 30, 2017 and December 31, 2016 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
September 30, 2017
 
December 31, 2016
 
Balance Sheet Caption
Foreign currency forward
$
428

 
$
1,058

 
Prepaid / Other current assets
Foreign currency forward
(2,252
)
 
(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

11

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

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Loss on euro-denominated debt
$
(58,419
)
 
$
(6,058
)
 
$
(124,258
)
 
$
(7,723
)
Tax benefit
20,446

 
2,119

 
43,490

 
2,702

Net loss on net investment hedges, net of tax
$
(37,973
)
 
$
(3,939
)
 
$
(80,768
)
 
$
(5,021
)

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 September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
Level 2
 
Level 2
Assets:
 
 
 
Foreign currency cash flow hedges
$
428

 
$
1,058

Liabilities:
 
 
 
Foreign currency cash flow hedges
2,252

 
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 September 30, 2017, and December 31, 2016 was $3,334,722 and $3,534,553, respectively, compared to the carrying value of $3,335,491 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 September 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 September 30, 2017 and 2016 were 24.6% and 28.2%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2017 relative to the prior comparable period is principally due to a discrete tax benefit in 2017.


12

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

The discrete items for the three months ended September 30, 2017 primarily resulted from the settlement of a foreign audit partially offset by adjustments to the provision based on filed tax returns. The discrete items for the three months ended September 30, 2016 principally resulted from the adjustment of the tax accounts to the U.S. tax return as filed.

The effective tax rates for the nine months ended September 30, 2017 and 2016 were 26.4% and 26.5%, respectively. The comparable effective tax rate for the nine months ended September 30, 2017 relative to the prior comparable period is primarily due to the benefit from the revaluation of deferred tax balances as a result of a tax rate reduction in a non U.S. jurisdiction in 2016 as compared to the foreign audit settlement in 2017.

For the nine months ended September 30, 2017, stock-based compensation excess tax benefits of $5,609 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 $32,127.

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

 
$
57.25

Average attainment rate reflected in expense
139.95
%
 
11.99
%

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Pre-tax stock-based compensation expense
$
4,341

 
$
3,431

 
$
21,810

 
$
17,791

Tax benefit
(1,436
)
 
(1,192
)
 
(7,623
)
 
(6,272
)
Total stock-based compensation expense, net of tax
$
2,905

 
$
2,239

 
$
14,187

 
$
11,519


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 September 30, 2017 and December 31, 2016, the Company has reserves totaling $33,366 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 September 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 and are included within Other accrued expenses and Other liabilities in the Consolidated Balance Sheet. The changes in the carrying amount of product warranties through September 30, 2017 and 2016 were as follows:
 
2017
 
2016
Beginning Balance, December 31 of the Prior Year
$
84,997

 
$
44,466

Provision for warranties
48,537

 
44,752

Settlements made
(56,066
)
 
(39,307
)
Other adjustments, including acquisitions and currency translation
853

 
2,103

Ending Balance, September 30
$
78,321

 
$
52,014


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. 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 September 30, 2017, the warranty accrual is included in Other accrued expenses and was reduced to $14,394 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 September 30,
 
Nine Months Ended September 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

 
$
3,478

 
$
1,399

 
$
1,389

 
$
9,063

 
$
10,435

 
$
4,059

 
$
4,167

Interest cost
5,429

 
5,762

 
1,332

 
1,334

 
16,288

 
17,285

 
3,881

 
4,103

Expected return on plan assets
(9,953
)
 
(9,698
)
 
(1,885
)
 
(1,899
)
 
(29,859
)
 
(29,095
)
 
(5,522
)
 
(5,821
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
107

 
184

 
(115
)
 
(100
)
 
320

 
550

 
(337
)
 
(299
)
Recognized actuarial loss
1,396

 
1,610

 
894

 
670

 
4,187

 
4,828

 
2,599

 
2,010

Transition obligation

 

 
1

 
1

 

 

 
3

 
3

Net periodic expense
$

 
$
1,336

 
$
1,626

 
$
1,395

 
$
(1
)
 
$
4,003

 
$
4,683

 
$
4,163



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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
619

 
$
740

 
$
1,855

 
$
2,219

Interest cost
1,019

 
1,317

 
3,057

 
3,951

Amortization:
 
 
 
 
 
 
 
   Prior service cost
1,103

 
1,567

 
3,308

 
4,700

   Recognized actuarial gain
(298
)
 
(141
)
 
(894
)
 
(421
)
Net periodic expense
$
2,443

 
$
3,483

 
$
7,326

 
$
10,449


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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
8

 
$
13

 
$
25

 
$
39

Interest cost
74

 
105

 
220

 
314

Amortization:
 
 
 
 
 
 
 
   Prior service cost (credit)
2

 
(35
)
 
6

 
(107
)
   Recognized actuarial gain
(41
)
 
(58
)
 
(121
)
 
(177
)
Net periodic expense
$
43

 
$
25

 
$
130

 
$
69


The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $3,049 and $3,698 for the three months ended September 30, 2017 and 2016, respectively, and $9,071 and $11,087 for the nine months ended September 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 $9,569 and $8,153 for the three months ended September 30, 2017 and 2016, respectively, and $31,766 and $26,310 for the nine months ended September 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
 
September 30, 2017
 
September 30, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
72,823

 
$
20,446

 
$
93,269

 
$
9,370

 
$
2,119

 
$
11,489

Pension and other post-retirement benefit plans
3,049

 
(974
)
 
2,075

 
3,698

 
(1,242
)
 
2,456

Changes in fair value of cash flow hedges
(712
)
 
