Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 1-4018
Dover Corporation
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 53-0257888 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
3005 Highland Parkway | |
Downers Grove, Illinois | 60515 |
(Address of principal executive offices) | (Zip Code) |
(630) 541-1540
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12-b-2 of the Exchange Act.
|
| | |
Large accelerated filer þ | | Accelerated filer o |
Non-accelerated filer o | (Do not check if smaller reporting company) | Smaller reporting company o |
| | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the Registrant’s common stock as of July 13, 2017 was 155,734,275.
Dover Corporation
Form 10-Q
Table of Contents
Item 1. Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 1,993,351 |
| | $ | 1,686,345 |
| | $ | 3,806,723 |
| | $ | 3,308,618 |
|
Cost of goods and services | 1,243,905 |
| | 1,055,132 |
| | 2,396,103 |
| | 2,088,141 |
|
Gross profit | 749,446 |
| | 631,213 |
| | 1,410,620 |
| | 1,220,477 |
|
Selling, general and administrative expenses | 484,046 |
| | 437,411 |
| | 969,336 |
| | 880,859 |
|
Operating earnings | 265,400 |
| | 193,802 |
| | 441,284 |
| | 339,618 |
|
Interest expense | 36,932 |
| | 33,779 |
| | 73,341 |
| | 67,097 |
|
Interest income | (2,338 | ) | | (1,622 | ) | | (4,918 | ) | | (3,226 | ) |
Gain on sale of businesses | — |
| | (801 | ) | | (90,093 | ) | | (12,029 | ) |
Other expense (income), net | 15 |
| | (2,053 | ) | | 191 |
| | (4,347 | ) |
Earnings before provision for income taxes | 230,791 |
| | 164,499 |
| | 462,763 |
| | 292,123 |
|
Provision for income taxes | 66,733 |
| | 46,209 |
| | 126,458 |
| | 74,477 |
|
Net earnings | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
Net earnings per share: | | | | | | | |
Basic | $ | 1.05 |
| | $ | 0.76 |
| | $ | 2.16 |
| | $ | 1.40 |
|
Diluted | $ | 1.04 |
| | $ | 0.76 |
| | $ | 2.14 |
| | $ | 1.39 |
|
Weighted average shares outstanding: | | | | | | | |
Basic | 155,703 |
| | 155,180 |
| | 155,622 |
| | 155,122 |
|
Diluted | 157,513 |
| | 156,595 |
| | 157,457 |
| | 156,414 |
|
Dividends paid per common share | $ | 0.44 |
| | $ | 0.42 |
| | $ | 0.88 |
| | $ | 0.84 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
Other comprehensive earnings (loss), net of tax | | | | | | | |
Foreign currency translation adjustments: | | | | | | | |
Foreign currency translation gains (losses) during period | 26,174 |
| | (41,992 | ) | | 66,071 |
| | (33,223 | ) |
Reclassification of foreign currency translation losses to earnings upon sale of subsidiaries | — |
| | — |
| | 3,875 |
| | — |
|
Total foreign currency translation adjustments | 26,174 |
| | (41,992 | ) | | 69,946 |
| | (33,223 | ) |
Pension and other post-retirement benefit plans: | | | | | | | |
Amortization of actuarial losses included in net periodic pension cost | 1,353 |
| | 1,416 |
| | 2,691 |
| | 2,825 |
|
Amortization of prior service costs included in net periodic pension cost | 702 |
| | 1,040 |
| | 1,404 |
| | 2,081 |
|
Total pension and other post-retirement benefit plans | 2,055 |
| | 2,456 |
| | 4,095 |
| | 4,906 |
|
Changes in fair value of cash flow hedges: | | | | | | | |
Unrealized net (losses) arising during period | (1,876 | ) | | (162 | ) | | (1,798 | ) | | (211 | ) |
Net losses (gains) reclassified into earnings | 159 |
| | 213 |
| | (58 | ) | | 166 |
|
Total cash flow hedges | (1,717 | ) | | 51 |
| | (1,856 | ) | | (45 | ) |
Other | (578 | ) | | (448 | ) | | (241 | ) | | 1,392 |
|
Other comprehensive earnings (loss) | 25,934 |
| | (39,933 | ) | | 71,944 |
| | (26,970 | ) |
Comprehensive earnings | $ | 189,992 |
| | $ | 78,357 |
| | $ | 408,249 |
| | $ | 190,676 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Assets |
Current assets: | | | |
Cash and cash equivalents | $ | 301,588 |
| | $ | 349,146 |
|
Receivables, net of allowances of $33,176 and $22,015 | 1,395,745 |
| | 1,265,201 |
|
Inventories | 962,070 |
| | 870,487 |
|
Prepaid and other current assets | 100,181 |
| | 104,357 |
|
Total current assets | 2,759,584 |
| | 2,589,191 |
|
Property, plant and equipment, net | 978,621 |
| | 945,670 |
|
Goodwill | 4,564,266 |
| | 4,562,677 |
|
Intangible assets, net | 1,757,675 |
| | 1,802,923 |
|
Other assets and deferred charges | 232,277 |
| | 215,530 |
|
Total assets | $ | 10,292,423 |
| | $ | 10,115,991 |
|
Liabilities and Stockholders' Equity |
Current liabilities: | |
| | |
|
Notes payable and current maturities of long-term debt | $ | 606,965 |
| | $ | 414,550 |
|
Accounts payable | 954,115 |
| | 830,318 |
|
Accrued compensation and employee benefits | 211,728 |
| | 226,440 |
|
Accrued insurance | 106,186 |
| | 96,062 |
|
Other accrued expenses | 322,347 |
| | 332,595 |
|
Federal and other income taxes | 14,005 |
| | 40,353 |
|
Total current liabilities | 2,215,346 |
| | 1,940,318 |
|
Long-term debt | 2,925,472 |
| | 3,206,637 |
|
Deferred income taxes | 630,079 |
| | 710,173 |
|
Other liabilities | 449,092 |
| | 459,117 |
|
Stockholders' equity: | |
| | |
|
Total stockholders' equity | 4,072,434 |
| | 3,799,746 |
|
Total liabilities and stockholders' equity | $ | 10,292,423 |
| | $ | 10,115,991 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock $1 Par Value | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balance at December 31, 2016 | $ | 256,538 |
| | $ | 946,755 |
| | $ | (4,972,016 | ) | | $ | 7,927,795 |
| | $ | (359,326 | ) | | $ | 3,799,746 |
|
Net earnings | — |
| | — |
| | — |
| | 336,305 |
| | — |
| | 336,305 |
|
Dividends paid | — |
| | — |
| | — |
| | (137,182 | ) | | — |
| | (137,182 | ) |
Common stock issued for the exercise of share-based awards | 308 |
| | (12,336 | ) | | — |
| | — |
| | — |
| | (12,028 | ) |
Share-based compensation expense | — |
| | 17,469 |
| | — |
| | — |
| | — |
| | 17,469 |
|
Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | — |
| | 71,944 |
| | 71,944 |
|
Other, net | — |
| | (3,820 | ) | | — |
| | — |
| | — |
| | (3,820 | ) |
Balance at June 30, 2017 | $ | 256,846 |
| | $ | 948,068 |
| | $ | (4,972,016 | ) | | $ | 8,126,918 |
| | $ | (287,382 | ) | | $ | 4,072,434 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Operating Activities: | | | |
Net earnings | $ | 336,305 |
| | $ | 217,646 |
|
Adjustments to reconcile net earnings to cash from operating activities: | | | |
Depreciation and amortization | 193,016 |
| | 176,698 |
|
Stock-based compensation expense | 17,469 |
| | 14,360 |
|
Gain on sale of assets | (910 | ) | | (1,530 | ) |
Gain on sale of businesses | (90,093 | ) | | (11,228 | ) |
