ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition for the three years ended December 31, 2019, 2018 and 2017. The MD&A should be read in conjunction with our Consolidated Financial Statements and Notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Form 10-K, particularly in Item 1A. "Risk Factors" and in the "Special Note Regarding Forward-Looking Statements" preceding Part I of this Form 10-K.
Throughout this 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 ("GAAP"). Please see "Non-GAAP Disclosures" at the end of this Item 7 for further detail on these financial measures. 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
Dover Corporation is a diversified global manufacturer and solutions provider delivering innovative equipment and components, consumable supplies, aftermarket parts, software and digital solutions and support services. Effective October 1, 2019, Dover transitioned from a three-segment to a five-segment structure as a result of a change to its management structure and operating model. Dover's five segments are structured around businesses with similar business models, go-to-market strategies and manufacturing practices. This new structure increases management efficiency and better aligns Dover’s operations with its strategic initiatives and capital allocation priorities, and provides greater transparency about our performance to external stakeholders. Dover's five operating and reportable segments are as follows: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment.
For the year ended December 31, 2019, consolidated revenue from continuing operations was $7.1 billion, an increase of $0.1 billion or 2.1%, as compared to the prior year. This increase included organic revenue growth of 3.8% and acquisition-related growth of 0.8%, partially offset by an unfavorable impact of 2.0% from foreign currency translation and a 0.5% impact from dispositions. Overall, customer pricing had a favorable impact of 1.0% on revenue for the year.
Within our Engineered Products segment, revenue increased $64.4 million, or 3.9%, from the prior year, reflecting organic growth of 5.4%, offset by an unfavorable impact from foreign currency translation of 1.5%. Organic revenue growth was driven by strong activity in the refuse truck and digital solutions product lines within our waste handling business, as well as solid revenue growth in our vehicle service business.
Our Fueling Solutions segment revenue increased $154.6 million, or 10.5% from prior year, reflecting organic growth of 10.5%, acquisition-related growth of 3.4%, partially offset by an unfavorable foreign currency impact of 3.0%, and a 0.4% impact from a disposition. Organic growth was principally driven by continued strong demand in the global retail fueling industry, particularly in the United States, Europe and Asia.
Our Imaging & Identification segment revenue decreased $25.4 million or 2.3%, from the prior year, reflecting organic growth of 1.2%, more than offset by an unfavorable foreign currency impact of 3.5%. The organic revenue growth was driven by increased equipment shipments and expanded service revenue in our marking and coding business, along with increased service revenue and increased printer and ink volumes in our digital printing business. The significant foreign currency impact was due to our broad international customer base, in particular in Asia and Europe.
Our Pumps & Process Solutions segment revenue increased $6.6 million or 0.5%, from the prior year, reflecting organic growth of 3.9%, acquisition related growth of 0.5%, partially offset by unfavorable impacts from disposition of 2.0% and foreign currency of 1.9%. Organic growth was broad-based across the segment and was driven by industrial, biopharma and thermal management markets, along with continued strong demand from our OEM customers for rotating equipment components, as well as pump and other equipment for plastics and polymer production.
Our Refrigeration & Food Equipment segment revenue decreased $56.5 million, or 3.9%, from the prior year, caused by an organic revenue decline of 2.7% and an unfavorable impact from foreign currency translation of 1.2%. The organic decline was driven primarily by reduced new food retail store construction activity with key U.S. retail refrigeration customers, reduced demand for heat exchanger products in Asia, and softer demand from national restaurant chain customers in our foodservice equipment business.
Gross profit was $2.6 billion for the year ended December 31, 2019, an increase of $61.4 million, or 2.4%, as compared to the prior year. The increase was primarily due to growth in sales volumes benefited by favorable pricing, product mix and strong volume gains, as well as the benefits from prior restructuring actions, partially offset by increased material costs due, in part, to U.S. Section 232 and 301 tariff exposure. Gross profit margin was 36.7% for the year ended December 31, 2019 compared to 36.6% for the prior year. For further discussion related to our consolidated and segment results, see "Consolidated Results of Operations" and "Segment Results of Operations," respectively, within MD&A.
Bookings decreased 0.4% over the prior year to $7.3 billion for the year ended December 31, 2019. Included in this result was a 1.3% increase in organic bookings, a 0.8% increase in acquisition-related bookings offset by a 2.1% unfavorable impact due to foreign exchange rates, and a 0.3% decline due to dispositions. Organic bookings increased 6.9% within our Fueling Solutions, 3.3% within our Pumps & Process Solutions and 2.3% within our Imaging & Identification segments, while bookings in our Engineered Products and Refrigeration & Food Equipment segments decreased 4.0% and 0.7% respectively. Overall, our book-to-bill increased from the prior year to 1.02. Backlog as of December 31, 2019 was $1.5 billion, up from $1.4 billion from the prior year. Backlog as of December 31, 2019 included $0.5 billion, $0.2 billion, $0.1 billion, $0.4 billion and $0.3 billion in the Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions and Refrigeration & Food Equipment segments, respectively.
From a geographic perspective, revenue for the U.S., our largest market, grew by 3.6% organically over the prior year, which was led by growth in our Engineered Products and Fueling Solutions segments. Asia and Europe also grew organically by 2.4 % and 6.5%, respectively, over the prior year.
During the year ended December 31, 2019, we executed several rightsizing programs to further optimize operations. Rightsizing charges included restructuring costs of $26.8 million and other costs of $5.3 million for the year ended December 31, 2019. Restructuring expense was comprised primarily of broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation, operational optimization and IT centralization. These restructuring charges were broad-based across all segments as well as corporate, with costs incurred of $3.2 million in Engineered Products, $4.9 million in Fueling Solutions, $6.4 million in Imaging & Identification, $5.7 million in Pumps & Process Solutions, $3.7 million in Refrigeration & Food Equipment and $3.0 million at Corporate. Other costs were comprised primarily of other charges related to the restructuring actions. We incurred other costs of $0.4 million in Pumps & Process Solutions, $2.4 million in Refrigeration & Food Equipment and $2.6 million at corporate. We expect to incur total rightsizing charges, comprised of $8 million of restructuring charges and $1 million of other costs, in 2020 for these initiatives.
During the year ended December 31, 2019, we made a total of three acquisitions totaling $216.4 million, net of cash acquired including contingent consideration. We acquired the assets of Belanger, Inc. ("Belanger"), a leading full-line car wash equipment manufacturer for $175 million, net of cash acquired. The acquisition of Belanger strengthens our position in the vehicle wash business within the Fueling Solutions segment. Additionally, we acquired the assets of All-Flow Pump Company, Limited business ("All-Flo"), a growing manufacturer of specialty pumps for $40 million. The All-Flo acquisition strengthens our position in the growing market for air-operated double-diaphragm pumps within the Pumps & Process Solutions segment. We also completed one immaterial acquisition. See Note 4 — Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for further details regarding the businesses acquired during the year.
Subsequently, on January 24, 2020, we acquired Sys-Tech Solutions, Inc. ("Systech"). Systech is a leading provider of software and solutions for product traceability, regulatory compliance and brand protections and will strengthen the portfolio of solutions offered by our Imaging & Identification segment to customers in pharmaceutical and consumer products industries. Also on January 24, 2020, we entered into a definitive agreement to acquire So. Cal. Soft-Pak, Incorporated ("Soft-Pak") Software Solutions. Soft-Pak is a leading specialized provider of integrated back office, route management and customer relationship management software solutions to the waste and recycling fleet industry and will further strengthen the digital offerings of our Environmental Solutions Group in the Engineered Products segment. The transaction is subject to
satisfaction of customary closing conditions and is expected to close in the first quarter of 2020. The combined purchase price for both acquisitions is approximately $210 million, subject to customary post-closing adjustments.
On March 29, 2019 we entered into a definitive agreement to sell Finder for total consideration of approximately $23.6 million net of estimated selling costs. Finder met the criteria to be classified as held for sale as of March 31, 2019 and based on the total consideration from the sale, net of selling costs, a loss on the assets held for sale of $46.9 million was recorded. The loss was comprised of an impairment on assets held for sale of $21.6 million and foreign currency translation losses reclassified from accumulated other comprehensive losses to current earnings of $25.3 million. Finder was subsequently sold on April 2, 2019, which generated total cash proceeds of $24.2 million.
On November 4, 2019, we issued €500 million of 0.750% euro-denominated notes due 2027 and $300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of $296.9 million, net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the $450 million 4.30% notes due 2021. The remainder of the proceeds will be used for general corporate purposes. The early extinguishment of debt required us to pay a make whole premium to the bondholders resulting in a loss of $23.5 million.
During the year ended December 31, 2019, we purchased 1.3 million shares of our common stock for a total cost of $143.3 million, or $106.64 per share. As of December 31, 2019, 8.4 million shares remain authorized for repurchase under our current share repurchase authorization. We also continued our 64 year history of increasing our annual dividend payments to shareholders and paid a total of $282.2 million in dividends to our shareholders.
CONSOLIDATED RESULTS OF OPERATIONS
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Years Ended December 31,
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% / Point Change
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(dollars in thousands, except per share figures)
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2019
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2018
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2017
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2019 vs. 2018
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2018 vs. 2017
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Revenue
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$
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7,136,397
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$
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6,992,118
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$
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6,820,886
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2.1
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%
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2.5
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%
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Cost of goods and services
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4,515,459
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4,432,562
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4,291,839
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1.9
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%
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3.3
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%
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Gross profit
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2,620,938
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2,559,556
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2,529,047
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2.4
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%
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1.2
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%
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Gross profit margin
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36.7
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%
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36.6
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%
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37.1
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%
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0.10
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(0.50)
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Selling, general and administrative expenses
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1,599,098
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1,716,444
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1,722,161
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(6.8)
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%
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(0.3)
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%
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Selling, general and administrative expenses as a percent of revenue
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22.4
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%
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24.5
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%
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25.2
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%
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(2.10)
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(0.70)
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Loss on assets held for sale
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46,946
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—
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—
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nm*
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nm*
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Operating Earnings
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974,894
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843,112
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806,886
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15.6
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%
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4.5
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%
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Interest expense
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125,818
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130,972
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144,948
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(3.9)
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%
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(9.6)
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%
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Interest income
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(4,526)
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(8,881)
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(8,491)
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(49.0)
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%
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4.6
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%
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Loss on extinguishment of debt
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23,543
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—
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—
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nm*
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nm*
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Other income, net
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(12,950)
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(4,357)
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(2,251)
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197.2
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%
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93.6
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%
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Gain on sale of businesses
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—
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|
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—
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(203,135)
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nm*
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nm*
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Earnings before provision for income taxes and discontinued operations
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843,009
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725,378
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875,815
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16.2
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%
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(17.2)
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%
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Provision for income taxes
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165,091
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|
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134,233
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129,152
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|
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23.0
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%
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|
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3.9
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%
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Effective tax rate
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19.6
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%
|
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18.5
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%
|
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14.7
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%
|
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1.1
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|
|
|
|
3.8
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|
|
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Earnings from continuing operations
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677,918
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|
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591,145
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|
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746,663
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|
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14.7
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%
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(20.8)
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%
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(Loss) earnings from discontinued operations, net
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—
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(20,878)
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65,002
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nm*
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nm*
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Earnings from continuing operations per common share - diluted
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$
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4.61
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|
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$
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3.89
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|
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$
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4.73
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18.5
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%
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(17.8)
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%
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(Loss) earnings from discontinued operations per common share -diluted
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$
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—
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$
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(0.14)
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|
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$
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0.41
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nm*
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nm*
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* nm: not meaningful
Revenue
For the year ended December 31, 2019, revenue increased $144.3 million, or 2.1% to $7.1 billion compared with 2018, reflecting organic growth of 3.8% led by our Fueling Solutions and Engineered Products segments, partially offset by our Refrigeration & Food Equipment segment. Revenue also increased due to acquisition-related growth of 0.8% from our Pumps & Process Solutions and Fueling Solutions segments, partially offset by an unfavorable impact from foreign currency translation of 2.0%, particularly in our Fueling Solutions and Imaging & Identification segments and a 0.5% impact from dispositions within our Pumps & Process Solutions and Fueling Solutions segments. Customer pricing favorably impacted revenue by approximately 1.0% in 2019.
For the year ended December 31, 2018, revenue increased $171.2 million, or 2.5% to $7.0 billion compared with 2017, reflecting organic growth of 3.7%, led by our Fueling Solutions and Engineered Products segments, partially offset by our Refrigeration & Food Equipment segment, acquisition-related growth of 0.5% from our Pumps & Process Solutions and Refrigeration & Food Equipment segments and a favorable impact from foreign currency translation of 0.8%. Revenue growth was partially offset by a 2.5% impact from dispositions within our Engineered Products segment. Customer pricing favorably impacted revenue by approximately 1.0% in 2018.
Gross Profit
For the year ended December 31, 2019, gross profit increased $61.4 million, or 2.4%, to $2.6 billion compared with 2018, primarily due to organic volume growth, pricing actions, and productivity initiatives including the benefits of rightsizing actions and cost reduction initiatives, as well as reduced rightsizing costs, partially offset by increased material costs, due, in part, to U.S. Section 232 and 301 tariff exposure. Gross profit margin increased 10 basis points as compared to the prior year.
For the year ended December 31, 2018, gross profit increased $30.5 million, or 1.2% to $2.6 billion compared with 2017, primarily due to growth in sales volumes and benefits of prior restructuring actions partially offset by the loss of gross profits due to divestitures. Gross profit margin decreased 50 basis points as compared to prior year due to unfavorable product mix and rising material costs in our Refrigeration & Food Equipment segment and the impact of inefficiencies due to facility consolidations principally in our Fueling Solutions segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2019, decreased $117.3 million, or 6.8% to $1.6 billion compared with 2018, primarily due to benefits from rightsizing actions started in 2018 and a decrease in restructuring costs of $23.7 million from $41.6 million in 2018 to $17.9 million in 2019. As a percentage of revenue, selling, general and administrative expenses decreased 210 basis points in 2019 to 22.4%, reflecting the leverage of costs on a higher revenue base and the decrease in expenses.
Selling, general and administrative expenses for the year ended December 31, 2018, decreased $5.7 million, or 0.3% to $1.7 billion compared with 2017 primarily due to benefits from prior restructuring actions and decreases from dispositions within our Engineered Products segment, offset by an increase in restructuring costs of $6.0 million from $35.6 million in 2017 to $41.6 million in 2018. As a percentage of revenue, selling, general and administrative expenses decreased 70 basis points in 2018 to 24.5%, reflecting the leverage of costs on a higher revenue base and the decrease in expenses.
Research and development costs, including qualifying engineering costs, are expensed when incurred and amounted to $141.0 million, $143.0 million and $130.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. These costs as a percent of revenue were 2.0%, 2.0% and 1.9% for the years December 31, 2019, 2018 and 2017, respectively.
Loss on assets held for sale
On March 29, 2019, we entered into a definitive agreement to sell Finder for total consideration of approximately $23.6 million net of estimated selling costs. As of March 31, 2019, Finder met the criteria to be classified as held for sale and based on the total consideration from the sale, net of selling costs, we recorded a loss on the assets held for sale of $46.9 million. The loss was comprised of an impairment on assets held for sale of $21.6 million and foreign currency translation losses reclassified from accumulated other comprehensive losses to current earnings of $25.3 million. We subsequently sold Finder on April 2, 2019, which generated total cash proceeds of $24.2 million.
Non-Operating Items
Interest Expense, net
For the year ended December 31, 2019, interest expense, net of interest income, decreased $0.8 million, or 0.7%, to $121.3 million compared with 2018 primarily due to the $350 million 5.45% 10-year notes that were paid in March 2018 that resulted in lower outstanding long-term debt and lower interest expense compared to 2018, partially offset by lower interest income.
For the year ended December 31, 2018, interest expense, net of interest income, decreased $14.4 million, or 10.5%, to $122.1 million compared with 2017 due to the $350 million that was paid in March 2018 that resulted in lower outstanding long-term debt and lower interest expense compared to 2017.
Loss on extinguishment of debt
On December 4, 2019, the Company extinguished the €300,000 2.125% notes due 2020 and the $450,000 4.30% notes due 2021. The Company was required to pay a make whole premium to the bondholders for the early extinguishment of debt, resulting in a loss of $23.5 million.
Other income, net
For the years ended December 31, 2019, 2018 and 2017, other income, net was $13.0 million, $4.4 million and $2.3 million, respectively. For the year ended December 31, 2019, other income increased compared to 2018 primarily due to increased earnings from our equity method investments and reduction of non-operating losses from our defined benefit and post-retirement benefit plans. For the year ended December 31, 2018, other income increased compared to 2017 primarily due to lower foreign exchange losses resulting from the re-measurement and settlement of foreign currency denominated balances.
Gain on sale of businesses
There were no dispositions in the year 2019 aside from the sale of Finder as described above, and no significant dispositions in 2018 aside from the spin-off of Apergy, whose results are presented as discontinued operations.
For the year ended December 31, 2017, gain on sale of businesses was $203.1 million. The gain was primarily due to the sales of PMI and the consumer and industrial winch business of Warn, both within the Engineered Products segment, in which we recognized gains on sale of $88.4 million and $116.9 million, respectively. Other immaterial dispositions completed during the year were recorded as a net loss of $2.2 million. The disposals in 2017 did not represent strategic shifts in operations and, therefore, did not qualify for presentation as discontinued operations.
Income Taxes
Our businesses have a global presence with 46.8%, 52.5% and 37.8% of our pre-tax earnings in 2019, 2018 and 2017, respectively, generated in foreign jurisdictions. Foreign earnings are generally subject to local country tax rates that differ from the 21.0% U.S. statutory tax rate. As a result of our non-U.S. business locations, our effective foreign tax rate is typically lower than the U.S. statutory tax rate.
Our effective tax rate was 19.6% for the year ended December 31, 2019, compared to 18.5% for the year ended December 31, 2018. The 2019 and 2018 rates were impacted by $26.6 million and $24.0 million, respectively, of favorable net discrete items primarily driven by the tax benefit of share award exercises.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted which reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $172.0 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. For the year ended December 31, 2017, we recorded provisional tax expense related to the deemed repatriation of $111.6 million payable over eight years.
On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, we recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in our consolidated financial statements for the year ended December 31, 2017. In accordance with SAB 118, we finalized the financial reporting impact of the Tax Reform Act in the fourth quarter of 2018. For the year ended December 31, 2018, we recorded a $4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Reform Act.
For the year ended December 31, 2017, our effective tax rate on continuing operations was 14.7%. The effective tax rate was impacted by favorable net discrete items totaling $51.7 million, principally related to the impact recorded for the U.S. Tax Reform Act.
We believe 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. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations and the expiration of various statutes of limitation, our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $15.3 million. We believe adequate provision has been made for all income tax uncertainties.
Earnings from Continuing Operations
For the year ended December 31, 2019, earnings from continuing operations increased $86.8 million, or 14.7%, to $677.9 million, or $4.61 per share, compared with earnings from continuing operations of $591.1 million, or $3.89 per share, for the year ended December 31, 2018. Earnings increased due to organic volume growth, pricing actions, and productivity initiatives including the benefits of restructuring actions and cost reduction initiatives. Additionally, after-tax rightsizing costs were lower by $32.9 million in 2019 compared to 2018. These benefits more than offset increases in material costs due, in part, to U.S. Section 232 and 301 tariff exposure, as well as a loss due to the after-tax extinguishment of debt of $18.4 million and a loss on assets held for sale of $46.9 million. Diluted earnings per share also improved due to the benefit of the prior and current year share repurchases.
For the year ended December 31, 2018, earnings from continuing operations decreased $155.5 million, or 20.8%, to $591.1 million, or $3.89 per share, compared with earnings from continuing operations of $746.7 million, or $4.73 per share, for the year ended December 31, 2017. Earnings decreased primarily because we did not record any gains from dispositions in 2018 compared to 2017 when we recorded net after-tax gains from dispositions of $172.6 million. In 2018, we recorded a net tax benefit primarily from the Tax Reform Act of $4.2 million, whereas in 2017, we recorded a net tax benefit of $54.9 million. Additionally, after-tax rightsizing costs were higher by $23.7 million in 2018 compared to 2017. Excluding these items, earnings from continuing operations increased in 2018 as a result of higher earnings due to increased sales volumes. Diluted earnings per share also improved due to the benefit of the share repurchase programs announced in November 2017.
Discontinued Operations
There were no discontinued operations for the year ended December 31, 2019.
The results of discontinued operations for December 31, 2018 and 2017 include the historical results of Apergy prior to its distribution on May 9, 2018. The years ended December 31, 2018 and 2017 included costs incurred by the Company to complete the spin-off of Apergy amounting to $46.4 million and $15.3 million, respectively, reflected in selling, general and administrative expenses in discontinued operations. Due to lump-sum payments made in 2018 for Apergy participants in the Dover U.S. Pension Plan, non-cash settlement costs of approximately $9.2 million were classified within discontinued operations.
Refer to Note 5 — Discontinued and Disposed Operations in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on disposed and discontinued operations.
Rightsizing Activities, which includes Restructuring and Other Costs
During the year ended December 31, 2019, rightsizing activities included restructuring charges of $26.8 million and other costs of $5.3 million. Restructuring expense was comprised primarily of broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation, operational optimization and IT centralization designed to increase operating margin, enhance operations and position the Company for sustained growth and investment. Other costs were comprised primarily of other charges related to the restructuring actions. These rightsizing charges were recorded in cost of goods and services and selling, general and administrative expenses in the Consolidated Statement of Earnings. We expect to incur total rightsizing charges, comprised of $8 million in restructuring charges and $1 million in other costs, in 2020 for these initiatives. Additional programs, beyond the scope of the announced programs may be implemented during 2020 with related restructuring charges. We recorded the following rightsizing costs for the year ended December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Engineered Products
|
|
Fueling Solutions
|
|
Imaging & Identification
|
|
Pumps & Process Solutions
|
|
Refrigeration & Food Equipment
|
|
Corporate
|
|
Total
|
Restructuring (GAAP)
|
$
|
3,155
|
|
|
$
|
4,943
|
|
|
$
|
6,426
|
|
|
$
|
5,666
|
|
|
$
|
3,671
|
|
|
$
|
2,961
|
|
|
$
|
26,822
|
|
Other costs, net
|
(5)
|
|
|
(58)
|
|
|
(76)
|
|
|
462
|
|
|
2,371
|
|
|
2,637
|
|
|
5,331
|
|
Rightsizing (non-GAAP)
|
$
|
3,150
|
|
|
$
|
4,885
|
|
|
$
|
6,350
|
|
|
$
|
6,128
|
|
|
$
|
6,042
|
|
|
$
|
5,598
|
|
|
$
|
32,153
|
|
During the year ended December 31, 2018, rightsizing activities included restructuring charges of $58.5 million and other costs of $14.3 million. Restructuring expense was comprised primarily of several programs in order to further optimize operations, including 1) alignment of our cost structure in preparation for the Apergy separation, 2) broad-based selling, general and administrative expense reduction initiatives and 3) initiation of footprint consolidation actions. Other costs were comprised primarily of other charges related to the restructuring actions. These rightsizing charges were recorded in cost of goods and services, selling, general and administrative expenses and other income, net in the Consolidated Statement of Earnings. We recorded the following rightsizing costs for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Engineered Products
|
|
Fueling Solutions
|
|
Imaging & Identification
|
|
Pumps & Process Solutions
|
|
Refrigeration & Food Equipment
|
|
Corporate
|
|
Total
|
Restructuring (GAAP)
|
$
|
7,158
|
|
|
$
|
15,478
|
|
|
$
|
13,882
|
|
|
$
|
10,266
|
|
|
$
|
3,475
|
|
|
$
|
8,244
|
|
|
$
|
58,503
|
|
Other costs, net
|
128
|
|
|
(146)
|
|
|
(1,237)
|
|
|
3,109
|
|
|
6,474
|
|
|
5,997
|
|
|
14,325
|
|
Rightsizing (non-GAAP)
|
$
|
7,286
|
|
|
$
|
15,332
|
|
|
$
|
12,645
|
|
|
$
|
13,375
|
|
|
$
|
9,949
|
|
|
$
|
14,241
|
|
|
$
|
72,828
|
|
During the year ended December 31, 2017, restructuring charges were $52.3 million. We commenced broad-based rightsizing actions in the fourth quarter of 2017 in connection with our planned spin-off of Apergy. A portion of our restructuring charges in 2017 were not classified as rightsizing. Rightsizing charges included restructuring charges of $38.9 million and other costs of $10.5 million. Restructuring initiatives in 2017 included headcount reductions, facility consolidations and product line exits. Other costs were comprised primarily of other charges related to the restructuring actions.
See Note 11 — Restructuring Activities in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details regarding our recent restructuring activities.
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our five operating and reportable segments (Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment). Each of these segments is comprised of various product and service offerings that serve multiple markets. See Note 19 — Segment Information in the Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation of segment revenue, earnings and margin to our consolidated revenue, earnings from continuing operations and margin. Segment EBITDA and segment EBITDA margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to segment earnings (EBIT) as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. For further information, see "Non-GAAP Disclosures" at the end of this Item 7.
Additionally, we believe the following operational metrics are useful to investors and others users of our financial information in assessing the performance of our segments:
•Bookings represent total orders received from customers in the current reporting period. This metric is an important measure of performance and an indicator of revenue order trends.
•Backlog represents an estimate of the total remaining bookings at a point in time for which performance obligations have not yet been satisfied. This metric is useful as it represents the aggregate amount we expect to recognize as revenue in the future.
•Book-to-bill is a ratio of the amount of bookings received from customers during a period divided by the amount of revenue recorded during that same period. This metric is a useful indicator of demand.
