10-K 1 a2012123110-k.htm 10-K 2012.12.31 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2012

Commission File Number: 1-4018
Dover Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
53-0257888
(I.R.S. Employer
Identification No.)
 
 
 
3005 Highland Parkway
Downers Grove, Illinois 60515
(Address of principal executive offices)
 
 
 
Registrant's telephone number: (630) 541-1540
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 Title of Each Class
 
 Name of Each Exchange on Which Registered
Common Stock, par value $1
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
 
 
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)







 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the close of business on June 30, 2012 was $9,799,921,456. The registrant’s closing price as reported on the New York Stock Exchange-Composite Transactions for June 30, 2012 was $53.61 per share. The number of outstanding shares of the registrant’s common stock as of February 8, 2013 was 174,679,432.

Documents Incorporated by Reference: Part III — Certain Portions of the Proxy Statement for Annual Meeting of Shareholders to be held on May 2, 2013 (the “2013 Proxy Statement”).




Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K, especially “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains “forward-looking” statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income, earnings, cash flows, changes in operations, operating improvements, industries in which Dover businesses operate and the U.S. and global economies. Statements in this Form 10-K that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “indicates,” “suggests,” “will,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” or the use of the future tense and similar words or phrases. Forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from current expectations including, but not limited to, the state of the worldwide economy and sovereign credit, especially in Europe; political events that could impact the worldwide economy; the impact of natural disasters and their effect on global supply chains and energy markets; current economic conditions and uncertainties in the credit and capital markets; instability in countries where Dover conducts business; possible future terrorist threats and their effect on the worldwide economy; the ability of Dover’s businesses to expand into new geographic markets and to anticipate and meet customer demands for new products and product enhancements; increased competition and pricing pressures in the markets served by Dover’s businesses; the impact of loss of a single-source manufacturing facility; changes in customer demand or loss of a significant customer; the relative mix of products and services which impacts margins and operating efficiencies; short-term capacity constraints; increases in the cost of raw materials; domestic and foreign governmental and public policy changes including environmental regulations, conflict mineral disclosure requirements, and tax policies (including domestic and international export subsidy programs, R&E credits and other similar programs); protection and validity of patent and other intellectual property rights; the ability to identify and successfully consummate value-adding acquisition opportunities; the Company’s ability to achieve expected savings from integration, synergy and other cost-control initiatives; unforeseen developments in contingencies such as litigation; international economic conditions including interest rate and currency exchange rate fluctuations; and a downgrade in Dover’s credit ratings. Readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The Company may, from time to time, post financial or other information on its Internet website, www.dovercorporation.com. The Internet address is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this report.


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TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I

ITEM 1. BUSINESS

Overview

Dover Corporation is a diversified global manufacturer focusing on innovative equipment and components, specialty systems, and support services provided through its four major operating segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The Company's entrepreneurial business model encourages, promotes, and fosters deep customer engagement, which has lead to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation. Unless the context indicates otherwise, references herein to “Dover,” “the Company,” and words such as “we,” “us,” and “our” include Dover Corporation and its subsidiaries. Dover was incorporated in 1947 in the State of Delaware and became a publicly traded company in 1955. Dover is headquartered in Downers Grove, Illinois and currently employs approximately 35,000 people worldwide within its continuing operations.

Our Communication Technologies segment is engaged in the design and manufacture of innovative products and components in the consumer electronics, medical technology, aerospace/defense, and telecom/other markets. Our Energy segment provides highly-engineered solutions for the safe and efficient extraction and handling of oil and gas in the drilling, production, and downstream markets. Our Engineered Systems segment is comprised of two platforms, Fluid Solutions and Refrigeration & Industrial, which are industry leaders in the fluids systems, refrigeration and food equipment, and certain other industrial markets. Our Printing & Identification segment provides integrated printing, coding, and dispensing solutions for the consumer goods, food, pharmaceutical, and industrial markets.

The following table shows the percentage of total revenue and segment earnings generated by each of our four segments for the years ended December 31, 2012, 2011 and 2010:
 
Revenue
 
Segment Earnings
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Communication Technologies
19
%
 
18
%
 
18
%
 
16
%
 
18
%
 
19
%
Energy
27
%
 
26
%
 
21
%
 
39
%
 
36
%
 
30
%
Engineered Systems
42
%
 
42
%
 
46
%
 
35
%
 
35
%
 
37
%
Printing & Identification
12
%
 
14
%
 
15
%
 
10
%
 
11
%
 
14
%

Management Philosophy

Our businesses are committed to operational excellence and to being market leaders as measured by market share, customer service, innovation, profitability, and return on invested capital. Our operating structure of four business segments and two platforms allows for focused acquisition activity, accelerates opportunities to identify and capture operating synergies, including global sourcing and supply chain integration, and advances the development of our executive talent. Our segment and executive management set strategic direction, initiatives and goals, provide oversight, allocate and manage capital, are responsible for major acquisitions, and provide other services. We foster an operating culture with high ethical standards, trust, respect, and open communication, to allow individual growth and operational effectiveness.

In addition, we are committed to creating value for our customers, employees, and shareholders through sustainable business practices that protect the environment and developing products that help our customers meet their sustainability goals. Our companies are increasing their focus on efficient energy usage, greenhouse gas reduction, and waste management as they strive to meet the global environmental needs of today and tomorrow.


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Company Goals

We are committed to driving shareholder return through three key objectives. First, we are committed to achieving annual organic sales growth over the next three years (2013 through 2015) of 4% to 6%, complemented by acquisition growth of 3% to 5% over the same period. Secondly, we continue to focus on segment margin expansion through productivity initiatives, including supply chain activities, strategic pricing, and portfolio shaping. We are targeting segment margins of approximately 19% by 2015, representing an increase of roughly 200 basis points over our 2012 segment margins. Lastly, we are committed to generating free cash flow as a percentage of sales of approximately 10% through disciplined capital allocation, strong performance, productivity improvements, and active working capital management. We support these goals through (1) alignment of management compensation with financial objectives, (2) well-defined and actively managed merger and acquisition processes, and (3) talent development programs.

Business Strategy

To achieve our goals, we are focused on execution of the following three key business strategies:

Positioning ourselves for growth

We have aligned our business segments to focus on key-end markets that are well-positioned for future growth. In particular, our businesses are well-positioned to capitalize on growth trends in the areas of global energy demand, sustainability, consumer product safety, communications, and emerging economies. For instance, our Communication Technologies segment is positioned to capitalize on growth in hand-held communications (handsets), medical technology, and aerospace/defense, with its complement of micro audio components and communication components serving those markets. Our Energy segment is driven by a growing demand for innovative extraction technologies. The growing demand from emerging economies, plus expanding exploration activity around the globe will provide significant opportunities for this segment. Our Engineered Systems segment combines its engineering technology, unique product advantages, and applications expertise to address market needs and requirements including sustainability, consumer product safety, and growth in emerging economies, while our Printing & Identification segment is responding to the growing requirements for consumer product safety and traceability technologies by providing integrated printing, coding, and identification solutions with a global reach, in the growing markets of fast moving consumer goods and industrial applications.

Capturing the benefits of common ownership

We are committed to operational excellence, and have implemented various productivity initiatives, such as supply chain management, lean manufacturing, and facility consolidations to maximize our efficiency, coupled with workplace safety initiatives to help ensure the health and welfare of our employees. We foster the sharing of best practices throughout the organization. To ensure success, our businesses place strong emphasis on continual quality improvement and new product development to better serve customers and expand into new product and geographic markets. We have also developed regional support centers and shared manufacturing centers in China, Brazil, and India. Further, we continue to make significant investments in talent development, recognizing that the growth and development of our employees are essential for our continued success.

Disciplined capital allocation

Our businesses generate annual free cash flow of approximately 10% of revenue. We are focused on the most efficient allocation of our capital to maximize investment returns. To do this, we grow and support our existing businesses, with annual investment in capital spending approximating 3.5% of revenue with a focus on internal projects to expand markets, develop products, and boost productivity. We continue to evaluate our portfolio for strategic fit and intend to make additional acquisitions focused on our key growth spaces: consumer electronics, energy, product ID, refrigeration and food equipment, and fluid solutions. We consistently provide shareholder returns by paying dividends, which have increased annually over each of the last 57 years. We will also continue to repurchase our shares per our previously announced share repurchase programs.


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Portfolio Development

Acquisitions

Our acquisition program has two key elements. First, we seek to acquire value creating add-on businesses that enhance our existing businesses either through their global reach and customers, or by broadening their product mix. Second, in the right circumstances, we will strategically pursue larger, stand-alone businesses that have the potential to either complement our existing businesses or allow us to pursue innovative technologies within our key growth spaces. Over the past three years (20102012), we have spent over $2.6 billion to purchase 22 businesses that strategically fit within our business model. This included the largest acquisition in our history, that of Sound Solutions in July of 2011 for net purchase consideration of approximately $790 million. By enhancing the product offerings serving the high growth handset market, the acquisition of Sound Solutions has enabled our Communication Technologies segment to be a global leader in audio components serving this market. In the fourth quarter of 2012, we spent approximately $600 million to acquire Anthony International, a leading manufacturer of specialty glass, commercial glass refrigerator and freezer doors, lighting systems, and display equipment. The acquisition of Anthony expands our portfolio of industry-leading technology in the refrigeration space and provides access to new geographies and new markets, most notably the convenience store market. Recent significant acquisitions have also included Harbison-Fischer, which we acquired for approximately $400 million at the beginning of 2011 in order to enhance our artificial lift portfolio within our Energy segment, Maag Pump Systems, a European acquisition for our Fluid Solutions platform, which we acquired in the first quarter of 2012 for approximately $266 million, and Production Control Services, acquired in the second quarter of 2012 for consideration totaling $220 million, which added to our artificial lift technology in our Energy segment.

For more details regarding acquisitions completed over the past two years, see Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K. Our future growth depends in large part on finding and acquiring successful businesses, as a substantial number of our current businesses operate in relatively mature markets. While we expect to generate annual organic growth of 4% - 5% over a long-term business cycle absent extraordinary economic conditions, sustained organic growth at these levels for individual businesses is difficult to achieve consistently each year. Our success is also dependent on the ability to successfully integrate our acquired businesses within our existing structure. To track post-merger integration and accountability, we utilize an internal tool kit and defined processes to help ensure synergies are realized and value is created, as had been planned when the acquisition was made.

Dispositions

We continually review our portfolio to evaluate whether our businesses continue to be essential contributors to our long-term strategy. Occasionally, we may also make an opportunistic sale of one of our businesses based on specific market conditions and strategic considerations. Accordingly, in an effort to reduce our exposure to cyclical markets and focus on our higher margin growth spaces, during the past three years (20102012) we have sold four businesses for aggregate consideration of approximately $517 million. Over the same period, disposals of a few minor non-core divisions of our businesses generated additional proceeds of approximately $5 million. Additionally, in the fourth quarter of 2012, we initiated the sale of two businesses in our Printing & Identification segment that serve the electronic assembly and test markets to reduce our exposure to these cyclical markets. The financial position and results of operations for these businesses have been presented as discontinued operations for all periods presented. For more details, see Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Business Segments

As noted previously, we currently operate through four business segments that are aligned with the key end-markets they serve and comprise our operating and reportable segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. For financial information about our segments and geographic areas, see Note 16 to the Consolidated Financial Statements in Item 8 of this Form 10-K.


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Communication Technologies

Our Communication Technologies segment serves the following major markets: consumer electronics, medical technology, aerospace/defense, and telecom/other.

Consumer electronics – Our businesses serving the consumer electronics market design, manufacture, and assemble micro-acoustic audio input and output components for use principally in personal mobile handsets.

Medical technology – Our businesses serving the medical technology market manufacture advanced miniaturized receivers and electromechanical components for use in hearing aids, connectors for use in a variety of medical devices and bio processing applications, and specialized components for use in implantable devices and medical equipment.

Aerospace/Defense – Our businesses serving the aerospace/defense markets manufacture precision engineered components and aftermarket parts across a broad array of market applications. This includes the design and manufacture of specialty hydraulics, fasteners, bearings, switches, and filters sold to both original equipment manufacturers ("OEMs") and as aftermarket products, as well as mechanical and frequency control communication components serving shipboard applications, strategic mission critical parts on key Airborne programs and Command and Control communications, and frequency control components, electromechanical switches, multi-layered capacitors, filters, and quick disconnect couplings. These businesses also support key space initiatives with critical communication components.

Telecom/Other - Our businesses serving these markets manufacture frequency control components for wired and wireless network base station communications that ensure precise signal timing and filters for non-interrupted access across high speed networks.

Communication Technologies’ products are manufactured primarily in North America, Europe, and Asia and are sold globally, directly and through a network of distributors.

Energy

Our Energy segment serves the oil, gas, and power generation industries with products that promote efficient and cost-effective drilling, extraction, storage, and movement of oil and gas products, or constitute critical components for power generation equipment. This segment consists of the following lines of business:

Drilling – Our businesses serving the drilling market design and manufacture products that promote efficient and cost-effective drilling, including long-lasting polycrystalline diamond cutters (PDCs) for applications in down-hole drilling tools and quartz pressure transducers and hybrid electronics used in down-hole tools and monitoring devices.

Production – Our businesses serving the production market design and manufacture products and components that facilitate the extraction and movement of fuel from the ground, including steel sucker rods, down-hole rod pumps, progressive cavity pumps and drive systems, plunger lifts, and accessories used in artificial lift applications in oil and gas production; pressure, temperature, and flow monitoring equipment used in oil and gas exploration and production applications; and control valves and instrumentation for oil and gas production. In addition, these businesses manufacture various compressor parts that are used in the natural gas production, distribution, and oil refining markets; and winches, hoists, gear drives, swing drives, auger drives, slewing ring bearings, hydraulic pump, and electronic monitoring solutions for energy, infrastructure, and recovery markets worldwide.