Cash effect of changes in assets and liabilities: | | | |
Accounts receivable, net | (106,927 | ) | | 429 |
|
Inventories | (93,132 | ) | | (16,429 | ) |
Prepaid expenses and other assets | (7,238 | ) | | (5,449 | ) |
Accounts payable | 97,677 |
| | 5,377 |
|
Accrued compensation and employee benefits | (21,399 | ) | | (42,534 | ) |
Accrued expenses and other liabilities | (38,169 | ) | | 16,135 |
|
Accrued and deferred taxes, net | (28,420 | ) | | 11,746 |
|
Other, net | (24,231 | ) | | (23,940 | ) |
Net cash provided by operating activities | 233,948 |
| | 341,281 |
|
Investing Activities: | |
| | |
|
Additions to property, plant and equipment | (90,594 | ) | | (72,652 | ) |
Acquisitions, net of cash and cash equivalents acquired | (25,568 | ) | | (475,236 | ) |
Proceeds from sale of property, plant and equipment | 4,479 |
| | 5,804 |
|
Proceeds from sale of businesses | 121,175 |
| | 47,300 |
|
Other | 21,151 |
| | (488 | ) |
Net cash provided by (used in) investing activities | 30,643 |
| | (495,272 | ) |
Financing Activities: | |
| | |
|
Proceeds from exercise of share-based awards, including tax benefits | — |
| | 3,966 |
|
Change in commercial paper and notes payable | (157,444 | ) | | 185,556 |
|
Dividends paid to stockholders | (137,182 | ) | | (131,253 | ) |
Payments to settle employee tax obligations on exercise of share-based awards | (12,028 | ) | | (7,440 | ) |
Other | (2,912 | ) | | — |
|
Net cash (used in) provided by financing activities | (309,566 | ) | | 50,829 |
|
Effect of exchange rate changes on cash and cash equivalents | (2,583 | ) | | (3,883 | ) |
Net decrease in cash and cash equivalents | (47,558 | ) | | (107,045 | ) |
Cash and cash equivalents at beginning of period | 349,146 |
| | 362,185 |
|
Cash and cash equivalents at end of period | $ | 301,588 |
| | $ | 255,140 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
1. Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim periods and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. These unaudited interim Condensed Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes for Dover Corporation ("Dover" or the "Company") for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K filed with the SEC on February 10, 2017. The year end Condensed Consolidated Balance Sheet was derived from audited financial statements. Certain amounts in the prior year have been reclassified to conform to the current year presentation.
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Condensed Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.
2. Acquisitions
2017 Acquisitions
On April 5, 2017, the Company purchased 100% of the voting stock of Caldera Graphics S.A.S. ("Caldera") within the Engineered Systems segment for $32,680, net of cash acquired and including contingent consideration. In connection with this acquisition, the Company recorded goodwill of $24,649 and intangible assets of $8,169, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 7 to 15 years. The pro forma effects of this acquisition on the Company’s operations are disclosed in this footnote.
2016 Acquisitions
During the six months ended June 30, 2016, the Company acquired three business within the Fluids segment for $475,236, net of cash. The Company recorded goodwill of $301,577 and intangible assets of $192,065, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 10 to 15 years.
The goodwill identified by these acquisitions reflect the benefits expected to be derived from product line expansion and operational synergies.
The Company has substantially completed the purchase price allocations for the 2017 and 2016 acquisitions. As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company will refine its estimates of fair value to allocate the purchase price more accurately. Purchase price allocation adjustments may arise through working capital adjustments, asset appraisals or to reflect additional facts and circumstances in existence as of the acquisition date. Identified measurement period adjustments will be recorded, including any related impacts to net earnings, in the reporting period in which the adjustments are determined and may be significant. See Note 6 — Goodwill and Other Intangible Assets for purchase price adjustments.
Pro Forma Information
The following unaudited pro forma information illustrates the impact of 2017 and 2016 acquisitions on the Company’s revenue and earnings from operations for the three and six months ended June 30, 2017 and 2016, respectively. In 2016, the Company acquired six businesses in separate transactions for total net consideration of $1,562 million. During the measurement period, we recorded working capital adjustments which resulted in final net cash consideration of $1,554 million.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The pro forma information assumes that the 2017 and 2016 acquisitions had taken place at the beginning of the prior year. Pro forma earnings are also adjusted to reflect the comparable impact of additional depreciation and amortization expense, net of tax, resulting from the fair value measurement of tangible and intangible assets relating to the year of acquisition.
The proforma effects for the three and six months ended June 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
As reported | $ | 1,993,351 |
| | $ | 1,686,345 |
| | $ | 3,806,723 |
| | $ | 3,308,618 |
|
Pro forma | 1,993,483 |
| | 1,877,659 |
| | 3,809,834 |
| | 3,698,831 |
|
Earnings: | | | | |
As reported | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
Pro forma | 164,209 |
| | 124,926 |
| | 336,756 |
| | 235,219 |
|
Basic earnings per share: | | | | |
As reported | $ | 1.05 |
| | $ | 0.76 |
| | $ | 2.16 |
| | $ | 1.40 |
|
Pro forma | 1.05 |
| | 0.81 |
| | 2.16 |
| | 1.52 |
|
Diluted earnings per share: | | | | |
As reported | $ | 1.04 |
| | $ | 0.76 |
| | $ | 2.14 |
| | $ | 1.39 |
|
Pro forma | 1.04 |
| | 0.80 |
| | 2.14 |
| | 1.50 |
|
3. Disposed Operations
On February 14, 2017, the Company completed the sale of Performance Motorsports International ("PMI"), a wholly owned subsidiary of the Company that manufactures pistons and other engine related components serving the motorsports and powersports markets. Total consideration was $147,313 for the transaction, including cash proceeds of $118,706. We recognized a gain on sale of $88,402 for the six months ended June 30, 2017 within the Condensed Consolidated Statements of Earnings and recorded a 25% equity method investment at fair value of $18,607 as well as a subordinated note receivable of $10,000.