Engineered Products
Our Engineered Products segment is a provider of a wide range of products, software and services that have broad customer applications across a number of markets, including aftermarket vehicle service, solid waste handling, industrial automation, aerospace and defense, industrial winch and hoist, and fluid dispensing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
(dollars in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
Revenue
|
|
$
|
1,697,557
|
|
|
$
|
1,633,147
|
|
|
$
|
1,626,856
|
|
|
3.9
|
%
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (EBIT) (1)
|
|
$
|
291,848
|
|
|
$
|
252,368
|
|
|
$
|
437,078
|
|
|
15.6
|
%
|
|
(42.3)
|
%
|
Depreciation and amortization
|
|
41,032
|
|
|
44,995
|
|
|
48,271
|
|
|
(8.8)
|
%
|
|
(6.8)
|
%
|
Segment EBITDA (1)
|
|
$
|
332,880
|
|
|
$
|
297,363
|
|
|
$
|
485,349
|
|
|
11.9
|
%
|
|
(38.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin (1)
|
|
17.2
|
%
|
|
15.5
|
%
|
|
26.9
|
%
|
|
|
|
|
Segment EBITDA margin (1)
|
|
19.6
|
%
|
|
18.2
|
%
|
|
29.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measures:
|
|
|
|
|
|
|
|
|
|
|
Bookings
|
|
$
|
1,708,321
|
|
|
$
|
1,803,555
|
|
|
$
|
1,677,319
|
|
|
(5.3)
|
%
|
|
7.5
|
%
|
Backlog
|
|
$
|
452,142
|
|
|
$
|
442,519
|
|
|
$
|
333,953
|
|
|
2.2
|
%
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components of revenue growth:
|
|
|
|
|
|
|
|
|
|
|
Organic growth
|
|
|
|
|
|
|
|
5.4
|
%
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions
|
|
|
|
|
|
|
|
—
|
%
|
|
(7.5)
|
%
|
Foreign currency translation
|
|
|
|
|
|
|
|
(1.5)
|
%
|
|
1.3
|
%
|
Total revenue growth
|
|
|
|
|
|
|
|
3.9
|
%
|
|
0.4
|
%
|
(1) Segment earnings (EBIT) and segment EBITDA for 2017 includes a gain of $205.3 million from the sales of PMI and Warn.
2019 Versus 2018
Engineered Products segment revenue for the year ended December 31, 2019 increased $64.4 million, or 3.9% compared to the prior year, comprised of broad-based organic growth of 5.4%, partially offset by a 1.5% unfavorable impact from foreign currency translation. Organic revenue growth was driven by strong activity in the refuse truck and digital solutions product lines within our waste handling business, as well as solid revenue growth in our vehicle service business. Customer pricing favorably impacted revenue by approximately 1.9% in 2019.
Engineered Products segment earnings for the year ended December 31, 2019 increased $39.5 million, or 15.6%, compared to the prior year. This increase was primarily driven by solid conversion on organic volume growth, pricing actions, and productivity initiatives, including the benefits of rightsizing actions and cost reduction initiatives, as well as a reduction in rightsizing costs. These benefits more than offset increases in material costs driven by U.S. Section 232 tariffs, most notably commodity cost increases impacting steel, and Section 301 tariffs, along with unfavorable foreign currency translation. Segment margin increased from 15.5% to 17.2% as compared to the prior year.
Bookings for the year ended December 31, 2019 decreased 5.3% compared to the prior year, reflecting an organic decline of 4.0% and an unfavorable impact from foreign currency translation of 1.3%. The decrease was primarily due to the timing of orders in our waste handling and vehicle services businesses. Segment book-to-bill was 1.01.
2018 Versus 2017
Engineered Products segment revenue for the year ended December 31, 2018 increased $6.3 million, or 0.4%, compared to the prior year, comprised of broad-based organic growth of 6.6% with particular strength in our waste handling, industrial winch, and aerospace and defense businesses and a favorable impact from foreign currency translation of 1.3%. This increase was partially offset by a 7.5% decrease from the dispositions of PMI in the first quarter of 2017 and the consumer and industrial winch business of Warn in the fourth quarter of 2017. Customer pricing favorably impacted revenue by approximately 1.9% in 2018.
Engineered Products segment earnings for the year ended December 31, 2018 decreased $184.7 million, or 42.3%, compared to the prior year. The decline in earnings was impacted by gains of $205.3 million recognized in 2017 from the sales of PMI and Warn, the lost earnings from those divested businesses of $25.6 million, and incremental rightsizing costs in 2018. This was partially offset by disposition costs in 2017 of $5.2 million, solid conversion on organic volume growth, favorable pricing, and productivity initiatives, including the benefits of prior year and current year restructuring initiatives. Partially offsetting this favorable operational performance were increases in material costs, primarily driven by U.S. Section 232 tariffs, most notably commodity cost increases impacting steel, and Section 301 tariffs. Segment margin decreased from 26.9% to 15.5% as compared to the prior year primarily due to the gain from the sales of PMI and Warn, lost earnings and disposition costs from 2017 divested businesses and incremental rightsizing costs.
Fueling Solutions
Our Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
(dollars in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
Revenue
|
|
$
|
1,620,177
|
|
|
$
|
1,465,590
|
|
|
$
|
1,338,062
|
|
|
10.5
|
%
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (EBIT)
|
|
$
|
231,873
|
|
|
$
|
152,255
|
|
|
$
|
159,180
|
|
|
52.3
|
%
|
|
(4.4)
|
%
|
Depreciation and amortization
|
|
75,045
|
|
|
68,463
|
|
|
67,835
|
|
|
9.6
|
%
|
|
0.9
|
%
|
Segment EBITDA
|
|
$
|
306,918
|
|
|
$
|
220,718
|
|
|
$
|
227,015
|
|
|
39.1
|
%
|
|
(2.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
|
14.3
|
%
|
|
10.4
|
%
|
|
11.9
|
%
|
|
|
|
|
Segment EBITDA margin
|
|
18.9
|
%
|
|
15.1
|
%
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measures:
|
|
|
|
|
|
|
|
|
|
|
Bookings
|
|
1,613,764
|
|
|
1,513,019
|
|
|
1,376,714
|
|
|
6.7
|
%
|
|
9.9
|
%
|
Backlog
|
|
205,842
|
|
|
208,574
|
|
|
187,046
|
|
|
(1.3)
|
%
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components of revenue growth:
|
|
|
|
|
|
|
|
|
|
|
Organic growth
|
|
|
|
|
|
|
|
10.5
|
%
|
|
9.9
|
%
|
Acquisitions
|
|
|
|
|
|
|
|
3.4
|
%
|
|
—
|
%
|
Dispositions
|
|
|
|
|
|
|
|
(0.4)
|
%
|
|
—
|
%
|
Foreign currency translation
|
|
|
|
|
|
|
|
(3.0)
|
%
|
|
(0.4)
|
%
|
Total revenue growth
|
|
|
|
|
|
|
|
10.5
|
%
|
|
9.5
|
%
|
2019 Versus 2018
Fueling Solutions segment revenue for the year ended December 31, 2019 increased $154.6 million, or 10.5%, compared to the prior year, attributable to organic growth of 10.5% and acquisition-related growth of 3.4%, partially offset by an unfavorable foreign currency translation impact of 3.0% and a 0.4% decrease from a disposition. The organic growth was principally driven by continued strong demand in the global retail fueling industry, particularly in the United States, Europe and Asia. Growth was also driven by the acquisition of Belanger. Customer pricing favorably impacted revenue by approximately 1.0% in 2019.
Fueling Solutions segment earnings for the year ended December 31, 2019 increased $79.6 million, or 52.3%, compared to the prior year. The increase was driven by volume leverage, pricing initiatives, productivity actions, acquisitions, and benefits of selling, general and administrative cost reductions realized, as well as decreased rightsizing costs. This growth was partially offset by increased material costs due, in part, to U.S. Section 232 and 301 tariff exposure. Segment margin increased 390 basis points compared to the prior year.
Bookings for the year ended December 31, 2019 increased 6.7% compared to the prior year, reflecting organic growth of 6.9% and acquisition-related growth of 3.2%, partially offset by a unfavorable impact from foreign currency translation of 3.1%, and a disposition related decline of 0.3%. Book to bill was 1.00.
2018 Versus 2017
Fueling Solutions segment revenue for the year ended December 31, 2018 increased $127.5 million, or 9.5%, compared to the prior year, attributable to organic growth of 9.9% and an unfavorable foreign currency translation impact of 0.4%. The organic growth was principally driven by continued strength in retail fueling, especially in the Asia Pacific region. Transport revenue improved over the prior year and the rail business experienced strong growth, in part, due to softer volumes experienced in last year’s second half and the continued rebound of aftermarket volumes. Customer pricing favorably impacted revenue by approximately 0.5% in 2018.
Fueling Solutions segment earnings for the year ended December 31, 2018 decreased $6.9 million, or 4.4%, compared to the prior year, primarily driven by increased material costs due, in part, to U.S. Section 232 and 301 tariff exposure, the negative productivity impacts of footprint consolidation and supply chain disruptions and increased rightsizing costs. Segment margin decreased 150 basis points primarily due to cost impacts driven by footprint consolidations and temporary supply chain disruptions impacting production.
Imaging & Identification
Our Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
(dollars in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
Revenue
|
|
$
|
1,084,471
|
|
|
$
|
1,109,843
|
|
|
$
|
1,041,188
|
|
|
(2.3)
|
%
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (EBIT)
|
|
$
|
229,484
|
|
|
$
|
198,902
|
|
|
$
|
167,404
|
|
|
15.4
|
%
|
|
18.8
|
%
|
Depreciation and amortization
|
|
30,530
|
|
|
30,882
|
|
|
37,176
|
|
|
(1.1)
|
%
|
|
(16.9)
|
%
|
Segment EBITDA
|
|
$
|
260,014
|
|
|
$
|
229,784
|
|
|
$
|
204,580
|
|
|
13.2
|
%
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
|
21.2
|
%
|
|
17.9
|
%
|
|
16.1
|
%
|
|
|
|
|
Segment EBITDA margin
|
|
24.0
|
%
|
|
20.7
|
%
|
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measures:
|
|
|
|
|
|
|
|
|
|
|
Bookings
|
|
$
|
1,092,915
|
|
|
$
|
1,106,303
|
|
|
$
|
1,061,260
|
|
|
(1.2)
|
%
|
|
4.2
|
%
|
Backlog
|
|
$
|
125,775
|
|
|
$
|
118,057
|
|
|
$
|
125,378
|
|
|
6.5
|
%
|
|
(5.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components of revenue growth:
|
|
|
|
|
|
|
|
|
|
|
Organic growth
|
|
|
|
|
|
|
|
1.2
|
%
|
|
4.6
|
%
|
Acquisitions
|
|
|
|
|
|
|
|
—
|
%
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
(3.5)
|
%
|
|
1.7
|
%
|
Total revenue growth
|
|
|
|
|
|
|
|
(2.3)
|
%
|
|
6.6
|
%
|
2019 Versus 2018
Imaging & Identification segment revenue for the year ended December 31, 2019 decreased $25.4 million, or 2.3% compared to the prior year, comprised of organic growth of 1.2%, more than offset by an unfavorable impact from foreign currency translation of 3.5%. The organic revenue growth was driven by increased equipment shipments and expanded service revenue in our marking and coding business, along with increased service revenue and increased printer and ink volumes in our digital printing business. The significant foreign currency impact was due to our broad international customer base, in particular in Asia and Europe. Customer pricing favorably impacted revenue by approximately 1.0% in 2019.
Imaging & Identification segment earnings for the year ended December 31, 2019 increased $30.6 million, or 15.4%, compared to the prior year. This increase was primarily driven by productivity initiatives, including the benefits of restructuring actions, favorable pricing, and conversion on revenue growth, as well as reduced rightsizing costs. As a result, segment margin increased from 17.9% to 21.2% as compared to the prior year.
Segment bookings for the year ended December 31, 2019 decreased 1.2% compared to the prior year, reflecting organic growth of 2.3%, more than offset by a unfavorable impact from foreign currency translation of 3.5%. Segment book-to-bill was 1.01.
2018 Versus 2017
Imaging & Identification segment revenue for the year ended December 31, 2018 increased $68.7 million, or 6.6%, compared to the prior year, comprised of organic growth of 4.6%, led by strong activity in our digital printing businesses,
complemented by growth in our marking and coding businesses, acquisition-related growth of 0.3% and a favorable impact from foreign currency translation of 1.7%. Customer pricing favorably impacted revenue by approximately 0.5% in 2018.
Imaging & Identification segment earnings for the year ended December 31, 2018 increased $31.5 million, or 18.8%, compared to the prior year. This increase was primarily driven by solid conversion on organic volume growth, favorable pricing and productivity initiatives, including the benefits of restructuring actions, as well as the net benefit of an earn-out reversal recorded in the second quarter of 2018. Partially offsetting the favorable operational performance were incremental rightsizing costs in 2018 as well as increases in material costs, primarily driven by U.S. Section 301 tariffs. Segment margin increased from 16.1% to 17.9% as compared to the prior year.
Pumps & Process Solutions
Our Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
(dollars in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
Revenue
|
|
$
|
1,338,528
|
|
|
$
|
1,331,893
|
|
|
$
|
1,217,235
|
|
|
0.5
|
%
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (EBIT) (1)
|
|
$
|
240,081
|
|
|
$
|
237,549
|
|
|
$
|
209,451
|
|
|
1.1
|
%
|
|
13.4
|
%
|
Depreciation and amortization
|
|
67,584
|
|
|
71,982
|
|
|
67,986
|
|
|
(6.1)
|
%
|
|
5.9
|
%
|
Segment EBITDA (1)
|
|
$
|
307,665
|
|
|
$
|
309,531
|
|
|
$
|
277,437
|
|
|
(0.6)
|
%
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin (1)
|
|
17.9
|
%
|
|
17.8
|
%
|
|
17.2
|
%
|
|
|
|
|
Segment EBITDA margin (1)
|
|
23.0
|
%
|
|
23.2
|
%
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measures:
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|
|
|
|
|
|
|
|
|
|
Bookings
|
|
1,393,830
|
|
|
1,386,875
|
|
|
1,236,376
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|
|
0.5
|
%
|
|
12.2
|
%
|
Backlog
|
|
353,073
|
|
|
315,230
|
|
|
272,704
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|
|
12.0
|
%
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components of revenue growth:
|
|
|
|
|
|
|
|
|
|
|
Organic growth
|
|
|
|
|
|
|
|
3.9
|
%
|
|
7.4
|
%
|
Acquisitions
|
|
|
|
|
|
|
|
0.5
|
%
|
|
1.4
|
%
|
Dispositions
|
|
|
|
|
|
|
|
(2.0)
|
%
|
|
(0.4)
|
%
|
Foreign currency translation
|
|
|
|
|
|
|
|
(1.9)
|
%
|
|
1.0
|
%
|
Total revenue growth
|
|
|
|
|
|
|
|
0.5
|
%
|
|
9.4
|
%
|
(1) Segment earnings (EBIT) and segment EBITDA for 2019 include a $46,946 loss on assets held for sale for Finder.
2019 Versus 2018
Pumps & Process Solutions segment revenue for the year ended December 31, 2019 increased $6.6 million, or 0.5%, compared to the prior year, attributable to organic growth of 3.9% and acquisition-related growth of 0.5%. This increase was partially offset by an unfavorable foreign currency translation impact of 1.9% and a 2.0% decrease from a disposition. The organic growth was principally driven by biopharma and thermal management markets, along with strong continued demand from our OEM customers for rotating and reciprocating machinery components. Customer pricing favorably impacted revenue by approximately 1.4% in 2019.
Pumps & Process Solutions segment earnings for the year ended December 31, 2019 increased $2.5 million, or 1.1%, compared to the prior year. Segment earnings includes a loss on assets held for sale for Finder in the first quarter of 2019 of $46.9 million. Segment earnings increased significantly excluding the loss on sale of Finder driven by volume leverage, pricing initiatives, and productivity actions, as well as reduced rightsizing costs. These benefits were partially offset by increased material costs due, in part, to U.S. Section 232 and 301 tariff exposure, inflation costs, and unfavorable product and regional mix. Segment margin increased to 17.9% from 17.8% in the prior year, an increase of 10 basis points.
.
Bookings for the year ended December 31, 2019 increased 0.5% compared to the prior year, reflecting organic growth of 3.3% and acquisition-related growth of 0.5%, offset by a unfavorable impact from foreign currency translation of 1.9% and
disposition related decline of 1.4%. Ending backlog was 12.0% higher than prior year, driven by growth in polymer processing, rotating and reciprocating machinery, and connection solutions businesses. Book to bill was 1.04.
2018 Versus 2017
Pumps & Process Solutions segment revenue for the year ended December 31, 2018 increased $114.7 million, or 9.4%, compared to the prior year, attributable to organic growth of 7.4%, acquisition-related growth of 1.4% and a favorable foreign currency translation impact of 1.0%. This increase was partially offset by a 0.4% decrease from dispositions. The organic growth was principally driven by industrial pump activity, strength in our Middle East market, solid biopharma and medical markets, continued infrastructure spending by our OEM customers, and polymer demand increase. Additionally, the revenue increase was driven by the acquisition of Ettlinger Group ("Ettlinger"). Customer pricing favorably impacted revenue by approximately 1.0% in 2018.
Pumps & Process Solutions segment earnings for the year ended December 31, 2018 increased $28.1 million, or 13.4%, compared to the prior year, primarily driven by increased volume and productivity gains. This growth was partially offset by increased material costs due, in part, to U.S. Section 232 and 301 tariff exposure and increased rightsizing costs. Segment margin increased 60 basis points for the year ended December 31, 2018 compared to the prior year.
Refrigeration & Food Equipment
Our Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
(dollars in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
Revenue
|
|
$
|
1,396,617
|
|
|
$
|
1,453,093
|
|
|
$
|
1,599,105
|
|
|
(3.9)
|
%
|
|
(9.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (EBIT)
|
|
$
|
118,832
|
|
|
$
|
136,119
|
|
|
$
|
193,822
|
|
|
(12.7)
|
%
|
|
(29.8)
|
%
|
Depreciation and amortization
|
|
51,360
|
|
|
60,477
|
|
|
57,207
|
|
|
(15.1)
|
%
|
|
5.7
|
%
|
Segment EBITDA
|
|
$
|
170,192
|
|
|
$
|
196,596
|
|
|
$
|
251,029
|
|
|
(13.4)
|
%
|
|
(21.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
|
8.5
|
%
|
|
9.4
|
%
|
|
12.1
|
%
|
|
|
|
|
Segment EBITDA margin
|
|
12.2
|
%
|
|
13.5
|
%
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measures:
|
|
|
|
|
|
|
|
|
|
|
Bookings
|
|
1,446,755
|
|
|
1,474,717
|
|
|
1,582,606
|
|
|
(1.9)
|
%
|
|
(6.8)
|
%
|
Backlog
|
|
320,577
|
|
|
268,991
|
|
|
244,972
|
|
|
19.2
|
%
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components of revenue decline:
|
|
|
|
|
|
|
|
|
|
|
Organic (decline) growth
|
|
|
|
|
|
|
|
(2.7)
|
%
|
|
(7.9)
|
%
|
Acquisitions
|
|
|
|
|
|
|
|
—
|
%
|
|
0.7
|
%
|
Dispositions
|
|
|
|
|
|
|
|
—
|
%
|
|
(2.6)
|
%
|
Foreign currency translation
|
|
|
|
|
|
|
|
(1.2)
|
%
|
|
0.7
|
%
|
Total revenue decline
|
|
|
|
|
|
|
|
(3.9)
|
%
|
|
(9.1)
|
%
|
2019 Versus 2018
Refrigeration & Food Equipment segment revenue for the year ended December 31, 2019 decreased $56.5 million, or 3.9%, compared to the prior year, reflecting an organic revenue decline of 2.7% and an unfavorable impact from foreign currency translation of 1.2%. The organic revenue decrease for the year ended December 31, 2019 was driven principally by reduced new food retail store construction activity with key U.S. Retail Refrigeration customers, reduced demand for heat exchanger products in Asia, and softer demand from national restaurant chain customers in our foodservice equipment business. These reductions were partially offset by increased project activity for can-shaping equipment and strong growth in the core door case product line within food retail industry which primarily serves store remodel applications. Customer pricing minimally impacted revenue in 2019.
Refrigeration & Food Equipment segment earnings for the year ended December 31, 2019 decreased $17.3 million, or 12.7%, compared to the prior year. Segment margin decreased to 8.5% from 9.4% in the prior year due to reduced volumes, unfavorable business mix in retail refrigeration, volume ramp costs for our door case product line, and costs incurred as a result of plant consolidations at our foodservice equipment business. These reductions were partially offset by improved productivity and benefits from prior year rightsizing actions, as well as reduced rightsizing costs.
Bookings for the year ended December 31, 2019 decreased 1.9% compared to the prior year, primarily driven by reduced demand in our U.S. retail refrigeration and foodservice equipment businesses, partially offset by increased market demand for aluminum can-shaping equipment driven by beverage companies shifting from plastic to aluminum containers. Bookings decreased 0.7% organically and decreased 1.2% due to foreign currency translation. Ending backlog was 19.2% higher than
prior year, driven by fourth quarter bookings growth in our retail refrigeration and can-shaping equipment businesses. Book to bill for the full year was 1.04.
2018 Versus 2017
Refrigeration & Food Equipment segment revenue for the year ended December 31, 2018 decreased $146.0 million, or 9.1%, compared to the prior year, reflecting an organic revenue decline of 7.9%, the impact from product line dispositions of 2.6%, partially offset by acquisition-related growth of 0.7% and a favorable impact from foreign currency translation of 0.7%. Customer pricing favorably impacted revenue by approximately 0.8% in 2018. Refrigeration & Food Equipment organic revenue declined principally due to weak capital spending and deferred remodel programs by key U.S. retail refrigeration customers, as well as a product re-design and SKU rationalization program in our refrigeration door system product line. Additionally, the foodservice equipment and can-shaping businesses also had year over year shortfalls due to project timing and market softness. These were partially offset by increased demand for heat exchanger products, most notably in Europe, and by the addition of sales from our Rosario acquisition.
Refrigeration & Food Equipment segment earnings for the year ended December 31, 2018 decreased $57.7 million, or 29.8%, compared to the prior year. Segment margin decreased to 9.4% from 12.1% in the prior year, as benefits from rightsizing actions, productivity gains and lower rightsizing costs were more than offset by volume reductions, unfavorable product mix in our can-shaping business, costs associated with product re-design and SKU rationalization in our refrigeration door system product line and a favorable $1.7 million disposition gain in 2017 due to a working capital adjustment. Segment margin was also impacted by rising material costs, most notably steel, inclusive of commodity pricing impacts attributable to U.S. Section 232 tariffs.
FINANCIAL CONDITION
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchase of outstanding shares, adequacy of available commercial paper and bank lines of credit and the ability to attract long-term capital with satisfactory terms. We generate substantial cash from the operations of our businesses and remain in a strong financial position, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
Cash Flows from Continuing Operations (in thousands)
|
2019
|
|
2018
|
|
2017
|
Net cash flows provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
945,306
|
|
|
$
|
789,193
|
|
|
$
|
739,409
|
|
Investing activities
|
(384,255)
|
|
|
(245,480)
|
|
|
208,335
|
|
Financing activities
|
(558,042)
|
|
|
(897,838)
|
|
|
(592,933)
|
|
Operating Activities
Cash provided by operating activities for the year ended December 31, 2019 increased $156.1 million compared to 2018. This increase was driven primarily by higher continuing earnings of $147.0 million, excluding a loss from discontinued operations, depreciation and amortization, a loss on assets held for sale and a loss on extinguishment of debt.
Cash provided by operating activities for the year ended December 31, 2018 increased $49.8 million compared to 2017. This increase was primarily driven by higher continuing earnings of $46.9 million, excluding non-cash activity from depreciation and amortization and gain on sale of businesses, and significantly lower tax payments in 2018 due to a lower tax rate as well as tax payments made in 2017 for dispositions. The increase was offset by higher investments in working capital relative to the prior year in support of organic bookings and timing of year end revenue.
Pension and Other Post-Retirement Activity: Total cash used in conjunction with pension plans during 2019 was $21.4 million, including contributions to our international pension plans and payments of benefits under our non-qualified supplemental pension plan.
The funded status of our U.S. qualified defined benefit pension plan is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Due to the overfunded status of this plan, the Company did not make contributions in 2019, 2018 or 2017 and does not expect to make contributions in the near term.
Our international pension plans are located in regions where often it is not economically advantageous to pre-fund the plans due to local regulations. Total cash contributions to ongoing international defined benefit pension plans in 2019, 2018 and 2017 totaled $7.2 million, $6.0 million and $8.0 million, respectively. In 2020, we expect to contribute approximately $4.6 million to our non-U.S. plans.
Our non-qualified supplemental pension plans are funded through Company assets as benefits are paid. In 2019, 2018 and 2017 a total of $13.6 million, $19.4 million, and $11.6 million in benefits were paid under these plans, respectively. See Note 17 — Employee Benefit Plans in the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding our post-retirement plans.
Adjusted Working Capital: We believe adjusted working capital (a non-GAAP measure calculated as accounts receivable, plus inventory, less accounts payable) provides a meaningful measure of our operational results by showing changes caused solely by revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Working Capital (dollars in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Accounts receivable
|
|
$
|
1,217,190
|
|
|
$
|
1,231,859
|
|
|
|
Inventories
|
|
806,141
|
|
|
748,796
|
|
|
|
Less: Accounts payable
|
|
983,293
|
|
|
969,531
|
|
|
|
Adjusted working capital
|
|
$
|
1,040,038
|
|
|
$
|
1,011,124
|
|
|
|
|
|
|
|
|
|
|
Adjusted working capital increased from December 31, 2018 by $28.9 million, or 2.9%, to $1.04 billion at December 31, 2019, which reflected a decrease in accounts receivable of $14.7 million, an increase in inventory of $57.3 million and an increase in accounts payable of $13.8 million. We continue to focus on improving working capital management by reducing our accounts receivable balance and increasing our accounts payable balance at December 31, 2019 compared to the prior year. However, inventories increased at December 31, 2019 compared to 2018 given planned footprint moves and a higher backlog going into 2020.
Investing Activities
Cash flow from investing activities is derived from cash inflows from proceeds from sales of businesses, property, plant and equipment and short-term investments, offset by cash outflows for capital expenditures and acquisitions. The majority of the activity in investing activities was comprised of the following:
•Acquisitions: In 2019, we deployed $215.7 million to acquire three businesses. In comparison, we acquired two businesses in 2018 for an aggregate purchase price of approximately $68.6 million. Total acquisition spend in 2017 was $27.2 million and was comprised of two businesses. See Note 4 — Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information with respect to recent acquisitions.
•Proceeds from sale of businesses: In 2019, we generated cash proceeds of $24.2 million, due to the sale of Finder. Cash proceeds of $3.9 million in 2018 was primarily due to cash received on a sale in 2017. In 2017, we generated cash proceeds of $372.7 million primarily from the sale of PMI and Warn.
•Capital spending: Capital expenditures, primarily to support growth initiatives, productivity and new product launches, were $186.8 million in 2019, $171.0 million in 2018 and $170.1 million in 2017. Our capital expenditures increased $15.8 million in 2019 compared to 2018, and remained relatively flat in 2018 compared to 2017.
