2012.09.30 10-Q
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, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 1-4018
Dover Corporation
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 53-0257888 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
3005 Highland Parkway | |
Downers Grove, Illinois | 60515 |
(Address of principal executive offices) | (Zip Code) |
(630) 541-1540
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b-2 of the Exchange Act.
|
| | |
Large accelerated filer þ | | Accelerated filer ¨ |
Non-accelerated filer ¨ | (Do not check if smaller reporting company) | Smaller reporting company ¨ |
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 11, 2012 was 179,010,954.
Dover Corporation
Form 10-Q
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in thousands, except per share figures)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 2,208,699 |
| | $ | 2,138,606 |
| | $ | 6,428,571 |
| | $ | 5,945,654 |
|
Cost of goods and services | 1,361,769 |
| | 1,332,324 |
| | 3,983,720 |
| | 3,651,625 |
|
Gross profit | 846,930 |
| | 806,282 |
| | 2,444,851 |
| | 2,294,029 |
|
Selling and administrative expenses | 476,573 |
| | 476,640 |
| | 1,451,503 |
| | 1,378,466 |
|
Operating earnings | 370,357 |
| | 329,642 |
| | 993,348 |
| | 915,563 |
|
Interest expense, net | 30,388 |
| | 30,061 |
| | 90,132 |
| | 86,536 |
|
Other expense, net | 3,962 |
| | 48 |
| | 6,726 |
| | 2,713 |
|
Earnings before provision for income taxes and discontinued operations | 336,007 |
| | 299,533 |
| | 896,490 |
| | 826,314 |
|
Provision for income taxes | 93,794 |
| | 76,095 |
| | 244,548 |
| | 188,887 |
|
Earnings from continuing operations | 242,213 |
| | 223,438 |
| | 651,942 |
| | 637,427 |
|
Loss from discontinued operations, net | (1,167 | ) | | (51,158 | ) | | (732 | ) | | (20,473 | ) |
Net earnings | $ | 241,046 |
| | $ | 172,280 |
| | $ | 651,210 |
| | $ | 616,954 |
|
| | | | | | | |
Comprehensive earnings | $ | 334,327 |
| | $ | 47,957 |
| | $ | 692,146 |
| | $ | 583,927 |
|
| | | | | | | |
Earnings per share from continuing operations: | | | | | | | |
Basic | $ | 1.33 |
| | $ | 1.20 |
| | $ | 3.56 |
| | $ | 3.42 |
|
Diluted | $ | 1.32 |
| | $ | 1.19 |
| | $ | 3.51 |
| | $ | 3.37 |
|
| | | | | | | |
Loss per share from discontinued operations: | | | | | | | |
Basic | $ | (0.01 | ) | | $ | (0.28 | ) | | $ | — |
| | $ | (0.11 | ) |
Diluted | $ | (0.01 | ) | | $ | (0.27 | ) | | $ | — |
| | $ | (0.11 | ) |
| | | | | | | |
Net earnings per share: | | | | | | | |
Basic | $ | 1.33 |
| | $ | 0.93 |
| | $ | 3.56 |
| | $ | 3.31 |
|
Diluted | $ | 1.31 |
| | $ | 0.91 |
| | $ | 3.51 |
| | $ | 3.26 |
|
| | | | | | | |
Dividends paid per common share | $ | 0.35 |
| | $ | 0.315 |
| | $ | 0.98 |
| | $ | 0.865 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Current assets: | | | |
Cash and cash equivalents | $ | 794,099 |
| | $ | 1,206,755 |
|
Receivables, net of allowances of $24,930 and $24,987 | 1,412,311 |
| | 1,190,265 |
|
Inventories, net | 923,389 |
| | 803,346 |
|
Prepaid and other current assets | 107,011 |
| | 154,859 |
|
Deferred tax assets | 40,297 |
| | 41,905 |
|
Total current assets | 3,277,107 |
| | 3,397,130 |
|
Property, plant and equipment, net | 1,113,918 |
| | 1,000,870 |
|
Goodwill | 4,047,293 |
| | 3,787,117 |
|
Intangible assets, net | 1,344,594 |
| | 1,207,084 |
|
Other assets and deferred charges | 123,748 |
| | 104,808 |
|
Assets of discontinued operations | 3,485 |
| | 4,441 |
|
Total assets | $ | 9,910,145 |
| | $ | 9,501,450 |
|
| | | |
Current liabilities: | |
| | |
|
Notes payable and current maturities of long-term debt | $ | 3,134 |
| | $ | 1,022 |
|
Accounts payable | 607,164 |
| | 543,924 |
|
Accrued compensation and employee benefits | 316,919 |
| | 281,611 |
|
Accrued insurance | 105,642 |
| | 104,172 |
|
Other accrued expenses | 229,743 |
| | 234,382 |
|
Federal and other taxes on income | 13,377 |
| | 37,870 |
|
Total current liabilities | 1,275,979 |
| | 1,202,981 |
|
Long-term debt | 2,192,162 |
| | 2,186,230 |
|
Deferred income taxes | 506,577 |
| | 411,163 |
|
Other liabilities | 625,845 |
| | 650,604 |
|
Liabilities of discontinued operations | 96,916 |
| | 119,917 |
|
Stockholders' equity: | |
| | |
|
Total stockholders' equity | 5,212,666 |
| | 4,930,555 |
|
Total liabilities and stockholders' equity | $ | 9,910,145 |
| | $ | 9,501,450 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock $1 Par Value | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Earnings (Loss) | | Treasury Stock | | Total Stockholders' Equity |
Balance at December 31, 2011 | $ | 250,592 |
| | $ | 663,289 |
| | $ | 6,629,116 |
| | $ | (47,510 | ) | | $ | (2,564,932 | ) | | $ | 4,930,555 |
|
Net earnings | — |
| | — |
| | 651,210 |
| | — |
| | — |
| | 651,210 |
|
Dividends paid | — |
| | — |
| | (179,133 | ) | | — |
| | — |
| | (179,133 | ) |
Common stock issued for acquisition | 1,636 |
| | 98,974 |
| | — |
| | — |
| | — |
| | 100,610 |
|
Common stock issued for the exercise of stock options and SARs | 1,319 |
| | 21,952 |
| | — |
| | — |
| | — |
| | 23,271 |
|
Tax benefit from the exercise of stock options and SARs | — |
| | 14,702 |
| | — |
| | — |
| | — |
| | 14,702 |
|
Stock-based compensation expense | — |
| | 24,002 |
| | — |
| | — |
| | — |
| | 24,002 |
|
Common stock acquired | — |
| | — |
| | — |
| | — |
| | (393,487 | ) | | (393,487 | ) |
Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | 40,936 |
| | — |
| | 40,936 |
|
Balance at September 30, 2012 | $ | 253,547 |
| | $ | 822,919 |
| | $ | 7,101,193 |
| | $ | (6,574 | ) | | $ | (2,958,419 | ) | | $ | 5,212,666 |
|
Preferred Stock: $100 par value per share; 100,000 shares authorized; no shares issued.