On February 17, 2016, the Company completed the sale of Texas Hydraulics, a wholly owned subsidiary of the Company, a custom manufacturer of fluid power components. Upon disposal of the business, the Company recognized total consideration of $47,300, which resulted in a gain on sale of $11,853 included within the Condensed Consolidated Statements of Earnings for the six months ended June 30, 2016.
These disposals did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.
4. Inventories
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Raw materials | $ | 485,699 |
| | $ | 428,286 |
|
Work in progress | 161,840 |
| | 138,652 |
|
Finished goods | 437,387 |
| | 409,314 |
|
Subtotal | 1,084,926 |
| | 976,252 |
|
Less reserves | (122,856 | ) | | (105,765 | ) |
Total | $ | 962,070 |
| | $ | 870,487 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
5. Property, Plant and Equipment, net |
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Land | $ | 70,914 |
| | $ | 68,575 |
|
Buildings and improvements | 615,387 |
| | 597,523 |
|
Machinery, equipment and other | 1,861,665 |
| | 1,802,832 |
|
Property, plant and equipment, gross | 2,547,966 |
| | 2,468,930 |
|
Total accumulated depreciation | (1,569,345 | ) | | (1,523,260 | ) |
Property, plant and equipment, net | $ | 978,621 |
| | $ | 945,670 |
|
Depreciation expense totaled $46,325 and $44,501 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, depreciation expense was $91,043 and $89,530, respectively.
6. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill by reportable operating segments were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Engineered Systems | | Fluids | | Refrigeration & Food Equipment | | Energy | | Total |
Balance at December 31, 2016 | $ | 1,567,216 |
| | $ | 1,413,508 |
| | $ | 536,179 |
| | $ | 1,045,774 |
| | $ | 4,562,677 |
|
Acquisitions | 24,649 |
| | — |
| | — |
| | — |
| | 24,649 |
|
Purchase price adjustments | (1,299 | ) | | (41,474 | ) | | — |
| | — |
| | (42,773 | ) |
Disposition of business | (27,793 | ) | | — |
| | — |
| | — |
| | (27,793 | ) |
Foreign currency translation | 31,537 |
| | 13,933 |
| | 430 |
| | 1,606 |
| | 47,506 |
|
Balance at June 30, 2017 | $ | 1,594,310 |
| | $ | 1,385,967 |
| | $ | 536,609 |
| | $ | 1,047,380 |
| | $ | 4,564,266 |
|
The Company recognized additions of $24,649 to goodwill as a result of the Caldera acquisition discussed in Note 2 — Acquisitions. During the six months ended June 30, 2017, the Company recorded $42,773 in adjustments for goodwill related to purchase price adjustments principally for deferred tax liabilities and working capital adjustments for the 2016 acquisitions.
As noted in Note 3 — Disposed Operations, the Company completed the sale of its PMI business during the six months ended June 30, 2017. As a result of this sale, the Engineered Systems goodwill balance was reduced by $27,793.
The Company tests goodwill for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate an impairment may have occurred. In the first quarter of 2017, the Company re-aligned its reporting units after acquiring four companies in the retail fueling market in 2016, increasing its reporting units from nine to ten. The Company performed the goodwill impairment test for the three reporting units within the Fluids segment impacted by the change, concluding that the fair values of the reporting units were in excess of their carrying values. Additionally, the Company has considered the economic environments in which its businesses operate, particularly those reporting units exposed to the oil and gas markets, and the long-term outlook for those businesses. The Company has determined that a triggering event has not occurred which would require impairment testing at this time.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The Company’s definite-lived and indefinite-lived intangible assets by major asset class were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortized intangible assets: | | | | | | | | | | | |
Customer intangibles | $ | 1,988,836 |
| | $ | 799,314 |
| | $ | 1,189,522 |
| | $ | 1,942,974 |
| | $ | 718,135 |
| | $ | 1,224,839 |
|
Trademarks | 250,555 |
| | 66,079 |
| | 184,476 |
| | 246,619 |
| | 56,455 |
| | 190,164 |
|
Patents | 159,655 |
| | 125,440 |
| | 34,215 |
| | 157,491 |
| | 119,828 |
| | 37,663 |
|
Unpatented technologies | 160,239 |
| | 72,921 |
| | 87,318 |
| | 155,752 |
| | 64,648 |
| | 91,104 |
|
Distributor relationships | 120,915 |
| | 49,480 |
| | 71,435 |
| | 113,463 |
| | 44,914 |
| | 68,549 |
|
Drawings & manuals | 34,749 |
| | 20,853 |
| | 13,896 |
| | 37,744 |
| | 23,114 |
| | 14,630 |
|
Other | 33,120 |
| | 21,967 |
| | 11,153 |
| | 31,632 |
| | 21,184 |
| | 10,448 |
|
Total | 2,748,069 |
| | 1,156,054 |
| | 1,592,015 |
| | 2,685,675 |
| | 1,048,278 |
| | 1,637,397 |
|
Unamortized intangible assets: | | | | | | | | | | | |
Trademarks | 165,660 |
| | — |
| | 165,660 |
| | 165,526 |
| | — |
| | 165,526 |
|
Total intangible assets, net | $ | 2,913,729 |
| | $ | 1,156,054 |
| | $ | 1,757,675 |
| | $ | 2,851,201 |
| | $ | 1,048,278 |
| | $ | 1,802,923 |
|
Amortization expense was $51,093 and $43,593 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, amortization expense was $101,973 and $87,168, respectively.
7. Restructuring Activities
The Company's restructuring charges by segment were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Engineered Systems | $ | 755 |
| | $ | 773 |
| | $ | 1,819 |
| | $ | 2,740 |
|
Fluids | 1,046 |
| | 2,764 |
| | 4,297 |
| | 7,990 |
|
Refrigeration & Food Equipment | 36 |
| | 52 |
| | 1,549 |
| | 73 |
|
Energy | 6 |
| | 5,610 |
| | 191 |
| | 12,026 |
|
Corporate | — |
| | — |
| | — |
| | 757 |
|
Total | $ | 1,843 |
| | $ | 9,199 |
| | $ | 7,856 |
| | $ | 23,586 |
|
| | | | | | | |
These amounts are classified in the Condensed Consolidated Statements of Earnings as follows: |
Cost of goods and services | $ | 163 |
| | $ | 4,329 |
| | $ | 4,234 |
| | $ | 10,180 |
|
Selling, general and administrative expenses | 1,680 |
| | 4,870 |
| | 3,622 |
| | 13,406 |
|
Total | $ | 1,843 |
| | $ | 9,199 |
| | $ | 7,856 |
| | $ | 23,586 |
|
The restructuring expenses of $1,843 and $7,856 incurred during the three and six months ended June 30, 2017, respectively, were related to restructuring programs initiated during 2017 and 2016. These programs are designed to better align the Company's costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures to further optimize operations. The Company expects the programs currently underway to be substantially completed in the next 12 to 18 months.