We anticipate that capital expenditures and any additional acquisitions we make in 2020 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, or by accessing the public debt or equity markets.
Financing Activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our common stock and payment of dividends, offset by net borrowing activity. The majority of financing activity was attributed to the following:
•Long-term debt, commercial paper and notes payable, net: During 2019, we issued €500 million of 0.750% euro-denominated notes due 2027 and $300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of $296.9 million, net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the $450 million 4.30% notes due 2021. The early extinguishment of debt resulted in a pre-tax loss of $23.5 million. Net borrowings decreased by $93.3 million due to the issuance of debt, early extinguishment of debt, and decrease in borrowings from commercial paper.
During 2018, we repaid the Company's $350.0 million 5.45% notes, which matured on March 15, 2018, and decreased net borrowings from commercial paper by $10.7 million. During 2017, we decreased net borrowings from commercial paper by $182.6 million with the cash proceeds from the sale of PMI and Warn.
•Cash received from Apergy, net of cash distributed: In connection with the separation of Apergy from Dover on May 9, 2018, Apergy incurred borrowings to fund a one-time cash payment of $700.0 million to Dover in connection with Dover's contribution to Apergy of stock and assets relating to the businesses spun off with Apergy. Dover received net cash of $689.6 million upon separation, which reflects $10.4 million of cash held by Apergy at the time of distribution and retained by it in connection with its separation from Dover.
•Repurchase of common stock: During the year ended December 31, 2019, we repurchased 1,343,622 shares of common stock at a total cost of $143.3 million. For the year ended December 31, 2018, we used $45.0 million to repurchase 440,608 shares under our January 2015 authorization, which expired on January 9, 2018. Under a share repurchase authorization adopted by the Board of Directors in February 2018, we also repurchased 1,753,768 shares of common stock at a total cost of $150.0 million and used $700 million to repurchase a total of 8,542,566 shares through an accelerated share repurchase transaction which concluded in December 2018. We funded the accelerated share repurchase primarily with funds received from Apergy in connection with the consummation of the Apergy spin-off. For the year ended December 31, 2017, we used $105.0 million to repurchase 1,059,682 shares under the January 2015 authorization.
•Dividend payments: Total dividend payments to common shareholders were $282.2 million in 2019, $283.6 million in 2018 and $284.0 million in 2017. Our dividends paid per common share increased 2% to $1.94 per share in 2019 compared to $1.90 per share in 2018, which represents the 64th consecutive year that our dividend has increased. The number of common shares outstanding decreased from 2018 to 2019 due to our share repurchase programs.
•Net Proceeds from the exercise of share-based awards: Payments to settle tax obligations on share exercises were $37.4 million, $46.3 million and $18.4 million in 2019, 2018 and 2017, respectively. These tax payments generally increase or decrease correspondingly to the number of exercises in a particular year.
Cash Flows from Discontinued Operations
There were no cash flows from discontinued operations for the year ended December 31, 2019. Our cash flows from discontinued operations for the years ended December 31, 2018 and 2017 (used) generated $(14.3) million and $48.5 million, respectively. These cash flows primarily reflect the operating results of Apergy prior to its separation during the second quarter of 2018. Cash flows used in discontinued operations for the year ended December 31, 2018 primarily reflects cash payments of spin-off costs of $46.4 million and capital expenditures of $23.7 million, partially offset by cash provided by operations of approximately $55.4 million. Cash flows generated for the years ended December 31, 2017 primarily reflects cash provided by operating activities of approximately $96.2 million, respectively, partially offset by capital expenditures.
Liquidity and Capital Resources
Free Cash Flow
In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures. We believe that free cash flow is an important measure of operating performance because it provides management and investors a measurement of cash generated from operations that may be available for mandatory payment obligations and investment opportunities, such as funding acquisitions, paying dividends, repaying debt and repurchasing our common stock.
The following table reconciles our free cash flow to cash flow provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
Free Cash Flow (dollars in thousands)
|
2019
|
|
2018
|
|
2017
|
Cash flow provided by operating activities
|
$
|
945,306
|
|
|
$
|
789,193
|
|
|
$
|
739,409
|
|
Less: Capital expenditures
|
(186,804)
|
|
|
(170,994)
|
|
|
(170,068)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
$
|
758,502
|
|
|
$
|
618,199
|
|
|
$
|
569,341
|
|
Free cash flow as a percentage of revenue
|
10.6
|
%
|
|
8.8
|
%
|
|
8.3
|
%
|
Free cash flow as a percentage of earnings from continuing operations
|
111.9
|
%
|
|
104.6
|
%
|
|
76.3
|
%
|
For 2019, we generated free cash flow of $758.5 million, representing 10.6% of revenue and 111.9% of earnings from continuing operations. Free cash flow in 2018 was $618.2 million or 8.8% of revenue and 104.6% of earnings from continuing operations. Free cash flow in 2017 was $569.3 million, or 8.3% of revenue and 76.3% of earnings from continuing operations. The full year increase in 2019 free cash flow reflects higher cash flow provided by operations due to higher operating earnings, as previously mentioned, partially offset by higher capital expenditures. The 2018 increase in free cash flow compared to 2017 is due to higher operating earnings. Cash payments related to restructuring initiatives were $33.3 million, $52.0 million, and $22.6 million in 2019, 2018, and 2017, respectively.
Capitalization
We use commercial paper borrowings for general corporate purposes, including the funding of acquisitions and the repurchase of our common stock. On October 4, 2019, we entered into a $1 billion five-year unsecured revolving credit facility with a syndicate of banks (the “Credit Agreement”) that replaced a similar existing credit facility that was set to expire in November 2020. The Credit Agreement will expire on October 4, 2024. This facility is used primarily as liquidity back-up for our commercial paper program. We have not drawn down any loans under this facility nor do we anticipate doing so. If we were to draw down a loan, at our election, the loan would bear interest at a base rate plus an applicable margin. Under this facility, we are required to pay a facility fee and to maintain an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of not less than 3.0 to 1. We were in compliance with this covenant and our other long-term debt covenants at December 31, 2019 and had a coverage ratio of 10.6 to 1. We are not aware of any potential impairment to our liquidity and expect to remain in compliance with all of our debt covenants.
On March 15, 2018, the outstanding 5.45% notes with a principal value of $350,000 matured. The repayment of debt was funded in part by borrowings under our commercial paper program and with existing cash balances.
On November 4, 2019, we issued €500 million of 0.750% euro-denominated notes due 2027 and $300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of $296.9 million, net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the $450 million 4.30% notes due 2021. Such redemption payments were made on December 4, 2019, which required us to pay a make whole premium to the bondholders, resulting in a loss of $23.5 million. The remainder of the proceeds will be used for general corporate purposes.
We also have a current shelf registration statement filed with the SEC that allows for the issuance of additional debt securities that may be utilized in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.
At December 31, 2019, our cash and cash equivalents totaled $397.3 million, of which approximately $273.1 million was held outside the United States. At December 31, 2018, our cash and cash equivalents totaled $396.2 million, of which $247.5 million was held outside the United States. Cash and cash equivalents are held primarily in bank deposits with highly rated banks. We regularly hold cash in excess of near-term requirements in bank deposits or invest the funds in government money market instruments or short-term investments, which consist of investment grade time deposits with original maturity dates at the time of purchase of no greater than three months.
We utilize the net debt to net capitalization calculation (a non-GAAP measure) to assess our overall financial leverage and capacity and believe the calculation is useful to investors for the same reason. Net debt represents total debt minus cash and cash equivalents. Net capitalization represents net debt plus stockholders' equity. The following table provides a reconciliation of net debt to net capitalization to the most directly comparable GAAP measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Debt to Net Capitalization Ratio (dollars in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Current maturities of long-term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
350,402
|
|
|
Commercial paper
|
|
84,700
|
|
|
220,318
|
|
|
|
230,700
|
|
|
Notes payable and current maturities of long-term debt
|
|
84,700
|
|
|
220,318
|
|
|
|
581,102
|
|
|
Long-term debt
|
|
2,985,716
|
|
|
2,943,660
|
|
|
|
2,986,702
|
|
|
Total debt
|
|
3,070,416
|
|
|
3,163,978
|
|
|
|
3,567,804
|
|
|
Less: Cash and cash equivalents
|
|
(397,253)
|
|
|
(396,221)
|
|
|
|
(753,964)
|
|
|
Net debt
|
|
2,673,163
|
|
|
2,767,757
|
|
|
|
2,813,840
|
|
|
Add: Stockholders' equity
|
|
3,032,660
|
|
|
2,768,666
|
|
|
|
4,383,180
|
|
|
Net capitalization
|
|
$
|
5,705,823
|
|
|
$
|
5,536,423
|
|
|
|
$
|
7,197,020
|
|
|
Net debt to net capitalization
|
|
46.8
|
%
|
|
50.0
|
%
|
|
|
39.1
|
%
|
|
Our net debt to net capitalization ratio decreased to 46.8% at December 31, 2019 compared to 50.0% at December 31, 2018. The decrease in this ratio was driven primarily by the increase in stockholders' equity of $264.0 million for the period as a result of increase in current earnings of $677.9 million, offset by $143.3 million in share repurchases and $282.2 million of dividends paid. Net debt decreased $94.6 million during the period primarily due to a reduction in commercial paper, partially offset by a net increase in long-term debt after debt issuances and redemptions in 2019.
Our net debt to net capitalization ratio increased to 50.0% at December 31, 2018 compared to 39.1% at December 31, 2017 primarily due to the reduction in stockholders' equity as a result of the $906.8 million distribution of Apergy, $895.0 million in share repurchases and $283.6 million of dividends paid, offset by $570.3 million of current earnings. Net debt decreased $46.1 million during the period primarily due to a reduction in current maturities of long term debt, partially offset by a reduction in cash levels to fund dividends and other operating purposes.
Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash flow-to-debt and debt-to-capitalization levels as well as our current credit standing. Our credit ratings, which are independently developed by the respective rating agencies, were as follows as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Rating
|
|
Long Term Rating
|
|
Outlook
|
Moody's
|
P-2
|
|
Baa1
|
|
Stable
|
Standard & Poor's
|
A-2
|
|
BBB+
|
|
Stable
|
|
|
|
|
|
|
Operating cash flow and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions and capital expenditures. Acquisition spending and/or share repurchases could potentially increase our debt.
We believe that existing sources of liquidity are adequate to meet anticipated funding needs at current risk-based interest rates for the foreseeable future.
Off-Balance Sheet Arrangements and Contractual Obligations
As of December 31, 2019, we had approximately $158.5 million outstanding in letters of credit, surety bonds, and performance and other guarantees with financial institutions, which expire on various dates through 2028. These letters of credit and bonds are primarily issued 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.
We have also provided typical indemnities in connection with sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.
A summary of our consolidated contractual obligations and commitments as of December 31, 2019 and the years when these obligations are expected to be due is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
|
Other
|
Long-term debt (1)
|
|
$
|
2,985,716
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,985,716
|
|
|
$
|
—
|
|
Interest payments (2)
|
|
1,336,429
|
|
|
98,673
|
|
|
197,346
|
|
|
197,346
|
|
|
843,064
|
|
|
—
|
|
Operating lease obligations
|
|
179,557
|
|
|
45,838
|
|
|
63,535
|
|
|
30,150
|
|
|
40,034
|
|
|
—
|
|
Purchase obligations
|
|
35,552
|
|
|
34,885
|
|
|
667
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Finance lease obligations
|
|
11,502
|
|
|
2,199
|
|
|
3,923
|
|
|
2,471
|
|
|
2,909
|
|
|
—
|
|
Supplemental and post-retirement benefits (3)
|
|
77,824
|
|
|
14,936
|
|
|
20,840
|
|
|
13,561
|
|
|
28,487
|
|
|
—
|
|
Income tax payable - deemed repatriation tax (4)
|
|
52,000
|
|
|
—
|
|
|
3,050
|
|
|
21,559
|
|
|
27,391
|
|
|
—
|
|
Unrecognized tax benefits (5)
|
|
101,052
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101,052
|
|
Total obligations
|
|
$
|
4,779,632
|
|
|
$
|
196,531
|
|
|
$
|
289,361
|
|
|
$
|
265,087
|
|
|
$
|
3,927,601
|
|
|
$
|
101,052
|
|
_________
|
|
|
|
|
|
(1)
|
|
See Note 12 — Borrowings and Lines of Credit to the Consolidated Financial Statements. Amounts represent principal payments for all long-term debt, including current maturities, net of unamortized discounts and deferred issuance costs.
|
(2)
|
|
Amounts represent estimate of future interest payments on long-term debt using the interest rates in effect at December 31, 2019.
|
(3)
|
|
Amounts represent estimated benefit payments under our unfunded supplemental and post-retirement benefit plans and our unfunded non-U.S. qualified defined benefit plans. See Note 17 — Employee Benefit Plans to the Consolidated Financial Statements. We also expect to contribute approximately $4.6 million to our non-U.S. qualified defined benefit plans in 2020, which amount is not reflected in the above table.
|
(4)
|
|
Amounts represent a tax imposed by the Tax Reform Act for a one-time deemed repatriation of unremitted earnings of foreign subsidiaries, including current payable.
|
(5)
|
|
Due to the uncertainty of the potential settlement of future unrecognized tax benefits, we are unable to estimate the timing of the related payments, if any, that will be made subsequent to 2019. This amount does not include the potential indirect benefits resulting from deductions or credits for payments made to other jurisdictions. This amount includes accrued interest and penalties.
|
Financial Instruments and Risk Management
The diverse nature of our businesses’ activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity prices. We periodically use derivative financial instruments to manage some of these risks. We do not hold or issue derivative instruments for trading or speculative purposes. We are exposed to credit loss in the event of nonperformance by counterparties to our financial instrument contracts; however, nonperformance by these counterparties is considered unlikely as our policy is to contract with highly-rated, diversified counterparties.
Interest Rate Exposure
As of December 31, 2019 and during the three year period then ended, we did not have any open interest rate swap contracts; however, we may in the future enter into interest rate swap agreements to manage our exposure to interest rate changes. We issue commercial paper, which exposes us to changes in variable interest rates; however, maturities are typically three months or less so a change in rates over this period would not have a material impact on our pre-tax earnings.
We consider our current risk related to market fluctuations in interest rates to be minimal since our debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-interest rate debt will increase as interest rates fall and
decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the 2019 year-end fair value of our long-term debt by approximately $275.2 million. However, since we have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.
Foreign Currency Exposure
We conduct business in various non-U.S. countries, including Canada, substantially all of the European countries, Mexico, Brazil, China, India and other Asian countries. Therefore, we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. We will occasionally use derivative financial instruments to offset such risks, when it is believed that the exposure will not be limited by our normal operating and financing activities. We have formal policies to mitigate risk in this area by using fair value and/or cash flow hedging programs.
Changes in the value of the currencies of the countries in which we operate affect our results of operations, financial position and cash flows when translated into U.S. dollars, our reporting currency. The strengthening of the U.S. dollar could result in unfavorable translation effects as the results of foreign operations are translated into U.S. dollars. We have generally accepted the exposure to exchange rate movements relative to our investment in non-U.S. operations. We may, from time to time, for a specific exposure, enter into fair value hedges.
Additionally, we have designated the €600 million and €500 million of euro-denominated notes issued November 9, 2016 and November 4, 2019, respectively, as a hedge of our net investment in euro-denominated operations. We had also designated the €300 million notes due in 2020 as a net investment hedge prior to our redemption of the notes. Due to the high degree of effectiveness between the hedging instruments and the exposure being hedged, fluctuations in the value of the euro-denominated debt due to exchange rate changes are offset by changes in the net investment. Accordingly, changes in the value of the euro-denominated debt are recognized in the cumulative translation adjustment section of other comprehensive income to offset changes in the value of the net investment in euro-denominated operations. Due to the fluctuations of the euro relative to the U.S. dollar, the U.S. dollar equivalent of this debt increases or decreases, resulting in the recognition of a pre-tax gain (loss) of $22.4 million, $45.2 million and $(125.3) million in other comprehensive income for the years ended December 31, 2019, 2018, and 2017 respectively.
Commodity Price Exposure
Certain of our businesses are exposed to volatility in the prices of certain commodities, such as aluminum, steel, copper and various precious metals, among others. Our primary exposure to commodity pricing volatility relates to the use of these materials in purchased component parts or the purchase of raw materials. When possible, we maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire.
Critical Accounting Policies and Estimates
Our consolidated financial statements and related financial information are based on the application of U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates, assumptions, judgments and interpretations of accounting principles that affect the amount of assets, liabilities, revenue and expenses on the consolidated financial statements. These estimates also affect supplemental information contained in our disclosures, including information regarding contingencies, risk and our financial condition. The significant accounting policies used in the preparation of our consolidated financial statements are discussed in Note 1 — Description of Business and Summary of Significant Accounting Policies in the Consolidated Financial Statements in Item 8 of this Form 10-K. The accounting assumptions and estimates discussed in the section below are most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. We believe our use of estimates and underlying accounting assumptions conforms to U.S. GAAP and is consistently applied. We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary. Management has discussed our critical accounting policies and estimates with the audit committee of the Board of Directors.
Revenue Recognition - Effective January 1, 2018, we adopted Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms
are identified and collectability is probable. Once we enter a contract, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized as control of promised goods or services transfers to the customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The amount of revenue recognized takes into account variable consideration, such as discounts and volume rebates. The majority of our revenue is generated through the manufacture and sale of a broad range of specialized products and components, with revenue recognized upon transfer of title and risk of loss, which is generally upon shipment. Service revenue represents less than 5% of our total revenue and is recognized as the services are performed. In limited cases, our revenue arrangements with customers require delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue is recognized. We include shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.
Inventories - Inventories for the majority of our subsidiaries, including all international subsidiaries, are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Other domestic inventories are stated at cost, determined on the last-in, first-out (LIFO) basis, which is less than market value. Under certain market conditions, estimates and judgments regarding the valuation of inventories are employed by us to properly value inventories.
Goodwill and Other Intangible Assets - We have significant goodwill and intangible assets on our consolidated balance sheets as a result of current and past acquisitions. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. In addition, the testing of goodwill and intangibles for impairment requires significant use of judgment and assumptions, particularly as it relates to the determination of fair value. Our indefinite-lived intangible assets and reporting units are tested and reviewed for impairment on an annual basis during the fourth quarter, or more frequently when indicators of impairment exist, when some portion but not all of a reporting unit is disposed of or classified as assets held for sale, or when a change in the composition of reporting units occurs for other reasons, such as a change in segments.
When performing an impairment test, we estimate fair value using the income-based valuation method. Under the income-based valuation method, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rate based on our most recent views of the long-term outlook for each reporting unit. Actual results may differ from these estimates. The discount rates used in these analyses vary by reporting unit and are based on a capital asset pricing model and published relevant industry rates. We use discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in our internally developed forecasts. Discount rates used in our 2019 reporting unit valuations ranged from 8.0% to 9.5%.
Concurrent with the timing of the annual impairment test, effective October 1, 2019, we changed our management structure which resulted in a change in our operating segments and reporting units. As a result, management tested goodwill for impairment before and after the segment change under the old and new reporting unit structures. We performed a quantitative goodwill impairment test for each of our seven reporting units under the old structure and fifteen reporting units under the new structure, concluding that the fair values of all of its reporting units were substantially in excess of their carrying values. As such, no goodwill impairment was recognized. While we believe the assumptions used in the 2019 impairment analysis are reasonable and representative of expected results, actual results may differ from expectations.
Employee Benefit Plans - The valuation of our pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. Inherent in these valuations are key assumptions, including discount rates, investment returns, projected salary increases and benefits and mortality rates. Annually, we review the actuarial assumptions used in our pension reporting and compare them with external benchmarks to ensure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on our pension expense and related funding requirements. Our expected long-term rate of return on plan assets is reviewed annually based on actual and forecasted returns, economic trends and and portfolio allocation. Our discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. As disclosed in Note 17 — Employee Benefit Plans to the Consolidated Financial Statements, the 2019 weighted-average discount rates used to measure our qualified defined benefit obligations ranged from 1.18% to 3.40%, a general decrease from the 2018 rates, which ranged from 1.83% to 4.35%. The lower 2019 discount rates in the U.S. are reflective of decreased market interest rates over this period. A 25 basis point decrease in the discount rates used for these plans would have increased the post-retirement benefit obligations by approximately $31.3 million from the
amount recorded in the consolidated financial statements at December 31, 2019. Our pension expense is also sensitive to changes in the expected long-term rate of return on plan assets. A decrease of 25 basis points in the expected long-term rate of return on assets would have increased our defined benefit pension expense by approximately $1.5 million.
Income Taxes - We have significant amounts of deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Reserves are also estimated, using more likely than not criteria, for ongoing audits regarding federal, state and non-U.S. issues that are currently unresolved. We routinely monitor the potential impact of these situations and believe that we have established the proper reserves. Reserves related to tax accruals and valuations related to deferred tax assets can be impacted by changes in tax codes and rulings (as further described below with respect to U.S. tax law), changes in statutory tax rates and our future taxable income levels. The provision for uncertain tax positions provides a recognition threshold and measurement attribute for financial statement tax benefits taken or expected to be taken in a tax return and disclosure requirements regarding uncertainties in income tax positions. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We record interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes.
On December 22, 2017, the Tax Reform Act was enacted which permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $172.0 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. For the year ended December 31, 2017, we recorded provisional tax expense related to the deemed repatriation of $111.6 million payable over eight years.
On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, we recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. In accordance with SAB 118, we finalized the financial reporting impact of the Tax Reform Act in the fourth quarter of 2018. For the year ended December 31, 2018, we recorded a $4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions we made as a result of the Tax Reform Act.
Risk, Retention, Insurance - We have significant accruals and reserves related to the self-insured portion of our risk management program. These accruals require the use of estimates and judgment with regard to risk exposure and ultimate liability. We estimate losses under these programs using actuarial assumptions, our experience and relevant industry data. We review these factors quarterly and consider the current level of accruals and reserves adequate relative to current market conditions and experience.
Contingencies - We have established liabilities for environmental and legal contingencies at both the business and corporate levels. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The valuation of liabilities for these contingencies is reviewed on a quarterly basis to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional liabilities for emerging issues. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations.
Restructuring - We establish liabilities for restructuring activities at an operation when management has committed to an exit or reorganization plan and when termination benefits are probable and can be reasonably estimated based on circumstances at the time the restructuring plan is approved by management or when termination benefits are communicated. Exit costs may include contractual terminations and asset impairments as a result of an approved restructuring plan. The accrual of both severance and exit costs requires the use of estimates. Though we believe that these estimates accurately reflect the anticipated costs, actual results may be different than the estimated amounts.
Disposed and Discontinued Operations - From time to time we sell or discontinue or dispose of certain operations for various reasons. Estimates are used to adjust, if necessary, the assets and liabilities of discontinued operations to their estimated fair value. These estimates include assumptions relating to the proceeds anticipated as a result of the sale. Fair
value is established using internal valuation calculations along with market analysis of similar-type entities. The adjustments to fair value of these operations provide the basis for the gain or loss when sold. Changes in business conditions or the inability to sell an operation could potentially require future adjustments to these estimates. As noted previously, in 2019, we recorded an impairment on assets held for sale due to the sale of Finder. In 2018 and 2017, no impairment charges were recorded due to operations sold, discontinued, or disposed.
Stock-Based Compensation - We are required to recognize in our Consolidated Statements of Earnings the expense associated with all share-based payment awards made to employees and directors, including stock appreciation rights ("SARs"), restricted stock units and performance share awards. We use the Black-Scholes valuation model to estimate the fair value of SARs granted to employees. The model requires that we estimate the expected life of the SAR, expected forfeitures and the volatility of our stock using historical data. For additional information related to the assumptions used, see Note 15 — Equity and Cash Incentive Program to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Recent Accounting Standards
See Note 1 — Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements and recently adopted accounting standards.
Non-GAAP Disclosures
In an effort to provide investors with additional information regarding our results as determined by GAAP, we also disclose non-GAAP information which we believe provides useful information to investors. Segment EBITDA, segment EBITDA margin, free cash flow, free cash flow as a percentage of revenue, free cash flow as a percentage of earnings from continuing operations, net debt, net capitalization, net debt to net capitalization ratio, adjusted working capital, organic revenue growth and rightsizing costs are not financial measures under GAAP and should not be considered as a substitute for earnings, cash flows from operating activities, debt or equity, working capital, revenue or restructuring costs as determined in accordance with GAAP, and they may not be comparable to similarly titled measures reported by other companies.
We believe that segment EBITDA and segment EBITDA margin are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment earnings, which is the most directly comparable GAAP measure. We do not present segment net income because corporate expenses are not allocated at a segment level. Segment EBITDA margin is calculated as segment EBITDA divided by segment revenue.
We believe the net debt to net capitalization ratio, free cash flow and free cash flow ratios are important measures of liquidity. Net debt to net capitalization ratio is helpful in evaluating our capital structure and the amount of leverage we employ. Free cash flow and free cash flow ratios provide both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase our common stock. Free cash flow as a percentage of revenue equals free cash flow divided by revenue. Free cash flow as a percentage of earnings from continuing operations equals free cash flow divided by earnings from continuing operations. We believe that reporting adjusted working capital, which is calculated as accounts receivable, plus inventory, less accounts payable, provides a meaningful measure of our operational results by showing the changes caused solely by revenue. We believe that reporting organic revenue growth, which exclude the impact of foreign currency exchange rates and the impact of acquisitions and divestitures, provides a useful comparison of our revenue performance and trends between periods. We believe that reporting rightsizing costs, which include restructuring and other charges, is important as it enables management and investors to better understand the financial impact of our broad-based cost reduction and operational improvement initiatives.
Reconciliations of non-GAAP measures can be found above in this Item 7, MD&A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
(All other schedules are not required and have been omitted)
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).
Based on its assessment under the criteria set forth in Internal Control — Integrated Framework (2013), management concluded that, as of December 31, 2019, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Dover Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Dover Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of earnings, of comprehensive earnings, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and financial statement schedule listed in the accompanying index for each of the three years in the period ended December 31, 2019 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Test
As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3.783 billion as of December 31, 2019. Management performs its goodwill impairment test annually in the fourth quarter, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired, when some portion but not all of a reporting unit is disposed of or classified as held for sale, or when a change in the composition of reporting units occurs for other reasons, such as a change in segments. Concurrent with the timing of the annual impairment test, effective October 1, 2019, the Company changed its management structure which resulted in a change in its operating segments and reporting units. As a result, management tested goodwill for impairment before and after the segment change under the old and new reporting unit structures. When performing the impairment test, management estimates fair value of each reporting unit using the income-based valuation method, which involves significant judgment. Under the income-based valuation method, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. Management uses internal forecasts to estimate future cash flows, which are based on historical performance and future estimated results.