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Operating Activities of Continuing Operations | | | |
Net earnings | $ | 651,210 |
| | $ | 616,954 |
|
| | | |
Adjustments to reconcile net earnings to cash from operating activities: | | | |
Loss from discontinued operations, net | 732 |
| | 20,473 |
|
Depreciation and amortization | 269,814 |
| | 220,331 |
|
Stock-based compensation | 23,589 |
| | 20,025 |
|
Cash effect of changes in current assets and liabilities (excluding effects of acquisitions, dispositions and foreign exchange): | | | |
Accounts receivable | (172,441 | ) | | (202,863 | ) |
Inventories | (55,560 | ) | | (66,422 | ) |
Prepaid expenses and other assets | 4,786 |
| | (15,105 | ) |
Accounts payable | 25,931 |
| | 102,709 |
|
Accrued expenses | (13,883 | ) | | (15,181 | ) |
Contributions to domestic employee benefit plans | (13,790 | ) | | (12,000 | ) |
Accrued and deferred taxes, net | 2,851 |
| | 10,425 |
|
Other, net | (12,005 | ) | | 20,031 |
|
Net cash provided by operating activities of continuing operations | 711,234 |
| | 699,377 |
|
| | | |
Investing Activities of Continuing Operations | |
| | |
|
Additions to property, plant and equipment | (215,116 | ) | | (188,717 | ) |
Acquisitions, including adjustment for prior year acquisition purchase price (net of cash and cash equivalents acquired) | (354,270 | ) | | (1,369,252 | ) |
Proceeds from sale of short-term investments | — |
| | 124,410 |
|
Proceeds from the sale of property, plant and equipment | 11,197 |
| | 7,369 |
|
Proceeds from the sale of businesses | — |
| | 304,176 |
|
Settlement of net investment hedge | — |
| | (18,211 | ) |
Other | (14,911 | ) | | — |
|
Net cash used in investing activities of continuing operations | (573,100 | ) | | (1,140,225 | ) |
| | | |
Financing Activities of Continuing Operations | |
| | |
|
Purchase of common stock | (393,487 | ) | | (129,637 | ) |
Proceeds from exercise of stock options and SARs, including tax benefits | 37,973 |
| | 36,636 |
|
Dividends to stockholders | (179,133 | ) | | (161,046 | ) |
Change in notes payable, net | — |
| | (14,966 | ) |
Reduction of long-term debt | (599 | ) | | (401,187 | ) |
Proceeds from long-term debt, net of discount and issuance costs | — |
| | 788,971 |
|
Net cash (used in) provided by financing activities of continuing operations | (535,246 | ) | | 118,771 |
|
| | | |
Cash Flows from Discontinued Operations | |
| | |
|
Net cash (used in) provided by operating activities of discontinued operations | (22,776 | ) | | 27,930 |
|
Net cash used in investing activities of discontinued operations | — |
| | (4,463 | ) |
Net cash (used in) provided by discontinued operations | (22,776 | ) | | 23,467 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents | 7,232 |
| | 26,645 |
|
| | | |
Net decrease in cash and cash equivalents | (412,656 | ) | | (271,965 | ) |
Cash and cash equivalents at beginning of period | 1,206,755 |
| | 1,189,079 |
|
| | | |
Cash and cash equivalents at end of period | $ | 794,099 |
| | $ | 917,114 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Dover Corporation (“Dover” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2011, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties and other matters. The year-end condensed consolidated balance sheet was derived from audited financial statements. As discussed in Note 9, the Company is reporting certain businesses that were sold during the third and fourth quarters of 2011 as discontinued operations. Therefore, the Company has classified the results of operations of these businesses as discontinued operations for all periods presented. It is the opinion of management that these financial statements reflect all adjustments necessary for a fair statement of the interim results. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.
2. Acquisitions
The following table details the acquisitions made during the nine months ended September 30, 2012.
|
| | | | |
2012 Acquisitions | | |
Date | Type | Company / Product Line Acquired | Location (Near) | Segment |
Jan 1 | Asset | Quattroflow Fluid Systems | Kamp-Lintfort, Germany | Engineered Systems |
Manufacturer of positive displacement pumps primarily serving the pharmaceutical and biotech industries. |
| | | | |
Mar 14 | Stock | Maag Pump Systems | Grossostheim, Germany | Engineered Systems |
Manufacturer of gear pump technology, pelletizing systems and engineered integrated solutions for the polymer, plastic, chemical and petrochemical industries. |
| | | | |
Apr 25 | Stock | Production Control Services (PCS) | Fredrick, Colorado | Energy |
Manufacturer of products in artificial lift and production optimization, including plunger lift, gas lift, nitrogen generation, and well site automation. |
The Company acquired these businesses in three separate transactions for net cash consideration of $399,270. Additionally, the acquisition of PCS was funded in part with common stock valued at $100,610 at the date of acquisition, so aggregate consideration for 2012 year-to-date acquisitions totaled $499,880. As a result of these acquisitions, the Company recorded approximately $195,192 of customer-related intangible assets (weighted average lives of 11 years), $15,940 of trademarks (weighted average lives of 11 years), and $37,666 of other intangibles (weighted average lives of 7 years). These acquisitions resulted in the recognition of goodwill totaling $260,446, of which $6,399 is expected to be deductible for tax purposes. In connection with the acquisition of Maag Pump Systems, the Company also provided restricted-use cash collateral to secure Maag's outstanding bank guarantees at the date of acquisition. At September 30, 2012, the outstanding amount of collateral totaled $5,074, which will decline as the guarantees expire or they are migrated to the Company's credit facility.
These businesses manufacture products in the energy and fluid solutions markets, two key growth areas for the Company. The businesses were acquired to complement and expand upon existing operations within the Energy segment and the Fluid Solutions platform of the Engineered Systems segment. The goodwill identified by these acquisitions reflects the benefits expected to be derived from product line expansion and operational synergies. Upon consummation of the acquisitions, each of these entities is now wholly-owned by Dover.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
The following presents the allocation of acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:
|
| | | |
Current assets, net of cash acquired | $ | 100,690 |
|
Property, plant and equipment | 49,669 |
|
Goodwill | 260,446 |
|
Intangible assets | 248,798 |
|
Other non-current assets | 5,902 |
|
Total liabilities | (165,625 | ) |
Net assets acquired | $ | 499,880 |
|
The Company has substantially completed the purchase price allocations for the 2012 acquisitions. However, if additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including through asset appraisals and learning more about the newly acquired businesses, the Company will refine its estimates of fair value to allocate the purchase price more accurately; however, any such revisions are not expected to be significant.
The Unaudited Condensed Consolidated Statements of Comprehensive Earnings include the results of these businesses from the dates of acquisition. The aggregate revenue of the 2012 acquisitions included in the Company’s consolidated revenue totaled $70,987 and $145,871 for the three and nine months ended September 30, 2012, respectively.