Downstream – Our businesses serving the downstream market produce systems and products that support efficient, safe, and environmentally-sensitive transportation and handling of fuel, hazardous liquids, and dry-bulk commodities. Vehicle fuel dispensing products include conventional, vapor recovery, and clean energy (LPG, CNG, and Hydrogen) nozzles, swivels, and breakaways, as well as tank pressure management systems. Products manufactured for the transportation, storage, and processing of hazardous liquid and dry-bulk commodities include relief valves, loading/unloading angle valves, rupture disc devices, actuator systems, level measurement gauges, swivel joints, butterfly valves, lined ball valves, aeration systems, industrial access ports, manholes, hatches, collars, weld rings, and fill covers. In addition, we offer bearings, bearing isolators, seals, and remote condition monitoring systems that are used for rotating machinery applications such as turbo machinery, motors, generators, and compressors used in energy, utility, marine, and other industries.


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Our Energy segment’s sales are made directly to customers and through various distribution channels. We manufacture our products primarily in North America, and our sales are concentrated in North America with an increasing level of international sales directed largely to Europe, Central and South America, China, the Middle East, and Australia.

Engineered Systems

Our Engineered Systems segment combines its engineering technology, unique product advantages, and applications expertise to address market needs and requirements including sustainability, consumer product safety needs, and growth in emerging economies. To better serve its end-markets, the segment manages its products and services through two core business platforms, Fluid Solutions and Refrigeration & Industrial, as described below.

Fluid Solutions

The Fluid Solutions platform designs and manufactures pumps, compressors, and chemical proportioning and dispensing products. The pumps and compressors are used to transfer liquid and bulk products and are sold to a wide variety of markets, including the refined fuels, LPG, pulp and paper, wastewater, food/sanitary, military, transportation, and chemical process industries. The pumps include centrifugal, reciprocating (double diaphragm), and rotary pumps that are used in demanding and specialized fluid transfer process applications. The chemical portioning and dispensing systems are used to dilute and dispense concentrated cleaning chemicals and are sold to the food service, health care, supermarket, institutional, school, building service contractor, and industrial markets. In addition, the platform manufactures copper-brazed compact heat exchangers and designs software for heating and cooling substations. Fluid Solutions products are manufactured in the United States, South America, Asia, and Europe and marketed globally through direct channels and a network of distributors.

Refrigeration & Industrial

The Refrigeration & Industrial platform manufactures products and systems serving the refrigeration and food equipment and other industrial markets, as follows:

Refrigeration and food equipment – Our businesses manufacture refrigeration systems, refrigeration display cases, walk-in coolers and freezers, specialty glass, commercial glass refrigerator and freezer doors, electrical distribution products and engineering services, commercial foodservice equipment, cook-chill production systems, custom food storage and preparation products, kitchen ventilation systems, conveyer systems, beverage can-making machinery, and packaging machines used for meat, poultry, and other food products. The platform’s refrigeration/food related manufacturing facilities and distributing operations are principally in North America, Europe, and Asia.

The majority of the refrigeration/food systems and machinery that are manufactured or serviced by the Refrigeration & Industrial platform are used by the supermarket industry, “big-box” retail and convenience stores, the commercial/industrial refrigeration industry, institutional and commercial foodservice and food production markets, and beverage can-making industries. The commercial foodservice cooking equipment products serve their markets worldwide through a network of dealers, distributors, national chain accounts, manufacturer representatives, and a direct sales force with the primary market being North America.

Other industrial – We also serve the vehicle service, industrial automation, and waste and recycling markets. Our businesses serving the vehicle service markets provide a wide range of products and services that are utilized in vehicle services, maintenance, washing, repair, and modification. Vehicle lifts and collision equipment are sold through equipment distributors and directly to a wide variety of markets, including independent service and repair shops, collision repair shops, national chains and franchised service facilities, new vehicle dealers, governments, and directly to consumers via the Internet. The businesses also produce 4WD and AWD powertrain systems and accessories for off-road vehicles, which are sold to OEMs and through extensive dealer networks primarily in North America. These other industrial manufacturing operations are located primarily in North and South America, Asia, and Europe.

The businesses in the industrial automation market provide a wide range of modular automation components including manual clamps, power clamps, rotary and linear mechanical indexers, conveyors, pick and place units, glove ports and manipulators, as well as end-of-arm robotic grippers, slides, and end effectors. These products serve a very broad market including food processing, packaging, paper processing, medical, electronic, automotive, nuclear, and general industrial products. They are produced in North America, Europe, and Asia and are marketed globally on a direct basis to OEMs and

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through a global dealer and distribution network to industrial end users. We also provide highly engineered hydraulic cylinders and swivels to the North American markets for use in mining and resource recovery, vehicle recovery, materials handling, and various other OEM applications.

Our businesses serving waste and recycling markets provide products and services for the refuse collection industry and for on-site processing and compaction of trash and recyclable materials. Products are sold to municipal customers, national accounts, and independent waste haulers through a network of distributors and directly in certain geographic areas. The on-site waste management and recycling systems include a variety of stationary compactors, wire processing and separation machines, and balers that are manufactured and sold primarily in the United States to distribution centers, malls, stadiums, arenas, office complexes, retail stores, and recycling centers.

Printing & Identification

Our Printing & Identification segment is a worldwide supplier of precision marking & coding, printing, dispensing, soldering and coating equipment, and related consumables and services. The segment serves two broad global end-markets: fast moving consumer goods and industrial.

Fast Moving Consumer Goods (FMCG) – Our businesses serving this market primarily design and manufacture marking & coding products used for printing variable information (such as date codes and serial numbers) on food, beverage, consumer goods, and pharmaceutical products, capitalizing on expanding food and product safety requirements and growth in emerging markets.

Industrial – Our products used by the industrial market are primarily marking & coding, bar code & portable printers, and fluid dispensing related products serving a number of industrial end markets including aerospace, cable, military, material packaging, industrial assembly, and medical devices capitalizing on growing industrial-related manufacturing in emerging markets. Additional products include broad line marking solutions leveraged for secondary packaging, such as cartons and pallets for use in warehouse logistics operations and bar code and portable printers used where on-demand labels/receipts are required.

In the fourth quarter of 2012, we reclassified to discontinued operations our businesses serving the electronic assembly and test markets, as we intend to divest these businesses in 2013.

Printing & Identification’s products are manufactured primarily in the United States, France, China, and India, and are sold throughout the world directly and through a network of distributors.

Raw Materials

We use a wide variety of raw materials, primarily metals and semi-processed or finished components, which are generally available from a number of sources. As a result, shortages or the loss of any single supplier have not had, and are not likely to have, a material impact on operating profits. While the required raw materials are generally available, commodity pricing has trended upward over the past few years, particularly for various grades of steel, copper, aluminum, select other commodities, and rare earth metals. Although some cost increases may be recovered through increased prices to customers, our operating results are exposed to such fluctuations. We attempt to control such costs through fixed-price contracts with suppliers and various other programs, such as our global supply chain activities.

Research and Development

Our businesses are encouraged to develop new products as well as to upgrade and improve existing products to satisfy customer needs, expand revenue opportunities domestically and internationally, maintain or extend competitive advantages, improve product reliability, and reduce production costs. During 2012, we spent $189,844 for research and development, including qualified engineering costs. In 2011 and 2010, research and development spending totaled $175,532 and $159,338, respectively.


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Our Communication Technologies and Printing & Identification segments expend significant effort in research and development because the rate of product development by their customers is often quite high. Our businesses that develop product identification and printing equipment and specialty electronic components for the consumer electronics, medical technology, and datacom/telecom markets believe that their customers expect a continuing rate of product innovation, performance improvement, and reduced costs. The result has been that product life cycles in these markets generally average less than five years with meaningful sales price reductions over that time period.

Our other segments contain many businesses that are also involved in important product improvement initiatives. These businesses also concentrate on working closely with customers on specific applications, expanding product lines and market applications, and continuously improving manufacturing processes. Most of these businesses experience a much more moderate rate of change in their markets and products than is generally experienced by the Communication Technologies and Printing & Identification segments.

Intellectual Property and Intangible Assets

Our businesses own many patents, trademarks, licenses, and other forms of intellectual property, which have been acquired over a number of years and, to the extent relevant, expire at various times over a number of years. A large portion of our businesses’ intellectual property consists of patents, unpatented technology, and proprietary information constituting trade secrets that we seek to protect in various ways, including confidentiality agreements with employees and suppliers where appropriate. In addition, a significant portion of our intangible assets relate to customer relationships. While our intellectual property and customer relationships are important to our success, the loss or expiration of any of these rights or relationships, or any group of related rights or relationships, is not likely to materially affect our results on a consolidated basis. We believe that our commitment to continuous engineering improvements, new product development, and improved manufacturing techniques, as well as strong sales, marketing, and service efforts, are significant to our general leadership positions in the niche markets we serve.

Seasonality

In general, our businesses, while not strongly seasonal, tend to have stronger revenue in the second and third quarters, particularly those serving the consumer electronics, transportation, construction, waste and recycling, petroleum, commercial refrigeration, and food service markets. Our businesses serving the major equipment markets, such as power generation, chemical, and processing industries, have longer lead times geared to seasonal, commercial, or consumer demands, and tend to delay or accelerate product ordering and delivery to coincide with those market trends that tend to moderate the aforementioned seasonality patterns.

Customers

We serve thousands of customers, no one of which accounted for more than 10% of our consolidated revenue in 2012. Similarly, within each of our four segments, no customer accounted for more than 10% of any individual segment’s revenue in 2012, except in our Communication Technologies segment where there is some revenue concentration with OEM customers in the consumer electronics market. Given our diversity of served markets, customer concentrations are quite varied. Businesses supplying the waste and recycling, agricultural, defense, energy, automotive, commercial refrigeration, handset, and hearing aid industries tend to deal with a few large customers that are significant within those industries. This also tends to be true for businesses supplying the power generation, aerospace, and chemical industries. In the other markets served, there is usually a much lower concentration of customers, particularly where the companies provide a substantial number of products and services applicable to a broad range of end-use applications.

Certain of our businesses, particularly within the Communication Technologies segment, serve the military, space, aerospace, commercial, and telecom infrastructure markets. Their customers include some of the largest operators in these markets. In addition, many of the OEM customers within the Communication Technologies segment outsource their manufacturing to Electronic Manufacturing Services (“EMS”) companies. Other customers include global cell phone and hearing aid manufacturers and many of the largest global EMS companies, particularly in China.

Backlog

Backlog is not a significant indicator of long-term performance, as our products generally have relatively short order-to-delivery periods. It is more relevant to our businesses that produce larger and more sophisticated machines or have long-term government

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contracts, primarily in the aerospace and defense markets of our Communication Technologies segment. Our total backlog relating to our continuing operations as of December 31, 2012 and 2011 was $1.5 billion and $1.4 billion, respectively.

Competition

Our competitive environment is complex because of the wide diversity of our products manufactured and the markets served. In general, most of our businesses are market leaders that compete with only a few companies, and the key competitive factors are customer service, product quality, price, and innovation. However, as we become increasingly global, we are exposed to more competition. Certain businesses in the Communication Technologies and Printing & Identification segments compete globally against a variety of companies, primarily operating in Europe and East Asia. A summary of our key competitors by end market within each our segments follows:
Segment

End Market
 
Key Competitors
Communication Technologies
 
Consumer electronics
 
AAC Technologies, GoerTek Inc.
 
 
Medical technology
 
Sonion A/S
 
 
Aerospace/Defense
 
Smiths Interconnect, SPS Technologies
 
 
Telecom/Other
 
Rakon Ltd., NDK Ltd.
Energy
 
Drilling
 
DeBeers Group (Element Six), Schlumberger Ltd. (MegaDiamond)
 
 
Production
 
Weatherford International Ltd., Lufkin Industries, Paccar Inc.
 
 
Downstream
 
Danaher Corp. (Gilbarco Veeder-Root), Franklin Electric, Gardner Denver, Inc. (Emco Wheaton)
Engineered Systems
 
Refrigeration and food systems
 
Hussman Corp., Heatcraft Worldwide Refrigeration (Kysor/Warren), Manitowoc Company, Illinois Tool Works
 
 
Other industrial
 
Oshkosh Corp. (McNeilus), Siemens AG (Weiss GmbH), Challenger Lifts, Labrie Enviroquip Group, and numerous others
 
 
Fluid solutions
 
IDEX Corp, Alfa Laval, Ingersoll Rand, Danfoss, SPX Corp.
Printing & Identification
 
Fast moving consumer goods
 
Danaher Corp. (Videojet), Domino Printing
 
 
Industrial
 
Danaher Corp. (Videojet), Domino Printing, Zebra Technologies

International

Consistent with our strategic focus on positioning our businesses for growth, we continue to increase our expansion into international markets, particularly in developing economies in South America, Asia, and Eastern Europe.

Most of our non-U.S. subsidiaries and affiliates are currently based in France, Germany, the Netherlands, Sweden, Switzerland, the United Kingdom and, with increasing emphasis, Canada, China, Malaysia, India, Mexico, Brazil, and Eastern Europe.