The $1,843 of restructuring charges incurred during the second quarter of 2017 primarily included the following items:
| |
• | The Engineered Systems segment recorded $755 of restructuring charges related to headcount reductions primarily within the Printing and Identification platform. |
| |
• | The Fluids segment recorded $1,046 of restructuring charges principally related to headcount reductions and facility consolidations primarily within its Fueling & Transport businesses. |
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The Company’s severance and exit accrual activities were as follows:
|
| | | | | | | | | | | |
| Severance | | Exit | | Total |
Balance at December 31, 2016 | $ | 10,908 |
| | $ | 1,439 |
| | $ | 12,347 |
|
Restructuring charges | 6,351 |
| | 1,505 |
| | 7,856 |
|
Payments | (10,382 | ) | | (1,386 | ) | | (11,768 | ) |
Foreign currency translation | 408 |
| | 53 |
| | 461 |
|
Other, including write-offs of fixed assets | (458 | ) | | 265 |
| | (193 | ) |
Balance at June 30, 2017 | $ | 6,827 |
| | $ | 1,876 |
| | $ | 8,703 |
|
8. Borrowings
Borrowings consisted of the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Short-term | | | |
Current portion of long-term debt and short-term borrowings | $ | 353,065 |
| | $ | 6,950 |
|
Commercial paper | 253,900 |
| | 407,600 |
|
Notes payable and current maturities of long-term debt | $ | 606,965 |
| | $ | 414,550 |
|
|
| | | | | | | | | | | |
| | | Carrying amount (1) |
| Principal | | June 30, 2017 | | December 31, 2016 |
Long-term | | | | | |
5.45% 10-year notes due March 15, 2018 | $ | 350,000 |
| | $ | 349,721 |
| | $ | 349,502 |
|
2.125% 7-year notes due December 1, 2020 (euro-denominated) | € | 300,000 |
| | 334,173 |
| | 311,851 |
|
4.30% 10-year notes due March 1, 2021 | $ | 450,000 |
| | 448,647 |
| | 448,458 |
|
3.150% 10-year notes due November 15, 2025 | $ | 400,000 |
| | 394,358 |
| | 394,042 |
|
1.25% 10-year notes due November 9, 2026 (euro-denominated) | € | 600,000 |
| | 660,931 |
| | 616,893 |
|
6.65% 30-year debentures due June 1, 2028 | $ | 200,000 |
| | 198,904 |
| | 198,830 |
|
5.375% 30-year debentures due October 15, 2035 | $ | 300,000 |
| | 295,436 |
| | 295,316 |
|
6.60% 30-year notes due March 15, 2038 | $ | 250,000 |
| | 247,657 |
| | 247,593 |
|
5.375% 30-year notes due March 1, 2041 | $ | 350,000 |
| | 343,462 |
| | 343,323 |
|
Other |
|
| | 3,021 |
| | 1,969 |
|
Total debt |
|
| | 3,276,310 |
| | 3,207,777 |
|
Less long-term debt current portion | | | (350,838 | ) | | (1,140 | ) |
Net long-term debt |
|
| | $ | 2,925,472 |
| | $ | 3,206,637 |
|
(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were
$18.0 million and $18.8 million as of June 30, 2017 and December 31, 2016, respectively. Total deferred debt issuance costs were $15.9 million and $16.5 million as of June 30, 2017 and December 31, 2016, respectively.
On March 15, 2018, the outstanding 5.45% notes with a principal value of $350.0 million will mature. These notes have been classified as a current maturity of long-term debt as of June 30, 2017.
The Company maintains a $1.0 billion five-year unsecured revolving credit facility (the "Credit Agreement") with a syndicate of banks which expires on November 10, 2020. The Company was in compliance with all covenants in the Credit Agreement and other long-term debt covenants at June 30, 2017 and had a coverage ratio of 10.4 to 1.0. The Company primarily uses the Credit Agreement as liquidity back-up for its commercial paper program and has not drawn down any loans under the facility and does not anticipate doing so. The Company generally uses commercial paper borrowings for general corporate purposes, funding of acquisitions and repurchases of its common stock.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
As of June 30, 2017, the Company had approximately $136,066 outstanding in letters of credit and performance and other guarantees which expire on various dates in 2017 through 2039. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.
9. Financial Instruments
Derivatives
The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations and certain commodity risks. In order to manage these risks, the Company has hedged portions of its forecasted sales and purchases to occur within the next twelve months that are denominated in non-functional currencies, with currency forward contracts designated as cash flow hedges. At June 30, 2017 and December 31, 2016, the Company had contracts with U.S. dollar equivalent notional amounts of $122,065 and $59,932, respectively, to exchange foreign currencies, principally the Chinese Yuan, Pound Sterling, Swedish Krona, Euro, Canadian Dollar and Swiss Franc. The Company believes it is probable that all forecasted cash flow transactions will occur.
In addition, the Company had outstanding contracts with a total notional amount of $43,482 and $56,189 as of June 30, 2017 and December 31, 2016, respectively, that are not designated as hedging instruments. These instruments are used to reduce the Company's exposure for operating receivables and payables that are denominated in non-functional currencies. Gains and losses on these contracts are recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.
The following table sets forth the fair values of derivative instruments held by the Company as of June 30, 2017, and December 31, 2016 and the balance sheet lines in which they are recorded:
|
| | | | | | | | | |
| Fair Value Asset (Liability) | | |
| June 30, 2017 | | December 31, 2016 | | Balance Sheet Caption |
Foreign currency forward | $ | 242 |
| | $ | 1,058 |
| | Prepaid / Other assets |
Foreign currency forward | (1,658 | ) | | (705 | ) | | Other accrued expenses |
For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in Accumulated other comprehensive loss as a separate component of the Condensed Consolidated Statement of Stockholders' Equity and is reclassified into Cost of goods and services in the Condensed Consolidated Statements of Earnings during the period in which the hedged transaction is recognized. The amount of gains or losses from hedging activity recorded in earnings is not significant, and the amount of unrealized gains and losses from cash flow hedges that are expected to be reclassified to earnings in the next twelve months is not significant; therefore, additional tabular disclosures are not presented. There are no amounts excluded from the assessment of hedge effectiveness and the Company's derivative instruments that are subject to credit risk contingent features were not significant.
The Company is exposed to credit loss in the event of nonperformance by counterparties to the financial instrument contracts held by the Company; however, nonperformance by these counterparties is considered unlikely as the Company’s policy is to contract with highly-rated, diversified counterparties.