In April 2012, the Company received approximately $45,000 as final payment for settlement of purchase price adjustments for post-acquisition contingencies relating to the 2011 Sound Solutions acquisition. This amount is reported within cash paid for acquisitions in the Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2012 and had no impact to the Company's earnings for the three and nine months ended September 30, 2012.
Pro Forma Information
The following unaudited pro forma information illustrates the effect on the Company’s revenue and earnings from continuing operations for the three and nine months ended September 30, 2012 and 2011, assuming that the 2012 acquisitions had taken place at the beginning of 2011. As a result, the supplemental pro forma earnings reflect adjustments to earnings from continuing operations as reported in the Unaudited Condensed Consolidated Statements of Comprehensive Earnings to exclude $3,264 and $9,906 of nonrecurring expense related to the fair value adjustments to acquisition-date inventory (after-tax) from the three and nine months ended September 30, 2012, respectively, and to exclude $3,285 of acquisition-related costs (after-tax) from the nine months ended September 30, 2012. The supplemental pro forma earnings for the comparable 2011 periods were adjusted to include these charges as if they were incurred at the beginning of 2011. The 2012 and 2011 supplemental pro forma earnings are also adjusted to reflect the comparable impact of additional depreciation and amortization expense (net of tax) resulting from the fair value measurement of tangible and intangible assets relating to 2012 and 2011 acquisitions.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue from continuing operations: | | | | | | | |
As reported | $ | 2,208,699 |
| | $ | 2,138,606 |
| | $ | 6,428,571 |
| | $ | 5,945,654 |
|
Pro forma | 2,208,699 |
| | 2,226,934 |
| | 6,494,791 |
| | 6,346,127 |
|
Earnings from continuing operations: | | | | | | | |
As reported | $ | 242,213 |
| | $ | 223,438 |
| | $ | 651,942 |
| | $ | 637,427 |
|
Pro forma | 245,477 |
| | 241,789 |
| | 670,170 |
| | 648,654 |
|
Basic earnings per share from continuing operations: | | | | | | | |
As reported | $ | 1.33 |
| | $ | 1.20 |
| | $ | 3.56 |
| | $ | 3.42 |
|
Pro forma | 1.35 |
| | 1.30 |
| | 3.66 |
| | 3.48 |
|
Diluted earnings per share from continuing operations: | | | | |
As reported | $ | 1.32 |
| | $ | 1.19 |
| | $ | 3.51 |
| | $ | 3.37 |
|
Pro forma | 1.33 |
| | 1.28 |
| | 3.61 |
| | 3.42 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the dates indicated or that may result in the future.
3. Inventories, net
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Raw materials | $ | 424,483 |
| | $ | 372,627 |
|
Work in progress | 207,711 |
| | 177,016 |
|
Finished goods | 345,477 |
| | 309,048 |
|
Subtotal | 977,671 |
| | 858,691 |
|
Less LIFO reserve | (54,282 | ) | | (55,345 | ) |
Total | $ | 923,389 |
| | $ | 803,346 |
|
4. Property, Plant and Equipment, net
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Land | $ | 63,553 |
| | $ | 54,113 |
|
Buildings and improvements | 626,425 |
| | 586,538 |
|
Machinery, equipment and other | 2,223,277 |
| | 2,033,926 |
|
| 2,913,255 |
| | 2,674,577 |
|
Less accumulated depreciation | (1,799,337 | ) | | (1,673,707 | ) |
Total | $ | 1,113,918 |
| | $ | 1,000,870 |
|
5. Goodwill and Other Intangible Assets
The following table provides the changes in carrying value of goodwill by segment for the nine months ended September 30, 2012:
|
| | | | | | | | | | | | | | | | | | | |
| Communication Technologies | | Energy | | Engineered Systems | | Printing & Identification | | Total |
Balance at January 1, 2012 | $ | 1,204,582 |
| | $ | 622,335 |
| | $ | 935,420 |
| | $ | 1,024,780 |
| | $ | 3,787,117 |
|
Acquisitions | — |
| | 108,856 |
| | 151,590 |
| | — |
| | 260,446 |
|
Purchase price adjustments | (6,998 | ) | | — |
| | — |
| | — |
| | (6,998 | ) |
Foreign currency translation | 201 |
| | 3,830 |
| | 799 |
| | 1,898 |
| | 6,728 |
|
Balance at September 30, 2012 | $ | 1,197,785 |
| | $ | 735,021 |
| | $ | 1,087,809 |
| | $ | 1,026,678 |
| | $ | 4,047,293 |
|
During the nine months ended September 30, 2012, the Company recorded adjustments totaling $6,998 to goodwill relating primarily to finalization of the purchase price allocation to assets acquired and liabilities assumed for the 2011 Sound Solutions acquisition.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
|
| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortized Intangible Assets: | | | | | | | |
Trademarks | $ | 91,018 |
| | $ | 25,065 |
| | $ | 66,428 |
| | $ | 20,518 |
|
Patents | 156,718 |
| | 107,150 |
| | 145,864 |
| | 99,990 |
|
Customer Intangibles | 1,354,926 |
| | 465,694 |
| | 1,171,608 |
| | 380,196 |
|
Unpatented Technologies | 145,950 |
| | 108,729 |
| | 142,405 |
| | 98,193 |
|
Drawings & Manuals | 33,694 |
| | 7,209 |
| | 8,165 |
| | 5,153 |
|
Distributor Relationships | 73,163 |
| | 31,349 |
| | 73,162 |
| | 28,500 |
|
Other | 46,509 |
| | 22,360 |
| | 28,677 |
| | 20,251 |
|
Total | 1,901,978 |
| | 767,556 |
| | 1,636,309 |
| | 652,801 |
|
Unamortized Intangible Assets: | |
| | |
| | |
| | |
|
Trademarks | 210,172 |
| | |
| | 223,576 |
| | |
|
Total Intangible Assets | $ | 2,112,150 |
| | $ | 767,556 |
| | $ | 1,859,885 |
| | $ | 652,801 |
|
Amortization expense totaled $40,266 and $37,772 for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, amortization expense was $115,608 and $92,497, respectively.
6. Borrowings
Borrowings consist of the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
4.875% 10-year notes due October 15, 2015 | $ | 299,392 |
| | $ | 299,244 |
|
5.45% 10-year notes due March 15, 2018 | 348,185 |
| | 347,938 |
|
4.30% 10-year notes due March 1, 2021 | 449,780 |
| | 449,761 |
|
6.60% 30-year notes due March 15, 2038 | 247,749 |
| | 247,683 |
|
5.375% 30-year notes due March 1, 2041 | 345,471 |
| | 345,352 |
|
6.65% 30-year debentures due June 1, 2028 | 199,440 |
| | 199,414 |
|
5.375% 30-year debentures due October 15, 2035 | 296,327 |
| | 296,208 |
|
Other | 8,952 |
| | 1,652 |
|
Total long-term debt | 2,195,296 |
| | 2,187,252 |
|
Less current installments | (3,134 | ) | | (1,022 | ) |
| $ | 2,192,162 |
| | $ | 2,186,230 |
|
The Company maintains a $1 billion unsecured revolving credit facility which expires on November 10, 2016. The Company primarily uses this facility as liquidity back-up for its commercial paper program and has not drawn down any loans under the $1 billion facility and does not anticipate doing so. The Company generally uses commercial paper borrowings for general corporate purposes, funding of acquisitions and the repurchases of its common stock.