The following table shows annual revenue derived from customers outside the U.S. as a percentage of total annual revenue for each of the last three years, by segment and in total:
 
% Non-U.S. Revenue by Segment
 
Years Ended December 31,
 
2012
 
2011
 
2010
Communication Technologies
73
%
 
71
%
 
63
%
Energy
31
%
 
32
%
 
33
%
Engineered Systems
37
%
 
36
%
 
34
%
Printing & Identification
72
%
 
74
%
 
74
%
Total percentage of revenue derived from customers outside of the U.S.
46
%
 
47
%
 
45
%

Our percentage of revenue derived from customers outside of the U.S. declined slightly in 2012 as compared to 2011 as a result of economic weakness in Europe and slower growth in Asia, which impacted certain of our businesses.

10




Our international operations are subject to certain risks, such as price and exchange rate fluctuations and non-U.S. governmental restrictions, which are discussed further in “Item 1A. Risk Factors.” For additional details regarding our non-U.S. revenue and the geographic allocation of the assets of our continuing operations, see Note 16 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Environmental Matters

Our operations are governed by a variety of international, national, state, and local environmental laws. We are committed to continued compliance and believe our operations generally are in substantial compliance with these laws. In a few instances, particular plants and businesses have been the subject of administrative and legal proceedings with governmental agencies or private parties relating to the discharge or potential discharge of regulated substances. Where necessary, these matters have been addressed with specific consent orders to achieve compliance.

In 2010, we developed and implemented a process to conduct an inventory of greenhouse gas emissions. Since then, we have evaluated our climate change risks and opportunities and have developed an energy and climate change strategy that includes clearly defined goals and objectives, along with prioritized programs and projects for achieving energy use and greenhouse gas emissions reductions. We have committed to reducing our overall energy and greenhouse gas intensity indexed to net revenue by 20% from 2010 to 2020. We also participated as a respondent in the 2012 Carbon Disclosure Project.

All of our segments are investigating the energy efficiencies related to their operations and the use of their products and services by customers. In some instances, our businesses may be able to help customers reduce some of their energy needs. Increased demand for energy-efficient products, based on a variety of drivers (including, but not limited to, reduction of greenhouse gas emissions) could result in increased sales for a number of our businesses.

There have been no material effects upon our earnings and competitive position resulting from compliance with laws or regulations enacted or adopted relating to the protection of the environment. We are aware of a number of existing or upcoming regulatory initiatives intended to reduce emissions in geographies where our manufacturing and warehouse/distribution facilities are located and have evaluated the potential impact of these regulations on our businesses. We anticipate that direct impacts from regulatory actions will not be significant in the short- to medium-term. We expect the regulatory impacts associated with climate change regulation would be primarily indirect and would result in “pass through” costs from energy suppliers, suppliers of raw materials, and other services related to our operations.

Employees

We had approximately 35,000 employees in continuing operations as of December 31, 2012, which was an increase of 13% from the prior year end. The increase is primarily the result of recent acquisitions, slightly offset by headcount reduction programs in certain businesses.

Iran Related Activities

Pursuant to Section 13(r) of the Securities Exchange Act of 1934, we are required to provide disclosure if, during 2012, we or any of our affiliates have engaged in transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency.

During the disclosure period, Automatik Plastics Machinery GmbH ("Automatik"), a German affiliate of Maag Pump Systems, which we acquired on March 13, 2012, exported from Germany European-origin equipment used in the processing of polystyrene pellets and PET chip to two entities in Iran, Tabriz Petrochemical (“Tabriz”) and Shahid Tondgoyan Petrochemical (“Shahid Tondgoyan”), which we understand are owned or controlled by the Government of Iran.  All of the exports except one were made prior to August 10, 2012, the date of enactment of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”).  Automatik made two exports to Tabriz on February 24, 2012 and May 8, 2012, with total revenue and net profit values of €51,550 and €14,759, respectively. Automatik made three exports to Shahid Tondgoyan on March 6, 2012, July 19, 2012, and August 8, 2012 with total revenue and net profit values of €516,831 and €162,588, respectively. The only export made after the enactment of the ITRA was made to Shahid Tondgoyan on October 4, 2012, with a revenue and net profit value of €20,388 and €7,411, respectively. This last export was made prior to the October 9, 2012 date of the Presidential Executive Order that made it a

11


violation of U.S. law for owned or controlled foreign subsidiaries after October 9, 2012 to knowingly engage in transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran.  For most of these exports, Automatik received official written confirmation from the German Government that it did not require a license under German law and for the others it received oral confirmation no license was required.  Automatik also received a payment in November 2012 for a prior order that was not shipped and will not be shipped in the future. Given the SEC guidance that issuers should disclose all activities, including those taking place prior to ITRA's enactment on August 10, 2012, we are including all exports by Automatik Germany to government entities in Iran during 2012.  Management has instructed all of the Company's non-U.S. affiliates not to engage in any trade transactions with Iran.

Other Information

We make available through the “Financial Reports” link on our Internet website, http://www.dovercorporation.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports. We post each of these reports on the website as soon as reasonably practicable after the report is filed with the Securities and Exchange Commission. The information on our Internet website is not incorporated into this Form 10-K.


12


ITEM 1A. RISK FACTORS

Our business, financial condition, operating results, and cash flows can be impacted by a number of factors which could cause our actual results to vary materially from recent results or from anticipated future results. In general, we are subject to the same general risks and uncertainties that impact many other industrial companies such as general economic, industry and/or market conditions, and growth rates; the impact of natural disasters, and their effect on global markets; possible future terrorist threats and their effect on the worldwide economy; and changes in laws or accounting rules. The risk factors discussed in this section should be considered together with information included elsewhere in this Form 10-K and should not be considered the only risks to which we are exposed.

Our results may be impacted by current domestic and international economic conditions and uncertainties.

Our businesses may be adversely affected by disruptions in the financial markets or declines in economic activity both domestically and internationally in those countries in which we operate. These circumstances will also impact our suppliers and customers in various ways which could have an impact on our business operations, particularly if global credit markets are not operating efficiently and effectively to support industrial commerce.  

Our Energy segment is subject to risk due to the volatility of global energy prices and regulations that impact production, although overall demand is more directly related to depletion rates and global economic conditions and related energy demands.

Negative changes in worldwide economic and capital market conditions are beyond our control, are highly unpredictable, and can have an adverse effect on our revenue, earnings, cash flows, and cost of capital.

We are subject to risks relating to our existing international operations and expansion into new geographical markets.

Approximately 46% of our revenues for 2012 and 47% of our revenues for 2011 were derived outside the United States. We continue to focus on penetrating global markets as part of our overall growth strategy and expect sales from outside the United States to continue to represent a significant portion of our revenues. In addition, many of our manufacturing operations and suppliers are located outside the United States.  Our international operations and our global expansion strategy are subject to general risks related to such operations, including:
o  
political, social, and economic instability and disruptions;
 
 
o  
government embargoes or trade restrictions;
 
 
o  
the imposition of duties and tariffs and other trade barriers;
 
 
o  
import and export controls;
 
 
o  
limitations on ownership and on repatriation of earnings;
 
 
o  
transportation delays and interruptions;
 
 
o  
labor unrest and current and changing regulatory environments;
 
 
o  
increased compliance costs, including costs associated with disclosure requirements and related due diligence;
 
 
o  
the impact of loss of a single-source manufacturing facility;
 
 
o  
difficulties in staffing and managing multi-national operations; and
 
 
o  
limitations on our ability to enforce legal rights and remedies.
 
 
If we are unable to successfully manage the risks associated with expanding our global business or adequately manage operational risks of our existing international operations, the risks could have a material adverse effect on our growth strategy involving expansion into new geographical markets or our results of operations and financial position.

Increasing product/service and price competition by international and domestic competitors, including new entrants, and our inability to introduce new and competitive products could cause our businesses to generate lower revenue, operating profits, and cash flows.

Our competitive environment is complex because of the wide diversity of the products that our businesses manufacture and the markets they serve. In general, most of our businesses compete with only a few companies. Our ability to compete effectively depends on how successfully we anticipate and respond to various competitive factors, including new products and services that may be introduced by competitors, changes in customer preferences, and pricing pressures. If our businesses

13


are unable to anticipate their competitors’ development of new products and services, and/or identify customer needs and preferences on a timely basis, or successfully introduce new products and services in response to such competitive factors, they could lose customers to competitors. If our businesses do not compete effectively, we may experience lower revenue, operating profits, and cash flows.

Some of our businesses may not anticipate, adapt to, or capitalize on technological developments and this could cause these businesses to become less competitive and lead to reduced market share, revenue, operating profits, and cash flows.

Certain of our Communication Technologies businesses sell their products in electronic and technology-based industries that are constantly experiencing change as new technologies are developed. In order to grow and remain competitive in these industries, they must adapt to future changes in technology to enhance their existing products and introduce new products to address their customers’ changing demands. If these businesses are unable to adapt to the rapid technological changes, it could have a material impact on our consolidated results of operations, financial position, and cash flows.
 
We could lose customers or generate lower revenue, operating profits, and cash flows if there are significant increases in the cost of raw materials (including energy) or if we are unable to obtain raw materials.

We purchase raw materials, sub-assemblies, and components for use in our manufacturing operations, which expose us to volatility in prices for certain commodities. Significant price increases for these commodities could adversely affect operating profits for certain of our businesses.  While we generally attempt to mitigate the impact of increased raw material prices by hedging or passing along the increased costs to customers, there may be a time delay between the increased raw material prices and the ability to increase the prices of products, or we may be unable to increase the prices of products due to a competitor’s pricing pressure or other factors. In addition, while raw materials are generally available now, the inability to obtain necessary raw materials could affect our ability to meet customer commitments and satisfy market demand for certain products. Consequently, a significant price increase in raw materials, or their unavailability, may result in a loss of customers and adversely impact revenue, operating profits, and cash flows.

Customer requirements and new regulations may increase our expenses and impact the availability of certain raw materials, which could adversely affect our revenue and operating profits.

Our businesses use parts or materials that are impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requirement for disclosure of the use of “conflict minerals” mined in the Democratic Republic of the Congo and adjoining countries.  It is possible that some of our businesses' customers will require “conflict free” metals in products purchased from us. We have begun the process of determining the country of origin of certain metals used by our businesses, as required by the Dodd-Frank Act. The supply chain due diligence and verification of sources may require several years to complete based on the current availability of smelter origin information and the number of vendors.  We may not be able to complete the process in the time frame required because of the complexity of our supply chain. Other governmental social responsibility regulations also may impact our suppliers, manufacturing operations, and operating profits.
 
The need to find alternative sources for certain raw materials or products because of customer requirements and regulations may impact our ability to secure adequate supplies of raw materials or parts, lead to supply shortages, or adversely impact the prices at which our businesses can procure compliant goods.     

Our businesses and their profitability and reputation could be adversely affected by domestic and foreign governmental and public policy changes (including environmental and employment regulations and tax policies such as export subsidy programs, research and experimentation credits, carbon emission regulations, and other similar programs), risks associated with emerging markets, changes in statutory tax rates, and unanticipated outcomes with respect to tax audits.

Our businesses’ domestic and international sales and operations are subject to risks associated with changes in local government laws (including environmental and export/import laws), regulations, and policies. Failure to comply with any of these laws could result in civil and criminal, monetary, and non-monetary penalties as well as potential damage to our reputation. In addition, we cannot provide assurance that our costs of complying with new and evolving regulatory reporting requirements and current or future laws, including environmental protection, employment, and health and safety laws, will not exceed our estimates. In addition, we have invested in certain countries, including Brazil, Russia, India, and China, that carry high levels of currency, political, compliance, and economic risk. While these risks or the impact of these risks are difficult to predict, any one or more of them could adversely affect our businesses and reputation.
 
Our effective tax rate is impacted by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, and changes in tax laws. The amount of income taxes and other taxes paid

14


can be adversely impacted by changes in statutory tax rates and laws and are subject to ongoing audits by domestic and international authorities. If these audits result in assessments different from amounts estimated, then our financial results may be adversely affected by unfavorable tax adjustments.
 
Our revenue, operating profits, and cash flows could be adversely affected if our businesses are unable to protect or obtain patent and other intellectual property rights.

Our businesses own patents, trademarks, licenses, and other forms of intellectual property related to their products. Our businesses employ various measures to maintain and protect their intellectual property. These measures may not prevent their intellectual property from being challenged, invalidated, or circumvented, particularly in countries where intellectual property rights are not highly developed or protected. Unauthorized use of these intellectual property rights could adversely impact the competitive position of our businesses and have a negative impact on our revenue, operating profits, and cash flows.

Our growth and results of operations may be adversely affected if we are unsuccessful in our capital allocation and acquisition program.

We expect to continue our strategy of seeking to acquire value creating add-on businesses that broaden our existing position and global reach as well as, in the right circumstances, strategically pursue larger acquisitions that could have the potential to either complement our existing businesses or allow us to pursue a new platform.  However, there can be no assurance that we will be able to continue to find suitable businesses to purchase, that we will be able to acquire such businesses on acceptable terms, or that all closing conditions will be satisfied with respect to any pending acquisition. If we are unsuccessful in our acquisition efforts, then our ability to continue to grow at rates similar to prior years could be adversely affected.  In addition a completed acquisition may underperform relative to expectations, may be unable to achieve synergies originally anticipated, or may expose us to unexpected liabilities. Further, if we fail to allocate our capital appropriately, in respect of either our acquisition program or organic growth in our operations, we could be overexposed in certain markets and geographies.  These factors could potentially have an adverse impact on our operating profits and cash flows.

Our operating profits and cash flows could be adversely affected if we cannot achieve projected savings and synergies.

We are continually evaluating our cost structure and seeking ways to capture synergies across our operations. If we are unable to reduce costs and expenses through our various programs, it could adversely affect our operating profits and cash flows.

Unforeseen developments in contingencies such as litigation could adversely affect our financial condition.