The principal considerations for our determination that performing procedures relating to the goodwill impairment test is a critical audit matter are there was significant judgment by management when developing the fair value measurement of each reporting unit, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and in evaluating management’s estimate of fair value of the reporting units, specifically related to revenue growth in the estimated future cash flows. In addition, the nature and extent of audit effort required to address the matter was a consideration, including the fact that in 2019, procedures were performed on reporting units before and after the Company’s change in segments.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the determination of revenue growth in the estimated future cash flows. These procedures also included, among others, testing the identification of the reporting units, testing the carrying value of the reporting units, testing the appropriateness of the discounted cash flow model, assessing sensitivities over the assumptions in the discounted cash flow model, and testing the reasonableness of significant assumptions used by management, specifically revenue growth. When testing revenue growth, we evaluated whether the assumptions were reasonable by (i) understanding management’s process to develop the estimated future cash flows, (ii) comparing management’s forecasted revenue growth to current and prior period performance and (iii) comparing management’s forecasted revenue growth to external market and/or industry data.
|
|
|
|
|
|
|
|
|
/s/ PricewaterhouseCoopers LLP
|
|
|
Chicago, Illinois
|
|
|
February 14, 2020
|
|
|
We have served as the Company's auditor since 1995.
DOVER CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue
|
$
|
7,136,397
|
|
|
$
|
6,992,118
|
|
|
$
|
6,820,886
|
|
Cost of goods and services
|
4,515,459
|
|
|
4,432,562
|
|
|
4,291,839
|
|
Gross profit
|
2,620,938
|
|
|
2,559,556
|
|
|
2,529,047
|
|
Selling, general and administrative expenses
|
1,599,098
|
|
|
1,716,444
|
|
|
1,722,161
|
|
Loss on assets held for sale
|
46,946
|
|
|
—
|
|
|
—
|
|
Operating earnings
|
974,894
|
|
|
843,112
|
|
|
806,886
|
|
Interest expense
|
125,818
|
|
|
130,972
|
|
|
144,948
|
|
Interest income
|
(4,526)
|
|
|
(8,881)
|
|
|
(8,491)
|
|
Loss on extinguishment of debt
|
23,543
|
|
|
—
|
|
|
—
|
|
Gain on sale of businesses
|
—
|
|
|
—
|
|
|
(203,135)
|
|
Other income, net
|
(12,950)
|
|
|
(4,357)
|
|
|
(2,251)
|
|
Earnings before provision for income taxes
|
843,009
|
|
|
725,378
|
|
|
875,815
|
|
Provision for income taxes
|
165,091
|
|
|
134,233
|
|
|
129,152
|
|
Earnings from continuing operations
|
677,918
|
|
|
591,145
|
|
|
746,663
|
|
(Loss) earnings from discontinued operations, net
|
—
|
|
|
(20,878)
|
|
|
65,002
|
|
Net earnings
|
$
|
677,918
|
|
|
$
|
570,267
|
|
|
$
|
811,665
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
Basic
|
$
|
4.67
|
|
|
$
|
3.94
|
|
|
$
|
4.80
|
|
Diluted
|
$
|
4.61
|
|
|
$
|
3.89
|
|
|
$
|
4.73
|
|
|
|
|
|
|
|
(Loss) earnings per share from discontinued operations:
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
(0.14)
|
|
|
$
|
0.42
|
|
Diluted
|
$
|
—
|
|
|
$
|
(0.14)
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
Basic
|
$
|
4.67
|
|
|
$
|
3.80
|
|
|
$
|
5.21
|
|
Diluted
|
$
|
4.61
|
|
|
$
|
3.75
|
|
|
$
|
5.15
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
145,198
|
|
|
149,874
|
|
|
155,685
|
|
Diluted
|
146,992
|
|
|
152,133
|
|
|
157,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
DOVER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net earnings
|
$
|
677,918
|
|
|
$
|
570,267
|
|
|
$
|
811,665
|
|
Other comprehensive earnings (loss), net of tax
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Foreign currency translation (losses) gains
|
(5,025)
|
|
|
(59,970)
|
|
|
143,064
|
|
Reclassification of foreign currency translation losses to earnings
|
25,339
|
|
|
—
|
|
|
3,992
|
|
Total foreign currency translation adjustments
|
20,314
|
|
|
(59,970)
|
|
|
147,056
|
|
Pension and other postretirement benefit plans:
|
|
|
|
|
|
Actuarial gains (losses)
|
47
|
|
|
(13,107)
|
|
|
12,439
|
|
Prior service credit (cost)
|
1,818
|
|
|
(14,661)
|
|
|
3,136
|
|
Amortization of actuarial losses included in net periodic pension cost
|
596
|
|
|
3,829
|
|
|
5,267
|
|
Amortization of prior service costs included in net periodic pension cost
|
2,141
|
|
|
2,875
|
|
|
3,007
|
|
Settlement and curtailment impact
|
806
|
|
|
9,926
|
|
|
(2,462)
|
|
|
|
|
|
|
|
Total pension and other postretirement benefit plans
|
5,408
|
|
|
(11,138)
|
|
|
21,387
|
|
Changes in fair value of cash flow hedges:
|
|
|
|
|
|
Unrealized net gains (losses)
|
1,495
|
|
|
1,158
|
|
|
(1,801)
|
|
Net (gains) losses reclassified into earnings
|
(147)
|
|
|
1,541
|
|
|
(590)
|
|
Total cash flow hedges
|
1,348
|
|
|
2,699
|
|
|
(2,391)
|
|
Other
|
—
|
|
|
—
|
|
|
(1,485)
|
|
Other comprehensive earnings (loss), net of tax
|
27,070
|
|
|
(68,409)
|
|
|
164,567
|
|
Comprehensive earnings
|
$
|
704,988
|
|
|
$
|
501,858
|
|
|
$
|
976,232
|
|
See Notes to Consolidated Financial Statements
DOVER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
397,253
|
|
|
$
|
396,221
|
|
|
|
|
|
Receivables, net of allowances of $29,381 and $28,469
|
1,217,190
|
|
|
1,231,859
|
|
Inventories
|
806,141
|
|
|
748,796
|
|
Prepaid and other current assets
|
127,846
|
|
|
126,878
|
|
|
|
|
|
|
|
|
|
Total current assets
|
2,548,430
|
|
|
2,503,754
|
|
Property, plant and equipment, net
|
842,318
|
|
|
806,497
|
|
Goodwill
|
3,783,347
|
|
|
3,677,328
|
|
Intangible assets, net
|
1,055,014
|
|
|
1,134,256
|
|
Other assets and deferred charges
|
440,368
|
|
|
243,936
|
|
|
|
|
|
Total assets
|
$
|
8,669,477
|
|
|
$
|
8,365,771
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Notes payable
|
$
|
84,700
|
|
|
$
|
220,318
|
|
Accounts payable
|
983,293
|
|
|
969,531
|
|
Accrued compensation and employee benefits
|
226,658
|
|
|
212,666
|
|
Accrued insurance
|
98,432
|
|
|
97,600
|
|
Other accrued expenses
|
339,060
|
|
|
313,452
|
|
|
|
|
|
Federal and other income taxes
|
17,748
|
|
|
13,854
|
|
Total current liabilities
|
1,749,891
|
|
|
1,827,421
|
|
Long-term debt
|
2,985,716
|
|
|
2,943,660
|
|
Deferred income taxes
|
322,036
|
|
|
339,325
|
|
Noncurrent income tax payable
|
52,000
|
|
|
54,304
|
|
Other liabilities
|
527,174
|
|
|
432,395
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock - $100 par value; 100,000 shares authorized; none issued
|
—
|
|
|
—
|
|
Common stock - $1 par value; 500,000,000 shares authorized; 258,551,748 and 257,822,352 shares issued at December 31, 2019 and 2018
|
258,552
|
|
|
257,822
|
|
Additional paid-in capital
|
869,719
|
|
|
886,016
|
|
Retained earnings
|
8,211,257
|
|
|
7,815,486
|
|
Accumulated other comprehensive loss
|
(216,026)
|
|
|
(243,096)
|
|
Treasury stock, at cost: 114,249,432 and 112,905,810 shares at December 31, 2019 and 2018
|
(6,090,842)
|
|
|
(5,947,562)
|
|
Total stockholders' equity
|
3,032,660
|
|
|
2,768,666
|
|
Total liabilities and stockholders' equity
|
$
|
8,669,477
|
|
|
$
|
8,365,771
|
|
See Notes to Consolidated Financial Statements
DOVER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock $1 Par Value
|
|
Additional Paid-In Capital
|
|
Treasury Stock
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Earnings (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
|
—
|
|
|
—
|
|
|
—
|
|
|
811,665
|
|
|
—
|
|
|
811,665
|
|
Dividends paid ($1.82 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(283,959)
|
|
|
—
|
|
|
(283,959)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for the exercise of share-based awards
|
454
|
|
|
(18,897)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,443)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
—
|
|
|
26,528
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock acquired
|
—
|
|
|
—
|
|
|
(105,023)
|
|
|
—
|
|
|
—
|
|
|
(105,023)
|
|
Other comprehensive earnings, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
164,567
|
|
|
164,567
|
|
Other
|
—
|
|
|
(11,901)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,901)
|
|
Balance at December 31, 2017
|
|
256,992
|
|
|
942,485
|
|
|
(5,077,039)
|
|
|
8,455,501
|
|
|
(194,759)
|
|
|
4,383,180
|
|
Adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
—
|
|
|
12,856
|
|
|
(12,856)
|
|
|
—
|
|
Cumulative catch-up adjustment related to Adoption of Topic 606
|
—
|
|
|
—
|
|
|
—
|
|
|
175
|
|
|
—
|
|
|
175
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
570,267
|
|
|
—
|
|
|
570,267
|
|
Dividends paid ($1.90 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(283,570)
|
|
|
—
|
|
|
(283,570)
|
|
Separation of Apergy
|
—
|
|
|
—
|
|
|
—
|
|
|
(939,743)
|
|
|
32,928
|
|
|
(906,815)
|
|
Common stock issued for the exercise of share-based awards
|
830
|
|
|
(47,084)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46,254)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
—
|
|
|
24,442
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock acquired
|
—
|
|
|
(24,454)
|
|
|
(870,523)
|
|
|
—
|
|
|
—
|
|
|
(894,977)
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(68,409)
|
|
|
(68,409)
|
|
Other
|
—
|
|
|
(9,373)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,373)
|
|
Balance at December 31, 2018
|
|
257,822
|
|
|
886,016
|
|
|
(5,947,562)
|
|
|
7,815,486
|
|
|
(243,096)
|
|
|
2,768,666
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
677,918
|
|
|
—
|
|
|
677,918
|
|
Dividends paid ($1.94 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(282,197)
|
|
|
—
|
|
|
(282,197)
|
|
Common stock issued for the exercise of share-based awards
|
|
730
|
|
|
(38,100)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,370)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
—
|
|
|
29,702
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock acquired
|
|
—
|
|
|
—
|
|
|
(143,280)
|
|
|
—
|
|
|
—
|
|
|
(143,280)
|
|
Other comprehensive earnings, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,070
|
|
|
27,070
|
|
Other
|
|
—
|
|
|
(7,899)
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
(7,849)
|
|
Balance at December 31, 2019
|
|
$
|
258,552
|
|
|
$
|
869,719
|
|
|
$
|
(6,090,842)
|
|
|
$
|
8,211,257
|
|
|
$
|
(216,026)
|
|
|
$
|
3,032,660
|
|
See Notes to Consolidated Financial Statements
DOVER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Operating Activities of Continuing Operations
|
|
|
|
|
|
|
|
Net earnings
|
$
|
677,918
|
|
|
$
|
570,267
|
|
|
$
|
811,665
|
|
Adjustments to reconcile net earnings to cash from operating activities:
|
|
|
|
|
|
Loss (earnings) from discontinued operations, net
|
—
|
|
|
20,878
|
|
|
(65,002)
|
|
Loss on assets held for sale
|
46,946
|
|
|
—
|
|
|
—
|
|
Loss on extinguishment of debt
|
23,543
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
272,287
|
|
|
282,580
|
|
|
283,278
|
|
Stock-based compensation
|
29,702
|
|
|
23,698
|
|
|
24,073
|
|
|
|
|
|
|
|
Gain on sale of businesses
|
—
|
|
|
—
|
|
|
(203,135)
|
|
Provision for losses on accounts receivable (net of recoveries)
|
5,933
|
|
|
3,875
|
|
|
10,341
|
|
Deferred income taxes
|
(11,966)
|
|
|
(35,448)
|
|
|
(160,395)
|
|
Employee benefit plan expense
|
5,844
|
|
|
11,912
|
|
|
12,191
|
|
Contributions to employee benefit plans
|
(21,436)
|
|
|
(25,933)
|
|
|
(18,588)
|
|
Other, net
|
(3,652)
|
|
|
(6,762)
|
|
|
(4,216)
|
|
Cash effect of changes in assets and liabilities (excluding effects of acquisitions, dispositions and foreign exchange):
|
|
|
|
|
|
Accounts receivable
|
(7,903)
|
|
|
(87,573)
|
|
|
(43,450)
|
|
Inventories
|
(56,870)
|
|
|
(85,052)
|
|
|
605
|
|
Prepaid expenses and other assets
|
(25,797)
|
|
|
(7,453)
|
|
|
(5,232)
|
|
Accounts payable
|
18,270
|
|
|
106,561
|
|
|
94,052
|
|
Accrued compensation and employee benefits
|
15,580
|
|
|
(7,037)
|
|
|
23,319
|
|
Accrued expenses and other liabilities
|
(12,656)
|
|
|
(5,026)
|
|
|
(36,024)
|
|
Accrued taxes
|
(10,437)
|
|
|
29,706
|
|
|
15,927
|
|
Net cash provided by operating activities of continuing operations
|
945,306
|
|
|
789,193
|
|
|
739,409
|
|
Investing Activities of Continuing Operations
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
(186,804)
|
|
|
(170,994)
|
|
|
(170,068)
|
|
Acquisitions (net of cash and cash equivalents acquired)
|
(215,687)
|
|
|
(68,557)
|
|
|
(27,188)
|
|
Proceeds from sale of property, plant and equipment
|
4,168
|
|
|
5,908
|
|
|
11,774
|
|
Proceeds from sale of businesses
|
24,218
|
|
|
3,937
|
|
|
372,666
|
|
|
|
|
|
|
|
Other
|
(10,150)
|
|
|
(15,774)
|
|
|
21,151
|
|
Net cash (used in) provided by investing activities of continuing operations
|
(384,255)
|
|
|
(245,480)
|
|
|
208,335
|
|
Financing Activities of Continuing Operations
|
|
|
|
|
|
|
|
Cash received from Apergy, net of cash distributed
|
—
|
|
|
689,643
|
|
|
—
|
|
Change in commercial paper and notes payable, net
|
(135,650)
|
|
|
(10,722)
|
|
|
(182,596)
|
|
Proceeds from long-term debt
|
847,469
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
(805,112)
|
|
|
(350,000)
|
|
|
—
|
|
Dividends to stockholders
|
(282,197)
|
|
|
(283,570)
|
|
|
(283,959)
|
|
Purchase of common stock
|
(143,280)
|
|
|
(894,977)
|
|
|
(105,023)
|
|
Payments for employee tax obligations upon exercise of share-based awards
|
(37,370)
|
|
|
(46,254)
|
|
|
(18,443)
|
|
Other
|
(1,902)
|
|
|
(1,958)
|
|
|
(2,912)
|
|
Net cash used in financing activities of continuing operations
|
(558,042)
|
|
|
(897,838)
|
|
|
(592,933)
|
|
Cash Flows from Discontinued Operations
|
|
|
|
|
|
|
|
Net cash provided by operating activities of discontinued operations
|
—
|
|
|
9,442
|
|
|
96,225
|
|
Net cash used in investing activities of discontinued operations
|
—
|
|
|
(23,705)
|
|
|
(46,484)
|
|
Net cash used in financing activities of discontinued operations
|
—
|
|
|
—
|
|
|
(1,208)
|
|
Net cash (used in) provided by discontinued operations
|
—
|
|
|
(14,263)
|
|
|
48,533
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(1,977)
|
|
|
10,645
|
|
|
1,474
|
|
Net (decrease) increase in cash and cash equivalents
|
1,032
|
|
|
(357,743)
|
|
|
404,818
|
|
Cash and cash equivalents at beginning of year
|
396,221
|
|
|
753,964
|
|
|
349,146
|
|
Cash and cash equivalents at end of year
|
$
|
397,253
|
|
|
$
|
396,221
|
|
|
$
|
753,964
|
|
Supplemental information - cash paid during the year for:
|
|
|
|
|
|
Income taxes
|
$
|
191,084
|
|
|
$
|
135,427
|
|
|
$
|
337,987
|
|
Interest
|
126,753
|
|
|
131,823
|
|
|
140,863
|
|
See Notes to Consolidated Financial Statements
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Dover Corporation ("Dover" or "Company") is a diversified global manufacturer and solutions provider delivering innovative equipment and components, consumable supplies, aftermarket parts, software and digital solutions and support services. The Company’s businesses are based primarily in the United States and Europe with manufacturing and other operations throughout the world. The Company operates through five business segments that are structured around similar business models, go-to market strategies and manufacturing practices: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions and Refrigeration & Food Equipment. For additional information on the Company’s segments, see Note 19 — Segment Information.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The results of operations of acquired businesses are included from the dates of acquisitions. As discussed in Note 5 — Discontinued and Disposed Operations, the Company is reporting the assets, liabilities, results of operations and cash flows of Apergy prior to the spin-off, as discontinued operations for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying disclosures. These estimates may be adjusted due to changes in future economic, industry, or customer financial conditions, as well as changes in technology or demand. Estimates are used for, but not limited to, allowances for doubtful accounts receivable, net realizable value of inventories, restructuring reserves, warranty reserves, pension and post-retirement plans, stock-based compensation, useful lives for depreciation and amortization of long-lived assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Actual results may ultimately differ from estimates, although management does not believe such differences would materially affect the consolidated financial statements in any individual year. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the Consolidated Financial Statements in the period that they are determined.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments, which are highly liquid in nature and have original maturities at the time of purchase of three months or less. The carrying value of cash and cash equivalents approximate fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at face amounts less an allowance for doubtful accounts. The allowance is an estimate based on historical collection experience, current economic and market conditions and a review of the current status of each customer's trade accounts receivable. Management evaluates the aging of the accounts receivable balances and the financial condition of its customers to estimate the amount of accounts receivable that may not be collected in the future and records the appropriate provision.
Inventories
Inventories for the majority of the Company’s subsidiaries, including all international subsidiaries, are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Other domestic inventories are stated at cost, determined on the last-in, first-out (LIFO) basis, which is less than market value.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Property, Plant and Equipment
Property, plant and equipment includes the historical cost of land, buildings, machinery and equipment, purchased software and significant improvements to existing plant and equipment or, in the case of acquisitions, the fair value appraisal of assets. Expenditures for maintenance, repairs and minor renewals are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. The Company depreciates its assets on a straight-line basis over their estimated useful lives as follows: buildings and improvements 5 to 31.5 years; machinery and equipment 3 to 15 years; furniture and fixtures 3 to 7 years; vehicles 3 to 7 years; and software 3 to 10 years.
Derivative Financial Instruments
The Company uses derivative financial instruments to hedge its exposures to various risks, including interest rate and foreign currency exchange rate risk. The Company does not enter into derivative financial instruments for speculative purposes and does not have a material portfolio of derivative financial instruments. Derivative financial instruments used for hedging purposes must be designated and effective as a hedge of the identified risk exposure at inception of the contract. The Company recognizes all derivatives as either assets or liabilities on the consolidated balance sheet and measures those instruments at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair value of both the derivatives and of the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the change in the fair value of the derivatives is recorded as a component of other comprehensive earnings and subsequently recognized in net earnings when the hedged items impact earnings.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. Goodwill and certain other intangible assets deemed to have indefinite lives (primarily trademarks) are not amortized. For goodwill, impairment tests are required at least annually, or more frequently if events or circumstances indicate that it may be impaired, when some portion but not all of a reporting unit is disposed of or classified as assets held for sale, or when a change in the composition of reporting units occurs for other reasons, such as a change in segments.
The Company performs its goodwill impairment test annually in the fourth quarter at the reporting unit level. Concurrent with the timing of the annual impairment test, effective October 1, 2019, the Company changed its management structure which resulted in a change in its operating segments and reporting units. As a result, management tested goodwill for impairment before and after the segment change under the old and new reporting unit structures. Based on its new organizational structure, the Company identified fifteen reporting units for which cash flows are determinable and to which goodwill may be allocated.
A quantitative test is used to determine existence of goodwill impairment and the amount of the impairment loss at the reporting unit level. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses an income-based valuation method, determining the present value of estimated future cash flows, to estimate the fair value of a reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Factors used in the impairment analysis require significant judgment, and actual results may differ from assumed and estimated amounts. The Company uses its own market assumptions including internal projections of future cash flows, discount rates and other assumptions considered reasonable in the analysis. These forecasts are based on historical performance and future estimated results. The discount rates used in these analyses vary by reporting unit and are based on a capital asset pricing model and published relevant industry rates. The Company uses discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in the internally developed forecasts. See Note 9 — Goodwill and Other Intangible Assets for further discussion of the Company's annual goodwill impairment test and results.
The Company uses an income-based valuation method to annually test its indefinite-lived intangible assets for impairment. The fair value of the intangible asset is compared to its carrying value. This method uses the Company’s own market assumptions, which are considered reasonable. Any excess of carrying value over the estimated fair value is recognized as an impairment loss. No impairment of indefinite-lived intangible assets was required for the years ended December 31, 2019, 2018, or 2017.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Other intangible assets with determinable lives primarily consist of customer intangibles, unpatented technologies, patents and trademarks. The other intangible assets are amortized over their estimated useful lives, ranging from 5 to 20 years.
Long-lived assets (including definite-lived intangible assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as a significant sustained change in the business climate. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows is produced and compared to its carrying value. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value, as determined by an estimate of discounted future cash flows.
Leases
Effective January 1, 2019, the Company adopted Accounting Standard Codification ("ASC") Topic 842, Leases, which requires the recording of operating lease right-of-use assets ("ROU") and operating lease liabilities. Finance leases were not impacted by the adoption of ASC Topic 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC Topic 840.
The Company has operating and finance leases for corporate offices, manufacturing plants, research and development facilities, shared services facilities, vehicle fleets and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded in the balance sheet. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.
The Company determines if an arrangement is a lease at inception of a contract. Operating lease ROU assets are included in other assets and deferred charges and operating lease liabilities are included in other accrued expenses and other liabilities in the Consolidated Balance Sheet. Finance lease ROU assets are included in property and equipment, and the related lease liabilities are included in other accrued expenses and other liabilities in the Consolidated Balance Sheet.
ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. ROU assets also include any advance lease payments made and exclude lease incentives. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Fixed operating lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.
Restructuring Accruals
The Company takes actions to reduce headcount, close facilities, or otherwise exit operations. Such restructuring activities at an operation are recorded when management has committed to an exit or reorganization plan and when termination benefits are probable and can be reasonably estimated based on circumstances at the time the restructuring plan is approved by management or when termination benefits are communicated. Exit costs may include contractual terminations and asset impairments as a result of an approved restructuring plan. The accrual of both severance and exit costs requires the use of estimates. Though the Company believes that its estimates accurately reflect the anticipated costs, actual results may be different from the original estimated amounts.
Foreign Currency
Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, have been translated at year-end exchange rates and profit and loss accounts have been translated using weighted-average monthly exchange
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
rates. Foreign currency translation gains and losses are included in the Consolidated Statements of Comprehensive Earnings as a component of other comprehensive earnings (loss). Assets and liabilities of an entity that are denominated in currencies other than an entity’s functional currency are re-measured into the functional currency using end of period exchange rates or historical rates, where applicable to certain balances. Gains and losses related to these re-measurements are recorded within the Consolidated Statements of Earnings as a component of other income, net. Gains and losses arising from intercompany foreign currency transactions that are of a long-term investment in nature are reported in the same manner as translation adjustments.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms are identified and collectability is probable. Once the Company has entered a contract, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized as control of promised goods or services transfers to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The amount of revenue recognized takes into account variable consideration, such as discounts and volume rebates.
Prior to 2018, revenue was recognized when all the following conditions were satisfied: a) persuasive evidence of an arrangement exists, b) price is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurred or services have been rendered.
The majority of the Company’s revenue is generated through the manufacture and sale of a broad range of specialized products and components, with revenue recognized upon transfer of control, title and risk of loss, which is generally upon shipment. Service revenue represents less than 5% of total revenue and is recognized as the services are performed. In limited cases, revenue arrangements with customers require delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue is recognized. The Company includes shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.
Stock-Based Compensation
The principal awards issued under the Company’s stock-based compensation plans include non-qualified stock appreciation rights ("SARs"), restricted stock units and performance share awards. The cost for such awards is measured at the grant date based on the fair value of the award. At the time of grant, the Company estimates forfeitures, based on historical experience, in order to estimate the portion of the award that will ultimately vest. The value of the portion of the award that is expected to ultimately vest is recognized as expense on a straight-line basis, generally over the explicit service period of three years (except for retirement-eligible employees) and is included in selling, general and administrative expenses in the Consolidated Statements of Earnings. Expense for awards granted to retirement-eligible employees is recorded over the period from the date of grant through the date the employee first becomes eligible to retire and is no longer required to provide service. See Note 15 — Equity and Cash Incentive Program for additional information related to the Company’s stock-based compensation.