Interest expense and interest income for the three and nine months ended September 30, 2012 and 2011 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Interest expense | $ | 31,103 |
| | $ | 31,700 |
| | $ | 94,226 |
| | $ | 93,816 |
|
Interest income | (715 | ) | | (1,639 | ) | | (4,094 | ) | | (7,280 | ) |
Interest expense, net | $ | 30,388 |
| | $ | 30,061 |
| | $ | 90,132 |
| | $ | 86,536 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
7. 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. In order to manage this risk the Company has hedged portions of its forecasted sales and purchases, which occur within the next twelve months and are denominated in non-functional currencies, with currency forward or collar contracts designated as cash flow hedges. At September 30, 2012 and December 31, 2011, the Company had contracts with U.S. dollar equivalent notional amounts of $48,700 and $83,541, respectively, to exchange foreign currencies, principally the U.S. dollar, euro, pound sterling, Japanese yen, Chinese yuan and Malaysian ringgit. The Company believes it is probable that all forecasted cash flow transactions will occur.
The Company also has an outstanding floating-to-floating cross currency swap agreement for a total notional amount of $50,000 in exchange for CHF 65,100, which expires on October 15, 2015. This transaction continues to hedge a portion of the Company’s net investment in CHF-denominated operations. The agreement qualifies as a net investment hedge and the effective portion of the change in fair value is reported within the cumulative translation adjustment section of other comprehensive income. The fair values at September 30, 2012 and December 31, 2011 reflected losses of $20,908 and $21,656, respectively, due to the strengthening of the Swiss franc relative to the U.S. dollar over the term of the arrangement.
The following table sets forth the fair values of derivative instruments held by the Company as of September 30, 2012 and December 31, 2011 and the balance sheet lines in which they are recorded:
|
| | | | | | | | | |
| Fair Value Asset (Liability) | | |
| September 30, 2012 | | December 31, 2011 | | Balance Sheet Caption |
Foreign currency forward / collar contracts | $ | 304 |
| | $ | 394 |
| | Prepaid / Other assets |
Foreign currency forward / collar contracts | (4 | ) | | (1,284 | ) | | Other accrued expenses |
Net investment hedge - cross currency swap | (20,908 | ) | | (21,656 | ) | | Other liabilities |
The amount of gains or losses from hedging activity recorded in earnings is not significant and the amount of unrealized gains and losses from cash flow hedges which 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 there are no credit risk related contingent features in the Company’s derivative instruments.
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.
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.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | |
Foreign currency cash flow hedges | $ | — |
| | $ | 304 |
| | $ | — |
| | $ | — |
| | $ | 394 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | |
Foreign currency cash flow hedges | — |
| | 4 |
| | — |
| | — |
| | 1,284 |
| | — |
|
Net investment hedge derivative | — |
| | 20,908 |
| | — |
| | — |
| | 21,656 |
| | — |
|
In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.
The estimated fair value of long-term debt at September 30, 2012 and December 31, 2011 was $2,696,102 and $2,679,793, respectively, compared to the carrying value of $2,195,296 and $2,187,252, respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy.
The carrying values of cash and cash equivalents, trade receivables, accounts payable, and notes payable are reasonable estimates of their fair values as of September 30, 2012 and December 31, 2011 due to the short-term nature of these instruments.
8. Income Taxes
The effective tax rates for continuing operations were 27.9% and 27.3% for the three and nine months ended September 30, 2012, respectively, and 25.4% and 22.9% for the comparable periods of 2011. The effective tax rates for the three and nine month periods of 2011 were favorably impacted by net discrete items, principally settlements with U.S. federal and state taxing authorities, totaling $2,390 and $32,744, respectively. Comparatively, settlements during the 2012 three and nine month periods totaled $4,513 and $5,573, respectively. Excluding these discrete items, the effective tax rates were 29.3% and 27.9% for the three and nine months ended September 30, 2012, and 26.2% and 26.8% for the comparable periods of 2011. On a year-over-year basis, the higher rates in the 2012 periods resulted from the unfavorable impact of increased U.S. earnings mix offset by lower effective tax rates in foreign jurisdictions.
Dover and its subsidiaries file U.S., various state and local, and foreign tax returns. The Company is routinely audited by the tax authorities in these jurisdictions and a number of audits are currently underway. The Internal Revenue Service is currently auditing the Company's consolidated income tax returns for the 2009-2010 tax years. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits which would result in an income tax provision benefit. At this time, it is not possible to estimate the range of change due to the uncertainties associated with the resolution of these matters. The Company believes adequate provision has been made for all income tax uncertainties.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
9. Discontinued Operations
Management evaluates Dover’s businesses periodically for their strategic fit within Dover’s operations. Accordingly, the Company decided to sell certain businesses within its Engineered Systems segment. Paladin Brands and Crenlo LLC, two businesses that serve construction related end markets, were sold during the third quarter of 2011 and Heil Trailer International, a manufacturer of specialty transportation trailers and equipment, was sold during the fourth quarter of 2011.
In connection with these disposals, for all periods presented, the Company has reclassified the results of these businesses into discontinued operations in the Unaudited Condensed Consolidated Statements of Comprehensive Earnings.
Summarized results of the Company’s discontinued operations are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | — |
| | $ | 170,967 |
| | $ | — |
| | $ | 484,350 |
|
| | | | | | | |
Gain (loss) on sale, net of taxes | $ | (634 | ) | | $ | (65,375 | ) | | $ | 1,226 |
| | $ | (66,040 | ) |
| | | | | | | |
Earnings (loss) from operations before taxes | $ | (385 | ) | | $ | 17,109 |
| | $ | (1,497 | ) | | $ | 44,078 |
|
Provision for income taxes | (148 | ) | | (2,892 | ) | | (461 | ) | | 1,489 |
|
Loss from discontinued operations, net of tax | $ | (1,167 | ) | | $ | (51,158 | ) | | $ | (732 | ) | | $ | (20,473 | ) |
The gain (loss) on sale, net of taxes for both the three and nine months ended September 30, 2012 reflects adjustments to sale proceeds of businesses sold in prior years. The earnings (loss) from operations before taxes for both the three and nine months ended September 30, 2012 reflects the net earnings generated by the three businesses sold in 2011, coupled with other expense and accrual adjustments.
The loss from discontinued operations, net for both the three and nine months ended September 30, 2011 reflects the net loss generated from the sale of two businesses in the third quarter of 2011, including an after-tax goodwill impairment charge of $76,072, offset in part by the earnings from operations generated by these businesses.