We and certain of our subsidiaries are, and from time to time may become, parties to a number of legal proceedings incidental to their businesses involving alleged injuries arising out of the use of their products, exposure to hazardous substances, or patent infringement, employment matters, and commercial disputes. The defense of these lawsuits may require significant expenses and divert management’s attention, and we may be required to pay damages that could adversely affect our financial condition. In addition, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against potential loss exposures. 

The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and may result in unexpected liabilities.

Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot be assured that these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our profitability and financial position.  
 
Failure to attract, retain, and develop personnel or to provide adequate succession plans for key management could have an adverse effect on our operating results.

Our growth, profitability, and effectiveness in conducting our operations and executing our strategic plans depend in part on our ability to attract, retain, and develop qualified personnel, align them with appropriate opportunities, and maintain adequate succession plans for key management positions. If we are unsuccessful in these efforts, our operating results could be adversely affected.
 

15


Our business operations may be adversely affected by information systems interruptions or intrusion. 

Our businesses rely on a number of information technologies to manage, store, and support business activities.  We have put in place a number of systems, processes, and practices designed to protect against intentional or unintentional misappropriation or corruption of our systems and information, disruption of our operations, or corruption of the software that supports our products.  Disruptions or cybersecurity attacks, such as unauthorized access, malicious software, or other violations may lead to exposure of proprietary or confidential information as well as potential data corruption.  Any intrusion may cause operational stoppages, violations of applicable law, diminished competitive advantages or reputational damages, and increased operational costs for remedial activities. 
 
Our reputation, ability to do business, and results of operations may be impaired by improper conduct by any of our employees, agents, or business partners.

While we strive to maintain high standards, we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners that would violate U.S. and/or non-U.S. laws or fail to protect our confidential information, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering, and data privacy laws, as well as the improper use of proprietary information or social media.  Any such violations of law or improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties, and related shareholder lawsuits and could damage our reputation. 
 
Our exposure to exchange rate fluctuations on cross-border transactions and the translation of local currency results into U.S. dollars could negatively impact our results of operations.

We conduct business through our subsidiaries in many different countries, and fluctuations in currency exchange rates could have a significant impact on the reported results of operations, which are presented in U.S. dollars. A significant and growing portion of our products are manufactured in lower-cost locations and sold in various countries. Cross-border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange effects. Accordingly, significant changes in currency exchange rates, particularly the Euro, Pound Sterling, Swiss franc, Chinese RMB (Yuan), and the Canadian dollar, could cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations.  Additionally, the strengthening of certain currencies such as the Euro and U.S. dollar potentially exposes us to competitive threats from lower cost producers in other countries such as China. Our sales are translated into U.S. dollars for reporting purposes. The strengthening of the U.S. dollar could result in unfavorable translation effects as the results of foreign locations are translated into U.S. dollars.

Our borrowing costs may be impacted by our credit ratings developed by various rating agencies.

Three major ratings agencies (Moody’s, Standard and Poor’s, and Fitch Ratings) evaluate our credit profile on an ongoing basis and have each assigned high ratings for our long-term debt as of December 31, 2012.  Although we do not anticipate a material change in our credit ratings, if our current credit ratings deteriorate, then our borrowing costs could increase, including increased fees under our Five-Year Credit Facility, and our access to future sources of liquidity may be adversely affected.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.


16


ITEM 2. PROPERTIES

The number, type, location and size of the properties used by our continuing operations as of December 31, 2012 are shown in the following charts, by segment:

Number and nature of facilities

Square footage (in 000s)

Manufacturing

Warehouse

Sales / Service

Owned

Leased
Communication Technologies
31


3


12


1,129


1,420

Energy
59


51


47


3,265


1,353

Engineered Systems
65


34


46


6,180


3,290

Printing & Identification
11


22


68


600


673

 
Locations
 
Expiration dates of leased facilities (in years)
 
North America
 
Europe
 
Asia
 
Other
 
Minimum
 
Maximum
Communication Technologies
18

 
9

 
9

 
1

 
1
 
15
Energy
122

 
5

 
3

 
10

 
1
 
13
Engineered Systems
84

 
41

 
26

 
3

 
1
 
12
Printing & Identification
13

 
27

 
41

 
2

 
1
 
7

We believe our owned and leased facilities are well-maintained and suitable for our operations.

ITEM 3. LEGAL PROCEEDINGS

A few of our 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 subsidiary’s liability appears to be very small in relation to the total projected expenditures and the number of other “potentially responsible parties” involved and it is anticipated to be immaterial to us on a consolidated basis. In addition, a few of our subsidiaries are involved in ongoing remedial activities at certain plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established. At December 31, 2012 and 2011, we have reserves totaling $28.9 million and $19.6 million, respectively, for environmental matters that are probable and estimable, with the 2012 increase primarily attributed to environmental contingencies assumed in recent acquisitions.

We and certain of our subsidiaries are, and from time to time may become, parties to a number of other legal proceedings incidental to our businesses. These proceedings primarily involve claims by private parties alleging injury arising out of the use of our businesses' products, exposure to hazardous substances or patent infringement, employment matters and commercial disputes. Management and legal counsel periodically review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred, the availability and extent of insurance coverage, and established reserves. At December 31, 2012 and 2011, we have reserves totaling $1.2 million for legal matters that are probable and estimable and not otherwise covered by insurance. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, we are not currently involved in any legal proceedings which, individually or in the aggregate, could have a material affect on our financial position, results of operations, or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


17


EXECUTIVE OFFICERS OF THE REGISTRANT

All of our officers are elected annually at the first meeting of the Board of Directors following our annual meeting of shareholders, and are subject to removal at any time by the Board of Directors. Our executive officers as of February 15, 2013, and their positions with Dover (and, where relevant, prior business experience) for the past five years, are as follows:
Name

Age

Positions Held and Prior Business Experience
Robert A. Livingston
 
59
 
Chief Executive Officer and Director (since December 2008), President (since June 2008) and Chief Operating Officer (from June 2008 to December 2008) of Dover; prior thereto Vice President of Dover and President and Chief Executive Officer of Dover Engineered Systems (from July 2007 to May 2008); prior thereto Vice President of Dover and President and Chief Executive Officer of Dover Electronics (from October 2004 to June 2007).
Ivonne M. Cabrera
 
46
 
Senior Vice President, General Counsel and Secretary of Dover (since January 2013); prior thereto Vice President, Deputy General Counsel, and Assistant Secretary of Dover (from November 2012 to December 2012); prior thereto Vice President, Business Affairs and General Counsel of Knowles Electronics, LLC (from February 2011 to December 2012); prior thereto Vice President (from May 2010 to February 2011), Deputy General Counsel and Assistant Secretary (from February 2004 to February 2011) of Dover.
Brad M. Cerepak
 
53
 
Senior Vice President and Chief Financial Officer (since May 2011) of Dover; prior thereto Vice President and Chief Financial Officer (from August 2009 to May 2011) of Dover; prior thereto Vice President, Finance (from June 2009 to August 2009) of Dover; prior thereto Vice President and Controller (from August 2005 to June 2008) of Trane, Inc.
Thomas W. Giacomini
 
47
 
Vice President (since February 2008) of Dover and President and Chief Executive Officer (since November 2011) of Dover Engineered Systems; prior thereto President (from April 2009 to November 2011) and Chief Executive Officer (from July 2009 to November 2011) of Dover Industrial Products; prior thereto President (from October 2007 to July 2009) of Dover's Material Handling Platform.
John F. Hartner
 
50
 
Vice President (since May 2011) of Dover and President and Chief Executive Officer (since November 2011) of Dover Printing & Identification; prior thereto Executive Vice President (from April 20l1 to November 2011) of Dover Engineered Systems; prior thereto Executive Vice President (from October 2007 to April 2011) of Dover Electronic Technologies.
Jay L. Kloosterboer
 
52
 
Senior Vice President, Human Resources (since May 2011) of Dover; prior thereto Vice President, Human Resources (from January 2009 to May 2011) of Dover; prior thereto Executive Vice President - Business Excellence (from May 2005 to January 2009) of AES Corporation.
Jeffrey S. Niew
 
46
 
Vice President of Dover and President and Chief Executive Officer of Dover Communication Technologies (since November 2011); prior thereto President (from January 2008 to November 2011) and Chief Executive Officer (from February 2010 to November 2011) of Knowles Electronics; prior thereto Chief Operating Officer (from January 2007 to February 2010) of Knowles Electronics.
Stephen R. Sellhausen
 
55
 
Senior Vice President, Corporate Development (since May 2011) of Dover; prior thereto Vice President, Corporate Development (from January 2009 to May 2011) of Dover; prior thereto Vice President, Business Development (from April 2008 to January 2009) of Dover; prior thereto investment banker with Citigroup Global Markets.
William W. Spurgeon, Jr.
 
54
 
Vice President (since October 2004) of Dover and President and Chief Executive Officer (since November 2011) of Dover Energy; prior thereto President and Chief Executive Officer (from July 2007 to November 2011) of Dover Fluid Management.
Niclas Ytterdahl
 
48
 
Senior Vice President, Global Sourcing (since January 2012) of Dover; prior thereto Vice President, Global Strategic Sourcing (from April 2006 to December 2011) of AES Corporation.


18


Name
 
Age
 
Positions Held and Prior Business Experience
Kevin P. Buchanan
 
57
 
Vice President, Tax (since July 2010) of Dover; prior thereto Deputy General Counsel, Tax (from November 2009 to June 2010) and Vice President, Tax (from May 2000 to October 2009) of Monsanto Company.
C. Anderson Fincher
 
42
 
Vice President (since May 2011) of Dover and Executive Vice President (since November 2011) of Dover Engineered Systems; prior thereto Executive Vice President (from May 2009 to November 2011) of Dover Industrial Products; prior thereto President (from January 2005 to May 2009) of Heil Trailer International.
Paul E. Goldberg
 
49
 
Vice President, Investor Relations (since November 2011) of Dover; prior thereto Treasurer and Director of Investor Relations (from February 2006 to November 2011) of Dover.
Raymond T. McKay, Jr.
 
59
 
Vice President (since February 2004) and Controller (since November 2002) of Dover.
Brian P. Moore
 
42
 
Vice President, Treasurer (since November 2011) of Dover; prior thereto Senior Director, Investor Relations (from April 2010 to October 2011) of USG Corporation; prior thereto Director of Credit & Accounts Receivable (from December 2008 to April 2010) of USG; prior thereto Director of Finance (from December 2007 to December 2008) at USG; prior thereto Assistant Treasurer (from October 2004 to December 2008) of USG.
James H. Moyle

 
60
 
Vice President (since 2009) of Dover and Executive Vice President (since January 2012) of Dover Engineered Systems; prior thereto Senior Vice President, Global Sourcing and Supply Chain (from April 2009 to December 2011) of Dover; prior thereto Chief Financial Officer (from July 2007 to April 2009) of Dover Fluid Management; prior thereto Vice President and Chief Financial Officer (from November 2005 to July 2007) of Dover Diversified.

Sivasankaran Somasundaram

 
47
 
Vice President (since January 2008) of Dover and Executive Vice President (since November 2011) of Dover Energy; prior thereto Executive Vice President (from January 2010 to November 2011) of Dover Fluid Management; President (from January 2008 to December 2009) of Dover's Fluid Solutions Platform; prior thereto President (from May 2006 to January 2008) of Gas Equipment Group.
Michael Y. Zhang
 
49
 
Vice President (since May 2010) of Dover and President, Asia (since May 2011) of Dover; prior thereto Managing Director (from January 2009 to May 2011) of Dover Regional Headquarters, China; prior thereto various roles at ABB, Ltd. including Vice President, ABB Control System and Product Business (from September 2004 to March 2008).



19


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividends

The principal market in which Dover common stock is traded is the New York Stock Exchange. Information on the high and low sales prices of our stock and the frequency and the amount of dividends paid during the last two years is as follows:
 
2012
 
2011
 
Market Prices
 
Dividends per Share
 
Market Prices
 
Dividends per Share
 
High
 
Low
 
 
High
 
Low
 
First Quarter
$
67.20

 
$
56.81

 
$
0.315

 
$
68.07

 
$
56.51

 
$
0.275

Second Quarter
64.36

 
50.88

 
0.315

 
69.25

 
60.57

 
0.275

Third Quarter
61.64

 
50.27

 
0.350

 
70.15

 
45.42

 
0.315

Fourth Quarter
65.80

 
54.90

 
0.350

 
59.27

 
43.64

 
0.315

 
 
 
 
 
$
1.330

 
 
 
 
 
$
1.180


Holders

The number of holders of record of Dover common stock as of February 1, 2013 was approximately 19,201. This figure includes participants in our domestic 401(k) program.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under our equity compensation plans is contained in Part III, Item 12 of this Form 10-K.

Recent Sales of Unregistered Securities

None.


20


Issuer Purchases of Equity Securities

During the fourth quarter of 2012, we made the following purchases of Dover shares:
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs (2)
Period
 
 
 
May 2012 Program
 
November 2012 Program
October 1 to October 31
1,798,907

 
$
58.41

 
1,798,907

 
3,908,289

 
$

November 1 to November 30
2,237,527

 
62.04

 
2,235,978

 
3,908,289

 
861,328

December 1 to December 31
1,729,037

 
64.54

 
1,727,106

 
3,908,289

 
749,898

For the Fourth Quarter
5,765,471

 
$
61.65

 
5,761,991

 
3,908,289

 
$
749,898


(1)
In May 2012, the Board of Directors renewed its standing authorization of the Company's share repurchase program, on terms consistent with its prior five-year authorization which expired at that time. This renewal authorizes the repurchase of up to 10,000,000 shares of the Company's common stock during the five-year period ending May 2017. We purchased 1,798,907 shares under this program during the fourth quarter. Additionally, in November 2012, the Board of Directors approved a $1 billion share repurchase program authorizing repurchases of Dover’s common shares over the next 12 to 18 months. We purchased 3,963,084 shares under this new program during the fourth quarter. We also acquired 3,480 shares from holders of our employee stock options when they tendered those shares as full or partial payment of the exercise price of such options. These shares were applied against the exercise price at the market price on the date of exercise.