Income Taxes
The provision for income taxes includes federal, state, local and non-U.S. taxes. Tax credits, primarily for research and experimentation, are recognized as a reduction of the provision for income taxes in the year in which they are available for tax purposes. Deferred taxes are provided using enacted rates on the future tax consequences of temporary differences. Temporary differences include the differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis and the tax benefit of carryforwards. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all will not be realized. In assessing the need for a valuation allowance, management considers all available evidence, including the future reversal of existing taxable temporary differences, taxable income in carryback periods, prudent and feasible tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax regulations, interpretations and rulings, changes to enacted statutory tax rates and changes to future taxable income estimates.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position in consideration of applicable tax statutes and related interpretations and precedents. Tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized on ultimate settlement.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company is subject to incremental U.S. tax on GILTI income due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for the GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities, and included these amounts in its consolidated financial statements for the year ended December 31, 2017. In accordance with SAB 118, the Company finalized the financial reporting impact of the Tax Reform Act in the fourth quarter of 2018. For the year ended December 31, 2018, the Company recorded a $4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company made as a result of the Tax Reform Act.
Research and Development Costs
Research and development costs, including qualifying engineering costs, are expensed when incurred and amounted to $140,957 in 2019, $143,033 in 2018 and $130,536 in 2017. These costs as a percent of revenue were 2.0% in 2019, 2.0% in 2018 and 1.9% in 2017.
Advertising Costs
Advertising costs are expensed when incurred and amounted to $24,609 in 2019, $26,831 in 2018 and $33,369 in 2017.
Risk, Retention, Insurance
The Company currently self-insures its product and commercial general liability claims up to $5.0 million per occurrence, its workers’ compensation claims up to $0.8 million per occurrence and automobile liability claims up to $1.0 million per occurrence. Third-party insurance provides primary level coverage in excess of these amounts up to certain specified limits. In addition, the Company has excess liability insurance from third-party insurers on both an aggregate and an individual occurrence basis well in excess of the limits of the primary coverage. A worldwide program of property insurance covers the Company’s owned and leased property and business interruption that may occur due to an insured hazard affecting those properties, subject to reasonable deductibles and aggregate limits. The Company’s property and casualty insurance programs contain various deductibles that, based on the Company’s experience, are typical and customary for a company of its size and risk profile. The Company does not consider any of the deductibles to represent a material risk to the Company. The Company generally maintains deductibles for claims and liabilities related primarily to workers’ compensation, health and welfare claims, general commercial, product and automobile liability, cybersecurity risks, property damage and business interruption resulting from certain events. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. As part of the Company’s risk management program, insurance is maintained to transfer risk beyond the level of self-retention and provide protection on both an individual claim and annual aggregate basis.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Reclassifications – Certain amounts in prior years have been reclassified to conform to the current year presentation. As described in Note 19 — Segment Information, the Company realigned into five business segments effective October 1, 2019.
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 June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. In addition, the FASB issued ASU 2019-04, Codification Improvements to Topic 326 which provides clarity on certain aspects of the amendments in ASU 2016-13. The guidance is effective for interim and annual periods for the Company beginning on January 1, 2020. The Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses. Management does not expect this update to have a material impact to the Company's Consolidated Financial Statements.
Recently Adopted Accounting Standards
In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. One of the changes in the ASU requires a presentation of changes in stockholders’ equity in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim periods. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on January 1, 2019. The additional elements of the ASU did not have a material impact on the Company's Consolidated Financial Statements. This guidance was effective immediately upon issuance.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The Company early adopted the guidance prospectively beginning on January 1, 2019. The adoption of this ASU did not have a material impact on the Company's Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments will be recorded in Other Comprehensive Income ("OCI") and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The Company adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the Company's Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amended 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. In addition, the FASB issued ASU 2018-11, Leases Targeted Improvements, which provides an additional transition method that allows entities to apply the new leases standard at adoption date. The Company elected this new transition method when it adopted ASU 2016-02 on January 1, 2019. Upon adoption on January 1, 2019, total assets and liabilities increased due to the
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
recording of right-of-use assets and lease liabilities amounting to approximately $163 million. See Note 8 — Leases for further details.
2. Spin-off of Apergy Corporation
On May 9, 2018, Dover completed the distribution of Apergy to its shareholders. The transaction was completed through the pro rata distribution of 100% of the common stock of Apergy to Dover's shareholders of record as of the close of business on April 30, 2018. Each Dover shareholder received one share of Apergy common stock for every two shares of Dover common stock held as of the record date.
The following is a summary of the assets and liabilities transferred to Apergy as part of the separation on May 9, 2018:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
Cash and cash equivalents
|
|
$
|
10,357
|
|
Current assets
|
|
462,620
|
|
Non-current assets
|
|
1,438,760
|
|
|
|
$
|
1,911,737
|
|
Liabilities:
|
|
|
Current liabilities
|
|
$
|
185,354
|
|
Non-current liabilities
|
|
119,568
|
|
|
|
$
|
304,922
|
|
|
|
|
Net assets distributed to Apergy Corporation
|
|
$
|
1,606,815
|
|
Less: Cash received from Apergy Corporation
|
|
700,000
|
|
Net distribution to Apergy Corporation
|
|
$
|
906,815
|
|
In connection with the spin-off from the Company, Apergy issued and sold $300.0 million in aggregate principal amount of its 6.375% senior notes due May 2026 in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended, and incurred $415.0 million in borrowings under its new senior secured term loan facility to fund a one-time cash payment of $700.0 million to Dover. Dover received net cash of $689.6 million upon separation, which reflects $10.4 million of cash held by Apergy on the distribution date and retained by it in connection with its separation from Dover. Dover utilized the proceeds from Apergy as the primary source of funding for the 2018 accelerated share repurchase program. See Note 21 — Stockholders' Equity for further information.
Included within the net assets distributed to Apergy is approximately $33 million of accumulated other comprehensive earnings attributable to Apergy, relating primarily to foreign currency translation gains, offset by unrecognized losses on pension obligations.
The historical results of Apergy, including the results of operations, cash flows, and related assets and liabilities have been reclassified to discontinued operations for all periods presented herein. See Note 5 — Discontinued and Disposed Operations.
3. Revenue
Revenue from contracts with customers
Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Accordingly, all periods prior to January 1, 2018 are presented in accordance with ASC Topic 605, Revenue Recognition.
Under ASC Topic 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms are identified and collectability is probable. Once the Company has entered a contract, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized as control of promised goods or services transfers to the customer in an amount that reflects the
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
consideration the Company expects to receive in exchange for those goods or services. The amount of revenue recognized takes into account variable consideration, such as discounts and volume rebates.
A majority of the Company’s revenue is short cycle in nature with shipments within one year from order. A small portion of the Company’s revenue derives from contracts extending over one year. The Company's payment terms generally range between 30 to 90 days and vary by the location of businesses, the type of products manufactured to be sold and the volume of products sold, among other factors.
Disaggregation of Revenue
Revenue from contracts with customers is disaggregated by segments and geographic location, as it best depicts the nature and amount of the Company's revenue.
See Note 19 — Segment Information for revenue by segment and geographic location.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer, and is the unit of accounting under ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A majority of the Company’s contracts have a single performance obligation which represents, in most cases, the equipment or product being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation, extended warranty and/or maintenance services. These contracts require judgment in determining the number of performance obligations.
The Company has elected to use the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component if it is expected, at contract inception, that the period between when Dover transfers a promised good or service to a customer, and when the customer pays for that good or service, will be one year or less. Thus, the Company may not consider an advance payment to be a significant financing component, if it is received less than one year before product completion.
The majority of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation.
The Company may also offer service-type warranties that provide services to the customer, in addition to the assurance that the product complies with agreed-upon specifications. If a warranty is determined to be a service-type warranty, it represents a distinct service and is treated as a separate performance obligation.
For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the standalone selling price for separate performance obligations or a cost plus margin approach when one is not available.
Over 95% of the Company’s performance obligations are recognized at a point in time that relate to the manufacture and sale of a broad range of products and components. Revenue is recognized when control transfers to the customer upon shipment or completion of installation, testing, certification, or other substantive acceptance provisions required under the contract. Less than 5% of the Company’s revenue is recognized over time and relates to the sale of engineered to order equipment or services.
For revenue recognized over time, there are two types of methods for measuring progress and both are relevant to the Company: (1) input methods and (2) output methods. Although this may vary by business, input methods generally are based on costs incurred relative to estimated total costs. Output methods generally are based on a measurement of progress, such as milestone achievement. The businesses use the method and measure of progress that best depicts the transfer of control to the customer of the goods or services to date relative to the remaining goods or services promised under the contract.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Transaction Price Allocated to the Remaining Performance Obligations
At December 31, 2019, we estimated that $80.4 million in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. We expect to recognize approximately 50% of our unsatisfied (or partially unsatisfied) performance obligations as revenue in 2020, with the remaining balance to be recognized in 2021 and thereafter.
Remaining consideration, including variable consideration, from contracts with customers is included in the amounts presented above and primarily consists of extended warranties on products and multi-year maintenance agreements, which are typically recognized as the performance obligation is satisfied.
The Company applied the standard's practical expedient that permits the omission of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2019
|
|
12/31/2018
|
|
At Adoption
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
14,894
|
|
|
$
|
9,330
|
|
|
$
|
11,932
|
|
Contract liabilities - current
|
|
44,001
|
|
|
36,461
|
|
|
48,268
|
|
Contract liabilities - non-current
|
|
9,121
|
|
|
9,382
|
|
|
9,916
|
|
Contract assets primarily relate to the Company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid and other current assets in the Condensed Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in other accrued expenses and non-current contract liabilities are recorded in other liabilities in the Condensed Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.
The revenue recognized during 2019 and 2018 that was included in the contract liability at the beginning of the respective periods amounted to $31,283 and $38,410.
Contract Costs
Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services in the Condensed Consolidated Statements of Earnings.
Critical Accounting Estimates
Estimates are used to determine the amount of variable consideration in contracts, the standalone selling price among separate performance obligations and the measure of progress for contracts where revenue is recognized over time. The Company reviews and updates these estimates regularly.
Some contracts with customers include variable consideration primarily related to volume rebates. The Company estimates variable consideration at the most likely amount to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Changes in Accounting Policies
The Company adopted ASC Topic 606, effective January 1, 2018, using the modified retrospective method applying ASC Topic 606 to contracts that are not complete as of the date of initial application. Under the modified retrospective method, the cumulative effect of applying the standard has been recognized at the date of initial application, January 1, 2018. The comparative information has not been adjusted and continues to be reported under ASC Topic 605. The Company's accounting policy has been updated to align with ASC Topic 606, and no significant changes to revenue recognition have occurred as a result of the change.
Shipping and handling charges are not considered a separate performance obligation. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.
Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (e.g., sales, use, value added, and some excise taxes) are excluded from revenue. The Company's policy elections related to shipping and handling and taxes have not changed with the adoption of ASC Topic 606.
Under ASC Topic 605, revenue was generally recognized when all of the following criteria were met: a) persuasive evidence of an arrangement exists, b) price is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurred or services have been rendered. The majority of the Company's revenue is generated through the manufacture and sale of a broad range of specialized products and components and revenue was recognized upon transfer of title and risk of loss, which was generally upon shipment. In limited cases, the Company's revenue arrangements with customers required delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue was recognized. The Company included shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.
Impact on Financial Statements
The adoption of ASC Topic 606 impacted certain contracts for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin. For these contracts, the Company now recognizes revenue over time based on the method and measure of progress that best depicts the transfer of control to the customer of the goods or services to date relative to the remaining goods or services promised under the contract.
The Company recorded a cumulative catch-up adjustment to retained earnings at January 1, 2018 for $0.2 million, related to the impact of adopting ASC Topic 606 under the modified retrospective method.
4. Acquisitions
2019
During the year ended December 31, 2019, the Company acquired three businesses in separate transactions for total consideration of $216,398, net of cash acquired and including contingent consideration. These businesses were acquired to complement and expand upon existing operations within the Fueling Solutions and Pumps & Process Solutions segments. The goodwill recorded as a result of these acquisitions represents the economic benefits expected to be derived from product line expansions and operational synergies. The goodwill is deductible for U.S. income tax purposes for these acquisitions.
On May 7, 2019, the Company acquired the assets of the All-Flo Pump Company, Limited business ("All-Flo"), a growing manufacturer of specialty pumps for $39,954. The All-Flo acquisition strengthens Dover's position in the growing market for air-operated double-diaphragm pumps within the Pumps & Process Solutions segment.
On January 25, 2019, the Company acquired the assets of Belanger, Inc. ("Belanger"), a leading full-line car wash equipment manufacturer for $175,350, net of cash acquired. The Belanger acquisition strengthens Dover's position in the vehicle wash business within the Fueling Solutions segment.
One other immaterial acquisition was completed during the year ended December 31, 2019, which included contingent consideration, within the Pumps & Process Solutions segment.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on their estimated fair values at acquisition date:
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Current assets, net of cash acquired
|
$
|
14,018
|
|
|
|
|
Property, plant and equipment
|
1,030
|
|
|
|
|
Goodwill
|
119,512
|
|
|
|
|
Intangible assets
|
91,980
|
|
|
|
|
Other assets and deferred charges
|
20
|
|
|
|
|
Current liabilities
|
(10,162)
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
$
|
216,398
|
|
|
|
|
The amounts assigned to goodwill and major intangible asset classifications were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated
|
|
Useful life (in years)
|
Goodwill
|
$
|
119,512
|
|
|
na
|
|
|
|
|
Customer intangibles
|
68,500
|
|
|
9 - 13
|
Patents
|
16,000
|
|
|
9
|
Trademarks
|
7,480
|
|
|
15
|
|
|
|
|
|
$
|
211,492
|
|
|
|
2018
During the year ended December 31, 2018, the Company acquired two businesses in separate transactions for total consideration of $68,557, net of cash acquired. The businesses were acquired to complement and expand upon existing operations within the Pumps & Process Solutions and Refrigeration & Food Equipment segments. The goodwill identified by these acquisitions reflects the benefits expected to be derived from product line expansion and operational synergies. The goodwill is non-deductible for U.S. federal income tax purposes for these acquisitions.
On January 2, 2018, the Company acquired 100% of the voting stock of Ettlinger Group ("Ettlinger"), within the Pumps & Process Solutions segment for $53,218, net of cash acquired. In connection with this acquisition, the Company recorded goodwill of $36,303 and intangible assets of $19,907, primarily related to customer intangibles. The intangible assets are being amortized over 8 to 15 years.
On January 12, 2018, the Company acquired 100% of the voting stock of Rosario Handel B.V. ("Rosario"), within the Refrigeration & Food Equipment segment for total consideration of $15,339, net of cash acquired. In connection with this acquisition, the Company recorded goodwill of $10,408 and a customer intangible asset of $4,149. The customer intangible asset is being amortized over 10 years.
The pro forma effects of the 2019 and 2018 acquisitions on the Company’s operations are disclosed in this footnote.
2017
During the year ended December 31, 2017, the Company acquired two businesses in separate transactions for total consideration of $34,300. On April 5, 2017, the Company purchased 100% of the voting stock of Caldera Graphics S.A.S. ("Caldera") within the Imaging & Identification segment for $32,857, net of cash acquired and including contingent consideration. One other immaterial acquisition was completed during the year within the Imaging & Identification segment.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Pro Forma Information
The following unaudited pro forma results of operations reflect the 2019 acquisitions as if they had occurred on January 1, 2018 and the 2018 acquisitions as if they had occurred on January 1, 2017. The pro forma information is not necessarily indicative of the results that actually would have occurred, nor does it indicate future operating results. The supplemental pro forma earnings reflect adjustments to earnings from continuing operations as reported in the Consolidated Statements of Earnings to exclude nonrecurring expense related to the fair value adjustments to acquisition-date inventory (after-tax) and acquisition-related costs (after-tax) from the year ended December 31, 2019. These adjustments were not material in 2019 and 2018. The supplemental pro forma earnings for the 2018 period were similarly adjusted for 2018 acquisitions charges as if incurred at the beginning of 2017. The 2019 and 2018 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 2019 and 2018 acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
As reported
|
$
|
7,136,397
|
|
|
$
|
6,992,118
|
|
Pro forma
|
7,145,275
|
|
|
7,059,856
|
|
Earnings:
|
|
|
|
As reported
|
$
|
677,918
|
|
|
$
|
591,145
|
|
Pro forma
|
680,824
|
|
|
600,603
|
|
Basic earnings per share:
|
|
|
|
As reported
|
$
|
4.67
|
|
|
$
|
3.94
|
|
Pro forma
|
4.69
|
|
|
4.01
|
|
Diluted earnings per share:
|
|
|
|
As reported
|
$
|
4.61
|
|
|
$
|
3.89
|
|
Pro forma
|
4.63
|
|
|
3.95
|
|
5. Discontinued and Disposed Operations
Discontinued Operations
The Apergy businesses, as discussed in Note 2, met the criteria to be reported as discontinued operations because the spin-off is a strategic shift in business that has a major effect on the Company's operations and financial results. Therefore, the results of discontinued operations for the years ended December 31, 2018 and 2017 include the historical results of Apergy prior to its distribution on May 9, 2018. The years ended December 31, 2018 and 2017 included costs incurred by Dover to complete the spin-off of Apergy amounting to $46,384 and $15,270, respectively, reflected in selling, general and administrative expenses in discontinued operations. Due to lump-sum payments made in 2018 for Apergy participants of the Dover U.S. Pension Plan, non-cash settlement and curtailment costs of approximately $9,200 were classified within discontinuing operations. See Note 2 — Spin-off of Apergy Corporation and Note 17 — Employee Benefit Plans for further information.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Summarized results of the Company's discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Revenue
|
|
|
|
|
|
|
$
|
403,688
|
|
|
$
|
1,010,135
|
|
Cost of goods and services
|
|
|
|
|
|
|
254,205
|
|
|
648,805
|
|
Gross profit
|
|
|
|
|
|
|
149,483
|
|
|
361,330
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
147,261
|
|
|
262,353
|
|
Operating earnings
|
|
|
|
|
|
|
2,222
|
|
|
98,977
|
|
Other expense, net
|
|
|
|
|
|
|
9,048
|
|
|
949
|
|
(Loss) earnings from discontinued operations before taxes
|
|
|
|
|
|
|
(6,826)
|
|
|
98,028
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
14,052
|
|
|
33,026
|
|
(Loss) earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
$
|
(20,878)
|
|
|
$
|
65,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 9, 2018, all assets and liabilities of Apergy were spun-off. Therefore, as of December 31, 2019 and 2018, there were no assets and liabilities classified as discontinued operations.
Disposed Businesses
2019
On March 29, 2019, the Company entered into a definitive agreement to sell Finder Pompe S.r.l ("Finder"), a wholly owned subsidiary, to Gruppo Aturia S.p.A (“Aturia”). As of March 31, 2019, Finder met the criteria to be classified as held for sale. The Company classified Finder's assets and liabilities separately on the consolidated balance sheet as of March 31, 2019.
Based on the total consideration from the sale, net of selling costs, the Company recorded a loss on the assets held for sale of $46,946 in the Condensed Consolidated Statements of Earnings during the three months ended March 31, 2019. The loss was comprised of an impairment on assets held for sale of $21,607 and $25,339 of foreign currency translation losses reclassified out of accumulated other comprehensive losses.
On April 2, 2019, Dover completed the sale of Finder to Aturia, which generated total cash proceeds of $24,218. The Finder business was included in the results of the Pumps & Process Solutions segment. The sale does not represent a strategic shift that will have a major effect on operations and financial results and, therefore, did not qualify for presentation as a discontinued operation.
2018
There were no other material dispositions in 2018 aside from the spin-off of Apergy.
2017
On November 1, 2017, the Company completed the sale of the consumer and industrial winch business of Warn Industries, Inc. ("Warn"), a wholly owned subsidiary of the Company, for total consideration of $250,283. The Company recognized a pre-tax gain on sale of $116,932. The Company retained the automotive business of Warn within the Engineered Products segment.
On February 14, 2017, the Company completed the sale of Performance Motorsports International ("PMI"), a wholly owned subsidiary of the Company that manufactures pistons and other engine related components serving the motorsports and powersports markets. Total consideration for the transaction was $147,313, including cash proceeds of $118,706. The Company recognized a pre-tax gain on sale of $88,402 and recorded a 25% equity method investment at fair value of $18,607 as well as a subordinated note receivable of $10,000.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Other immaterial dispositions completed during the year were recorded as a net pre-tax loss of $2,196. Gains and losses recorded from the sale of businesses were reported in the gain on sale of businesses line in the Consolidated Statements of Earnings.
6. Inventories
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Raw materials
|
$
|
467,912
|
|
|
$
|
439,616
|
|
Work in progress
|
162,670
|
|
|
154,878
|
|
Finished goods
|
280,051
|
|
|
265,722
|
|
Subtotal
|
910,633
|
|
|
860,216
|
|
Less reserves
|
(104,492)
|
|
|
(111,420)
|
|
Total
|
$
|
806,141
|
|
|
$
|
748,796
|
|
At December 31, 2019 and 2018, approximately 8% and 11%, respectively, of the Company's total inventories were accounted for using the LIFO method.
7. Property, Plant and Equipment, net
The components of property, plant and equipment, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Land
|
$
|
56,583
|
|
|
$
|
53,623
|
|
Buildings and improvements
|
527,192
|
|
|
529,982
|
|
Machinery, equipment and other
|
1,648,354
|
|
|
1,555,345
|
|
Property, plant and equipment, gross
|
2,232,129
|
|
|
2,138,950
|
|
Total accumulated depreciation
|
(1,389,811)
|
|
|
(1,332,453)
|
|
Property, plant and equipment, net
|
$
|
842,318
|
|
|
$
|
806,497
|
|
Total depreciation expense was $133,340, $138,712 and $133,107 for the years ended December 31, 2019, 2018 and 2017, respectively.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
8. Leases
The Company adopted ASC Topic 842, Leases as of January 1, 2019, using the transition method per ASU No. 2018-11 issued in July 2018 wherein entities were allowed to initially apply the new leases standard at adoption date. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. Adoption of ASC Topic 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets and operating lease liabilities of approximately $163 million, as of January 1, 2019. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows. See Note 1 — Basis of Presentation for further detail on ROU assets and lease liabilities.
The components of lease costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Costs:
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
$
|
52,317
|
|
|
|
Variable
|
|
|
|
|
6,584
|
|
|
|
Short-term
|
|
|
|
|
17,387
|
|
|
|
Total(1)
|
|
|
|
|
$
|
76,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Finance lease cost and sublease income were immaterial.
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
|
|
$
|
53,450
|
|
|
|
Operating cash flows from finance leases
|
|
|
|
|
425
|
|
|
Financing cash flows from finance leases
|
|
|
|
|
1,915
|
|
|
Total
|
|
|
|
|
$
|
55,790
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
$
|
41,598
|
|
|
|
Financing leases
|
|
|
|
|
1,542
|
|
|
Total
|
|
|
|
|
$
|
43,140
|
|
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Supplemental balance sheet information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
Right-of-use assets:
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
|
|
|
|
|
|
$
|
155,019
|
|
|
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
$
|
41,835
|
|
Other liabilities
|
|
|
|
|
|
|
121,298
|
|
Total operating lease liabilities
|
|
|
|
|
|
|
$
|
163,133
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
|
|
Right of use assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net (1)
|
|
|
|
|
|
|
$
|
9,008
|
|
|
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
$
|
1,794
|
|
Other liabilities
|
|
|
|
|
|
|
8,078
|
|
Total financing lease liabilities
|
|
|
|
|
|
|
$
|
9,872
|
|
(1) Finance lease assets are recorded net of accumulated depreciation of $4,614.
The aggregate future lease payments for operating and finance leases as of December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
2020
|
$
|
45,838
|
|
|
$
|
2,199
|
|
2021
|
36,761
|
|
|
2,107
|
|
2022
|
26,774
|
|
|
1,816
|
|
2023
|
17,184
|
|
|
1,338
|
|
2024
|
12,966
|
|
|
1,133
|
|
Thereafter
|
40,034
|
|
|
2,909
|
|
Total lease payments
|
179,557
|
|
|
|
11,502
|
|
Less: Interest
|
(16,424)
|
|
|
|
(1,630)
|
|
Present value of lease liabilities
|
$
|
163,133
|
|
|
$
|
9,872
|
|
Average lease terms and discount rates were as follows:
|
|
|
|
|
|
|
December 31, 2019
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
5.9
|
Finance leases
|
5.9
|
Weighted-average discount rate
|
|
Operating leases
|
3.2%
|
|
Finance leases
|
4.1%
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
9. Goodwill and Other Intangible Assets
Goodwill
ASC 350, Intangibles - Goodwill and Other Intangibles, provides guidance on an entity's subsequent measurement and recognition of goodwill and other intangibles, including subsequent changes to carrying amounts, including impairment and fair value adjustments. In accordance with the guidance set forth in ASC 350, and in connection with the separation of Apergy, in 2018, the Company was required to calculate the portion of goodwill included in the Apergy distribution. Using a relative fair value approach, the Company reallocated $3,546 of goodwill from a reporting unit that included Apergy to a reporting unit now included within the Engineered Products segment. In 2019, in connection with the change in segment structure, the Company changed its reporting units which resulted in a reallocation of $40,394 of goodwill from the Engineered Products segment to the Imaging & Identification segment using the relative fair value approach. See Note 19 — Segment Information for further information.
The changes in the carrying value of goodwill by reportable operating segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Products
|
|
Fueling Solutions
|
|
Imaging & Identification
|
|
Pumps & Process Solutions
|
|
Refrigeration & Food Equipment
|
|
Total
|
Goodwill
|
$
|
695,041
|
|
|
$
|
794,635
|
|
|
$
|
960,939
|
|
|
$
|
769,619
|
|
|
$
|
536,699
|
|
|
$
|
3,756,933
|
|
Accumulated impairment loss
|
(10,591)
|
|
|
—
|
|
|
—
|
|
|
(59,970)
|
|
|
—
|
|
|
(70,561)
|
|
Balance at January 1, 2018
|
684,450
|
|
|
794,635
|
|
|
960,939
|
|
|
709,649
|
|
|
536,699
|
|
|
3,686,372
|
|
Reallocation due to Apergy separation
|
3,546
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,546
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
36,303
|
|
|
10,408
|
|
|
46,711
|
|
Purchase price adjustments
|
—
|
|
|
—
|
|
|
328
|
|
|
—
|
|
|
—
|
|
|
328
|
|
Foreign currency translation
|
(8,803)
|
|
|
(24,016)
|
|
|
(16,799)
|
|
|
(8,970)
|
|
|
(1,041)
|
|
|
(59,629)
|
|
Balance at December 31, 2018
|
679,193
|
|
|
770,619
|
|
|
944,468
|
|
|
736,982
|
|
|
546,066
|
|
|
3,677,328
|
|
Acquisitions
|
—
|
|
|
97,898
|
|
|
—
|
|
|
21,614
|
|
|
—
|
|
|
119,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reallocation due to reporting unit changes
|
(40,394)
|
|
|
—
|
|
|
40,394
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Disposition of business
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,739)
|
|
|
—
|
|
|
(4,739)
|
|
Foreign currency translation
|
(2,228)
|
|
|
4,864
|
|
|
(7,793)
|
|
|
(3,230)
|
|
|
(367)
|
|
|
(8,754)
|
|
Balance at December 31, 2019
|
$
|
636,571
|
|
|
$
|
873,381
|
|
|
$
|
977,069
|
|
|
$
|
750,627
|
|
|
$
|
545,699
|
|
|
$
|
3,783,347
|
|
During 2019 and 2018, the Company recognized additions of $119,512 and $46,711, respectively, to goodwill as a result of acquisitions as discussed in Note 4 — Acquisitions. During 2019 and 2018, the Company recorded adjustments totaling $0 and $328, respectively, as a result of the finalization of purchase price allocation to assets acquired and liabilities assumed related to acquisitions completed in 2018 and 2017.