Assets and liabilities of discontinued operations are summarized below:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets of Discontinued Operations | | | |
Current assets | $ | 3,188 |
| | $ | 2,832 |
|
Non-current assets | 297 |
| | 1,609 |
|
| $ | 3,485 |
| | $ | 4,441 |
|
Liabilities of Discontinued Operations | |
| | |
|
Current liabilities | $ | 9,066 |
| | $ | 31,592 |
|
Non-current liabilities | 87,850 |
| | 88,325 |
|
| $ | 96,916 |
| | $ | 119,917 |
|
At September 30, 2012 and December 31, 2011, the assets and liabilities of discontinued operations consist primarily of tax-related accruals and unrecognized benefits, as well as other accruals for compensation, legal, environmental and warranty contingencies, none of which are individually significant.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
10. Restructuring Activities
The following table details restructuring charges incurred by segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Communication Technologies | $ | 928 |
| | $ | 669 |
| | $ | 2,586 |
| | $ | 1,820 |
|
Energy | 55 |
| | 741 |
| | 550 |
| | 2,538 |
|
Engineered Systems | 3,190 |
| | 1,093 |
| | 4,616 |
| | 2,485 |
|
Printing & Identification | (90 | ) | | 610 |
| | 5,898 |
| | (217 | ) |
Total | $ | 4,083 |
| | $ | 3,113 |
| | $ | 13,650 |
| | $ | 6,626 |
|
| | | | | | | |
These amounts are classified in the Unaudited Condensed Consolidated Statements of Comprehensive Earnings as follows: |
| | | | | | | |
Cost of goods and services | $ | 1,473 |
| | $ | 1,278 |
| | $ | 2,702 |
| | $ | 2,520 |
|
Selling and administrative expenses | 2,610 |
| | 1,835 |
| | 10,948 |
| | 4,106 |
|
Total | $ | 4,083 |
| | $ | 3,113 |
| | $ | 13,650 |
| | $ | 6,626 |
|
The restructuring expenses incurred in the three and nine months ended September 30, 2012 relate primarily to programs initiated in 2012, principally a few targeted facility consolidations and headcount reductions intended to better align the Company's operations with current market conditions. The Company expects to incur additional restructuring expenses of approximately $8,000 in the fourth quarter of 2012 relating to these programs, which are expected to conclude in 2012 into early 2013, coupled with new programs to be initiated to optimize operations relating to recent acquisitions and further reduce headcount.
Restructuring expenses incurred in the three and nine months ended September 30, 2011 also included targeted facility consolidations at certain businesses. These programs were substantially complete by the end of 2011 and the related expenses were not significant.
The following table details the Company’s severance and other restructuring accrual activity:
|
| | | | | | | | | | | |
| Severance | | Exit | | Total |
Balance at December 31, 2011 | $ | 2,463 |
| | $ | 3,129 |
| | $ | 5,592 |
|
Restructuring charges | 10,463 |
| | 3,187 |
| | 13,650 |
|
Payments | (8,465 | ) | | (3,332 | ) | | (11,797 | ) |
Other, including foreign currency | 7 |
| | 83 |
| | 90 |
|
Balance at September 30, 2012 | $ | 4,468 |
| | $ | 3,067 |
| | $ | 7,535 |
|
The accrual balance at December 31, 2011 primarily reflects ongoing lease commitment obligations for facilities closed in earlier periods.
11. 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 which 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.
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, exposure to hazardous substances, patent infringement, employment matters and commercial disputes. Management and legal
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
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. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on these reviews, it is unlikely that the disposition of the lawsuits and the other matters mentioned above will have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
Letters of Credit
As of September 30, 2012, the Company had approximately $72,081 outstanding in letters of credit and guarantees with financial institutions, which expire at various dates in 2012 through 2016. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations.
Warranty Accruals
Estimated warranty program claims are provided for at the time of sale. Amounts provided for are based on historical costs and adjusted new claims. The changes in the carrying amount of product warranties through September 30, 2012 and 2011 are as follows:
|
| | | | | | | |
| 2012 | | 2011 |
Beginning Balance, January 1 | $ | 42,524 |
| | $ | 40,032 |
|
Provision for warranties | 24,963 |
| | 27,924 |
|
Settlements made | (26,304 | ) | | (26,954 | ) |
Other adjustments, including acquisitions and currency translation | 3,320 |
| | 2,209 |
|
Ending balance, September 30 | $ | 44,503 |
| | $ | 43,211 |
|
12. Employee Benefit Plans
The following tables set forth the components of the Company’s net periodic expense relating to retirement and post-retirement benefit plans:
Retirement 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 |
| 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
Service Cost | $ | 3,602 |
| | $ | 3,541 |
| | $ | 1,079 |
| | $ | 763 |
| | $ | 10,804 |
| | $ | 10,625 |
| | $ | 3,147 |
| | $ | 2,256 |
|
Interest Cost | 6,284 |
| | 6,809 |
| | 2,231 |
| | 2,176 |
| | 18,852 |
| | 20,427 |
| | 6,428 |
| | 6,489 |
|
Expected return on plan assets | (9,744 | ) | | (9,618 | ) | | (2,022 | ) | | (2,073 | ) | | (29,234 | ) | | (28,854 | ) | | (5,810 | ) | | (6,150 | ) |
Amortization: | | | | | | | | | | | | | | | |
Prior service cost | 260 |
| | 327 |
| | 30 |
| | 30 |
| | 786 |
| | 979 |
| | 89 |
| | 93 |
|
Recognized actuarial loss | 3,378 |
| | 2,083 |
| | 130 |
| | 65 |
| | 10,136 |
| | 6,251 |
| | 371 |
| | 193 |
|
Transition obligation | — |
| | — |
| | (13 | ) | | (11 | ) | | — |
| | — |
| | (36 | ) | | (33 | ) |
Other | — |
| | — |
| | 56 |
| | 33 |
| | — |
| | — |
| | 158 |
| | 97 |
|
Net periodic expense | $ | 3,780 |
| | $ | 3,142 |
| | $ | 1,491 |
| | $ | 983 |
| | $ | 11,344 |
| | $ | 9,428 |
| | $ | 4,347 |
| | $ | 2,945 |
|
The net periodic expense reflected above does not include the impact of pension plans related to recent acquisitions. Such amounts are not significant for the periods presented.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
Non-Qualified Supplemental Benefits
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Service Cost | $ | 1,326 |
| | $ | 1,016 |
| | $ | 3,978 |
| | $ | 3,048 |
|
Interest Cost | 1,979 |
| | 1,961 |
| | 5,937 |
| | 5,881 |
|
Amortization: | | | | | | | |
Prior service cost | 1,857 |
| | 1,817 |
| | 5,569 |
| | 5,449 |
|
Recognized actuarial loss | 33 |
| | — |
| | 103 |
| | — |
|
Net periodic expense | $ | 5,195 |
| | $ | 4,794 |
| | $ | 15,587 |
| | $ | 14,378 |
|
Post-Retirement Plans
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Service Cost | $ | 62 |
| | $ | 52 |
| | $ | 186 |
| | $ | 155 |
|
Interest Cost | 149 |
| | 181 |
| | 445 |
| | 543 |
|
Amortization: | | | | | | | |
Prior service cost | (104 | ) | | (102 | ) | | (312 | ) | | (307 | ) |
Recognized actuarial gain | (5 | ) | | (61 | ) | | (15 | ) | | (181 | ) |
Settlement gains | — |
| | — |
| | (1,493 | ) | | — |
|
Net periodic expense | $ | 102 |
| | $ | 70 |
| | $ | (1,189 | ) | | $ | 210 |
|
The Company purchased life insurance contracts to settle a portion of the post-retirement obligations relating to employees of two businesses that were sold in 2011, resulting in settlement gains of $1,493, which are included within the results of discontinued operations for the nine months ended September 30, 2012.