(2)
As of December 31, 2012, the number of shares still available for repurchase under the May 2012 share repurchase authorization was 3,908,289. The approximate dollar amount still available for repurchase under the November 2012 share repurchase authorization was $749,898.
 

21


Performance Graph

This performance graph does not constitute soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any of our filings under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date of this Form 10-K and irrespective of any general incorporation language in any such filing, except to the extent we specifically incorporate this performance graph by reference therein.

Comparison of Five-Year Cumulative Total Return *
Dover Corporation, S&P 500 Index & Peer Group Index

Total Shareholder Returns
Data Source: Research Data Group, Inc
_______________________
*Total return assumes reinvestment of dividends.
This graph assumes $100 invested on December 31, 2007 in Dover Corporation common stock, the S&P 500 index, and a peer group index.

Thomas & Betts Corp. and Cooper Industries, two companies that were part of the peer index group in 2011, were acquired by ABB Ltd and Eaton Corporation, respectively, during 2012 and have since been removed from the index. The 2012 peer index consists of the following 37 public companies selected by the Company.
3M Company
Gardner Denver Inc.
Rockwell Automation
Actuant Corp.
Honeywell International
Roper Industries
Ametek Inc.
Hubbell Incorporated
Snap-On Inc.
Amphenol Corp.
IDEX Corporation
SPX Corporation
Cameron International
Illinois Tool Works
Teledyne Technologies Inc.
Carlisle Companies
Ingersoll-Rand PLC
Textron Inc.
Corning Inc.
Lennox International Inc.
The Timken Company
Crane Company
Nordson Corp.
Tyco International
Danaher Corporation
Pall Corporation
United Technologies Corp.
Eaton Corporation
Parker-Hannifin Corp.
Vishay Intertechnology Inc.
Emerson Electric Co.
Pentair Inc.
Weatherford International
Flowserve Corporation
Precision Castparts Corp.
 
FMC Technologies
Regal Beloit Corp.
 


22


ITEM 6. SELECTED FINANCIAL DATA

dollars in thousands except share data
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
8,104,339

 
$
7,369,154

 
$
6,109,507

 
$
5,055,796

 
$
6,233,670

Earnings from continuing operations
 
833,119

 
773,186

 
619,497

 
390,705

 
579,374

Net earnings
 
811,070

 
895,243

 
700,104

 
356,438

 
590,831

 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
4.59

 
$
4.16

 
$
3.31

 
$
2.10

 
$
3.07

Discontinued operations
 
(0.12
)
 
0.66

 
0.43

 
(0.18
)
 
0.06

Net earnings
 
4.47

 
4.82

 
3.75

 
1.91

 
3.13

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
181,551,000

 
185,882,000

 
186,897,000

 
186,136,000

 
188,481,000

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
4.53

 
$
4.09

 
$
3.27

 
$
2.09

 
$
3.06

Discontinued operations
 
(0.12
)
 
0.65

 
0.43

 
(0.18
)
 
0.06

Net earnings
 
4.41

 
4.74

 
3.70

 
1.91

 
3.12

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
183,993,000

 
188,887,000

 
189,170,000

 
186,736,000

 
189,269,000

 
 
 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
1.33

 
$
1.18

 
$
1.07

 
$
1.02

 
$
0.90

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
297,012

 
$
262,676

 
$
169,297

 
$
108,639

 
$
160,489

Depreciation and amortization
 
357,585

 
290,477

 
229,237

 
217,981

 
216,585

Total assets
 
10,443,943

 
9,500,552

 
8,558,743

 
7,882,403

 
7,883,238

Total debt
 
2,800,116

 
2,187,252

 
1,807,476

 
1,860,884

 
2,084,173


All results and data in the table above reflect continuing operations, unless otherwise noted. As a result, the data presented above will not necessarily agree to previously issued financial statements. See Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on disposed and discontinued operations and Note 2 for additional information regarding the impact of 2012 acquisitions.


23


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, 2012. 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.

OVERVIEW AND OUTLOOK

Dover is a diversified global manufacturer focusing on innovative equipment and components, specialty systems, and support services provided through its four major operating segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The Company's entrepreneurial business model encourages, promotes, and fosters deep customer engagement which has led to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation.

Overall, 2012 concluded as a solid performance year, with strong revenue, earnings, and cash flow growth, despite the backdrop of a low-growth macro-economic environment. Our consolidated revenue increased $735 million or 10% to $8.1 billion, inclusive of acquisitions, and our gross profit increased by $262 million or 9% to $3.1 billion. The 2012 results were led by our strong positions in the energy, handset, refrigeration and food equipment, and other industrial markets.

In our Energy segment, expanding production activity and strong downstream investments in distribution and retail fueling are among the trends that drove solid results during the year. The strong production and downstream performance was partially offset by the softening North American rig count, which caused our year-over-year drilling end market comparisons to decline as the year progressed. In all, the segment had solid performance, characterized by continuing growth and strong margins. We expect this trend to continue in 2013.

Within our Communication Technologies segment, several OEM's launched new products in the handset market during the second quarter and our microelectronic mechanical ("MEMs") microphone activity was very strong once the new OEM product launches commenced. However, our 2012 performance at Sound Solutions was weaker than anticipated. The Sound Solutions business continued to work through operational challenges which led to lower volumes than anticipated for the year; however, they did experience sequential growth and margin improvement in the fourth quarter, relative to the earlier quarters, and we expect their performance to continue to improve in 2013. Overall, we expect the handset market to be strong in 2013, supported by numerous new product releases, coupled with the increased use of multiple microphones per handset. Our aerospace/defense and medical technology markets were solid during the year, while our telecom market continued to be weak.

Within our Engineered Systems segment, the refrigeration and food equipment markets were solid, as were most of our U.S. industrial end markets. The results of our Fluid Solutions platform continued to reflect good performance from our first quarter Maag Pump Systems acquisition, which helped to mitigate the impact of a weakened market in Europe. We expect 2013 to be another solid year for Engineered Systems, as we leverage our recent acquisitions and continue our geographic expansion within our Fluid Solutions platform. We anticipate customer wins, an active remodel market, expanded product offerings and recent acquisitions to drive 2013 growth within our Refrigeration & Industrial platform.

In our Printing & Identification segment, solid organic growth in our fast moving consumer goods market more than offset uneven demand in our industrial markets, which was impacted by weak Europe and slowing China markets. We anticipate the release of several new products in the first half of the year, traction of added sales and service resources in key regional markets, along with stable fast moving consumer goods and industrial markets to contribute to our 2013 growth. Margin performance in the segment steadily improved over the course of 2012, driven by productivity and restructuring activities. We expect incremental benefit from these activities to carry over into 2013, enabling continued reinvestment in our product identification growth space.


24


In addition to our solid financial results, we continued to execute on our corporate strategy. During 2012, we continued to focus on our five key growth spaces of communication components, energy, fluids, refrigeration and food equipment, and product identification. We invested $1.2 billion on seven acquisitions that expanded our markets, enhanced our product offerings and broadened our customer base. In advancing our strategy of focusing on our higher margin growth spaces, we have reclassified to discontinued operations two non-core businesses serving the electronic assembly and test markets. We expect to divest these businesses in 2013. Although solid performers, these businesses serve highly volatile end-markets, and their sale should improve the consistency of our future results and enable management to focus on our key growth spaces. In 2012, we generated $964 million in free cash flow, which enabled us to continue to invest in higher growth economies and innovation, and to continue our long tradition of raising our annual dividend, now standing at 57 consecutive years. Lastly, in November of 2012, we announced and began to execute on a $1 billion share repurchase program, to continue to drive long-term shareholder value.

With respect to our expectations for 2013, we are targeting full year organic growth in the range of 3% to 5% (inclusive of a negligible foreign exchange impact) and acquisition related growth of approximately 4% for acquisitions completed in 2012.  Based on these revenue assumptions, our profitability expectations and anticipated additional share buy-backs, our diluted earnings per share from continuing operations for 2013 is estimated to be in the range of $5.05 to $5.35, and we expect our earnings to follow a traditional seasonal pattern of being higher in the second and third quarters. If global or domestic economic conditions accelerate or deteriorate, our operating results for 2013 could be materially different than currently projected.


25


CONSOLIDATED RESULTS OF OPERATIONS

As discussed in Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K, in the fourth quarter of 2012, we reclassified certain businesses in the Printing & Identification segment to discontinued operations based on our decision to divest these businesses. The results of operations of these businesses have been removed from the results of continuing operations and are presented within results of discontinued operations for all periods presented.
 
 
 
Years Ended December 31,
 
% / Point Change
(dollars in thousands, except per share figures)
 
2012
 
2011
 
2010
 
2012 vs. 2011
 
2011 vs. 2010
Revenue
 
$
8,104,339

 
$
7,369,154

 
$
6,109,507

 
10.0
%
 
20.6
%
Cost of goods and services
 
4,997,274

 
4,524,351

 
3,686,861

 
10.5
%
 
22.7
%
Gross profit
 
3,107,065

 
2,844,803

 
2,422,646

 
9.2
%
 
17.4
%
Gross profit margin
 
38.3
%
 
38.6
%
 
39.7
%
 
(0.3
)
 
(1.1
)
 
 
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
1,841,688

 
1,720,954

 
1,499,597

 
7.0
%
 
14.8
%
Selling and administrative as a percent of revenue
 
22.7
%
 
23.4
%
 
24.5
%
 
(0.7
)
 
(1.1
)
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
121,141

 
115,525

 
106,371

 
4.9
%
 
8.6
%
Other expense (income), net
 
6,665

 
(1,938
)
 
3,556

 
nm

 
nm

 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
304,452

 
237,076

 
193,625

 
28.4
%
 
22.4
%
Effective tax rate
 
26.8
%
 
23.5
%
 
23.8
%
 
3.3

 
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
 
833,119

 
773,186

 
619,497

 
7.8
%
 
24.8
%
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net
 
(22,049
)
 
122,057

 
80,607

 
nm

 
51.4
%
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations per common share - diluted
 
$
4.53

 
$
4.09

 
3.27

 
10.8
%
 
25.1
%
 
Revenue

Our 2012 consolidated revenue increased 10% to $8.1 billion, reflecting organic growth of 5%, growth from acquisitions of 6% and an unfavorable impact from currency translation of 1%. All four of our segments generated 2012 organic revenue growth, with the majority attributed to volume increases driven by strength in the energy, handset, refrigeration and food equipment, and many of the other industrial markets served by our Engineered Systems segment. Approximately 3% of our growth was generated by new products, particularly in our Communication Technologies segment, and geographic market expansion in our Energy segment. Pricing had a negligible impact to 2012 revenue, as price increases implemented to offset higher commodity costs, were partly offset by lower strategic pricing initiatives. Revenues generated outside of the U.S. increased by 9% compared with 2011, with growth in Canada and Asia offsetting weakness in Europe.

Over 80% of the 2012 revenue growth from acquisitions was generated by Sound Solutions, Maag Pump Systems, and Production Control Services, three of our more significant recent acquisitions made in the second half of 2011 and first half of 2012.

Our 2011 consolidated revenue increased $1.3 billion or 21% compared with 2010, reflecting organic growth of 12%, growth from acquisitions of 7% and a favorable impact from currency translation of 2%. The majority of our 2011 organic growth was attributed to increased volumes across all four segments driven by strength in the energy and consumer handset markets and solid growth in fluid solutions, refrigeration equipment and many of the industrial markets served by our Engineered Systems segment. Additionally, approximately 2% of our growth was generated by new products, particularly in our Communication Technologies and Printing & Identification segments. Pricing added about 1% to revenue principally driven by strategic pricing initiatives and price increases implemented to offset higher commodity costs. Revenues generated outside of the U.S. increased by 25% compared with 2010, with revenue generated in emerging economies of China and Latin America increasing 56%.


26


Over 70% of the 2011 revenue growth from acquisitions was generated by Harbison-Fischer and Sound Solutions, two large acquisitions that we made in 2011 to expand our operations serving the artificial lift and handset markets, respectively.

Gross Profit

Our gross profit increased $262.3 million or 9% in 2012 compared with 2011, reflecting the benefit of increased sales volumes, favorable net material costs, and benefits from productivity initiatives. Gross profit margin as a percentage of revenue contracted 30 basis points in 2012 to 38.3% from 38.6% in 2011, with the reduction in large part due to the integration of Sound Solutions, which generated lower than anticipated revenue in 2012, more than offsetting the operating leverage achieved by our other businesses.

Our gross profit increased $422.2 million or 17% in 2011 compared with 2010, reflecting the benefit of increased sales volumes. However, gross profit margin as a percentage of revenue contracted 110 basis points in 2011 to 38.6% from 39.7% in 2010 due principally to the impact of product and customer mix, which more than offset operating leverage, as well as the impact of higher depreciation from recent acquisitions.

Selling and Administrative Expenses

Selling and administrative expenses increased $120.7 million or 7% in 2012 compared with 2011 due primarily to general increases across the segments in support of higher volumes. As a percentage of revenue, selling and administrative expenses declined to 22.7% in 2012 compared with 23.4% in 2011. This 70 basis point improvement is largely a result of leverage from the higher revenue levels, which more than offset higher acquisition-related amortization and increased restructuring charges.