During 2019, the Company derecognized $4,739 of goodwill as a result of the disposition of businesses as discussed in Note 5 — Discontinued and Disposed Operations. The Company reallocated goodwill upon disposal based upon the fair value of the disposed business relative to the remaining entities in its reporting unit.
Annual impairment testing
The Company tests goodwill for impairment annually in the fourth quarter of each year, whenever events or circumstances indicate an impairment may have occurred, or when a change in the composition of reporting units occurs for other reasons, such as a change in segments. Concurrent with the timing of the annual impairment test, effective October 1, 2019, the Company changed its management structure which resulted in a change in its operating segments and reporting units. As a result, management tested goodwill for impairment before and after the segment change under the old and new reporting unit structures.
The Company performed its annual goodwill impairment test during the fourth quarter of 2019 using a discounted cash flow analysis as discussed in Note 1 — Description of Business and Summary of Significant Accounting Policies. The Company performed a quantitative goodwill impairment test for each of its seven reporting units under the old structure and fifteen reporting units under the new structure, concluding that the fair values of all of its reporting units were substantially in excess of their carrying values. No impairment of goodwill was required. As previously noted, the fair values of each of the
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Company’s reporting units was determined using a discounted cash flow analysis which includes management’s current assumptions as to future cash flows and long-term growth rates. The discount rates used in these analyses varied by reporting unit and were based on a capital asset pricing model and published relevant industry rates. The Company used discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in our internally developed forecasts. Discount rates used in the 2019 reporting unit valuations ranged from 8.0% to 9.5%.
While the Company believes the assumptions used in the 2019 impairment analysis are reasonable and representative of expected results, actual results may differ from expectations.
Intangible Assets
The Company's definite-lived and indefinite-lived intangible assets by major asset class were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer intangibles
|
$
|
1,410,636
|
|
|
$
|
714,566
|
|
|
$
|
696,070
|
|
|
$
|
1,395,742
|
|
|
$
|
645,305
|
|
|
$
|
750,437
|
|
Trademarks
|
218,064
|
|
|
85,791
|
|
|
132,273
|
|
|
214,774
|
|
|
72,305
|
|
|
142,469
|
|
Patents
|
159,376
|
|
|
133,677
|
|
|
25,699
|
|
|
144,302
|
|
|
128,254
|
|
|
16,048
|
|
Unpatented technologies
|
154,505
|
|
|
99,276
|
|
|
55,229
|
|
|
155,380
|
|
|
85,560
|
|
|
69,820
|
|
Distributor relationships
|
82,779
|
|
|
44,202
|
|
|
38,577
|
|
|
82,970
|
|
|
37,943
|
|
|
45,027
|
|
Drawings & manuals
|
27,500
|
|
|
22,403
|
|
|
5,097
|
|
|
31,849
|
|
|
23,273
|
|
|
8,576
|
|
Other
|
22,355
|
|
|
16,939
|
|
|
5,416
|
|
|
21,046
|
|
|
15,835
|
|
|
5,211
|
|
Total
|
2,075,215
|
|
|
1,116,854
|
|
|
958,361
|
|
|
2,046,063
|
|
|
1,008,475
|
|
|
1,037,588
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
96,653
|
|
|
—
|
|
|
96,653
|
|
|
96,668
|
|
|
—
|
|
|
96,668
|
|
Total intangible assets, net
|
$
|
2,171,868
|
|
|
$
|
1,116,854
|
|
|
$
|
1,055,014
|
|
|
$
|
2,142,731
|
|
|
$
|
1,008,475
|
|
|
$
|
1,134,256
|
|
The Company recorded $91,980 of acquired intangible assets in 2019. See Note 4 — Acquisitions.
Amortization expense was $138,947, $143,868 and $150,171, including acquisition-related intangible amortization of $136,963, $142,170 and $148,147, for the years ended December 31, 2019, 2018 and 2017, respectively.
Estimated future amortization expense related to intangible assets held at December 31, 2019 is as follows:
|
|
|
|
|
|
|
Estimated Amortization
|
|
2020
|
$
|
127,990
|
|
2021
|
122,079
|
|
2022
|
108,670
|
|
2023
|
98,960
|
|
2024
|
94,528
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
10. Other Accrued Expenses and Other Liabilities
The following table details the major components of other accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Contract liabilities - current
|
$
|
44,001
|
|
|
$
|
36,461
|
|
Accrued rebates and volume discounts
|
43,694
|
|
|
38,064
|
|
Warranty
|
43,018
|
|
|
42,498
|
|
Operating lease liability
|
41,835
|
|
|
—
|
|
Taxes other than income
|
34,419
|
|
|
34,785
|
|
Accrued interest
|
20,403
|
|
|
25,390
|
|
Restructuring and exit costs
|
16,173
|
|
|
27,697
|
|
Accrued commissions (non-employee)
|
15,916
|
|
|
17,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (none of which are individually significant)
|
79,601
|
|
|
90,710
|
|
Total other accrued expenses
|
$
|
339,060
|
|
|
$
|
313,452
|
|
The following table details the major components of other liabilities (non-current):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Defined benefit and other post-retirement benefit plans
|
$
|
165,150
|
|
|
$
|
167,930
|
|
|
|
|
|
Operating lease liabilities
|
121,298
|
|
|
—
|
|
Unrecognized tax benefits
|
101,052
|
|
|
112,299
|
|
Deferred compensation
|
78,375
|
|
|
81,332
|
|
Legal and environmental
|
30,514
|
|
|
31,462
|
|
Contract liabilities - non current
|
9,121
|
|
|
9,382
|
|
Warranty
|
6,098
|
|
|
7,575
|
|
Other (none of which are individually significant)
|
15,566
|
|
|
22,415
|
|
Total other liabilities
|
$
|
527,174
|
|
|
$
|
432,395
|
|
Warranty
Estimated warranty program claims are provided for at the time of sale. Amounts provided for are based on historical costs and adjusted for new claims. The changes in the carrying amount of product warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning Balance, December 31 of the Prior Year
|
$
|
50,073
|
|
|
$
|
59,403
|
|
|
$
|
80,331
|
|
Provision for warranties
|
63,957
|
|
|
59,176
|
|
|
57,164
|
|
Settlements made
|
(63,574)
|
|
|
(66,687)
|
|
|
(71,068)
|
|
Other adjustments, including acquisitions and currency translation
|
(1,340)
|
|
|
(1,819)
|
|
|
(7,024)
|
|
Ending Balance, December 31
|
$
|
49,116
|
|
|
$
|
50,073
|
|
|
$
|
59,403
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
11. Restructuring Activities
The Company initiated various restructuring programs and incurred severance and other restructuring costs by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Engineered Products
|
$
|
3,155
|
|
|
$
|
7,158
|
|
|
$
|
3,991
|
|
Fueling Solutions
|
4,943
|
|
|
15,478
|
|
|
9,968
|
|
Imaging & Identification
|
6,426
|
|
|
13,882
|
|
|
8,076
|
|
Pumps & Process Solutions
|
5,666
|
|
|
10,266
|
|
|
6,379
|
|
Refrigeration & Food Equipment
|
3,671
|
|
|
3,475
|
|
|
14,070
|
|
Corporate
|
2,961
|
|
|
8,244
|
|
|
9,776
|
|
Total
|
$
|
26,822
|
|
|
$
|
58,503
|
|
|
$
|
52,260
|
|
These amounts are classified in the Consolidated Statements of Earnings as follows:
|
|
|
|
|
|
Cost of goods and services
|
$
|
8,910
|
|
|
$
|
16,921
|
|
|
$
|
16,658
|
|
Selling, general and administrative expenses
|
17,912
|
|
|
41,582
|
|
|
35,602
|
|
|
|
|
|
|
|
Total
|
$
|
26,822
|
|
|
$
|
58,503
|
|
|
$
|
52,260
|
|
Total restructuring charges of $26,822 incurred during the year ended December 31, 2019, were a result of restructuring programs initiated in 2018 and 2019. Restructuring expense was comprised primarily of broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation, operational optimization and IT centralization designed to increase operating margin, enhance operations and position the Company for sustained growth and investment. The Company expects to incur total charges of approximately $8 million in 2020 for these initiatives. Additional programs, beyond the scope of the announced programs may be implemented during 2020 with related restructuring charges.
The $26,822 of restructuring charges incurred during 2019 included the following programs:
•The Engineered Products segment recorded $3,155 of restructuring charges related to programs across the segment focused on headcount reductions and facility restructuring costs.
•The Fueling Solutions segment recorded $4,943 of restructuring charges principally related to headcount reductions.
•The Imaging & Identification segment recorded $6,426 of restructuring charges principally related to headcount reductions.
•The Pumps & Process Solutions segment recorded $5,666 of restructuring charges principally related to headcount reductions.
•The Refrigeration & Food Equipment segment recorded $3,671, of restructuring charges primarily due to headcount reductions and facility restructuring costs.
•Corporate recorded $2,961 of restructuring charges primarily related to headcount reductions.
Restructuring expenses incurred in 2018 and 2017 also included headcount reduction, targeted facility consolidations at certain businesses and actions taken to optimize the Company's cost structure.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The following table details the Company’s severance and other restructuring accrual activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Exit
|
|
Total
|
Balance at January 1, 2017
|
$
|
10,658
|
|
|
$
|
1,230
|
|
|
$
|
11,888
|
|
Restructuring charges
|
32,228
|
|
|
20,032
|
|
|
52,260
|
|
Payments
|
(16,898)
|
|
|
(5,707)
|
|
|
(22,605)
|
|
Other, including foreign currency translation
|
(1,033)
|
|
|
(9,239)
|
|
(1)
|
(10,272)
|
|
Balance at December 31, 2017
|
24,955
|
|
|
6,316
|
|
|
31,271
|
|
Restructuring charges
|
45,146
|
|
|
13,357
|
|
|
58,503
|
|
Payments
|
(43,287)
|
|
|
(8,713)
|
|
|
(52,000)
|
|
Other, including foreign currency translation
|
(2,530)
|
|
|
(7,080)
|
|
(1)
|
(9,610)
|
|
Balance at December 31, 2018
|
24,284
|
|
|
3,880
|
|
|
28,164
|
|
Restructuring charges
|
20,271
|
|
|
6,551
|
|
|
26,822
|
|
Payments
|
(29,887)
|
|
|
(3,383)
|
|
|
(33,270)
|
|
Other, including foreign currency translation
|
(917)
|
|
|
(4,409)
|
|
(1)
|
(5,326)
|
|
Balance at December 31, 2019
|
$
|
13,751
|
|
|
$
|
2,639
|
|
|
$
|
16,390
|
|
(1) Other activity in exit reserves primarily represents the non-cash write-off of certain long-lived assets and inventory in connection with certain facility closures and product exits.
The restructuring accrual balances at December 31, 2019 primarily reflect restructuring plans initiated during the year.
12. Borrowings and Lines of Credit
Borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Short-term:
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
84,700
|
|
|
$
|
220,318
|
|
Notes payable
|
$
|
84,700
|
|
|
$
|
220,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount (1)
|
|
|
|
Principal
|
|
December 31, 2019
|
|
December 31, 2018
|
Long-term:
|
|
|
|
|
|
2.125% 7-year notes due December 1, 2020 (euro-denominated)
|
€
|
300,000
|
|
|
$
|
—
|
|
|
$
|
339,657
|
|
4.30% 10-year notes due March 1, 2021
|
$
|
450,000
|
|
|
—
|
|
|
449,200
|
|
3.150% 10-year notes due November 15, 2025
|
$
|
400,000
|
|
|
396,042
|
|
|
395,368
|
|
1.25% 10-year notes due November 9, 2026 (euro-denominated)
|
€
|
600,000
|
|
|
658,089
|
|
|
672,103
|
|
0.750% 8-year notes due November 4, 2027 (euro denominated)
|
€
|
500,000
|
|
|
548,008
|
|
|
—
|
|
6.65% 30-year debentures due June 1, 2028
|
$
|
200,000
|
|
|
199,155
|
|
|
199,054
|
|
2.950% 10-year notes due November 4, 2029
|
$
|
300,000
|
|
|
296,270
|
|
|
—
|
|
5.375% 30-year debentures due October 15, 2035
|
$
|
300,000
|
|
|
296,060
|
|
|
295,811
|
|
6.60% 30-year notes due March 15, 2038
|
$
|
250,000
|
|
|
247,939
|
|
|
247,827
|
|
5.375% 30-year notes due March 1, 2041
|
$
|
350,000
|
|
|
344,153
|
|
|
343,877
|
|
Other
|
|
|
—
|
|
|
763
|
|
Total long-term debt
|
|
|
2,985,716
|
|
|
2,943,660
|
|
Less long-term debt current portion
|
|
|
—
|
|
|
—
|
|
Net long-term debt
|
|
|
$
|
2,985,716
|
|
|
$
|
2,943,660
|
|
(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were $18.9 million and $15.8 million as of December 31, 2019 and 2018, respectively. Total deferred debt issuance costs were $16.2 million and $13.0 million as of December 31, 2019 and 2018, respectively.
The discounts are being amortized to interest expense using the effective interest method over the life of the issuances. The deferred issuance costs are amortized on a straight-line basis over the life of the debt.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
On March 15, 2018, the outstanding 5.45% notes with a principal value of $350,000 matured. The repayment of debt was funded by the Company's commercial paper program and existing cash balances.
On November 4, 2019, the Company issued €500,000 of 0.750% euro-denominated notes due 2027 and $300,000 of 2.950% notes due 2029 and notified the debt holders of our €300,000 2.125% notes due 2020 ("2020 Notes") and our $450,000 4.30% Notes due 2021 ("2021 Notes") of our intent to redeem these notes on December 4, 2019. The proceeds from the sale of euro-denominated notes of €494,685, net of discounts and issuance costs, were used in part to redeem the 2020 Notes. The proceeds from the sale of notes of $296,937, net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the 2021 Notes. Such redemption payments were made on December 4, 2019, which required the Company to pay a make whole premium to the bondholders, resulting in a loss of $23,543. The remainder of the proceeds will be used for general corporate purposes.
On October 4, 2019, the Company entered into a $1 billion five-year unsecured revolving credit facility with a syndicate banks (the “Credit Agreement”) that replaced a similar existing credit facility that was set to expire in November 2020. The Credit Agreement will expire on October 4, 2024. The Company may elect to have loans under the Credit Agreement bear interest at a rate based on a benchmark interbank offered rate specified for each currency and, in the case of US Dollars, an alternate base rate (as defined in the Credit Agreement) based on a prime rate plus a specified margin ranging from 0.805% to 1.20%, set on the basis of the credit rating accorded to the Company’s senior unsecured debt by S&P and Moody’s. The Credit Agreement requires the Company to pay a facility fee and imposes various restrictions on the Company such as, among other things, a requirement to maintain a minimum interest coverage ratio of EBITDA to consolidated net interest expense of not less than 3.0 to 1. The Company was in compliance with all covenants in the Credit Agreement and other long-term debt covenants at December 31, 2019 and had a coverage ratio of 10.6 to 1. The Company primarily uses this facility 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 the repurchases of its common stock.
As of December 31, 2019, the future maturities of long-term debt were as follows:
|
|
|
|
|
|
|
Future Maturities
|
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
—
|
|
2024
|
—
|
|
2025 and thereafter
|
2,985,716
|
|
Total
|
$
|
2,985,716
|
|
Letters of Credit and other Guarantees
As of December 31, 2019, the Company had approximately $158.5 million outstanding in letters of credit, surety bonds, and performance and other guarantees with financial institutions, which expire on various dates through 2028. These letters of credit and bonds are primarily issued as security for insurance, warranty and other performance obligations. In general, the Company would only be liable for the amount of these guarantees in the event of default in the performance of its obligations, the probability of which is believed to be remote.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
13. 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, which occur within the next twelve months that are denominated in non-functional currencies, with currency forward contracts designated as cash flow hedges. At December 31, 2019 and 2018, the Company had contracts with U.S. dollar equivalent notional amounts of $179,580 and $193,649, respectively, to exchange foreign currencies, principally the Pound sterling, Chinese yuan, 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 at December 31, 2019 and 2018 with a total notional amount of $79,707 and $66,906, respectively, that are not designated as hedging instruments. These instruments are used to reduce the Company's exposure to operating receivables and payables that are denominated in non-functional currencies. Gains and losses on these contracts are recorded in other income, net in the Consolidated Statements of Earnings.
The following table sets forth the fair values of derivative instruments held by the Company as of December 31, 2019 and 2018 and the balance sheet lines in which they are recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset (Liability)
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Balance Sheet Caption
|
Foreign currency forward
|
$
|
2,892
|
|
|
$
|
1,874
|
|
|
Prepaid and other current assets
|
Foreign currency forward
|
(476)
|
|
|
(1,165)
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
For a cash flow hedge, the change in estimated fair value of a hedging instrument is recorded in accumulated other comprehensive earnings (loss), net of tax as a separate component of the Consolidated Statements of Stockholders' Equity and is reclassified into revenues and cost of goods and services in the 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 €500,000 of euro-denominated notes issued November 9, 2016 and November 4, 2019, respectively, as a hedge of its net investment in euro-denominated operations. The Company also designated the 2020 Notes as a net investment hedge prior to the redemption of the notes. Changes in the value of the euro-denominated debt are recognized in foreign currency translation adjustments within other comprehensive earnings (loss) of the Consolidated Statements of Comprehensive Earnings to offset changes in the value of the net investment in euro-denominated operations. Changes in the value of the euro-denominated debt resulting from exchange rate differences are offset by changes in the net investment due to the high degree of effectiveness between the hedging instruments and the exposure being hedged.
Amounts recognized in other comprehensive earnings (loss) for the gains (losses) on its net investment hedges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Gain/(loss) on euro-denominated debt
|
$
|
22,449
|
|
|
$
|
45,230
|
|
|
$
|
(125,262)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (expense)/benefit
|
(4,714)
|
|
|
(9,498)
|
|
|
43,842
|
|
Gain/(loss) on net investment hedges, net of tax
|
$
|
17,735
|
|
|
$
|
35,732
|
|
|
$
|
(81,420)
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Fair Value Measurements
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 as follows:
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 Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
Level 2
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cash flow hedges
|
|
|
$
|
2,892
|
|
|
|
|
|
|
$
|
1,874
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cash flow hedges
|
|
|
476
|
|
|
|
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The derivative contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates and interest rates; therefore, they are classified within Level 2 of the fair value hierarchy.
In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require disclosures regarding the fair value of all of the Company’s financial instruments.
The estimated fair value of long-term debt at December 31, 2019 and 2018 was $3,322,033 and $3,132,330, 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 equivalents, trade receivables, accounts payable and notes payable are reasonable estimates of their fair values as of December 31, 2019 and 2018 due to the short-term nature of these instruments.
14. Income Taxes
Income taxes have been based on the following components of earnings before provision for income taxes and discontinued operations in the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
448,301
|
|
|
$
|
344,793
|
|
|
$
|
544,900
|
|
Foreign
|
394,708
|
|
|
380,585
|
|
|
330,915
|
|
Total
|
$
|
843,009
|
|
|
$
|
725,378
|
|
|
$
|
875,815
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2019, 2018 and 2017 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
71,069
|
|
|
$
|
47,445
|
|
|
$
|
188,559
|
|
State and local
|
16,709
|
|
|
14,120
|
|
|
18,857
|
|
Foreign
|
102,284
|
|
|
86,523
|
|
|
43,228
|
|
Total current
|
190,062
|
|
|
148,088
|
|
|
250,644
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(6,033)
|
|
|
876
|
|
|
(121,879)
|
|
State and local
|
1,770
|
|
|
626
|
|
|
(1,247)
|
|
Foreign
|
(20,708)
|
|
|
(15,357)
|
|
|
1,634
|
|
Total deferred
|
(24,971)
|
|
|
(13,855)
|
|
|
(121,492)
|
|
Total expense
|
$
|
165,091
|
|
|
$
|
134,233
|
|
|
$
|
129,152
|
|
Differences between the effective income tax rate and the U.S. federal income statutory tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of federal income tax benefit
|
1.7
|
|
|
1.6
|
|
|
1.0
|
|
Foreign operations tax effect
|
(1.3)
|
|
|
(1.1)
|
|
|
(6.2)
|
|
SAB 118
|
—
|
|
|
(0.6)
|
|
|
—
|
|
Domestic manufacturing deduction
|
—
|
|
|
—
|
|
|
(1.7)
|
|
Foreign tax credits
|
(0.1)
|
|
|
(0.3)
|
|
|
0.1
|
|
|
|
|
|
|
|
Share awards
|
(1.7)
|
|
|
(2.0)
|
|
|
(1.0)
|
|
Changes in tax law
|
—
|
|
|
—
|
|
|
(6.7)
|
|
Disposition of businesses
|
1.2
|
|
|
—
|
|
|
(4.6)
|
|
Other
|
(1.2)
|
|
|
(0.1)
|
|
|
(1.2)
|
|
Effective tax rate from continuing operations
|
19.6
|
%
|
|
18.5
|
%
|
|
14.7
|
%
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Deferred Tax Assets:
|
|
|
|
Accrued compensation, principally postretirement and other employee benefits
|
$
|
62,547
|
|
|
$
|
72,795
|
|
Accrued expenses, principally for state income taxes, interest and warranty
|
29,736
|
|
|
30,159
|
|
Net operating loss and other carryforwards
|
269,599
|
|
|
290,629
|
|
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes
|
17,671
|
|
|
19,228
|
|
Accounts receivable, principally due to allowance for doubtful accounts
|
3,409
|
|
|
3,379
|
|
Accrued insurance
|
2,001
|
|
|
1,897
|
|
|
|
|
|
Long-term liabilities, principally warranty, environmental and exit costs
|
3,305
|
|
|
4,183
|
|
|
|
|
|
Total gross deferred tax assets
|
388,268
|
|
|
422,270
|
|
Valuation allowance
|
(244,153)
|
|
|
(264,398)
|
|
Total deferred tax assets, net of valuation allowances
|
144,115
|
|
|
157,872
|
|
Deferred Tax Liabilities:
|
|
|
|
Intangible assets, principally due to different tax and financial reporting bases and amortization lives
|
$
|
(364,843)
|
|
|
$
|
(394,851)
|
|
Property, plant and equipment, principally due to differences in depreciation
|
(56,401)
|
|
|
(49,380)
|
|
Other liabilities
|
(18,434)
|
|
|
(23,533)
|
|
Total gross deferred tax liabilities
|
(439,678)
|
|
|
(467,764)
|
|
Net deferred tax liability
|
$
|
(295,563)
|
|
|
$
|
(309,892)
|
|
|
|
|
|
Classified as follows in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
$
|
26,473
|
|
|
$
|
29,433
|
|
|
|
|
|
Deferred income taxes
|
(322,036)
|
|
|
(339,325)
|
|
|
$
|
(295,563)
|
|
|
$
|
(309,892)
|
|
As of December 31, 2019, the Company had non-U.S loss carryforwards of $938.5 million primarily resulting from non-operating activities. The entire balance of the non-U.S. losses as of December 31, 2019 is available to be carried forward, with $72.6 million of these losses expiring during the years 2020 through 2039. The remaining $865.9 million of such losses can be carried forward indefinitely.
The Company has $54.1 million and $62.9 million of state tax loss carryforwards as of December 31, 2019 and 2018, respectively, that are available for use by the Company between 2020 and 2039.
The Company maintains valuation allowances by jurisdiction against the deferred tax assets related to certain of these carryforwards for which it is more likely than not that some portion or all will not be realized.
On December 22, 2017, the Tax Reform Act was enacted which permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $172.0 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. As of December 31, 2017, the Company recorded provisional tax expense related to the deemed repatriation of $111.6 million payable over eight years. The GILTI provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets.
On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. In accordance with SAB 118, the Company finalized the financial reporting impact of the Tax Reform Act in the fourth
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
quarter of 2018. For the year ended December 31, 2018, the Company recorded a $4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Reform Act.
Unrecognized Tax Benefits
The Company files federal, state, 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. 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. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $15.3 million. The Company is no longer subject to examinations of its federal income tax returns through 2015. All significant state, local and international matters have been concluded through 2012. The Company believes adequate provision has been made for all income tax uncertainties.