13. Other Comprehensive Earnings
The amounts recognized in other comprehensive earnings were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2012 | | September 30, 2011 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments | $ | 82,694 |
| | $ | 108 |
| | $ | 82,802 |
| | $ | (120,520 | ) | | $ | (1,896 | ) | | $ | (122,416 | ) |
Cash flow hedges | 298 |
| | (104 | ) | | 194 |
| | (2,337 | ) | | 818 |
| | (1,519 | ) |
Pension and other postretirement benefit plans | 16,268 |
| | (5,693 | ) | | 10,575 |
| | — |
| | — |
| | — |
|
Other | (261 | ) | | (29 | ) | | (290 | ) | | (518 | ) | | 130 |
| | (388 | ) |
Total other comprehensive earnings (loss) | $ | 98,999 |
| | $ | (5,718 | ) | | $ | 93,281 |
| | $ | (123,375 | ) | | $ | (948 | ) | | $ | (124,323 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2012 | | September 30, 2011 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments | $ | 34,181 |
| | $ | (262 | ) | | $ | 33,919 |
| | $ | (46,414 | ) | | $ | 14,942 |
| | $ | (31,472 | ) |
Cash flow hedges | 675 |
| | (236 | ) | | 439 |
| | (2,911 | ) | | 1,019 |
| | (1,892 | ) |
Pension and other postretirement benefit plans | 9,952 |
| | (3,637 | ) | | 6,315 |
| | — |
| | — |
| | — |
|
Other | 318 |
| | (55 | ) | | 263 |
| | 351 |
| | (14 | ) | | 337 |
|
Total other comprehensive earnings (loss) | $ | 45,126 |
| | $ | (4,190 | ) | | $ | 40,936 |
| | $ | (48,974 | ) | | $ | 15,947 |
| | $ | (33,027 | ) |
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
14. Segment Information
For management reporting and performance evaluation purposes, the Company categorizes its operating companies into four distinct reportable segments. In the fourth quarter of 2011, the Company reorganized into four new business segments that are aligned with the key end-markets they serve: Communication Technologies, Energy, Engineered Systems and Printing & Identification.
Therefore, consistent with the requirements of segment reporting, the Company has revised its operating segments to align with the revised operating and management reporting structure. All information for the prior periods has been conformed to the current period presentation.
Segment financial information and a reconciliation of segment results to consolidated results follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
REVENUE: | | | | | | | |
Communication Technologies | $ | 396,470 |
| | $ | 405,357 |
| | $ | 1,115,734 |
| | $ | 963,782 |
|
Energy | 562,263 |
| | 510,608 |
| | 1,632,619 |
| | 1,390,359 |
|
Engineered Systems | 892,121 |
| | 823,141 |
| | 2,600,368 |
| | 2,369,588 |
|
Printing & Identification | 358,086 |
| | 400,515 |
| | 1,080,591 |
| | 1,224,639 |
|
Intra-segment eliminations | (241 | ) | | (1,015 | ) | | (741 | ) | | (2,714 | ) |
Total consolidated revenue | $ | 2,208,699 |
| | $ | 2,138,606 |
| | $ | 6,428,571 |
| | $ | 5,945,654 |
|
| | | | | | | |
EARNINGS FROM CONTINUING OPERATIONS: | | |
| | | | |
Segment earnings: | |
| | |
| | | | |
Communication Technologies | $ | 63,706 |
| | $ | 53,433 |
| | $ | 160,584 |
| | $ | 155,285 |
|
Energy | 139,038 |
| | 125,268 |
| | 405,089 |
| | 328,766 |
|
Engineered Systems | 144,245 |
| | 125,529 |
| | 400,145 |
| | 352,334 |
|
Printing & Identification | 51,407 |
| | 59,447 |
| | 125,686 |
| | 182,051 |
|
Total segments | 398,396 |
| | 363,677 |
| | 1,091,504 |
| | 1,018,436 |
|
Corporate expense / other (1) | 32,001 |
| | 34,083 |
| | 104,882 |
| | 105,586 |
|
Net interest expense | 30,388 |
| | 30,061 |
| | 90,132 |
| | 86,536 |
|
Earnings from continuing operations before provision for income taxes and discontinued operations | 336,007 |
| | 299,533 |
| | 896,490 |
| | 826,314 |
|
Provision for taxes | 93,794 |
| | 76,095 |
| | 244,548 |
| | 188,887 |
|
Earnings from continuing operations | $ | 242,213 |
| | $ | 223,438 |
| | $ | 651,942 |
| | $ | 637,427 |
|
| |
(1) | Certain expenses are maintained at the corporate level and not allocated to the segments. These expenses include executive and functional compensation costs, non-service pension costs, non-operating insurance expenses, and various administrative expenses relating to the corporate headquarters. |
15. Recent Accounting Standards
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04 which was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The Company adopted this guidance on January 1, 2012, and its adoption did not significantly impact the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05 which provides new guidance on the presentation of comprehensive income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and instead requires an entity to present the total of comprehensive income, the components of net income
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this ASU only requires a change in the format of the current presentation. The Company adopted this guidance for its 2011 year-end reporting, presenting other comprehensive earnings in a separate statement following the statement of earnings. For its condensed interim reporting herein, the Company has reported total comprehensive income using a single-statement approach.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for Dover for its annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company performs its annual goodwill impairment test in the fourth quarter and does not expect the adoption of this ASU to significantly impact its consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test of an indefinite-lived intangible asset. Per the terms of this ASU, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The revised standard is effective for Dover for its annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; however, early adoption is permitted. The Company does not expect adoption of this ASU to significantly impact its consolidated financial statements.
16. Equity Incentive Program
The Company typically grants SARs and performance shares annually at its regularly scheduled first quarter Compensation Committee meeting. In the first quarters of 2012 and 2011, the Company issued stock settled appreciation rights (“SARs”) covering 1,719,943 and 1,524,329 shares, respectively, and 50,416 and 44,751 performance shares, respectively.