Selling and administrative expenses increased $221.4 million or 15% in 2011 compared with 2010 due primarily to general increases across the segments in support of higher volumes. As a percentage of revenue, selling and administrative expenses declined to 23.4% in 2011 compared with 24.5% in 2010. This 110 basis point improvement was largely a result of leverage from the higher revenue levels, which more than offset higher amortization and other nonrecurring expenses related to recent acquisitions.

Non-Operating Items

Interest expense, net, increased $5.6 million or 5% to $121.1 million in 2012 primarily due to lower average levels of cash on hand at reduced interest rates, leading to $4.4 million less of interest income in 2012 as compared with 2011.

In 2011, our interest expense, net, increased 9% to $115.6 million due primarily to higher average outstanding borrowings during 2011 as compared with 2010. As discussed in Note 9 to the Consolidated Financial Statements in Item 8 of this Form 10-K, in February of 2011 we issued $800 million in new notes, receiving net proceeds of $789 million, approximately half of which was used to repay outstanding commercial paper balances incurred to retire $400 million of notes which came due earlier that month, with the remainder used to fund first quarter 2011 acquisitions. As a result, our total borrowings were $380 million higher at the end of 2011 compared to the end of 2010.

Other expense (income), net in 2012, 2011, and 2010 includes $9.5 million, $7.5 million, and $6.9 million, respectively, of net expense from foreign currency exchange fluctuations on assets and liabilities denominated in currencies other than the functional currency, offset in each of these years by royalty income and other miscellaneous non-operating gains and losses, none of which are individually significant. In 2010, other expense (income), net also includes a $4.3 million loss on extinguishment of debt relating to early settlement of a non-interest bearing, structured loan arrangement.

Income Taxes

We operate globally, and 38%, 43%, and 47% of our pre-tax earnings in 2012, 2011, and 2010, respectively, were generated in foreign jurisdictions, where such earnings are generally subject to local country tax rates that are well below the 35% U.S. statutory rate.  We also benefit from tax holidays and incentives in a number of the foreign jurisdictions in which we operate.  As a result, our blended effective tax rate is typically significantly lower than the U.S. statutory rate.


27


The 2012 effective tax rate on continuing operations was 26.8% compared to the 2011 rate of 23.5%. The 2012 and 2011 rates were favorably impacted by net discrete items, principally settlements with U.S. federal and state taxing authorities totaling $16.1 million and $40.7 million, respectively. After adjusting for discrete items, the effective tax rates were 28.2% and 27.5% for 2012 and 2011, respectively. The higher pre-discrete rate in 2012 reflects the impact of a higher proportion of U.S. earnings, partly offset by lower effective tax rates on earnings generated in foreign jurisdictions.

The 2010 effective tax rate on continuing operations was 23.8%. The effective tax rate in 2010 was also favorably impacted by net discrete and other items totaling $50.3 million, arising principally from settlements with the U.S. federal taxing authority, coupled with the resolution of a foreign tax matter. After adjusting for discrete and other items, the effective tax rate for 2010 was 30%, which was higher than the adjusted effective tax rate for 2011 of 27.5% due primarily to the geographic mix of earnings, with a greater proportion of our non-U.S. earnings generated in foreign jurisdictions having higher tax rates than in 2011, when more of the non-U.S. earnings were generated in foreign jurisdictions having lower tax rates on average.

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 $140 million. Some portion of such change may be reported as discontinued operations. We believe adequate provision has been made for all income tax uncertainties.

Earnings from Continuing Operations

Earnings from continuing operations increased 8% to $833.1 million, or $4.53 diluted earnings per share ("EPS") in 2012, compared with earnings from continuing operations of $773.2 million, or $4.09 EPS, in 2011. The increase in 2012 earnings from continuing operations is primarily the result of higher revenues and benefits from productivity and cost containment initiatives, offset in part by higher acquisition-related expenses and increased restructuring charges relative to 2011. The EPS increase reflects the increase in earnings, as well as the impact of lower weighted average shares outstanding for the 2012 period relative to 2011. As discussed in the "Financial Condition" section of this MD&A, we have repurchased incrementally more common shares in 2012 as compared to 2011.

Earnings from continuing operations increased 25% to $773.2 million, or $4.09 EPS in 2011, compared with earnings from continuing operations of $619.5 million, or $3.27 EPS, in 2010. The increase in 2011 dollar earnings and EPS from continuing operations was primarily the result of higher revenues and the lower effective tax rate relative to 2010.
 
Discontinued Operations

We did not dispose of any businesses in 2012. However, in the fourth quarter, we announced our intent to divest Everett Charles Technologies (including the Multitest business, collectively "ECT") and DEK International ("DEK"), two non-core businesses serving the electronic assembly and test markets. The results of operations and cash flows of these businesses have been reclassified to discontinued operations for all periods presented herein. In the fourth quarter of 2012, we recognized a goodwill impairment charge of $63.8 million ($51.9 million, net of tax) in connection with the intended divestiture of ECT. As a result, in 2012, we generated a net after-tax loss from discontinued operations of $22.0 million, or a loss of $0.12 EPS, reflecting $30.0 million of net earnings from the operations of these businesses along with minor adjustments to other discontinued assets and liabilities, which were more than offset by the fourth quarter goodwill impairment charge.

We sold three businesses in the third and fourth quarters of 2011, and the operations of these businesses were reclassified to discontinued operations in 2011. Our net earnings from discontinued operations for 2011 totaled $122.1 million, or $0.65 EPS, and includes net earnings of $100.7 million from the operations of the businesses sold in 2011 and held for sale in 2012, coupled with tax benefits of $18.0 million and adjustments to other discontinued assets and liabilities. Net earnings from discontinued operations also includes a $4.7 million loss on the 2011 sale of the three businesses, inclusive of goodwill impairment.

For 2010, our net earnings from discontinued operations totaled $80.6 million, or $0.43 EPS, and includes net earnings of $80.7 million from the operations of the businesses sold in 2011 and held for sale in 2012, coupled with adjustments to other discontinued assets and liabilities, offset in part by a net loss of $14.2 million relating to the sale of a business that had been reflected as a discontinued operation in a previous year. Refer to Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on disposed and discontinued operations.

28


Restructuring Activities

2012 Restructuring Activities

During the year, we initiated restructuring actions relating to ongoing cost reduction efforts, including targeted facility consolidations and headcount reductions at certain businesses. As a result, in 2012, we incurred restructuring charges totaling $19.4 million related to these programs, as follows:

The Communication Technologies segment incurred restructuring charges of $5.5 million, primarily relating to a facility consolidation and related headcount reductions within its operations that serve the telecom infrastructure market to better reflect the current market dynamics, along with headcount reductions undertaken to facilitate management changes and optimize the cost structure of its businesses serving the consumer electronics market.

The Energy segment incurred restructuring charges of $0.7 million, primarily representing costs for the integration of recent acquisitions and minor headcount reductions.

The Engineered Systems segment incurred restructuring charges of $7.5 million, mainly relating to facility consolidations and other headcount reduction programs undertaken to optimize its cost structure.

The Printing & Identification segment incurred restructuring charges of $5.7 million, principally relating to rationalization of global headcount within its marking and coding businesses to better align its footprint with present market conditions.

We expect to incur restructuring charges of approximately $20 to $30 million in 2013 in connection with the above-mentioned projects, as well as certain other programs to be initiated during the year to rationalize headcount and optimize operations in a few select businesses. We anticipate that a significant portion of the 2013 charges will be incurred in the first quarter, with much of the benefit of the 2012 and 2013 programs being realized over the remainder of 2013 and into 2014. We also expect to fund the remainder of the 2012 programs currently underway, as well those commenced in 2013, over the next 12 to 18 months. In light of the economic uncertainty in certain of our end markets and our continued focus on improving our operating efficiency, it is possible that additional programs may be implemented throughout the remainder of 2013.

2011 and 2010 Restructuring Activities

Restructuring initiatives in 2011 and 2010 were limited to a few targeted facility consolidations. We incurred restructuring charges of $5.6 million and $5.9 million, respectively, relating to such activities. See Note 8 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details regarding our recent restructuring activities.




29


SEGMENT RESULTS OF OPERATIONS
 
This summary that follows provides a discussion of the results of operations of each of our four reportable operating segments (Communication Technologies, Energy, Engineered Systems, and Printing & Identification). Each of these segments is comprised of various product and service offerings that serve multiple end markets. See Note 16 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation of segment revenue, earnings, and operating margin to our consolidated revenue, earnings from continuing operations, and operating 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 operating income 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 the Non-GAAP Disclosures at the end of this Item 7.

Communication Technologies

Our Communication Technologies segment is engaged in the design and manufacture of innovative products and components which serve the following key markets:  Consumer Electronics, Medical Technology, Aerospace/Defense, and Telecom/Other.  For the reporting within this Form 10-K, and on a go-forward basis, we have condensed our end market analysis into the four above-mentioned markets, reduced from the analysis of five end markets in our prior annual and quarterly reporting. Therefore, all prior year revenue information has been recast to be consistent with the current end-market designations.

 
 
Years Ended December 31,
 
% Change
(dollars in thousands)
 
2012
 
2011
 
2010
 
2012 vs. 2011
 
2011 vs. 2010
Revenue:
 
 
 
 
 
 
 
 
 
 
Consumer Electronics
 
$
708,191

 
$
542,389

 
$
260,396

 
30.6
 %
 
108.3
 %
Medical Technology
 
244,788

 
233,820

 
240,400

 
4.7
 %
 
(2.7
)%
Aerospace/Defense
 
413,877

 
400,179

 
374,900

 
3.4
 %
 
6.7
 %
Telecom/Other
 
149,729

 
183,689

 
200,316

 
(18.5
)%
 
(8.3
)%
Total
 
$
1,516,585

 
$
1,360,077

 
$
1,076,012

 
11.5
 %
 
26.4
 %
 
 
 
 
 
 
 
 
 
 
 
Segment earnings
 
$
218,960

 
$
226,382

 
$
205,215

 
(3.3
)%
 
10.3
 %
Operating margin
 
14.4
%
 
16.6
%
 
19.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
351,579

 
$
328,221

 
$
277,477

 
7.1
 %
 
18.3
 %
Segment EBITDA margin
 
23.2
%
 
24.1
%
 
25.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
132,619

 
$
101,839

 
$
72,262

 
30.2
 %
 
40.9
 %
Bookings
 
1,504,242

 
1,344,540

 
1,128,265

 
11.9
 %
 
19.2
 %
Backlog
 
424,144

 
437,320

 
404,374

 
(3.0
)%
 
8.1
 %
 
 
 
 
 
 
 
 
 
 
 
Components of segment revenue growth:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
Organic growth
 
 
 
 
 
 
 
2.4
 %
 
7.2
 %
Acquisitions
 
 
 
 
 
 
 
9.9
 %
 
18.0
 %
Foreign currency translation
 
 
 
 
 
 
 
(0.8
)%
 
1.2
 %
 
 
 
 
 
 
 
 
11.5
 %
 
26.4
 %


30


2012 Versus 2011

Revenue generated by our Communication Technologies segment in 2012 increased by $156.5 million or 12% compared to the same period of 2011. The overall increase in revenue resulted primarily from increased microelectronic mechanical (“MEMs”) microphone volumes stemming from new product introductions and overall smart phone market growth, combined with a full year of revenue for Sound Solutions in 2012 compared to six months of revenue in 2011. Our MEMs revenue grew in excess of 25% over the 2011 level. The 2012 revenue increase was partially offset by strategic pricing initiatives for our communications and telecommunication products, corresponding to normal product life cycle maturities, and reduced volumes in certain end markets. 

Our revenue in the consumer electronics market (representing 47% of 2012 segment revenue) increased $165.8 million or 31% due to solid demand for components serving the handset market. This growth was tempered in part by delays in the launches of certain OEM products and operational challenges in the Sound Solutions business impacting its product rollouts which have led to lower volume for this portion of the business. As anticipated, our Sound Solutions business experienced improvement in revenue and margin in the fourth quarter of 2012 relative to earlier quarters, and we expect this trend to continue in 2013. Overall, our MEMs microphones remain well positioned to capitalize on this market's growth as we have continued to invest in capacity to meet the growing market demands.

Our medical technology revenue (16% of 2012 segment revenue) increased by $11.0 million or 5% due to increased hearing aid demand. Revenue derived from other medical products was unfavorably impacted by weakened European and Asian economic conditions.

Revenue derived from our aerospace/defense market (27% of 2012 segment revenue) increased $13.7 million or 3% mainly due to continued increase in build rates of commercial aircraft and the timing and funding of key defense programs in which we participate. The defense market in Europe continues to be impacted by the weak macro-economic environment.

We continue to experience weakened demand in the global telecom markets, driven in part by continued deferred industry investment.  This contributed to a revenue decrease of $34.0 million or 18% from our telecom/other markets (10% of 2012 segment revenue).

Communication Technologies earnings in 2012 decreased $7.4 million or 3% compared with 2011, with a decrease in operating margin of 220 basis points. The earnings and margin decreases were mainly due to lower margins from the integration of Sound Solutions including a full year of incremental depreciation and amortization compared to six months in 2011, new product ramp up costs and restructuring charges related to cost reduction activities, offset in part by productivity initiatives, leverage on higher MEMs volume, and the absence of one-time acquisition related costs associated with the Sound Solutions. 

Bookings for the year ended December 31, 2012 and backlog at December 31, 2012 indicate continued strength across each of our end markets, with the exception of our telecommunication/other market.