The following table is a reconciliation of the beginning and ending balances of the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Unrecognized tax benefits at January 1, 2017
|
|
|
|
|
$
|
70,315
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
14,466
|
|
Additions for tax positions of prior years
|
|
|
|
|
4,105
|
|
Reductions for tax positions of prior years
|
|
|
|
|
(9,653)
|
|
Cash settlements
|
|
|
|
|
(954)
|
|
Lapse of statutes
|
|
|
|
|
(10,245)
|
|
Unrecognized tax benefits at December 31, 2017
|
|
|
|
|
68,034
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
15,580
|
|
Additions for tax positions of prior years
|
|
|
|
|
29,637
|
|
Reductions for tax positions of prior years
|
|
|
|
|
(5,226)
|
|
Cash settlements
|
|
|
|
|
(7,345)
|
|
Lapse of statutes
|
|
|
|
|
(7,219)
|
|
Unrecognized tax benefits at December 31, 2018
|
|
|
|
|
93,461
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
4,493
|
|
Additions for tax positions of prior years
|
|
|
|
|
6,668
|
|
Reductions for tax positions of prior years
|
|
|
|
|
(9,217)
|
|
Cash settlements
|
|
|
|
|
(922)
|
|
Lapse of statutes
|
|
|
|
|
(11,269)
|
|
Unrecognized tax benefits at December 31, 2019 (1)
|
|
|
|
|
$
|
83,214
|
|
(1) If recognized, the net amount of potential tax benefits that would impact the Company’s effective tax rate is $75.5 million. During the years ended December 31, 2019, 2018 and 2017, the Company recorded (income) expense of $(0.6) million, $2.4 million and $(0.5) million, respectively, as a component of provision for income taxes related to the accrued interest and penalties on unrecognized tax benefits. The Company had accrued interest and penalties of $17.8 million at December 31, 2019 and $18.8 million at December 31, 2018, which are not included in the above table.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
15. Equity and Cash Incentive Program
The Company's share-based awards are typically granted annually at its regularly scheduled first quarter Compensation Committee meeting. Additionally, in the second quarter of 2018, the Company granted equity awards to its new President and Chief Executive Officer. Awards were made pursuant to the terms of the Company's 2012 Equity and Cash Incentive Plan (the "2012 Plan"), which was approved by shareholders on May 3, 2012. This plan replaced the 2005 Equity and Cash Incentive Plan (the "2005 Plan"), which would have otherwise terminated according to its terms on January 31, 2015 and the 1996 Non-Employee Directors Stock Compensation Plan (the "Directors Plan"), which would have otherwise terminated according to its terms on December 31, 2012. Upon adoption of the 2012 Plan, no additional awards could be granted under the 2005 Plan. 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.
In 2018, in connection with the separation of Apergy, the Company modified the outstanding equity awards for its employees. The awards were modified such that all individuals received an equivalent fair value both before and after the separation of Apergy. This modification resulted in the issuance of an additional 1,138,008 SARs, 26,316 performance shares, and 47,063 RSUs in 2018. The exercise price of these outstanding awards, where applicable, was adjusted to preserve the value of the awards immediately prior to the separation. As no incremental fair value was awarded as a result of the issuance of these additional shares, the modification did not result in additional compensation expense.
Stock-based compensation costs are reported within selling, general and administrative expenses in the Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Pre-tax stock-based compensation expense (continuing)
|
$
|
29,702
|
|
|
$
|
23,698
|
|
|
$
|
24,073
|
|
Tax benefit
|
(2,490)
|
|
|
(2,722)
|
|
|
(8,411)
|
|
Total stock-based compensation expense, net of tax
|
$
|
27,212
|
|
|
$
|
20,976
|
|
|
$
|
15,662
|
|
Pre-tax stock-based compensation expense attributable to Apergy employees for the years ended December 31, 2018 and 2017 was $744 and $2,454, respectively. These costs are reported within earnings from discontinued operations in the Consolidated Statement of Earnings.
SARs
The exercise price per share for SARs is equal to the closing price of the Company’s stock on the New York Stock Exchange on the date of grant. New common shares are issued when SARs are exercised. The period during which SARs are exercisable is fixed by the Company’s Compensation Committee at the time of grant. Generally, the SARs vest after three years of service and expire at the end of ten years.
In 2019, 2018 and 2017, the Company issued SARs covering 615,089, 757,603 and 1,028,116 shares, respectively. Since 2006, the Company has only issued SARs and does not anticipate issuing stock options in the future. The fair value of each SAR grant was estimated on the date of grant using a Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
2017
|
Risk-free interest rate
|
2.51
|
%
|
|
2.58
|
%
|
—
|
|
2.87%
|
|
|
1.80
|
%
|
Dividend yield
|
2.13
|
%
|
|
1.99
|
%
|
—
|
|
2.43%
|
|
|
2.27
|
%
|
Expected life (years)
|
5.6
|
|
5.6
|
—
|
|
5.7
|
|
4.6
|
Volatility
|
22.35
|
%
|
|
20.95
|
%
|
—
|
|
21.20%
|
|
|
21.90
|
%
|
Grant price (1)
|
$
|
91.20
|
|
|
$79.75
|
—
|
|
$82.09
|
|
$
|
66.85
|
|
Fair value at date of grant (1)
|
$
|
17.55
|
|
|
$14.58
|
—
|
|
$15.41
|
|
|
$
|
10.65
|
|
|
|
|
|
|
|
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(1) 2018 and 2017 grant prices and fair values at date of grant reflect the modification of grants in connection with the separation of Apergy on May 9, 2018.
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 awards is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of activity relating to SARs granted under the 2012 Plan and the predecessor plans for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
Outstanding at January 1, 2019
|
5,329,204
|
|
|
$
|
60.19
|
|
|
|
Granted
|
615,089
|
|
|
91.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited / expired
|
(181,498)
|
|
|
78.84
|
|
|
|
Exercised
|
(2,163,626)
|
|
|
52.66
|
|
|
|
Outstanding at December 31, 2019
|
3,599,169
|
|
|
69.07
|
|
|
6.4
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
1,579,082
|
|
|
$
|
57.26
|
|
|
4.3
|
The following table summarizes information about outstanding SARs at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding
|
|
|
|
|
|
|
|
SARs Exercisable
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life
in Years
|
|
Aggregate Intrinsic Value
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life
in Years
|
|
Aggregate Intrinsic Value
|
$25.96 - $58.69
|
|
952,991
|
|
|
$
|
51.11
|
|
|
4.0
|
|
$
|
61,132
|
|
|
952,991
|
|
|
$
|
51.20
|
|
|
4.0
|
|
$
|
61,922
|
|
$61.79 - $79.75
|
|
1,636,963
|
|
|
$
|
68.43
|
|
|
6.3
|
|
76,655
|
|
|
624,996
|
|
|
$
|
66.65
|
|
|
4.5
|
|
30,318
|
|
$82.09 - $97.33
|
|
1,009,215
|
|
|
$
|
87.06
|
|
|
8.7
|
|
28,457
|
|
|
1,095
|
|
|
$
|
82.09
|
|
|
3.9
|
|
36
|
|
|
|
3,599,169
|
|
|
|
|
|
|
$
|
166,244
|
|
|
1,579,082
|
|
|
|
|
|
|
$
|
92,276
|
|
Unrecognized compensation expense related to SARs not yet exercisable was $8,862 at December 31, 2019. This cost is expected to be recognized over a weighted average period of 1.7 years.
Other information regarding the exercise of SARs is listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
SARs
|
|
|
|
|
|
Fair value of SARs that became exercisable
|
$
|
8,611
|
|
|
$
|
12,832
|
|
|
$
|
16,006
|
|
Aggregate intrinsic value of SARs exercised
|
$
|
89,473
|
|
|
$
|
101,365
|
|
|
$
|
44,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Performance Share Awards
Performance share awards granted are expensed over the three-year requisite performance and service period. Awards become vested if (1) the Company achieves certain specified internal metrics and (2) the employee remains continuously employed by the Company during the performance period. Partial vesting may occur after separation from service in the case of certain terminations not for cause and for retirements.
In 2019, 2018 and 2017, the Company issued performance shares covering 35,172, 122,459 and 57,958 shares, respectively. The performance share awards granted in these years 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 up or down 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 Consolidated Statements of Earnings in the period of change.
The fair value and average attainment used in determining compensation cost of the performance shares issued in 2019, 2018 and 2017 are as follows for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
2017
|
Fair value per share at date of grant (1)
|
$91.20
|
|
$79.75
|
-
|
|
$82.09
|
|
$66.85
|
Average attainment rate reflected in expense
|
200.3%
|
|
|
282.4%
|
|
|
|
|
237.0
|
%
|
(1) 2018 and 2017 fair values per share at date of grant reflect the modification of grants in connection with the separation of Apergy on May 9, 2018.
A summary of activity for performance share awards for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant-Date
Fair Value
|
Unvested at January 1, 2019
|
144,957
|
|
|
$
|
76.99
|
|
Granted
|
35,172
|
|
|
91.33
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(19,026)
|
|
|
76.46
|
|
Vested
|
(23,294)
|
|
|
66.85
|
|
Unvested at December 31, 2019
|
137,809
|
|
|
$
|
82.45
|
|
Unrecognized compensation expense related to unvested performance shares as of December 31, 2019 was $13,016, which will be recognized over a weighted average period of 1.3 years.
Restricted Stock Units
The Company also has restricted stock authorized for grant (as part of the 2012 Plan). Under this Plan, common stock of the Company may be granted at no cost to certain officers and key employees. In general, restrictions limit the sale or transfer of these shares during a three-year period, and restrictions lapse proportionately over the three-year period. The Company granted 124,929, 284,721 and 174,203 of restricted stock units in 2019, 2018 and 2017, respectively. The fair value of these awards was determined using Dover's closing stock price on the date of grant.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
A summary of activity for restricted stock units for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant-Date
Fair Value
|
Unvested at January 1, 2019
|
390,481
|
|
|
$
|
73.35
|
|
Granted
|
124,929
|
|
|
91.34
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(23,706)
|
|
|
84.02
|
|
Vested
|
(167,151)
|
|
|
69.55
|
|
Unvested at December 31, 2019
|
324,553
|
|
|
$
|
81.45
|
|
|
|
|
|
Unrecognized compensation expense relating to unvested restricted stock units as of December 31, 2019 was $17,307, which will be recognized over a weighted average period of 1.6 years.
Directors' Shares
The Company issued the following shares to its non-employee directors under the 2012 Plan as partial compensation for serving as directors of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Aggregate shares granted
|
10,838
|
|
|
15,802
|
|
|
16,231
|
|
Shares deferred
|
(6,168)
|
|
|
(9,917)
|
|
|
(11,337)
|
|
|
|
|
|
|
|
Net shares issued
|
4,670
|
|
|
5,885
|
|
|
4,894
|
|
16. Commitments and Contingent Liabilities
Guarantees
The Company has provided typical indemnities in connection with sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The Company does not have any material liabilities recorded for these indemnifications and is not aware of any claims or other information that would give rise to material payments under such indemnities.
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 relatively insignificant 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 December 31, 2019 and 2018, the Company has reserves totaling $30,608 and $31,797, respectively, for environmental and other matters, including private party claims for exposure to hazardous substances, that are probable and estimable.
The Company and some 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 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 consider the availability and extent of insurance coverage. The Company has reserves for other legal matters that are probable and estimable, and at December 31, 2019 and 2018, these reserves were not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
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.
17. Employee Benefit 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. The Company’s expense relating to defined contribution plans was $50,031, $46,030 and $43,447 for the years ended December 31, 2019, 2018 and 2017, respectively.
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.
In July 2013, the Company announced that, after December 31, 2013, the U.S. qualified and non-qualified defined benefit plans would be closed to new employees. All pension-eligible employees as of December 31, 2013 will continue to earn a pension benefit through December 31, 2023 as long as they remain employed by an operating company participating in the impacted plans. The Company also announced that effective January 1, 2024, the plans would be frozen to any future benefit accruals.
In connection with the spin-off on May 9, 2018, assets and liabilities related to the Norris USW participants were moved to a new plan sponsored by Apergy. Assets and liabilities of several non-U.S. qualified and U.S. non-qualified plans were also transferred to Apergy. Apergy participants (other than Norris USW participants) in the Dover U.S. pension plan (the "Plan") fully vested in their benefits and ceased accruing future benefits. The separation of Apergy triggered a pension plan curtailment which required a re-measurement of the Plan's benefit obligation in the second quarter of 2018, assuming a discount rate of 4.2% and an expected return on assets of 6.8%. The Plan retained the obligation and participants were able to elect lump-sum payments from plan assets. In 2018, the Plan made total lump sum payments of $74,016. Based on the total lump sum payments made to both Apergy and other participants in the plan during the year and the second quarter re-measurement, the Company recorded non-cash settlement and curtailment charges of approximately $13,939 in 2018, of which $9,200 was classified within discontinued operations.
The Company also maintains other post-retirement benefit plans which cover approximately 409 participants, approximately 386 of whom are eligible for medical benefits. These plans are closed to new entrants. The supplemental and other post-retirement benefit plans are supported by the general assets of the Company.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Obligations and Funded Status
The following tables summarize the Consolidated Balance Sheets impact, including the benefit obligations, assets and funded status associated with the Company's significant defined benefit and other post-retirement benefit plans at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
|
|
|
|
Non-Qualified Supplemental Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
U.S. Plan
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
447,173
|
|
|
$
|
566,389
|
|
|
$
|
270,329
|
|
|
$
|
278,188
|
|
|
$
|
66,836
|
|
|
$
|
106,012
|
|
|
$
|
7,849
|
|
|
$
|
8,595
|
|
Service cost
|
7,016
|
|
|
9,019
|
|
|
5,665
|
|
|
5,359
|
|
|
1,942
|
|
|
2,624
|
|
|
19
|
|
|
30
|
|
Interest cost
|
19,026
|
|
|
20,756
|
|
|
5,101
|
|
|
4,962
|
|
|
2,670
|
|
|
3,204
|
|
|
312
|
|
|
290
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
1,681
|
|
|
1,279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(38,093)
|
|
|
(18,172)
|
|
|
(9,298)
|
|
|
(8,161)
|
|
|
(13,617)
|
|
|
(19,352)
|
|
|
(572)
|
|
|
(620)
|
|
Actuarial (gain) loss
|
55,105
|
|
|
(48,104)
|
|
|
24,791
|
|
|
(19,533)
|
|
|
2,352
|
|
|
(7,687)
|
|
|
462
|
|
|
(446)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendments
|
—
|
|
|
69
|
|
|
—
|
|
|
3,073
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements and curtailments
|
—
|
|
|
(78,896)
|
|
|
(5,412)
|
|
|
(1,813)
|
|
|
—
|
|
|
(2,289)
|
|
|
—
|
|
|
—
|
|
Currency translation and other
|
1
|
|
|
—
|
|
|
3,677
|
|
|
21,554
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Spin-off of Apergy
|
—
|
|
|
(3,888)
|
|
|
—
|
|
|
(14,579)
|
|
|
—
|
|
|
(15,676)
|
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
490,228
|
|
|
447,173
|
|
|
296,534
|
|
|
270,329
|
|
|
60,183
|
|
|
66,836
|
|
|
8,070
|
|
|
7,849
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
488,900
|
|
|
617,840
|
|
|
162,589
|
|
|
175,534
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actual return (loss) on plan assets
|
99,431
|
|
|
(32,939)
|
|
|
23,812
|
|
|
(8,490)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Company contributions
|
—
|
|
|
—
|
|
|
7,247
|
|
|
5,961
|
|
|
13,617
|
|
|
19,352
|
|
|
572
|
|
|
620
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
1,681
|
|
|
1,279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(38,093)
|
|
|
(18,172)
|
|
|
(9,298)
|
|
|
(8,161)
|
|
|
(13,617)
|
|
|
(19,352)
|
|
|
(572)
|
|
|
(620)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements and curtailments
|
—
|
|
|
(74,016)
|
|
|
(4,350)
|
|
|
(1,472)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency translation and other
|
—
|
|
|
—
|
|
|
3,909
|
|
|
11,223
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Spin-off of Apergy
|
—
|
|
|
(3,813)
|
|
|
—
|
|
|
(13,285)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
550,238
|
|
|
488,900
|
|
|
185,590
|
|
|
162,589
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Funded (Unfunded) status
|
$
|
60,010
|
|
|
$
|
41,727
|
|
|
$
|
(110,944)
|
|
|
$
|
(107,740)
|
|
|
$
|
(60,183)
|
|
|
$
|
(66,836)
|
|
|
$
|
(8,070)
|
|
|
$
|
(7,849)
|
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
$
|
60,010
|
|
|
$
|
41,727
|
|
|
$
|
671
|
|
|
$
|
919
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued compensation and employee benefits
|
—
|
|
|
—
|
|
|
(1,526)
|
|
|
(1,493)
|
|
|
(12,500)
|
|
|
(13,219)
|
|
|
(692)
|
|
|
(702)
|
|
Other liabilities (deferred compensation)
|
—
|
|
|
—
|
|
|
(110,089)
|
|
|
(107,166)
|
|
|
(47,683)
|
|
|
(53,617)
|
|
|
(7,378)
|
|
|
(7,147)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities
|
60,010
|
|
|
41,727
|
|
|
(110,944)
|
|
|
(107,740)
|
|
|
(60,183)
|
|
|
(66,836)
|
|
|
(8,070)
|
|
|
(7,849)
|
|
Accumulated Other Comprehensive Loss (Earnings):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses (gains)
|
71,247
|
|
|
81,437
|
|
|
70,694
|
|
|
66,480
|
|
|
(20,556)
|
|
|
(25,186)
|
|
|
(632)
|
|
|
(1,164)
|
|
Prior service cost (credit)
|
549
|
|
|
852
|
|
|
(2,724)
|
|
|
(72)
|
|
|
6,288
|
|
|
9,099
|
|
|
58
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
(15,263)
|
|
|
(17,597)
|
|
|
(15,492)
|
|
|
(14,861)
|
|
|
3,066
|
|
|
3,461
|
|
|
290
|
|
|
412
|
|
Total accumulated other comprehensive loss (earnings), net of tax
|
56,533
|
|
|
64,692
|
|
|
52,478
|
|
|
51,547
|
|
|
(11,202)
|
|
|
(12,626)
|
|
|
(284)
|
|
|
(681)
|
|
Net amount recognized at December 31,
|
$
|
116,543
|
|
|
$
|
106,419
|
|
|
$
|
(58,466)
|
|
|
$
|
(56,193)
|
|
|
$
|
(71,385)
|
|
|
$
|
(79,462)
|
|
|
$
|
(8,354)
|
|
|
$
|
(8,530)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligations
|
$
|
476,357
|
|
|
$
|
438,005
|
|
|
$
|
282,883
|
|
|
$
|
258,109
|
|
|
$
|
56,017
|
|
|
$
|
60,080
|
|
|
|
|
|
The Company’s net unfunded status at December 31, 2019 and 2018 includes net liabilities of $110,944 and $107,740, respectively, relating to the Company’s significant international qualified plans, some in locations where it is not economically advantageous to pre-fund the plans due to local regulations. The majority of the international obligations relate to defined pension plans operated by the Company’s businesses in Germany, Switzerland, and the United Kingdom.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The accumulated benefit obligation for all defined benefit pension plans was $815,257 and $756,194 at December 31, 2019 and 2018, respectively. Pension plans with accumulated benefit obligations in excess of plan assets consist of the following at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Projected benefit obligation (PBO)
|
$
|
348,137
|
|
|
$
|
330,168
|
|
Accumulated benefit obligation (ABO)
|
331,126
|
|
|
311,192
|
|
Fair value of plan assets
|
177,057
|
|
|
154,673
|
|
Net Periodic Benefit Cost
The operating expense component of net periodic benefit cost (service cost) is reported with similar compensation costs in the Company's Consolidated Statement of Earnings. The non-operating components (all other components of net periodic benefit expense, including interest cost, amortization of prior service cost, curtailments and settlements, etc.) are reported outside of operating income in other income, net in the Consolidated Statement of Earnings.
Components of the net periodic benefit cost were as follows:
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Supplemental Benefits
|
|
|
|
|
|
U.S. Plan
|
|
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
7,016
|
|
|
$
|
9,019
|
|
|
$
|
12,083
|
|
|
$
|
5,665
|
|
|
$
|
5,359
|
|
|
$
|
5,688
|
|
|
$
|
1,942
|
|
|
$
|
2,624
|
|
|
$
|
2,473
|
|
Interest cost
|
19,026
|
|
|
20,756
|
|
|
21,718
|
|
|
5,101
|
|
|
4,962
|
|
|
5,263
|
|
|
2,670
|
|
|
3,204
|
|
|
4,076
|
|
Expected return on plan assets
|
(34,136)
|
|
|
(39,045)
|
|
|
(39,812)
|
|
|
(6,220)
|
|
|
(7,675)
|
|
|
(7,417)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
303
|
|
|
298
|
|
|
427
|
|
|
(398)
|
|
|
(449)
|
|
|
(425)
|
|
|
2,811
|
|
|
3,770
|
|
|
4,411
|
|
Recognized actuarial loss (gain)
|
—
|
|
|
3,102
|
|
|
5,582
|
|
|
3,109
|
|
|
2,952
|
|
|
3,506
|
|
|
(2,280)
|
|
|
(1,132)
|
|
|
(1,192)
|
|
Transition obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement and curtailment loss (gain)
|
—
|
|
|
13,939
|
|
(1)
|
76
|
|
|
961
|
|
|
7
|
|
|
678
|
|
|
—
|
|
|
(1,381)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
$
|
(7,791)
|
|
|
$
|
8,069
|
|
|
$
|
74
|
|
|
$
|
8,218
|
|
|
$
|
5,157
|
|
|
$
|
7,297
|
|
|
$
|
5,143
|
|
|
$
|
7,085
|
|
|
$
|
9,768
|
|
Less: Discontinued operations
|
—
|
|
|
10,109
|
|
(1)
|
3,383
|
|
|
—
|
|
|
114
|
|
|
810
|
|
|
—
|
|
|
279
|
|
|
1,226
|
|
Net periodic (income) expense - Continuing operations
|
$
|
(7,791)
|
|
|
$
|
(2,040)
|
|
|
$
|
(3,309)
|
|
|
$
|
8,218
|
|
|
$
|
5,043
|
|
|
$
|
6,487
|
|
|
$
|
5,143
|
|
|
$
|
6,806
|
|
|
$
|
8,542
|
|
(1) $9.2 million of the total settlement and curtailment loss on the U.S. Plan is attributable to Apergy participants in the Dover Defined Benefit Plan and has therefore been reflected in the results of discontinued operations.
Other Post-Retirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
19
|
|
|
$
|
30
|
|
|
$
|
68
|
|
Interest cost
|
312
|
|
|
290
|
|
|
783
|
|
Amortization of:
|
|
|
|
|
|
Prior service cost
|
13
|
|
|
13
|
|
|
7
|
|
Recognized actuarial gain
|
(70)
|
|
|
(30)
|
|
|
(161)
|
|
Settlement and curtailment gain
|
—
|
|
|
—
|
|
|
(4,598)
|
|
|
|
|
|
|
|
Net periodic expense (benefit)
|
$
|
274
|
|
|
$
|
303
|
|
|
$
|
(3,901)
|
|
The curtailment gain in 2017 relates primarily to the impact of an amendment to the post-retirement plan in Brazil.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Amounts expected to be amortized from accumulated other comprehensive earnings (loss) into net periodic benefit cost during 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
Non-Qualified Supplemental Benefits
|
|
Other Post-Retirement Benefits
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
$
|
227
|
|
|
$
|
(473)
|
|
|
$
|
1,695
|
|
|
$
|
13
|
|
Recognized actuarial loss (gain)
|
7,536
|
|
|
2,986
|
|
|
(1,858)
|
|
|
(15)
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
7,763
|
|
|
$
|
2,513
|
|
|
$
|
(163)
|
|
|
$
|
(2)
|
|
Assumptions
The Company determines actuarial assumptions on an annual basis. The weighted average assumptions used in determining the benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
|
|
|
|
Non-Qualified Supplemental Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
U.S. Plan
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Discount rate
|
3.40
|
%
|
|
4.35
|
%
|
|
1.18
|
%
|
|
1.83
|
%
|
|
3.20
|
%
|
|
4.30
|
%
|
|
3.10
|
%
|
|
4.15
|
%
|
Average wage increase
|
4.00
|
%
|
|
4.50
|
%
|
|
1.80
|
%
|
|
2.10
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
na
|
|
na
|
Ultimate medical trend rate
|
na
|
|
|
na
|
|
|
na
|
|
|
na
|
|
|
na
|
|
|
na
|
|
|
5.00
|
%
|
|
5.00
|
%
|
The weighted average assumptions used in determining the net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Non- Qualified Supplemental Benefits
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
|
U.S. Plan
|
|
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
4.35
|
%
|
|
4.2%/3.65%
|
|
(1)
|
4.10
|
%
|
|
1.83
|
%
|
|
1.94
|
%
|
|
2.06
|
%
|
|
4.30
|
%
|
|
3.57
|
%
|
|
3.97
|
%
|
|
4.15
|
%
|
|
3.50
|
%
|
|
6.49
|
%
|
Average wage increase
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
2.10
|
%
|
|
2.33
|
%
|
|
2.34
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
na
|
|
na
|
|
na
|
Expected return on plan assets
|
6.80
|
%
|
|
6.8%/7.25%
|
|
(1)
|
7.25
|
%
|
|
3.67
|
%
|
|
4.66
|
%
|
|
4.73
|
%
|
|
na
|
|
na
|
|
|
na
|
|
|
na
|
|
|
na
|
|
|
na
|
|
(1) The separation of Apergy triggered a pension plan curtailment which required a re-measurement of the Plan's benefit obligation in the second quarter 2018, assuming a discount rate of 4.2% and an expected return on assets of 6.8%.
The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. The remeasurement in the second quarter of 2018, triggered by the Apergy spin-off, resulted in an increase to the discount rate used in determining net periodic benefit cost from 3.65% to 4.20% for the balance of 2018.
For other post-retirement benefit measurement purposes, a 7.00% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rates) was assumed for 2020. The rate was assumed to decrease gradually to 5.00% by the year 2027 and remain at that level thereafter. The health care cost trend rate assumption can have an effect on the amounts reported. For example, increasing (decreasing) the assumed health care cost trend rates by one percentage point in each year would increase (decrease) the accumulated other post-retirement benefit obligation as of December 31, 2019 by $78 and $(76), respectively, and would have a negligible impact on the net post-retirement benefit cost for 2019.
Plan Assets
The primary financial objective of the plans is to secure participant retirement benefits. Accordingly, the key objective in the plans’ financial management is to promote stability and, to the extent appropriate, growth in the funded status. Related and supporting financial objectives are established in conjunction with a review of current and projected plan financial requirements.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
As it relates to the funded defined benefit pension plans, the Company’s funding policy is consistent with the funding requirements of the Employment Retirement Income Security Act ("ERISA") and applicable international laws. The Company is responsible for overseeing the management of the investments of the plans’ assets and otherwise ensuring that the plans’ investment programs are in compliance with ERISA, other relevant legislation and related plan documents. Where relevant, the Company has retained professional investment managers to manage the plans’ assets and implement the investment process. The investment managers, in implementing their investment processes, have the authority and responsibility to select appropriate investments in the asset classes specified by the terms of their applicable prospectus or investment manager agreements with the plans.
The assets of the plans are invested to achieve an appropriate return for the plans consistent with a prudent level of risk. The plan's long-term investment objective is to generate investment returns that provide adequate assets to meet all benefit obligations in accordance with applicable regulations. The expected return on assets assumption used for pension expense is developed through analysis of historical and forecasted market returns, statistical analysis, current market conditions and the past experience of plan asset investments. Overall, it is projected that the investment of plan assets within Dover’s U.S. defined benefit plan will achieve a net return over time from the asset allocation strategy of 6.80%.