249

 
(463
)
 
(488
)
 
170

 
(318
)
Other
309

 
(37
)
 
272

 
269

 
(29
)
 
240

Total other comprehensive earnings
$
75,469

 
$
19,684

 
$
95,153

 
$
12,849

 
$
1,018

 
$
13,867


 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
119,725

 
$
43,490

 
$
163,215

 
$
(24,436
)
 
$
2,702

 
$
(21,734
)
Pension and other post-retirement benefit plans
9,071

 
(2,901
)
 
6,170

 
11,087

 
(3,725
)
 
7,362

Changes in fair value of cash flow hedges
(3,566
)
 
1,248

 
(2,318
)
 
(557
)
 
195

 
(362
)
Other
35

 
(4
)
 
31

 
1,853

 
(221
)
 
1,632

Total other comprehensive earnings (loss)
$
125,265

 
$
41,833

 
$
167,098

 
$
(12,053
)
 
$
(1,049
)
 
$
(13,102
)

Total comprehensive earnings were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

Other comprehensive earnings (loss)
95,153

 
13,867

 
167,098

 
(13,102
)
Comprehensive earnings
$
274,065

 
$
143,951

 
$
682,315

 
$
334,628


Amounts reclassified from accumulated other comprehensive (loss) to earnings during the three and nine months ended September 30, 2017 and 2016 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 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
$
1,951

 
$
2,082

 
$
5,771

 
$
6,243

Amortization of prior service costs
1,098

 
1,616

 
3,300

 
4,844

Total before tax
3,049

 
3,698

 
9,071

 
11,087

Tax benefit
(974
)
 
(1,242
)
 
(2,901
)
 
(3,725
)
Net of tax
$
2,075

 
$
2,456

 
$
6,170

 
$
7,362

Cash flow hedges:
 
 
 
 
 
 
 
Net (gains) losses reclassified into earnings
$
(417
)
 
$
(55
)
 
$
(506
)
 
$
201

Tax expense (benefit)
146

 
19

 
177

 
(70
)
Net of tax
$
(271
)
 
$
(36
)
 
$
(329
)
 
$
131



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 gains and losses and prior service costs, in both Selling, general and administrative expenses and Cost of goods and services within the Condensed Consolidated Statements of Earnings, 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Engineered Systems
$
645,832

 
$
570,562

 
$
1,908,897

 
$
1,739,989

Fluids
562,818

 
412,822

 
1,641,272

 
1,217,722

Refrigeration & Food Equipment
438,788

 
451,328

 
1,221,926

 
1,243,966

Energy
359,298

 
273,248

 
1,042,554

 
815,486

Intra-segment eliminations
(461
)
 
(197
)
 
(1,651
)
 
(782
)
Total consolidated revenue
$
2,006,275

 
$
1,707,763

 
$
5,812,998

 
$
5,016,381

Earnings:
 
 

 
 
 
 
Segment earnings: (1)
 

 
 

 
 
 
 
Engineered Systems
$
98,348

 
$
97,240

 
$
379,566

 
$
295,022

Fluids
87,164

 
66,178

 
213,361

 
166,258

Refrigeration & Food Equipment
65,413

 
64,111

 
164,804

 
165,502

Energy
51,936

 
13,279

 
146,995

 
24,448

Total segment earnings
302,861

 
240,808

 
904,726

 
651,230

Corporate expense / other (2)
31,741

 
26,638

 
102,420

 
81,066

Interest expense
35,453

 
33,789

 
108,794

 
100,886

Interest income
(1,761
)
 
(795
)
 
(6,679
)
 
(4,021
)
Earnings before provision for income taxes
237,428

 
181,176

 
700,191

 
473,299

Provision for income taxes
58,516

 
51,092

 
184,974

 
125,569

Net earnings
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

(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 expense (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 nine months ended September 30, 2017 and 2016, the Company repurchased no shares of common stock under the January 2015 authorization. As of September 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
178,912

 
$
130,084

 
$
515,217

 
$
347,730

Basic earnings per common share:
 

 
 

 
 
 
 
Net earnings
$
1.15

 
$
0.84

 
$
3.31

 
$
2.24

Weighted average shares outstanding
155,757,000

 
155,300,000

 
155,668,000

 
155,182,000

Diluted earnings per common share:
 

 
 

 
 
 
 
Net earnings
$
1.14

 
$
0.83

 
$
3.27

 
$
2.22

Weighted average shares outstanding
157,555,000

 
156,798,000

 
157,565,000

 
156,562,000


The following table is a reconciliation of the share amounts used in computing earnings per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average shares outstanding - Basic
155,757,000

 
155,300,000

 
155,668,000

 
155,182,000

Dilutive effect of assumed exercise of SARs and vesting of performance shares and RSUs
1,798,000

 
1,498,000

 
1,897,000

 
1,380,000

Weighted average shares outstanding - Diluted
157,555,000

 
156,798,000

 
157,565,000

 
156,562,000


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 87,000 and 21,000 for the three months ended September 30, 2017 and 2016, respectively, and 37,000 and 31,000 for the nine months ended September 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 August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The guidance is effective for interim and annual periods for the Company on January 1, 2019, 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 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 guidance is effective

19

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

for interim and annual periods for the Company on January 1, 2018. 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.

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, identifying potential differences from applying the requirements of the new guidance to its contracts and updating and providing training on its accounting policy. The Company has also made progress in 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 does not expect the adoption of this ASU to have a material impact 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 did not have a material impact on the Company's Consolidated Financial Statements.


20

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

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 $5,609 for the nine months ended September 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 first-in first-out ("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.



21


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.