2011 Versus 2010

Revenue generated by our Communication Technologies segment increased $284.1 million or 26% compared with 2010, with $190.2 million, or 18% of the growth, attributed principally to the 2011 acquisition of Sound Solutions, which supplemented our product offerings in the growing handset market. Our organic revenue growth of 7% was largely due to continued strong demand for smart phones serving the consumer electronics market which grew significantly year over year.  Although there was an incremental decrease in revenue due to strategic pricing initiatives for our communication and telecommunication products corresponding to normal product life cycle maturities, this decrease was more than offset by revenue growth from market share gains, new product introductions and product mix.

Our revenue in the consumer electronics market (representing 40% of 2011 segment revenue) increased $91.8 million or 35%, excluding Sound Solutions.  Our MEMs microphones and SiSonic™ technologies were well positioned to capitalize on this market's growth as we have continued to invest in capacity to meet the growing market demands.

Our medical technology revenue (17% of segment revenue) declined by $6.6 million or 3% principally due to softer hearing aid demand in the first half of 2011 and overall softer medical equipment demand.

31



Our aerospace/defense revenue (29% of 2011 segment revenue) increased $25.3 million or 7%. We experienced solid demand in the commercial aerospace market due to increased build rates of commercial aircraft by leading aircraft manufactures and increased demand for our aftermarket products globally. This increase was partially offset by revenue derived from our defense market mainly due to timing and funding of certain programs in which we participate. 

Our telecom/other revenue (14% of 2011 segment revenue) decreased $16.6 million or 8% due to weakened demand in the global telecom markets, driven in part by deferred industry investment due to service provider consolidation.

Communication Technologies 2011 earnings increased 10% compared with 2010, but operating margin declined 250 basis points. The margin decline mainly resulted from higher acquisition related costs including incremental depreciation and amortization, higher raw material costs, and lower margins from the integration of the Sound Solutions acquisition.  Excluding the impact of Sound Solutions, earnings would have increased by $36.6 million, or 18%, and operating margin would have increased by 160 basis points as compared with 2010.

Energy

Our Energy segment serves the oil, gas, and power generation industries with products that promote efficient and cost-effective drilling, extraction, storage, and movement of oil and gas products, or constitute critical components for power generation equipment. The Energy segment operates through the following business lines: Drilling, which comprises products supporting the cost-effective drilling of oil and gas wells; Production, which comprises products and components facilitating the extraction and movement of fuel from the ground; and Downstream, which comprises systems and products that support the efficient, safe, and environmentally-sensitive handling of fuel, hazardous liquids, and dry-bulk commodities.

 
 
Years Ended December 31,
 
% Change
(dollars in thousands)
 
2012
 
2011
 
2010
 
2012 vs. 2011
 
2011 vs. 2010
Revenue:
 
 
 
 
 
 
 
 
 
 
Drilling
 
$
408,629

 
$
400,280

 
$
297,926

 
2.1
 %
 
34.4
%
Production
 
1,182,315

 
969,271

 
562,800

 
22.0
 %
 
72.2
%
Downstream
 
581,660

 
531,198

 
442,781

 
9.5
 %
 
20.0
%
Total
 
$
2,172,604

 
$
1,900,749

 
$
1,303,507

 
14.3
 %
 
45.8
%
 
 
 
 
 
 
 
 
 
 
 
Segment earnings
 
$
538,650

 
$
450,637

 
$
316,113

 
19.5
 %
 
42.6
%
Operating margin
 
24.8
%
 
23.7
%
 
24.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
633,727

 
$
528,456

 
$
364,955

 
19.9
 %
 
44.8
%
Segment EBITDA margin
 
29.2
%
 
27.8
%
 
28.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
95,077

 
$
77,819

 
$
48,842

 
22.2
 %
 
59.3
%
Bookings
 
2,193,042

 
1,985,405

 
1,319,015

 
10.5
 %
 
50.5
%
Backlog
 
256,093

 
246,351

 
152,183

 
4.0
 %
 
61.9
%
 
 
 
 
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
Organic growth
 
 
 
 
 
 
 
9.4
 %
 
26.2
%
Acquisitions
 
 
 
 
 
 
 
5.3
 %
 
18.5
%
Foreign currency translation
 
 
 
 
 
 
 
(0.4
)%
 
1.1
%
 
 
 
 
 
 
 
 
14.3
 %
 
45.8
%


32


2012 Versus 2011

Our 2012 Energy segment revenue increased $271.9 million or 14% compared to 2011. The increase was driven by organic revenue growth of 9%, growth from the acquisitions of Production Control Services (in April 2012) and Oil Lift (in September 2011) totaling 5%, and a negligible impact from foreign currency translation. Pricing actions, mainly in response to increased raw material costs, represented approximately 2% of the revenue increase.

Drilling revenue (representing 19% of 2012 segment revenue) increased by $8.3 million or 2% due to an essentially flat level of drilling activity compared to 2011, which moderated demand for the segment's drilling products.

Production revenue (54% of 2012 segment revenue) increased by $213.0 million 22%, with 12% due to organic growth and 10% from acquisitions. Organic growth was driven by an increased number of active U.S. oil wells and wells with natural gas liquids driving demand for artificial lift products, higher international sales, and increased demand for compressor related products and winch products serving the infrastructure and recovery markets.

Our revenues in the drilling sector, and to a smaller extent in the production sector, are impacted by changes in the number of active North American drilling rigs. In 2012, the average North American drilling rig count declined 1% compared to the prior year. We expect the North American rig count growth to turn positive in the second half of 2013.

Downstream revenue (27% of 2012 segment revenue) increased by $50.5 million or 10%, reflecting increased demand for loading equipment for the rail, cargo tank and chemical/industrial markets, bearing products serving energy markets, and fuel delivery systems.

Energy earnings in 2012 increased $88.0 million or 20% primarily resulting from higher volume in the production and downstream sectors. Operating margin increased 110 basis points compared to the prior year due to improved operating leverage associated with higher volumes, strategic pricing, and productivity gains, which more than offset the impact of unfavorable product mix and higher acquisition-related depreciation and amortization.

Bookings for the year ended December 31, 2012 and backlog at December 31, 2012 increased 11% and 4%, respectively, compared to the prior year periods. We expect market conditions in 2013 to moderate compared to 2012, with continued geographic expansion and further penetration of new and acquired products and technologies are also expected to contribute to our growth in 2013.

2011 Versus 2010

Our Energy segment posted record organic revenue, earnings, and bookings in 2011. Revenue and earnings were up 46% and 43%, respectively, due to continued strength in the drilling, production, and downstream energy markets served by the segment. Recent acquisitions generated revenue growth of 19% and contributed to the segment’s record results. Sales outside of North America grew 35% driven by significantly higher sales to Central and South America, the Middle East, and Russia. Pricing actions, generally undertaken to offset commodity inflation, accounted for a marginal portion of the revenue increase.

Drilling revenue (representing 21% of 2011 segment revenue) grew 34% due to increased exploration activity, pricing, and market share increases.

Production revenue (51% of 2011 segment revenue) increased 72%, with 35% due to organic growth and 37% from acquisitions. The organic growth was driven by higher drilling and well completion activity, increased international sales, and higher demand for winch products serving the energy, infrastructure, and recovery markets.

Our revenues in the drilling and production sectors are impacted by changes in the number of active North American drilling rigs. The average North American drilling rig count in 2011 was up 21% over the prior year, driven by strong oil prices.

Downstream revenue (28% of 2011 segment revenue) was up 20%, with 14% from organic revenue growth and the balance from recent acquisitions. The organic growth reflected continued strong demand for products in the power generation, rail, cargo tank, and chemical/industrial markets, as well as nozzles and hanging hardware for retail fueling stations.

33


Energy earnings increased $134.5 million, or 43%, from the higher organic and acquisition volumes. Energy operating margin declined 60 basis points compared to the prior year, due to the impact of acquisition-related costs, including higher depreciation and amortization, and higher material costs, partially offset by improved operating leverage associated with the higher volumes, strategic pricing, and productivity gains.

Engineered Systems

Our Engineered Systems segment is comprised of two platforms, Fluid Solutions and Refrigeration & Industrial.  The Fluid Solutions platform designs and manufactures pumps, compressors, and chemical proportioning and dispensing products.  The Refrigeration & Industrial platform manufactures products and systems which serve two key end-markets:  Refrigeration & Food Equipment and Other Industrial.   
 
 
Years Ended December 31,
 
% Change
(dollars in thousands)
 
2012
 
2011
 
2010
 
2012 vs. 2011
 
2011 vs. 2010
Revenue:
 
 
 
 
 
 
 
 
 
 
Refrigeration & Industrial
 
 
 
 
 
 
 
 
 
 
Refrigeration & Food Equipment
 
$
1,373,579

 
$
1,240,938

 
$
1,142,533

 
10.7
 %
 
8.6
%
Other Industrial
 
1,230,263

 
1,183,700

 
1,077,311

 
3.9
 %
 
9.9
%
       
 
2,603,842

 
2,424,638

 
2,219,844

 
7.4
 %
 
9.2
%
 
 
 
 
 
 
 
 
 
 
 
Fluid Solutions Platform
 
817,162

 
677,621

 
567,914

 
20.6
 %
 
19.3
%
Eliminations
 
(1,460
)
 
(1,524
)
 
(1,316
)
 
 
 
 
 
 
$
3,419,544

 
$
3,100,735

 
$
2,786,442

 
10.3
 %
 
11.3
%
 
 
 
 
 
 
 
 
 
 
 
Segment earnings
 
$
501,952

 
$
445,186

 
$
382,644

 
12.8
 %
 
16.3
%
Operating margin
 
14.7
%
 
14.4
%
 
13.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
595,573

 
$
519,962

 
$
455,170

 
14.5
 %
 
14.2
%
Segment EBITDA margin
 
17.4
%
 
16.8
%
 
16.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
93,621

 
$
74,776

 
$
72,526

 
25.2
 %
 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
Bookings
 
 
 
 
 
 
 
 
 
 
Refrigeration & Industrial
 
$
2,585,130

 
$
2,512,706

 
$
2,291,896

 
2.9
 %
 
9.6
%
Fluid Solutions
 
796,489

 
682,832

 
573,886

 
16.6
 %
 
19.0
%
Eliminations
 
(1,441
)
 
(2,816
)
 
(2,412
)
 
 
 
 
 
 
$
3,380,178

 
$
3,192,722

 
$
2,863,370

 
5.9
 %
 
11.5
%
 
 
 
 
 
 
 
 
 
 
 
Backlog
 
 
 
 
 
 
 
 
 
 
Refrigeration & Industrial
 
$
516,559

 
$
528,118

 
$
446,267

 
(2.2
)%
 
18.3
%
Fluid Solutions
 
160,890

 
54,194

 
47,123

 
196.9
 %
 
15.0
%
Eliminations
 
(157
)
 
(177
)
 
(315
)
 
 
 
 
 
 
$
677,292

 
$
582,135

 
$
493,075

 
16.3
 %
 
18.1
%
 
 
 
 
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
Organic growth
 
 
 
 
 
 
 
5.6
 %
 
9.4
%
Acquisitions
 
 
 
 
 
 
 
6.1
 %
 
0.6
%
Foreign currency translation
 
 
 
 
 
 
 
(1.4
)%
 
1.3
%
 
 
 
 
 
 
 
 
10.3
 %
 
11.3
%


34


2012 Versus 2011

Engineered Systems 2012 revenue increased $318.8 million or 10% driven by organic revenue growth of 6% and growth from recent acquisitions of 6%, offset by a 2% unfavorable foreign currency impact.

Revenue of our Refrigeration & Industrial platform, which serves our refrigeration and food equipment and other industrial end-markets, increased $179.2 million or 7%.

Revenue derived from refrigeration and food equipment markets (representing 40% of 2012 segment revenue) increased $132.6 million or 11%, with 2% of the revenue growth generated by the Anthony and Advansor acquisitions, and the remaining 9% of the growth reflecting solid demand for refrigeration systems fueled by remodel activity at major retail chains, as well as increased demand for foodservice equipment through dealer and direct channels and for beverage can-making equipment, especially in Asia.

Revenue generated by our businesses serving other industrial markets (36% of 2012 segment revenue) increased $46.6 million or 4%. The increase was driven by higher demand for waste and recycling equipment and industrial automation machinery, along with increased demand for vehicle services in the important Asian markets and strong first-half demand for hydraulic equipment serving the mining and utility sectors.

Revenue of our Fluid Solutions platform (24% of 2012 segment revenue) increased by $139.5 million or 21% reflecting the favorable impact of recent acquisitions, most notably Maag Pump Systems, which was acquired in the first quarter of 2012, partly offset by a 1% decline in organic revenue, primarily resulting from weakness in our European markets.

Engineered Systems segment earnings in 2012 increased $56.8 million or 13% compared with 2011, due to the impact of recent acquisitions, favorable net material cost, and productivity improvements, partially offset by weakened Europe markets and unfavorable foreign currency impacts. Operating margin increased 30 basis points compared to 2011, as favorable pricing and productivity benefits more than offset acquisition-related costs and unfavorable foreign currency impacts.

Segment bookings for 2012 and backlog at December 31, 2012 increased compared to 2011 levels, primarily from higher pump equipment orders associated with Maag. Our 2012 Refrigeration & Industrial year-end backlog level declined slightly compared to 2011, which included significant refrigeration bookings for Target's P-fresh remodeling project, which is nearing completion.

2011 Versus 2010

Engineered Systems 2011 revenue increased 11%, driven by organic revenue growth of 9%, favorable foreign currency of 1% and a negligible impact from recent acquisitions.

Revenue of our refrigeration & industrial platform, which serves our refrigeration and food equipment, waste and recycling, and other industrial end-markets, increased $204.8 million or 9%.

Revenue from refrigeration and food equipment (representing 40% of 2011 segment revenue) increased $98 million or 9% reflecting strong demand for refrigeration systems fueled by remodel activity at major retail chains.