The Company has designated the €600,000 and €300,000 of euro-denominated notes issued November 9, 2016 and December 4, 2013, respectively, as hedges of a portion of its net investment in euro-denominated operations. Changes in the value of the euro-denominated debt are recognized in foreign currency translation adjustments within Other comprehensive earnings (loss) of the Condensed Consolidated Statements of Comprehensive Earnings to offset changes in the value of the net investment in euro-denominated operations.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
Amounts recognized in Other comprehensive earnings (loss) for the gains (losses) on net investment hedges were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(Loss) gain on euro-denominated debt | $ | (35,318 | ) | | $ | 4,500 |
| | $ | (65,839 | ) | | $ | (1,665 | ) |
Tax benefit (expense) | 12,362 |
| | (1,575 | ) | | 23,044 |
| | 583 |
|
Net (loss) gain on net investment hedges, net of tax | $ | (22,956 | ) | | $ | 2,925 |
| | $ | (42,795 | ) | | $ | (1,082 | ) |
Fair Value Measurements
Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Level 2 | | Level 2 |
Assets: | | | |
Foreign currency cash flow hedges | $ | 242 |
| | $ | 1,058 |
|
Liabilities: | | | |
Foreign currency cash flow hedges | 1,658 |
| | 705 |
|
In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.
The estimated fair value of long-term debt, net at June 30, 2017, and December 31, 2016 was $3,273,628 and $3,534,553, respectively, compared to the carrying value of $3,276,310 and $3,207,777, respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the fair value hierarchy.
The carrying values of cash and cash equivalents, trade receivables, accounts payable and notes payable are reasonable estimates of their fair values as of June 30, 2017, and December 31, 2016 due to the short-term nature of these instruments.
10. Income Taxes
The effective tax rates for the three months ended June 30, 2017 and 2016 were 28.9% and 28.1%, respectively. The increase in the effective tax rate for the three months ended June 30, 2017 relative to the prior comparable period is principally due to an increase in tax expense from discrete items in 2017 compared to 2016.
The discrete items for the three months ended June 30, 2017 primarily resulted from the provision to return adjustments in foreign jurisdictions and the effect of the settlement of the 2013 IRS audit. The discrete items for the three months ended June 30, 2016 principally resulted from reassessment of the realizable benefits of certain state credits.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The effective tax rates for the six months ended June 30, 2017 and 2016 were 27.3% and 25.5%, respectively. The increase in the effective tax rate for the six months ended June 30, 2017 relative to the prior comparable period is primarily due to the benefit in the prior year from the revaluation of deferred tax balances as a result of a tax rate reduction in a non-U.S. jurisdiction, as well as the current year recognition of foreign adjustments to filed tax returns.
For the six months ended June 30, 2017, stock-based compensation excess tax benefits of $4,623 were reflected in the Condensed Consolidated Statement of Earnings as a component of the provision for income taxes as a result of adopting Accounting Standards Update ("ASU") 2016-09, Compensation Stock Compensation (Topic 718). See Note 18 — Recent Accounting Pronouncements regarding the adoption of the standard.
Dover and its subsidiaries file tax returns in the U.S., including various state and local returns and in other foreign jurisdictions. We believe adequate provision has been made for all income tax uncertainties. The Company is routinely audited by taxing authorities in its filing jurisdictions, and a number of these audits are currently underway. The Company believes that within the next twelve months uncertain tax positions may be resolved and statutes of limitations will expire, which could result in a decrease in the gross amount of unrecognized tax benefits of approximately zero to $27,899.
11. Equity Incentive Program
The Company typically grants equity awards annually at its regularly scheduled first quarter meeting of the Compensation Committee of the Board of Directors. During 2017, the Company issued stock-settled appreciation rights ("SARs") covering 1,028,116 shares, performance share awards of 57,958 and restricted stock units ("RSUs") of 174,203.
The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.
The assumptions used in determining the fair value of the SARs awarded during the respective periods were as follows:
|
| | | | | | | |
| SARs |
| 2017 | | 2016 |
Risk-free interest rate | 1.80 | % | | 1.05 | % |
Dividend yield | 2.27 | % | | 3.09 | % |
Expected life (years) | 4.6 |
| | 4.6 |
|
Volatility | 21.90 | % | | 26.17 | % |
| | | |
Grant price | $ | 79.28 |
| | $ | 57.25 |
|
Fair value per share at date of grant | $ | 12.63 |
| | $ | 9.25 |
|
The performance share awards granted in 2017 and 2016 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in Selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings in the period of change.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The fair value and average attainment used in determining stock-based compensation cost for the performance shares issued in 2017 and 2016 is as follows for the six months ended June 30, 2017:
|
| | | | | | | |
| Performance shares |
| 2017 | | 2016 |
Fair value per share at date of grant | $ | 79.28 |
| | $ | 57.25 |
|
Average attainment rate reflected in expense | 167.04 | % | | 20.96 | % |
The Company also has granted RSUs, and the fair value of these awards was determined using Dover's closing stock price on the date of grant.
Stock-based compensation is reported within Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Pre-tax stock-based compensation expense | $ | 4,664 |
| | $ | 2,973 |
| | $ | 17,469 |
| | $ | 14,360 |
|
Tax benefit | (1,633 | ) | | (1,030 | ) | | (6,187 | ) | | (5,080 | ) |
Total stock-based compensation expense, net of tax | $ | 3,031 |
| | $ | 1,943 |
| | $ | 11,282 |
| | $ | 9,280 |
|
On January 1, 2017, the Company adopted ASU 2016-09, Compensation: Stock Compensation (Topic 718). See Note 18 — Recent Accounting Pronouncements for further details.
12. Commitments and Contingent Liabilities
Litigation
A few of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under federal and state statutes that provide for the allocation of such costs among "potentially responsible parties." In each instance, the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other "potentially responsible parties" involved and is anticipated to be immaterial to the Company. In addition, a few of the Company’s subsidiaries are involved in ongoing remedial activities at certain current and former plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established. At June 30, 2017, and December 31, 2016, the Company has reserves totaling $29,840 and $29,959, respectively, for environmental and other matters, including private party claims for exposure to hazardous substances that are probable and estimable.