The Company’s actual and target weighted average asset allocation for our U.S. Corporate Pension Plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Current Target
|
Equity securities
|
34
|
%
|
|
36
|
%
|
|
34
|
%
|
Fixed income
|
64
|
%
|
|
55
|
%
|
|
66
|
%
|
Real estate and other
|
2
|
%
|
|
9
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
While the non-U.S. investment policies are different for each country, the long-term objectives are generally the same as for the U.S. pension assets. The Company's non-U.S. plans were expected to achieve average rates of return on invested assets of 3.67% in 2019, 4.66% in 2018 and 4.73% in 2017.
The fair values of both U.S. and non-U.S. pension plan assets by asset category within the fair value hierarchy (as defined in Note 13 — Financial Instruments) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Qualified Defined Benefits Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2019
|
|
|
|
|
|
|
|
12/31/2018
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
|
Total Fair Value
|
|
Level 1
|
|
Level 2
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
—
|
|
|
$
|
216,981
|
|
|
|
|
$
|
216,981
|
|
|
$
|
—
|
|
|
$
|
150,179
|
|
|
|
|
$
|
150,179
|
|
Government securities
|
5,846
|
|
|
69,486
|
|
|
|
|
75,332
|
|
|
1,586
|
|
|
113,931
|
|
|
|
|
115,517
|
Interest-bearing cash and short-term investments
|
1,438
|
|
|
—
|
|
|
|
|
1,438
|
|
|
2,066
|
|
|
—
|
|
|
|
|
2,066
|
Total investments at fair value
|
7,284
|
|
|
286,467
|
|
|
|
|
293,751
|
|
|
3,652
|
|
|
264,110
|
|
|
|
|
267,762
|
Investments measured at net asset value*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collective funds
|
—
|
|
|
—
|
|
|
|
|
241,058
|
|
|
—
|
|
|
—
|
|
|
|
|
175,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
32,686
|
|
Short-term investment funds
|
—
|
|
|
—
|
|
|
|
|
15,429
|
|
|
—
|
|
|
—
|
|
|
|
|
12,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
7,284
|
|
|
$
|
286,467
|
|
|
|
|
$
|
550,238
|
|
|
$
|
3,652
|
|
|
$
|
264,110
|
|
|
|
|
$
|
488,900
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2019
|
|
|
|
|
|
|
|
12/31/2018
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
Common stocks
|
$
|
44,685
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,685
|
|
|
$
|
28,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,528
|
|
Fixed income investments
|
—
|
|
|
19,871
|
|
|
—
|
|
|
19,871
|
|
|
—
|
|
|
27,797
|
|
|
—
|
|
|
27,797
|
|
Mutual funds
|
26,799
|
|
|
—
|
|
|
—
|
|
|
26,799
|
|
|
23,438
|
|
|
—
|
|
|
—
|
|
|
23,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
3,752
|
|
|
—
|
|
|
—
|
|
|
3,752
|
|
|
470
|
|
|
—
|
|
|
—
|
|
|
470
|
|
Other
|
—
|
|
|
3,519
|
|
|
18,597
|
|
|
22,116
|
|
|
—
|
|
|
2,390
|
|
|
21,283
|
|
|
23,673
|
|
Total investments at fair value
|
75,236
|
|
|
23,390
|
|
|
18,597
|
|
|
117,223
|
|
|
52,436
|
|
|
30,187
|
|
|
21,283
|
|
|
103,906
|
|
Investments measured at net asset value*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collective funds
|
—
|
|
|
—
|
|
|
—
|
|
|
64,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,505
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
4,367
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,178
|
|
Total
|
$
|
75,236
|
|
|
$
|
23,390
|
|
|
$
|
18,597
|
|
|
$
|
185,590
|
|
|
$
|
52,436
|
|
|
$
|
30,187
|
|
|
$
|
21,283
|
|
|
$
|
162,589
|
|
* In accordance with Fair Value Measurement Topic 820 (Subtopic 820-10), certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient were not classified in the fair value hierarchy. These are included to permit reconciliation of the fair value hierarchy to the aggregate pension plan assets.
Common stocks represent investments in domestic and foreign equities, which are publicly traded on active exchanges and are valued based on quoted market prices.
Fixed income investments include U.S. Treasury bonds and notes, which are valued based on quoted market prices, as well as investments in other government and municipal securities and corporate bonds, which are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Mutual funds are categorized as either Level 1, 2 or Net Asset Value ("NAV") as a practical expedient depending on the nature of the observable inputs. Collective funds and real estate investment funds are valued using NAV as a practical expedient as of the last business day of the year. The NAV is based on the underlying value of the assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The value of the underlying assets is based on quoted prices in active markets.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The availability of observable data is monitored by plan management to assess appropriate classification of financial instruments within the fair value hierarchy. Depending upon the availability of such inputs, specific securities may transfer between levels. In such instances, the transfer is reported at the end of the reporting period.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2018 and 2019, due to the following:
|
|
|
|
|
|
|
Level 3
|
Balance at December 31, 2017
|
$
|
4,592
|
|
Actual return on plan assets:
|
|
|
|
Relating to assets still held at December 31, 2018
|
(29)
|
|
|
|
|
|
Insurance contracts added
|
16,975
|
|
Foreign currency translation
|
(255)
|
|
Balance at December 31, 2018
|
21,283
|
|
Actual return on plan assets:
|
|
Relating to assets still held at December 31, 2019
|
319
|
|
Relating to assets sold during the period
|
14
|
|
Purchases
|
1,615
|
|
Sales and settlements
|
(4,971)
|
|
Foreign currency translation
|
337
|
|
Balance at December 31, 2019
|
$
|
18,597
|
|
Future Estimates
Benefit Payments
Estimated future benefit payments to retirees, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefits
|
|
|
|
Non-Qualified Supplemental Benefits
|
|
Other Post-Retirement Benefits
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
$
|
37,225
|
|
|
$
|
8,592
|
|
|
$
|
12,698
|
|
|
$
|
704
|
|
2021
|
35,141
|
|
|
8,720
|
|
|
11,820
|
|
|
675
|
|
2022
|
35,407
|
|
|
9,205
|
|
|
4,428
|
|
|
658
|
|
2023
|
33,303
|
|
|
10,578
|
|
|
4,442
|
|
|
634
|
|
2024
|
34,510
|
|
|
11,618
|
|
|
3,808
|
|
|
608
|
|
2025 - 2029
|
149,224
|
|
|
60,816
|
|
|
14,453
|
|
|
2,626
|
|
Contributions
In 2020, the Company expects to contribute approximately $4.6 million to its non-US plans and currently does not expect to contribute to its U.S. plans.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
18. Other Comprehensive Earnings (Loss)
The amounts recognized in other comprehensive earnings (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation adjustments
|
$
|
25,028
|
|
|
$
|
(4,714)
|
|
|
$
|
20,314
|
|
Pension and other postretirement benefit plans
|
6,592
|
|
|
$
|
(1,184)
|
|
|
$
|
5,408
|
|
Changes in fair value of cash flow hedges
|
1,707
|
|
|
$
|
(359)
|
|
|
$
|
1,348
|
|
|
|
|
|
|
|
Total other comprehensive earnings
|
$
|
33,327
|
|
|
$
|
(6,257)
|
|
|
$
|
27,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation adjustments
|
|
$
|
(69,468)
|
|
|
$
|
9,498
|
|
|
$
|
(59,970)
|
|
Pension and other post-retirement benefit plans
|
|
(14,379)
|
|
|
3,241
|
|
|
(11,138)
|
|
Changes in fair value of cash flow hedges
|
|
3,416
|
|
|
(717)
|
|
|
2,699
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
$
|
(80,431)
|
|
|
$
|
12,022
|
|
|
$
|
(68,409)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation adjustments
|
|
$
|
103,214
|
|
|
$
|
43,842
|
|
|
$
|
147,056
|
|
Pension and other postretirement benefit plans
|
|
28,784
|
|
|
(7,397)
|
|
|
21,387
|
|
Changes in fair value of cash flow hedges
|
|
(3,678)
|
|
|
1,287
|
|
|
(2,391)
|
|
Other
|
|
(1,687)
|
|
|
202
|
|
|
(1,485)
|
|
Total other comprehensive earnings
|
$
|
126,633
|
|
|
$
|
37,934
|
|
|
$
|
164,567
|
|
The components of accumulated other comprehensive earnings (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Cumulative foreign currency translation adjustments
|
$
|
(122,252)
|
|
|
$
|
(142,567)
|
|
Pension and other postretirement benefit plans
|
(97,525)
|
|
|
(102,932)
|
|
Changes in fair value of cash flow hedges and other
|
3,751
|
|
|
2,403
|
|
|
$
|
(216,026)
|
|
|
$
|
(243,096)
|
|
Total comprehensive earnings (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net earnings
|
$
|
677,918
|
|
|
$
|
570,267
|
|
|
$
|
811,665
|
|
Other comprehensive (loss) earnings
|
27,070
|
|
|
(68,409)
|
|
|
164,567
|
|
Comprehensive earnings
|
$
|
704,988
|
|
|
$
|
501,858
|
|
|
$
|
976,232
|
|
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Amounts reclassified from accumulated other comprehensive earnings (loss) to earnings (loss) during the year ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
Reclassification of foreign currency translation losses to earnings
|
$
|
25,339
|
|
|
$
|
—
|
|
|
$
|
3,992
|
|
|
|
Tax benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Net of tax
|
$
|
25,339
|
|
|
$
|
—
|
|
|
$
|
3,992
|
|
|
|
Pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
Amortization of actuarial losses
|
$
|
759
|
|
|
$
|
4,893
|
|
|
$
|
7,735
|
|
|
|
Amortization of prior service costs and transition obligation
|
2,729
|
|
|
3,631
|
|
|
4,424
|
|
|
|
Settlement and curtailment
|
961
|
|
|
12,565
|
|
|
(3,844)
|
|
|
|
Total before tax
|
4,449
|
|
|
21,089
|
|
|
8,315
|
|
|
|
Tax benefit
|
(906)
|
|
|
(4,459)
|
|
|
(2,503)
|
|
|
|
Net of tax
|
$
|
3,543
|
|
|
$
|
16,630
|
|
|
$
|
5,812
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Net (gains) losses reclassified into earnings
|
$
|
(186)
|
|
|
$
|
1,950
|
|
|
$
|
(908)
|
|
|
|
Tax expense (benefit)
|
39
|
|
|
(409)
|
|
|
318
|
|
|
|
Net of tax
|
$
|
(147)
|
|
|
$
|
1,541
|
|
|
$
|
(590)
|
|
|
|
The Company recognizes the amortization of net actuarial losses, prior service costs and transition obligation as well as settlements and curtailments, in other income, net in the Consolidated Statements of Earnings.
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 in the Consolidated Statements of Earnings.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
19. Segment Information
Effective October 1, 2019, Dover transitioned from a three-segment to a five-segment structure as a result of a change to its management structure and operating model. The Company's businesses are structured around similar business models, go-to market strategies and manufacturing practices which increases management efficiency and better aligns Dover's operations with its strategic initiatives and capital allocation priorities, and provide greater transparency about performance. Operating segments are defined as the components of an enterprise for which separate financial information is available and regularly evaluated by the entity's chief operating decision maker ("CODM") or decision-making group, which is composed of Dover's executive leadership team, in making resource allocation decisions and evaluating performance.
The Company categorizes its operating companies into five reportable segments based on how the CODM analyze performance, allocate capital and make strategic and operational decisions. The five reportable segments are as follows:
•Engineered Products segment is a provider of a wide range of products, software and services that have broad customer applications across a number of markets, including aftermarket vehicle service, solid waste handling, industrial automation, aerospace and defense, industrial winch and hoist, and fluid dispensing.
•Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
•Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
•Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
•Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Segment financial information and a reconciliation of segment results to consolidated results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
Engineered Products
|
$
|
1,697,557
|
|
|
$
|
1,633,147
|
|
|
$
|
1,626,856
|
|
Fueling Solutions
|
1,620,177
|
|
|
1,465,590
|
|
|
1,338,062
|
|
Imaging & Identification
|
1,084,471
|
|
|
1,109,843
|
|
|
1,041,188
|
|
Pumps & Process Solutions
|
1,338,528
|
|
|
1,331,893
|
|
|
1,217,235
|
|
Refrigeration & Food Equipment
|
1,396,617
|
|
|
1,453,093
|
|
|
1,599,105
|
|
Intra-segment eliminations
|
(953)
|
|
|
(1,448)
|
|
|
(1,560)
|
|
Total consolidated revenue
|
$
|
7,136,397
|
|
|
$
|
6,992,118
|
|
|
$
|
6,820,886
|
|
Earnings from continuing operations:
|
|
|
|
|
|
Segment earnings (EBIT): (1)
|
|
|
|
|
|
Engineered Products
|
$
|
291,848
|
|
|
$
|
252,368
|
|
|
$
|
437,079
|
|
Fueling Solutions
|
231,873
|
|
|
152,255
|
|
|
159,180
|
|
Imaging & Identification
|
229,484
|
|
|
198,902
|
|
|
167,404
|
|
Pumps & Process Solutions (2)
|
240,081
|
|
|
237,549
|
|
|
209,451
|
|
Refrigeration & Food Equipment
|
118,832
|
|
|
136,119
|
|
|
193,822
|
|
Total segment earnings (EBIT)
|
1,112,118
|
|
|
977,193
|
|
|
1,166,936
|
|
Corporate expense / other (3)
|
124,274
|
|
|
129,724
|
|
|
154,664
|
|
Interest expense
|
125,818
|
|
|
130,972
|
|
|
144,948
|
|
Interest income
|
(4,526)
|
|
|
(8,881)
|
|
|
(8,491)
|
|
Loss on extinguishment of debt
|
23,543
|
|
|
—
|
|
|
—
|
|
Earnings before provision for income taxes and discontinued operations
|
843,009
|
|
|
725,378
|
|
|
875,815
|
|
Provision for income taxes
|
165,091
|
|
|
134,233
|
|
|
129,152
|
|
Earnings from continuing operations
|
$
|
677,918
|
|
|
$
|
591,145
|
|
|
$
|
746,663
|
|
Segment margins:
|
|
|
|
|
|
Engineered Products
|
17.2
|
%
|
|
15.5
|
%
|
|
26.9
|
%
|
Fueling Solutions
|
14.3
|
%
|
|
10.4
|
%
|
|
11.9
|
%
|
Imaging & Identification
|
21.2
|
%
|
|
17.9
|
%
|
|
16.1
|
%
|
Pumps & Process Solutions (2)
|
17.9
|
%
|
|
17.8
|
%
|
|
17.2
|
%
|
Refrigeration & Food Equipment
|
8.5
|
%
|
|
9.4
|
%
|
|
12.1
|
%
|
Total Segments
|
15.6
|
%
|
|
14.0
|
%
|
|
17.1
|
%
|
Earnings from continuing operations
|
9.5
|
%
|
|
8.5
|
%
|
|
10.9
|
%
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Engineered Products
|
$
|
41,032
|
|
|
$
|
44,995
|
|
|
$
|
48,271
|
|
Fueling Solutions
|
75,045
|
|
|
68,463
|
|
|
67,835
|
|
Imaging & Identification
|
30,530
|
|
|
30,882
|
|
|
37,176
|
|
Pumps & Process Solutions
|
67,584
|
|
|
71,982
|
|
|
67,986
|
|
Refrigeration & Food Equipment
|
51,360
|
|
|
60,477
|
|
|
57,207
|
|
Corporate
|
6,736
|
|
|
5,781
|
|
|
4,803
|
|
Consolidated total
|
$
|
272,287
|
|
|
$
|
282,580
|
|
|
$
|
283,278
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Engineered Products
|
$
|
38,049
|
|
|
$
|
34,016
|
|
|
$
|
25,762
|
|
Fueling Solutions
|
21,780
|
|
|
37,232
|
|
|
40,702
|
|
Imaging & Identification
|
18,593
|
|
|
13,029
|
|
|
11,733
|
|
Pumps & Process Solutions
|
50,442
|
|
|
49,333
|
|
|
49,923
|
|
Refrigeration & Food Equipment
|
51,052
|
|
|
32,482
|
|
|
32,541
|
|
Corporate
|
6,888
|
|
|
4,902
|
|
|
9,407
|
|
Consolidated total
|
$
|
186,804
|
|
|
$
|
170,994
|
|
|
$
|
170,068
|
|
(1) Segment earnings (EBIT) 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.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(2) For the year ended December 31, 2019 includes a $46,946 loss on assets held for sale for Finder.
(3) 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 overhead costs, deal related expenses and various administrative expenses relating to the corporate headquarters.
Selected financial information by segment (continued):
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31:
|
2019
|
|
2018
|
Engineered Products
|
$
|
1,431,948
|
|
|
$
|
1,477,671
|
|
Fueling Solutions
|
2,107,045
|
|
|
1,895,308
|
|
Imaging & Identification
|
1,673,689
|
|
|
1,592,349
|
|
Pumps & Process Solutions
|
1,553,836
|
|
|
1,562,845
|
|
Refrigeration & Food Equipment
|
1,302,618
|
|
|
1,252,870
|
|
Corporate (4)
|
600,341
|
|
|
584,728
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
8,669,477
|
|
|
$
|
8,365,771
|
|
(4)The significant portion of corporate assets are principally cash and cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
Long-Lived Assets
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
At December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
United States
|
$
|
3,806,033
|
|
|
$
|
3,619,717
|
|
|
$
|
3,654,102
|
|
|
$
|
491,732
|
|
|
$
|
480,780
|
|
Europe
|
1,571,901
|
|
|
1,572,788
|
|
|
1,476,686
|
|
|
261,170
|
|
|
239,070
|
|
Asia
|
863,050
|
|
|
867,268
|
|
|
754,845
|
|
|
60,601
|
|
|
59,550
|
|
Other Americas
|
625,707
|
|
|
631,164
|
|
|
621,831
|
|
|
24,174
|
|
|
24,872
|
|
Other
|
269,706
|
|
|
301,181
|
|
|
313,422
|
|
|
4,641
|
|
|
2,225
|
|
Consolidated total
|
$
|
7,136,397
|
|
|
$
|
6,992,118
|
|
|
$
|
6,820,886
|
|
|
$
|
842,318
|
|
|
$
|
806,497
|
|
The majority of revenue from our Engineered Products, Fueling Systems, Imaging & Identification. Pumps & Process Solutions, and Refrigeration & Food Equipment segments is generated from sales to customers within the United States, Europe and Asia. Each segment also generates revenue across the other geographies, with no significant concentration of any segment’s remaining revenue.
Revenue is attributed to regions based on the location of the Company’s customer, which in some instances is an intermediary and not necessarily the end user. Long-lived assets are comprised of net property, plant and equipment. The Company’s businesses are based primarily in the United States, Europe and Asia. The Company’s businesses serve thousands of customers, none of which accounted for more than 10% of consolidated revenue.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
20. Earnings per Share
The following table sets forth a reconciliation of the information used in computing basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
$
|
677,918
|
|
|
$
|
591,145
|
|
|
$
|
746,663
|
|
(Loss) earnings from discontinued operations, net
|
—
|
|
|
(20,878)
|
|
|
65,002
|
|
Net earnings
|
$
|
677,918
|
|
|
$
|
570,267
|
|
|
$
|
811,665
|
|
Basic earnings per common share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
4.67
|
|
|
$
|
3.94
|
|
|
$
|
4.80
|
|
(Loss) earnings from discontinued operations, net
|
$
|
—
|
|
|
$
|
(0.14)
|
|
|
$
|
0.42
|
|
Net earnings
|
$
|
4.67
|
|
|
$
|
3.80
|
|
|
$
|
5.21
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
145,198,000
|
|
|
149,874,000
|
|
|
155,685,000
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
4.61
|
|
|
$
|
3.89
|
|
|
$
|
4.73
|
|
(Loss) earnings from discontinued operations, net
|
$
|
—
|
|
|
$
|
(0.14)
|
|
|
$
|
0.41
|
|
Net earnings
|
$
|
4.61
|
|
|
$
|
3.75
|
|
|
$
|
5.15
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
146,992,000
|
|
|
152,133,000
|
|
|
157,744,000
|
|
The following table is a reconciliation of the share amounts used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted average shares outstanding - Basic
|
145,198,000
|
|
|
149,874,000
|
|
|
155,685,000
|
|
Dilutive effect of assumed exercise of SARs and vesting of performance shares and RSUs
|
1,794,000
|
|
|
2,259,000
|
|
|
2,059,000
|
|
Weighted average shares outstanding - Diluted
|
146,992,000
|
|
|
152,133,000
|
|
|
157,744,000
|
|
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. For the years ended December 31, 2019, 2018 and 2017, the weighted average number of anti-dilutive potential common shares excluded from the calculation above totaled 28,096, 1,382 and 79,756, respectively.
21. Stockholders' Equity
The Company has the authority to issue up to 100,000 shares of $100 par preferred stock and up to 500,000,000 shares of $1.00 par common stock. There were no issuances of preferred stock. As of December 31, 2019 and 2018, the Company issued 258,551,748 and 257,822,352 shares of common stock and had 114,249,432 and 112,905,810 treasury shares, held at cost, respectively.
Share Repurchases
The Company's prior January 2015 share repurchase authorization expired on January 9, 2018. From January 1 to January 9, 2018, the Company repurchased 440,608 shares of common stock at a total cost of $44,977 or $102.08 per share. There were 5,271,168 shares available for repurchase under this authorization upon expiration.
In February 2018, the Company's Board of Directors approved a new standing share repurchase authorization, whereby the Company may repurchase up to 20 million shares of its common stock through December 31, 2020. This share repurchase authorization replaced the January 2015 share repurchase authorization.
DOVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
On May 22, 2018, the Company entered into a $700,000 accelerated share repurchase agreement (the “ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”) to repurchase its shares in an accelerated share repurchase program (the “ASR Program”). The Company conducted the ASR Program under the February 2018 share repurchase authorization. The Company funded the ASR Program with funds received from Apergy in connection with the consummation of the Apergy spin-off.
Under the terms of the ASR Agreement, the Company paid Goldman Sachs $700,000 on May 24, 2018 and on that date received initial deliveries of 7,078,751 shares, representing a substantial majority of the shares expected to be retired over the course of the ASR Agreement. In December 2018 Goldman Sachs delivered a total of 1,463,815 shares which completed the ASR Program. During 2018, the Company received a total of 8,542,566 shares as part of the ASR Agreement. The total number of shares ultimately repurchased under the ASR Agreement was based on the volume-weighted average share price of Dover’s common stock during the calculation period of the ASR Program, less a discount, which was $81.94 over the term of the ASR Program.
During the year ended December 31, 2019 and 2018, under the February 2018 authorization, exclusive of the ASR Agreement, the Company repurchased 1,343,622 and 1,753,768 shares of common stock at a total cost of $143,280 and $150,000 or $106.64 and $85.53 per share, respectively.
As of December 31, 2019, 8,360,044 shares remain authorized for repurchase under the February 2018 share repurchase authorization.
22. Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
Quarter
|
Revenue
|
|
Gross Profit
|
|
Earnings
|
|
Per Share - Basic
|
|
Per Share - Diluted
|
|
Net Earnings
|
Per Share - Basic
|
|
Per Share - Diluted
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
$
|
1,724,757
|
|
|
$
|
623,542
|
|
|
$
|
105,705
|
|
|
$
|
0.73
|
|
|
$
|
0.72
|
|
|
$
|
105,705
|
|
$
|
0.73
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
Second
|
1,810,706
|
|
|
672,593
|
|
|
198,085
|
|
|
1.36
|
|
|
1.35
|
|
|
198,085
|
1.36
|
|
|
1.35
|
|
|
|
|
|
|
|
Third
|
1,825,345
|
|
|
673,488
|
|
|
206,006
|
|
|
1.42
|
|
|
1.40
|
|
|
206,006
|
1.42
|
|
|
1.40
|
|
|
|
|
|
|
|
Fourth
|
1,775,589
|
|
|
651,315
|
|
|
168,122
|
|
|
1.16
|
|
|
1.15
|
|
|
168,122
|
1.16
|
|
|
1.15
|
|
|
|
|
|
|
|
|
$
|
7,136,397
|
|
|
$
|
2,620,938
|
|
|
$
|
677,918
|
|
|
$
|
4.67
|
|
|
$
|
4.61
|
|
|
$
|
677,918
|
|
$
|
4.67
|
|
|
$
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
$
|
1,637,671
|
|
|
$
|
602,828
|
|
|
$
|
109,409
|
|
|
$
|
0.71
|
|
|
$
|
0.70
|
|
|
$
|
131,434
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
Second
|
1,798,094
|
|
|
665,236
|
|
|
166,456
|
|
|
1.10
|
|
|
1.08
|
|
|
139,959
|
0.92
|
|
|
0.91
|
|
|
|
|
|
|
|
Third
|
1,747,403
|
|
|
646,520
|
|
|
157,305
|
|
|
1.07
|
|
|
1.05
|
|
|
157,305
|
1.07
|
|
|
1.05
|
|
|
|
|
|
|
|
Fourth
|
1,808,950
|
|
|
644,972
|
|
|
157,975
|
|
|
1.08
|
|
|
1.07
|
|
|
141,569
|
0.97
|
|
|
0.96
|
|
|
|
|
|
|
|
|
$
|
6,992,118
|
|
|
$
|
2,559,556
|
|
|
$
|
591,145
|
|
|
$
|
3.94
|
|
|
$
|
3.89
|
|
|
$
|
570,267
|
|
$
|
3.80
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
23. Subsequent Events
On January 24, 2020, the Company acquired Sys-Tech Solutions, Inc. ("Systech"). Systech is a leading provider of software and solutions for product traceability, regulatory compliance and brand protections and will strengthen the portfolio of solutions offered by the Imaging & Identification segment.
On January 24, 2020, the Company entered into a definitive agreement to acquire So. Cal. Soft-Pak, Incorporated ("Soft-Pak") Software Solutions. Soft-Pak is a leading provider of integrated back office, route management and customer relationship management software solutions to the waste and recycling fleet industry and will further strengthen the digital offerings of the Engineered Products segment. The transaction is subject to satisfaction of customary closing conditions and is expected to close in the first quarter of 2020.
The combined purchase price for both acquisitions is approximately $210,000, subject to customary post-closing adjustments.