The fair value of each SARs grant was estimated on the date of grant using the Black-Scholes option pricing model. The performance share awards are market condition awards and have been assessed at fair value on the date of grant using a Monte Carlo simulation model. The following assumptions were used in determining the fair value of the SARs and performance shares awarded during the respective periods:
|
| | | | | | | | | | | | | | | |
| SARs | | Performance Shares |
| 2012 | | 2011 | | 2012 | | 2011 |
Risk-free interest rate | 1.05 | % | | 2.68 | % | | 0.37 | % | | 1.34 | % |
Dividend yield | 2.03 | % | | 1.70 | % | | 2.03 | % | | 1.61 | % |
Expected life (years) | 5.7 |
| | 5.8 |
| | 2.9 |
| | 2.9 |
|
Volatility | 36.41 | % | | 33.56 | % | | 34.10 | % | | 40.48 | % |
Grant price | $ | 65.38 |
| | $ | 66.59 |
| | n/a |
| | n/a |
|
Fair value at date of grant | $ | 18.51 |
| | $ | 20.13 |
| | $ | 71.98 |
| | $ | 91.41 |
|
Stock-based compensation is reported within selling and administrative expenses in the accompanying Unaudited Condensed Consolidated Statements of Comprehensive 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, |
| 2012 | | 2011 | | 2012 | | 2011 |
Pre-tax compensation expense | $ | 7,483 |
| | $ | 6,018 |
| | $ | 23,589 |
| | $ | 20,025 |
|
Tax benefit | (2,643 | ) | | (2,107 | ) | | (8,330 | ) | | (7,009 | ) |
Total stock-based compensation expense, net of tax | $ | 4,840 |
| | $ | 3,911 |
| | $ | 15,259 |
| | $ | 13,016 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
On May 3, 2012, the shareholders approved the Dover Corporation 2012 Equity and Cash Incentive Plan (the "2012 Plan"), to replace the 2005 Equity and Cash Incentive Plan, which otherwise would terminate according to its terms on January 31, 2015, and the 1996 Non-Employee Directors Stock Compensation Plan, which would otherwise terminate according to its terms on December 31, 2012. Officers and other key employees, as well as non-employee directors, are eligible to participate in the 2012 Plan, which has a ten year term and will terminate on May 3, 2022. The 2012 Plan provides for stock options and SARs grants, restricted stock awards, restricted stock unit awards, performance share awards, cash performance awards, directors' shares and deferred stock units. Under the 2012 Plan, a total of 17,000,000 shares of common stock are reserved for issuance, subject to adjustments resulting from stock dividends, stock splits, recapitalizations, reorganizations and other similar changes.
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, |
| 2012 | | 2011 | | 2012 | | 2011 |
Earnings from continuing operations | $ | 242,213 |
| | $ | 223,438 |
| | $ | 651,942 |
| | $ | 637,427 |
|
Loss from discontinued operations, net | (1,167 | ) | | (51,158 | ) | | (732 | ) | | (20,473 | ) |
Net earnings | $ | 241,046 |
| | $ | 172,280 |
| | $ | 651,210 |
| | $ | 616,954 |
|
| | | | | | | |
Basic earnings per common share: | |
| | |
| | | | |
Earnings from continuing operations | $ | 1.33 |
| | $ | 1.20 |
| | $ | 3.56 |
| | $ | 3.42 |
|
Loss from discontinued operations, net | $ | (0.01 | ) | | $ | (0.28 | ) | | $ | — |
| | $ | (0.11 | ) |
Net earnings | $ | 1.33 |
| | $ | 0.93 |
| | $ | 3.56 |
| | $ | 3.31 |
|
| | | | | | | |
Weighted average shares outstanding | 181,763,000 |
| | 185,770,000 |
| | 183,000,000 |
| | 186,246,000 |
|
| | | | | | | |
Diluted earnings per common share: | |
| | |
| | | | |
Earnings from continuing operations | $ | 1.32 |
| | $ | 1.19 |
| | $ | 3.51 |
| | $ | 3.37 |
|
Loss from discontinued operations, net | $ | (0.01 | ) | | $ | (0.27 | ) | | $ | — |
| | $ | (0.11 | ) |
Net earnings | $ | 1.31 |
| | $ | 0.91 |
| | $ | 3.51 |
| | $ | 3.26 |
|
| | | | | | | |
Weighted average shares outstanding | 183,932,000 |
| | 188,436,000 |
| | 185,489,000 |
| | 189,420,000 |
|
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, |
| 2012 | | 2011 | | 2012 | | 2011 |
Weighted average shares outstanding - Basic | 181,763,000 |
| | 185,770,000 |
| | 183,000,000 |
| | 186,246,000 |
|
Dilutive effect of assumed exercise of employee stock options, SARs and performance shares | 2,169,000 |
| | 2,666,000 |
| | 2,489,000 |
| | 3,174,000 |
|
Weighted average shares outstanding - Diluted | 183,932,000 |
| | 188,436,000 |
| | 185,489,000 |
| | 189,420,000 |
|
Diluted per share amounts are computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and SARs, and vesting of performance shares and restricted shares, as determined using the treasury stock method. For the three months ended September 30, 2012 and 2011, the weighted average number of anti-dilutive potential common shares excluded from the calculation above totaled 3,128,000 and 1,495,000, respectively. For the nine months ended September 30, 2012 and 2011, the weighted average number of anti-dilutive potential common shares excluded from the calculation above totaled 2,899,000 and 1,287,000, respectively.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(in thousands, except share data)
18. Share Repurchases
Share repurchases during the nine months ended September 30, 2012 were as follows:
|
| | | |
Shares repurchased in the open market | 6,552,804 |
|
Shares repurchased from holders of employee stock options | 82,823 |
|
Total shares repurchased | 6,635,627 |
|
Average price paid per share | $ | 59.28 |
|
In May 2012, the Board of Directors renewed its standing authorization of the Company's share repurchase program, on terms consistent with its prior five-year authorization which expired at that time. This renewal authorizes the repurchase of up to 10,000,000 shares of the Company's common stock during the five-year period ending May 2017. The Company repurchased 4,292,804 shares under this new authorization during the nine months ended September 30, 2012. As of September 30, 2012, the approximate number of shares still available for repurchase under the May 2012 share repurchase authorization was 5,707,196.
Treasury shares increased to 73,636,114 at September 30, 2012 from a balance of 67,000,487 at December 31, 2011.
The Company initiated the repurchase of an additional 900,000 shares at the end of September 2012, which did not settle until October 2012. Consequently, these amounts have been excluded from share repurchases for the period and are not included in the balance of treasury shares at September 30, 2012. These share repurchases would not have materially impacted the calculation of weighted average shares outstanding nor the calculation of earnings per share.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to the section below entitled “Special Notes Regarding Forward-Looking Statements” for a discussion of factors that could cause our actual results to differ from the forward-looking statements contained below and throughout this quarterly report.