The Company and certain of its subsidiaries are also parties to a number of other legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of the Company’s products, patent infringement, employment matters, and commercial disputes. Management and legal counsel, at least quarterly, review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and currently accrued to-date, and the availability and extent of insurance coverage. The Company has reserves for legal matters that are probable and estimable and not otherwise covered by insurance, and at June 30, 2017 and December 31, 2016, these reserves were not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
Warranty Accruals
Estimated warranty program claims are provided for at the time of sale of the Company's products. Amounts provided for are based on historical costs and adjusted for new claims. The changes in the carrying amount of product warranties through June 30, 2017 and 2016 were as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Beginning Balance, December 31 of the Prior Year | $ | 84,997 |
| | $ | 44,466 |
|
Provision for warranties | 32,967 |
| | 29,148 |
|
Settlements made | (38,527 | ) | | (26,649 | ) |
Other adjustments, including acquisitions and currency translation | 145 |
| | 3,011 |
|
Ending Balance, June 30 | $ | 79,582 |
| | $ | 49,976 |
|
During the fourth quarter of 2016, the Company determined that there was a quality issue with a product component part in the Fluids segment and voluntarily reported this issue to the U.S. Consumer Product Safety Commission (“CPSC”). During the first quarter of 2017, the Company announced a voluntary recall of the product in collaboration with the CPSC. Based on information that was available during the fourth quarter 2016, at December 31, 2016, the Company recorded a warranty accrual of $23,150 in Other liabilities in the Consolidated Balance Sheet to cover the estimated costs of the recall. At June 30, 2017, the warranty accrual is included in Other acrrued expenses and was reduced to $16,230 reflecting payments made against the accrual.
13. Employee Benefit Plans
Retirement Plans
The Company offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. In addition, the Company sponsors qualified defined benefit pension plans covering certain employees of the Company and its subsidiaries. The plans’ benefits are generally based on years of service and employee compensation. The Company also provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law.
The following tables set forth the components of the Company’s net periodic expense relating to retirement benefit plans:
Qualified Defined Benefits
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| U.S. Plan | | Non-U.S. Plans | | U.S. Plan | | Non-U.S. Plans |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 3,021 |
| | $ | 3,479 |
| | $ | 1,343 |
| | $ | 1,405 |
| | $ | 6,042 |
| | $ | 6,957 |
| | $ | 2,660 |
| | $ | 2,778 |
|
Interest cost | 5,430 |
| | 5,761 |
| | 1,285 |
| | 1,394 |
| | 10,859 |
| | 11,523 |
| | 2,549 |
| | 2,769 |
|
Expected return on plan assets | (9,953 | ) | | (9,699 | ) | | (1,833 | ) | | (1,974 | ) | | (19,906 | ) | | (19,397 | ) | | (3,637 | ) | | (3,922 | ) |
Amortization: | | | | | | | | | | | | | | | |
Prior service cost (credit) | 106 |
| | 183 |
| | (112 | ) | | (100 | ) | | 213 |
| | 366 |
| | (222 | ) | | (199 | ) |
Recognized actuarial loss | 1,395 |
| | 1,610 |
| | 864 |
| | 675 |
| | 2,791 |
| | 3,219 |
| | 1,705 |
| | 1,340 |
|
Transition obligation | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 2 |
| | 2 |
|
Net periodic expense | $ | (1 | ) | | $ | 1,334 |
| | $ | 1,548 |
| | $ | 1,401 |
| | $ | (1 | ) | | $ | 2,668 |
| | $ | 3,057 |
| | $ | 2,768 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
Non-Qualified Supplemental Benefits
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 618 |
| | $ | 739 |
| | $ | 1,236 |
| | $ | 1,479 |
|
Interest cost | 1,019 |
| | 1,317 |
| | 2,038 |
| | 2,634 |
|
Amortization: | | | | | | | |
Prior service cost | 1,103 |
| | 1,566 |
| | 2,205 |
| | 3,133 |
|
Recognized actuarial gain | (298 | ) | | (140 | ) | | (596 | ) | | (280 | ) |
Net periodic expense | $ | 2,442 |
| | $ | 3,482 |
| | $ | 4,883 |
| | $ | 6,966 |
|
Post-Retirement Benefit Plans
The Company also maintains post-retirement benefit plans, although these plans are closed to new entrants. The supplemental and post-retirement benefit plans are supported by the general assets of the Company. The following table sets forth the components of the Company’s net periodic expense relating to its post-retirement benefit plans:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 9 |
| | $ | 13 |
| | $ | 17 |
| | $ | 26 |
|
Interest cost | 73 |
| | 104 |
| | 146 |
| | 209 |
|
Amortization: | | | | | | | |
Prior service cost (credit) | 2 |
| | (35 | ) | | 4 |
| | (71 | ) |
Recognized actuarial gain | (40 | ) | | (59 | ) | | (80 | ) | | (118 | ) |
Net periodic expense | $ | 44 |
| | $ | 23 |
| | $ | 87 |
| | $ | 46 |
|
The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $3,021 and $3,701 for the three months ended June 30, 2017 and 2016, respectively, and $6,022 and $7,392 for the six months ended June 30, 2017 and 2016, respectively.
Defined Contribution Retirement Plans
The Company also offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. The Company’s expense relating to defined contribution plans was $10,839 and $8,349 for the three months ended June 30, 2017 and 2016, respectively, and $22,197 and $18,157 for the six months ended June 30, 2017 and 2016.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
14. Other Comprehensive Earnings
The amounts recognized in other comprehensive earnings (loss) were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| June 30, 2017 | | June 30, 2016 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments | $ | 13,812 |
| | $ | 12,362 |
| | $ | 26,174 |
| | $ | (40,417 | ) | | $ | (1,575 | ) | | $ | (41,992 | ) |
Pension and other post-retirement benefit plans | 3,021 |
| | (966 | ) | | 2,055 |
| | 3,701 |
| | (1,245 | ) | | 2,456 |
|
Changes in fair value of cash flow hedges | (2,642 | ) | | 925 |
| | (1,717 | ) | | 78 |
| | (27 | ) | | 51 |
|
Other | (657 | ) | | 79 |
| | (578 | ) | | (507 | ) | | 59 |
| | (448 | ) |
Total other comprehensive earnings (loss) | $ | 13,534 |
| | $ | 12,400 |
| | $ | 25,934 |
| | $ | (37,145 | ) | | $ | (2,788 | ) | | $ | (39,933 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2017 | | June 30, 2016 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments | $ | 46,902 |
| | $ | 23,044 |
| | $ | 69,946 |
| | $ | (33,806 | ) | | $ | 583 |
| | $ | (33,223 | ) |
Pension and other post-retirement benefit plans | 6,022 |
| | (1,927 | ) | | 4,095 |
| | 7,392 |
| | (2,486 | ) | | 4,906 |
|
Changes in fair value of cash flow hedges | (2,855 | ) | | 999 |
| | (1,856 | ) | | (69 | ) | | 24 |
| | (45 | ) |
Other | (274 | ) | | 33 |
| | (241 | ) | | 1,584 |
| | (192 | ) | | 1,392 |
|
Total other comprehensive earnings (loss) | $ | 49,795 |
| | $ | 22,149 |
| | $ | 71,944 |
| | $ | (24,899 | ) | | $ | (2,071 | ) | | $ | (26,970 | ) |
Total comprehensive earnings were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
Other comprehensive earnings (loss) | 25,934 |
| | (39,933 | ) | | 71,944 |
| | (26,970 | ) |
Comprehensive earnings | $ | 189,992 |
| | $ | 78,357 |
| | $ | 408,249 |
| | $ | 190,676 |
|
Amounts reclassified from accumulated other comprehensive (loss) to earnings during the three and six months ended June 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 |
| 2016 |
Foreign currency translation: | | | | | | | |
Reclassification of foreign currency translation losses to earnings from sale of a subsidiary | $ | — |
| | $ | — |
| | $ | 3,875 |
| | $ | — |
|
Tax benefit | — |
| — |
| — |
| | — |
| | — |
|
Net of tax | $ | — |
| | $ | — |
| | $ | 3,875 |
| | $ | — |
|
Pension and other postretirement benefit plans: | | | | | | | |
Amortization of actuarial losses | $ | 1,921 |
| | $ | 2,087 |
| | $ | 3,820 |
| | $ | 4,163 |
|
Amortization of prior service costs | 1,100 |
| | 1,614 |
| | 2,202 |
| | 3,229 |
|
Total before tax | 3,021 |
| | 3,701 |
| | 6,022 |
| | 7,392 |
|
Tax benefit | (966 | ) | | (1,245 | ) | | (1,927 | ) | | (2,486 | ) |
Net of tax | $ | 2,055 |
| | $ | 2,456 |
| | $ | 4,095 |
| | $ | 4,906 |
|
Cash flow hedges: | | | | | | | |
Net losses (gains) reclassified into earnings | $ | 245 |
| | $ | 328 |
| | $ | (89 | ) | | $ | 256 |
|
Tax (expense) benefit | (86 | ) | | (115 | ) | | 31 |
| | (90 | ) |
Net of tax | $ | 159 |
| | $ | 213 |
| | $ | (58 | ) | | $ | 166 |
|
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The Company recognizes net periodic pension cost, which includes amortization of net actuarial losses and prior service costs, in both selling, general and administrative expenses and cost of goods and services, depending on the functional area of the underlying employees included in the plans.
Cash flow hedges consist mainly of foreign currency forward contracts. The Company recognizes the realized gains and losses on its cash flow hedges in the same line item as the hedged transaction, such as revenue, cost of goods and services, or selling, general and administrative expenses.
15. Segment Information
The Company categorizes its operating companies into four distinct reportable segments. Segment financial information and a reconciliation of segment results to consolidated results is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
Engineered Systems | $ | 655,430 |
| | $ | 592,432 |
| | $ | 1,263,065 |
| | $ | 1,169,427 |
|
Fluids | 553,259 |
| | 405,838 |
| | 1,078,454 |
| | 804,900 |
|
Refrigeration & Food Equipment | 426,304 |
| | 429,386 |
| | 783,138 |
| | 792,638 |
|
Energy | 359,168 |
| | 259,008 |
| | 683,256 |
| | 542,238 |
|
Intra-segment eliminations | (810 | ) | | (319 | ) | | (1,190 | ) | | (585 | ) |
Total consolidated revenue | $ | 1,993,351 |
| | $ | 1,686,345 |
| | $ | 3,806,723 |
| | $ | 3,308,618 |
|
Earnings: | | |
| | | | |
Segment earnings (loss): (1) | |
| | |
| | | | |
Engineered Systems | $ | 106,820 |
| | $ | 104,034 |
| | $ | 281,218 |
| | $ | 197,782 |
|
Fluids | 73,558 |
| | 54,033 |
| | 126,197 |
| | 100,080 |
|
Refrigeration & Food Equipment | 65,829 |
| | 63,230 |
| | 99,391 |
| | 101,391 |
|
Energy | 53,368 |
| | (75 | ) | | 95,059 |
| | 11,169 |
|
Total segment earnings | 299,575 |
| | 221,222 |
| | 601,865 |
| | 410,422 |
|
Corporate expense / other (2) | 34,190 |
| | 24,566 |
| | 70,679 |
| | 54,428 |
|
Interest expense | 36,932 |
| | 33,779 |
| | 73,341 |
| | 67,097 |
|
Interest income | (2,338 | ) | | (1,622 | ) | | (4,918 | ) | | (3,226 | ) |
Earnings before provision for income taxes | 230,791 |
| | 164,499 |
| | 462,763 |
| | 292,123 |
|
Provision for income taxes | 66,733 |
| | 46,209 |
| | 126,458 |
| | 74,477 |
|
Net earnings | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
| |
(1) | Segment earnings includes non-operating income and expense directly attributable to the segments. Non-operating income and expense includes gain on sale of businesses and other income, net. |
| |
(2) | Certain expenses are maintained at the corporate level and not allocated to the segments. These expenses include executive and functional compensation costs, non-service pension costs, non-operating insurance expenses, shared business services costs and various administrative expenses relating to the corporate headquarters. |
16. Share Repurchases
In January 2015, the Board of Directors approved a standing share repurchase authorization, whereby the Company may repurchase up to 15,000,000 shares of its common stock over the following three years. This plan replaced all previously authorized repurchase programs. During the six months ended June 30, 2017 and 2016, the Company repurchased no shares of common stock under the January 2015 authorization. As of June 30, 2017, there were 6,771,458 shares available for repurchase under the authorization.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
17. Earnings per Share
The following table sets forth a reconciliation of the information used in computing basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | $ | 164,058 |
| | $ | 118,290 |
| | $ | 336,305 |
| | $ | 217,646 |
|
Basic earnings per common share: | |
| | |
| | | | |
Net earnings | $ | 1.05 |
| | $ | 0.76 |
| | $ | 2.16 |
| | $ | 1.40 |
|
Weighted average shares outstanding | 155,703,000 |
| | 155,180,000 |
| | 155,622,000 |
| | 155,122,000 |
|
Diluted earnings per common share: | |
| | |
| | | | |
Net earnings | $ | 1.04 |
| | $ | 0.76 |
| | $ | 2.14 |
| | $ | 1.39 |
|
Weighted average shares outstanding | 157,513,000 |
| | 156,595,000 |
| | 157,457,000 |
| | 156,414,000 |
|
The following table is a reconciliation of the share amounts used in computing earnings per share:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Weighted average shares outstanding - Basic | 155,703,000 |
| | 155,180,000 |
| | 155,622,000 |
| | 155,122,000 |
|
Dilutive effect of assumed exercise of SARs and vesting of performance shares and RSUs | 1,810,000 |
| | 1,415,000 |
| | 1,835,000 |
| | 1,292,000 |
|
Weighted average shares outstanding - Diluted | 157,513,000 |
| | 156,595,000 |
| | 157,457,000 |
| | 156,414,000 |
|
Diluted earnings per share amounts are computed using the weighted average number of common shares outstanding and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of SARs and vesting of performance shares and RSUs, as determined using the treasury stock method.