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we refer to measures used by management to evaluate performance, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP). These include organic revenue growth, free cash flow and adjusted working capital. Organic revenue and organic growth refer to revenue and revenue growth excluding the impacts of foreign exchange, acquisitions and divestitures. Free cash flow is operating cash flow less capital spending, while adjusted working capital refers to accounts receivable, plus inventory, less accounts payable. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
OVERVIEW AND OUTLOOK
Dover is a diversified, multinational corporation that manufactures a broad range of specialized products and components and also offers related services and consumables. Dover provides its customers with outstanding products and services that reflect the Company’s commitment to operational excellence, innovation and market leadership. Unless the context indicates otherwise, references herein to “Dover,” “the Company,” and such words as “we,” “us,” and “our” include Dover Corporation and its subsidiaries.
In the fourth quarter of 2011, we realigned our businesses into four new segments to more closely match our key end-markets. As a result, our principal business segments are Communication Technologies, Energy, Engineered Systems, and Printing & Identification. We believe the revised segment structure provides better alignment and focus around our end-markets, allows for better leverage of our executive leadership talent and expertise, helps improve the sharing and leveraging of resources within and between the four segments, enhances execution of business-specific strategies, and facilitates internal and external benchmarking against companies serving similar markets.
Our Communication Technologies segment is engaged in the design and manufacture of innovative products and components in the communications, life sciences, aerospace/industrial, defense, and telecommunication/other markets. Our Energy segment provides highly-engineered solutions for the safe and efficient extraction and handling of oil and gas in the drilling, production, and downstream markets. Our Engineered Systems segment is comprised of two platforms, Fluid Solutions and Refrigeration & Industrial, which are industry leaders in the fluids systems, refrigeration and food equipment, and certain other industrial markets. Our Printing & Identification segment provides integrated printing, coding, and testing solutions for the fast moving consumer goods, industrial, and electronics markets.
The following table shows the percentage of total revenue and segment earnings generated by each of our four segments for the three months ended September 30, 2012 and 2011:
|
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2012 | | September 30, 2011 |
| Revenue | | Segment Earnings | | Revenue | | Segment Earnings |
Communication Technologies | 17.9 | % | | 16.0 | % | | 18.9 | % | | 14.8 | % |
Energy | 25.5 | % | | 34.9 | % | | 23.9 | % | | 34.4 | % |
Engineered Systems | 40.4 | % | | 36.2 | % | | 38.5 | % | | 34.5 | % |
Printing & Identification | 16.2 | % | | 12.9 | % | | 18.7 | % | | 16.3 | % |
| | | | | | | |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
We generated positive results during the third quarter of 2012, with revenue of $2.2 billion and gross profit of $846.9 million, representing increases of 3% and 5%, respectively, compared to the third quarter of 2011. The quarter’s results were led by our strong positions in the energy, handset, food equipment and waste and recycling markets. We achieved this growth despite modestly weaker global economic conditions, including continued weakness in Europe and China, which have contributed to
generally slower revenue growth rates in the quarter.
Third quarter bookings of $2.1 billion were relatively flat as compared with the prior year period. Strong growth in our Energy segment and modest increases in our Engineered Systems and Communication Technologies segments were offset by weaker electronics end market bookings in our Printing & Identification segment.
Within our Communication Technologies segment, several OEM's launched new products in the handset market towards the end of the third quarter which drove solid sequential results. These launches were generally later than our expectations at the end of the second quarter and impacted volume in the third quarter. Our microelectronic mechanical ("MEMs") microphone activity was very strong once the new OEM product launches commenced. However, our performance at Sound Solutions was weaker than anticipated. The Sound Solutions business continued to work through operational challenges in the third quarter and is making good progress, yet such challenges led to lower volumes than anticipated. This lower volume, coupled with normal seasonality in the handset market, will likely continue to impact the handset results through year-end. Our aerospace/industrial and life sciences markets remained stable during the quarter, while our telecom markets continued to be weak.
In our Energy segment, expanding production activity and strong downstream investments in distribution and retail fueling are among the trends that drove solid results during in the quarter. This strong production and downstream performance was partially offset by the softening North American rig count, which impacted our drilling end market results. In all, the segment had solid performance, characterized by continuing growth and strong margins. We expect this trend to continue for the balance of the year.
Within our Engineered Systems segment, the refrigeration and food equipment markets were solid, as were most of our U.S. industrial end markets, especially waste and recycling. The results of our Fluid Solutions platform continued to reflect solid performance from our first quarter Maag Pump Systems acquisition, which helped to mitigate the impacts of weakened markets in Europe and China. The result for the segment was 15% earnings growth as revenue growth was leveraged by strong margin performance. We expect the segment's fourth quarter performance to be impacted by the normal seasonality of our refrigeration markets and slightly moderating global economic trends.
In our Printing & Identification segment, we experienced further weakening in the electronics markets during the quarter. Strong organic growth of 6% in our fast moving consumer goods market, excluding the impact of currency, was driven by solid North American demand coupled with the benefits of our second quarter restructuring activities, which helped minimize the impact of softening electronics markets and a weak Europe. We expect this segment's performance to remain weak in the fourth quarter, due to low order rates in the electronics market.
Overall, the strong market positions of our businesses and cost management initiatives enabled us to generate segment margin of 18% despite the aforementioned challenges in our Communication Technologies and Printing & Identification segments. This strong margin performance, supplemented by increased share repurchase activity in the quarter, enabled us to deliver double-digit diluted earnings per share ("EPS") growth. As such, we generated EPS from continuing operations of $1.32 in the third quarter of 2012 compared to $1.19 in the same quarter of last year.
We expect the fourth quarter to be challenging in light of continued economic uncertainty, coupled with the unfavorable conditions that we expect to continue in our handset and electronics markets. As a result, we estimate our 2012 organic growth to be approximately 3% (inclusive of a 2% unfavorable foreign exchange impact) and acquisition related growth to be approximately 4% for acquisitions completed in 2011 and the first half of 2012. Based on these revised revenue assumptions and profitability expectations, diluted earnings per share from continuing operations for 2012 is estimated to be in the range of $4.55 to $4.65. If global or domestic economic conditions accelerate or deteriorate, our operating results for 2012 could be materially different than currently projected.
RESULTS OF OPERATIONS
As discussed in Note 9 to the Unaudited Condensed Consolidated Financial Statements, we are reporting three businesses that were sold during 2011 as discontinued operations. Therefore, we have classified the results of operations of these businesses as discontinued operations for all periods presented.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, except per share figures) | 2012 | | 2011 | | % / Point Change | | 2012 | | 2011 | | % / Point Change |
Revenue | $ | 2,208,699 |
| | $ | 2,138,606 |
| | 3.3 | % | | $ | 6,428,571 |
| | $ | 5,945,654 |
| | 8.1 | % |
Cost of goods and services | 1,361,769 |
| | 1,332,324 |
| | 2.2 | % | | 3,983,720 |
| | 3,651,625 |
| | 9.1 | % |
Gross profit | 846,930 |
| | 806,282 |
| | 5.0 | % | | 2,444,851 |
| | 2,294,029 |
| | 6.6 | % |
Gross profit margin | 38.3 | % | | 37.7 | % | | 0.6 |
| | 38.0 | % | | 38.6 | % | | (0.6 | ) |
| | | | | | | | | | | |
Selling and administrative expenses | |