The weighted average number of anti-dilutive potential common shares excluded from the calculation above were approximately 33,000 and 60,000 for the three months ended June 30, 2017 and 2016, respectively, and 20,000 and 65,000 for the six months ended June 30, 2017 and 2016, respectively.
18. Recent Accounting Pronouncements
Recently Issued Accounting Standards
The following standards, issued by the Financial Accounting Standards Board ("FASB"), will, or are expected to, result in a change in practice and/or have a financial impact to the Company’s Consolidated Financial Statements:
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes the income statement presentation of defined benefit and post-retirement benefit plan expense by requiring separation between operating expense (service cost component of net periodic benefit expense) and non-operating expense (all other components of net periodic benefit expense, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported outside of operating income. The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods for the Company on January 1, 2018, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. This guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating this guidance and the impact it will have on its Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. This guidance will be effective for the Company on January 1, 2018.
The Company commenced its assessment of ASU 2014-09 during the second half of 2015 and developed a project plan to guide the implementation. We made progress on this project plan including analyzing the ASU’s impact on the Company's contract portfolio, surveying the Company's businesses and discussing the various revenue streams, completing contract reviews, comparing its historical accounting policies and practices to the requirements of the new guidance and identifying potential differences from applying the requirements of the new guidance to its contracts. The Company has also made progress in drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance. The Company expects to adopt this new guidance using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating this guidance and the impact it will have on its Consolidated Financial Statements.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amended guidance simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. The Company early adopted this guidance on January 1, 2017 as its annual impairment test is performed after January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. The adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes within the Condensed Consolidated Statements of Earnings rather than paid-in capital of $4,623 for the six months ended June 30, 2017. Additionally, our Condensed Consolidated Statement of Cash Flows now present excess tax benefits as an operating activity, adjusted prospectively. Finally, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award. The Company adopted this guidance on January 1, 2017.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 340): Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance on January 1, 2017. The adoption of this ASU did not have a material impact to the Company's Consolidated Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to the section below entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of factors that could cause our actual results to differ from the forward-looking statements contained below and throughout this quarterly report.
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we refer to measures used by management to evaluate performance as well as liquidity, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). We believe these measures provide investors with important information that is useful in understanding our business results and trends. Explanations within this MD&A provide more details on the use and derivation of these measures.
OVERVIEW AND OUTLOOK
Dover is a diversified global manufacturer delivering innovative equipment and components, specialty systems, consumable supplies, software and digital solutions and support services through four operating segments: Engineered Systems, Fluids, Refrigeration & Food Equipment and Energy. The Company's entrepreneurial business model encourages, promotes and fosters deep customer engagement and collaboration, which has led to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation. Unless the context indicates otherwise, references herein to "Dover," "the Company," and words such as "we," "us," or "our" include Dover Corporation and its consolidated subsidiaries.
Dover's four segments are as follows:
| |
• | Our Engineered Systems segment is comprised of two platforms, Printing & Identification and Industrials, and is focused on the design, manufacture and service of critical equipment and components serving the fast-moving consumer goods, digital textile printing, vehicle service, environmental solutions and industrial end markets. |
| |
• | Our Fluids segment, serving the Fueling & Transport, Pumps and Hygienic & Pharma end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas and industrial markets. In the first quarter of 2017, we aligned our financial reporting around these key end markets to provide more detailed information after acquiring four companies in the retail fueling market in 2016. |
| |
• | Our Refrigeration & Food Equipment segment is a provider of innovative and energy efficient equipment and systems serving the commercial refrigeration and food equipment end markets. |
| |
• | Our Energy segment, serving the Drilling & Production, Bearings & Compression and Automation end markets, is a provider of customer-driven solutions and services for safe and efficient production and processing of fuels worldwide and has a strong presence in the bearings and compression components and automation markets. |
The following table shows the percentage of total revenue and segment earnings generated by each of our four segments for the three months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | |
| Revenue | | Segment Earnings |
| Three Months Ended June 30, | | Three Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Engineered Systems | 32.9 | % | | 35.1 | % | | 35.7 | % | | 47.0 | % |
Fluids | 27.7 | % | | 24.0 | % | | 24.5 | % | | 24.4 | % |
Refrigeration & Food Equipment | 21.4 | % | | 25.5 | % | | 22.0 | % | | 28.6 | % |
Energy | 18.0 | % | | 15.4 | % | | 17.8 | % | | — | % |
In the second quarter of 2017, revenue of $2.0 billion increased 18.2% from $1.7 billion, as compared to the second quarter of 2016. Results were driven by organic revenue growth of 10.0%, which was broad-based across our segments, and acquisition-related revenue growth of 11.7% primarily within our Fluids and Engineered Systems segments. This growth was partially offset by a revenue decline of 2.8%, due to disposed businesses, and an unfavorable impact from foreign currency translation of 0.7%.
The growth in organic revenue was led by our Energy segment, in which growth of 39.3% was driven by U.S rig count growth and increased well completion activity, as well as strong results in our Bearings & Compression end market. Engineered Systems segment organic revenue increased 5.2%, reflecting continued growth in our Printing & Identification platform, and broad-based
growth in our Industrial platform, particularly in our environmental solutions business. Organic growth in our Refrigeration & Food Equipment segment increased 5.1%, driven by strong activity in the retail refrigeration market. Fluids segment organic revenue increased 3.6%, principally driven by our businesses serving the retail fueling, industrial pump, and hygienic and pharma markets.
From a geographic perspective, the majority of our geographic markets grew organically. Our U.S., Europe and China activities all improved organically year over year.
During the first quarter of 2017, we completed the sale of Performance Motorsports International ("PMI") in our Engineered Systems segment, a manufacturer of pistons and other engine related components serving the motorsports and powersports markets. Total consideration was $147.3 million for the transaction, including cash proceeds of $118.7 million. We recognized a pre-tax gain on sale of $88.4 million (net of tax gain on sale of $61.7 million) and recorded a 25% equity method investment at fair value as well as a subordinated note receivable.
During the second quarter of 2017, we completed the acquisition of Caldera Graphics S.A.S. ("Caldera") for approximately $32.7 million, net of cash acquired and including contingent consideration. Caldera enhances our ability to serve the global digital textile printing market with their high-quality technical software designed for the digital printing industry. Caldera is included in the Printing & Identification platform within the Engineered Systems segment.
Due to our strong second quarter 2017 results and our increased confidence in the second half, supported by solid bookings and backlog, we have increased our full year expectations for revenue and earnings per share. We now expect full year revenue to increase approximately 12% to 14%. This forecast includes expected organic revenue growth of 5% to 7%. In total, full year diluted earnings per share is expected to be in the range of $4.23 to $4.33.
CONSOLIDATED RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands, except per share data) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenue | $ | 1,993,351 |
| | $ | 1,686,345 |
| | 18.2 | % | | $ | 3,806,723 |
| | $ | |