Performance by our businesses serving the waste and recycling and other industrial markets (38% of 2011 segment revenue) was driven by increased global demand for industrial automation machinery, improving demand for vehicle services in the important Asian markets and a market rebound in hydraulic equipment due in part to strength in the mining sector, partially offset by a double-digit decline in waste and recycling revenue given continued constraints on municipal spending. These factors combined to increase other industrial revenue by $106 million or 10%.

Revenue of our fluid solutions platform (22% of 2011 segment revenue) increased by $110 million or 19% reflecting strong demand for pumps in the chemical, transport, and hygienic markets and increasing demand for heat exchange systems, coupled with the benefits from geographic expansion, particularly in Asia, and price increases necessary to cover rising commodity costs.


35


Engineered Systems segment earnings increased $62.5 million or 16% on the strength of increased volume. Operating margin expanded by 70 basis points, as a result of positive pricing actions and productivity savings, which more than offset cost escalation and unfavorable product mix.

Printing & Identification

Our Printing & Identification segment is a worldwide supplier of precision marking and coding, printing, dispensing, soldering and coating equipment and related consumables and services.  The segment serves two broad global end- markets:  Fast Moving Consumer Goods ("FMCG") and Industrial.  As discussed previously, two businesses serving the electronic assembly and test markets, namely ECT and DEK, were reclassified to discontinued operations in the fourth quarter of 2012, as we expect to divest these businesses in 2013. The discussion that follows addresses only the remaining continuing operations of the segment.
 
 
Years Ended December 31,
 
% Change
(dollars in thousands)
 
2012
 
2011
 
2010
 
2012 vs. 2011
 
2011 vs. 2010
Revenue:
 
 
 
 
 
 
 
 
 
 
Fast Moving Consumer Goods
 
$
588,856

 
$
581,158

 
$
545,000

 
1.3
 %
 
6.6
 %
Industrial
 
407,675

 
427,078

 
398,681

 
(4.5
)%
 
7.1
 %
Total
 
$
996,531

 
$
1,008,236

 
$
943,681

 
(1.2
)%
 
6.8
 %
 
 
 
 
 
 
 
 
 
 
 
Segment earnings
 
$
135,159

 
$
141,561

 
$
151,235

 
(4.5
)%
 
(6.4
)%
Operating margin
 
13.6
%
 
14.0
%
 
16.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBITDA
 
$
168,761

 
$
175,043

 
$
184,805

 
(3.6
)%
 
(5.3
)%
Segment EBITDA margin
 
16.9
%
 
17.4
%
 
19.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other measures:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
33,602

 
$
33,482

 
$
33,570

 
0.4
 %
 
(0.3
)%
Bookings
 
999,054

 
1,018,355

 
959,177

 
(1.9
)%
 
6.2
 %
Backlog
 
97,857

 
94,557

 
90,554

 
3.5
 %
 
4.4
 %
 
 
 
 
 
 
 
 
 
 
 
Components of revenue growth:
 
 
 
 
 
 
 
2012 vs. 2011
 
2011 vs. 2010
Organic growth
 
 
 
 
 
 
 
2.4
 %
 
3.3
 %
Acquisitions
 
 
 
 
 
 
 
 %
 
 %
Foreign currency translation
 
 
 
 
 
 
 
(3.6
)%
 
3.5
 %
 
 
 
 
 
 
 
 
(1.2
)%
 
6.8
 %

2012 Versus 2011

Printing & Identification segment revenue decreased $11.7 million or 1% compared to 2011, attributable to 2% organic revenue growth, primarily driven by higher FMCG end market revenue, more than offset by a 3% unfavorable foreign currency impact.

FMCG revenue (representing 59% of 2012 segment revenue) grew $7.7 million or 5% year-over-year, excluding a 4% unfavorable impact from foreign currency. Despite economic weakness in Europe, growth was driven by continued market acceptance of our new products and added sales and service resources in key regional markets.

Industrial revenue (41% of 2012 segment revenue) contracted 1% compared with the prior year, excluding a 4% unfavorable impact from foreign currency, reflecting weaker European and slowing Asia markets.

Printing & Identification segment earnings declined $6.4 million or 5% in 2012 compared to 2011, resulting in an operating margin decline of 40 basis points.  The margin decline is primarily attributed to lower industrial end market volumes, key strategic investments for growth and restructuring expenses recognized in the first half of 2012, partially offset by ongoing productivity improvements and a partial year of restructuring savings.

36



Bookings for 2012 decreased 2% as compared to 2011, principally due to unfavorable currency, while backlog levels at December 31, 2012 increased 4% compared to the prior year end.

2011 Versus 2010
 
Printing & Identification segment 2011 revenue increased $64.6 million or 7% compared with 2010, with over 3% organic revenue growth and 3.5% favorable foreign currency impact.

FMCG revenue (representing 58% of 2011 segment revenue) grew in excess of 3% year-over-year, excluding a 3.5% favorable impact from foreign currency, as new product introductions gained traction as the year progressed, offset partially by softening European markets at the end of the year.

Industrial revenue (42% of 2011 segment revenue) was up similarly in excess of 3% versus the prior year, excluding a 3.5% favorable impact from foreign currency.

Printing & Identification segment earnings declined $9.7 million in 2011 compared to 2010, resulting in an operating margin decline of 200 basis points.  The margin decline is primarily attributed to unfavorable regional mix and new product introduction costs. We also completed several small employee reduction in force programs across targeted businesses to streamline operations and to align more closely with our growth in geographic end markets. Costs related to these programs were not significant.




37


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 Statement of Cash Flows:
 
Years Ended December 31,
Cash Flows from Continuing Operations (in thousands)
2012
 
2011
 
2010
Net Cash Flows Provided By (Used In):
 
 
 
 
 
Operating activities
$
1,261,160

 
$
948,864

 
$
830,295

Investing activities
(1,345,888
)
 
(1,012,430
)
 
(166,444
)
Financing activities
(342,942
)
 
(50,501
)
 
(304,788
)

Operating Activities

Cash provided by operating activities in 2012 increased $312.3 million, primarily due to increased net earnings in 2012 and reduced investment in working capital relative to 2011. Higher sales volume increased 2012 net earnings before depreciation and amortization by $127 million as compared with 2011. Our net cash flow increased $129 million on the change in working capital year-over-year, as we converted working capital of approximately $31 million to cash in 2012, while we invested $98 million in working capital in 2011. Additionally, 2012 cash flow increased $77 million from the year-over-year change in income tax accruals. In 2012, our tax provision exceeded our payments leading to an increase in the accrued tax balance, while in 2011 we made tax payments in excess of the 2011 provision, in part due to 2011 settlement activity, which reduced the accrued tax balance.

Cash provided by operating activities in 2011 increased $118.6 million, primarily due to increased earnings in 2011 and reduced investment in working capital relative to 2010. Higher sales volume increased 2011 net earnings before depreciation and amortization by $215 million as compared with 2010. Our investment in working capital was $59 million lower than in 2010, at which time a working capital build-up was necessary to support revenue levels recovering from the 2009 declines. These increases in cash flow were partially offset by $170 million of higher income tax payments resulting from our higher earnings and 2011 tax settlement activity, as well as higher employee incentive compensation payments and reductions in deferred revenue.

Pension and Post-Retirement Activity. Post-retirement costs relating to pension and other employee-related defined benefit plans affect results in all segments. We recorded net periodic benefit costs of $44 million, $40 million, and $33 million in 2012, 2011, and 2010, respectively, relating to our benefit plans (including our defined benefit, supplemental, and post-retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value plan obligations, expected returns on plan assets, the service and interest costs, and the amortization of actuarial gains and losses. In 2012, the actual return on plan assets increased consistent with increased returns within the global equity markets. In 2011, the actual return on U.S. plan assets increased, while returns on our non-U.S. plans declined, as a result of the different mix of investments in the plans. In 2013, we expect our net periodic benefit cost to be approximately $60 million, with the increase compared to 2012 being attributed to the lower discount rates used to value the post-retirement obligations, higher amortization relating to unrecognized asset losses, and an increase in participants in our supplemental retirement plans.

The funded status of our qualified defined benefit pension plans 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. At December 31, 2012, the projected benefit obligations of our qualified defined benefit plans reflected underfunding by $153 million, which includes $49 million relating to the U.S. Dover Corporate Pension Plan and $103 million relating to our significant international pension 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

38


to defined pension plans operated by our businesses in Germany, the United Kingdom, and Switzerland. Cash contributions to qualified defined benefit pension plans in 2012, 2011, and 2010 totaled $28 million, $49 million, and $38 million, respectively. In 2013, we expect to contribute $20 to $40 million to our U.S. qualified defined benefit plan and approximately $14 million to our non-U.S. plans. See Note 14 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding our post-retirement plans.

Adjusted Working Capital. In 2012, Adjusted Working Capital (a non-GAAP measure calculated as accounts receivable, plus inventory, less accounts payable) increased from 2011 by $111 million, or 8%, to $1.4 billion, which reflected an increase in receivables of $107 million, an increase in net inventory of $139 million, and an increase in accounts payable of $135 million, generally due to the impact of 2012 acquisitions. Excluding acquisitions and the effects of foreign exchange translation of $11 million, Adjusted Working Capital would have decreased by $30 million, or 2%.

Investing Activities

Cash used in investing activities results from cash outflows for capital expenditures, acquisitions, and short-term investments, partially offset by proceeds from sales of businesses, property, plant and equipment, and short-term investments.  In 2012, we used cash in investing activities of $1.3 billion compared to $1.0 billion in 2011, driven by the following factors:

Acquisitions. In 2012, we used $1.0 billion to acquire seven businesses, including $266 million for Maag Pump Systems, a European acquisition for our Fluid Solutions platform, $119 million for the cash portion of the purchase price paid for PCS, a second quarter acquisition in our Energy segment, and $603 million for Anthony International, a fourth quarter acquisition for our Refrigeration & Industrial platform. A portion of the PCS acquisition was also funded by the issuance of Dover stock valued at $101 million at the date of acquisition. Cash paid for the 2012 acquisitions is net of $45 million received as final payment for settlement of purchase price adjustments for post-acquisition contingencies relating to the 2011 Sound Solutions acquisition by our Communication Technologies segment. In comparison, in 2011, we used $1.4 billion to acquire nine businesses, including $401 million for the acquisition of Harbison-Fischer by our Energy segment and $824 million for the acquisition of Sound Solutions. See Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information with respect to recent acquisitions.
Capital spending. Capital expenditures, primarily to support capacity expansion, innovation, and cost savings, were $297 million in 2012 and $263 million in 2011. Our capital expenditures were approximately $34 million higher in the 2012 period as compared to 2011, reflecting continued investment in capacity expansion to support growth in the handset market with significant investments to increase MEMs manufacturing capacity in our domestic and Asian facilities, along with other investments supporting growth in our energy production end markets. We expect 2013 capital expenditures as a percentage of revenue to approximate 3.5%.
Proceeds from sale of businesses. In 2011, we generated cash of $517 million, primarily from the sale of Paladin Brands, Crenlo, and Heil Trailer, three businesses that had operated in our Engineered Systems segment.
Short-term investments. We typically invest cash in excess of near-term requirements in short-term investments. In 2011, we generated proceeds of $124 million from the sale of short-term investments, which were liquidated to provide cash for 2011 acquisitions. We held no short-term investments during 2012.
We anticipate that capital expenditures and any acquisitions we make through the remainder of 2013 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, the use of established lines of credit, or accessing the public debt or equity markets.

39


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 and proceeds from exercise of stock options.  For 2012, we used cash of $343 million for financing activities compared to $51 million in 2011, with the activity attributed to the following:

Long-term debt. In the 2012 period, we had negligible reductions in long-term debt. However, in the 2011 period, we received proceeds of $789 million from the issuance of 4.3% 10-year Notes due 2021 and 5.375% 30-year Notes due 2041.  These proceeds were used to fund acquisitions made in the first quarter of 2011 and repay $400 million of other borrowings which came due during the period.
Notes payable. In December 2012, we received proceeds of $608 million from commercial paper issued principally to fund the fourth quarter Anthony acquisition.
Treasury purchases. In November 2012, Dover's Board of Directors approved an additional $1 billion stock repurchase program, to drive additional shareholder value. As a result, our 2012 activity includes incremental share buy-backs under the above-mentioned program and the repurchase of shares to offset the dilutive impact of shares issued for the second quarter acquisition of PCS, in addition to the typical repurchase of shares to offset the dilutive impact of shares issued under our equity compensation plans. In total, we used $749 million in 2012 to purchase 12.3 million shares of our common stock in the open market. In 2011, we purchased approximately 4.0 million shares for $242 million.
Dividend payments. Total dividend payments to common shareholders were $241 million in 2012 and $219 million in 2011. Our dividends per common share increased 13% to $1.33 per share in 2012 compared to $1.18 per share in 2011. This represents the 57th consecutive year that our dividend has increased.
Proceeds from the exercise of stock options. We received $43 million from employee exercises of stock options in 2012, compared to $40 million in 2011, with the variance attributed to a greater number of options exercised in the 2012 period.
Cash Flows from Discontinued Operations

In 2012, 2011, and 2010 our businesses reported as discontinued operations generated cash flow of $5 million, $117 million, and $100 million, respectively. The 2011 and 2010 amounts reflect cash flows from the three businesses sold in the third and fourth quarters of 2011, as well as cash flows from the two businesses reclassified to discontinued operations in 2012. The significant decrease in 2012 cash flows from discontinued operations, relative to the prior years, reflects a significant decrease in 2012 earnings from the businesses reclassified in 2012, as well as the the absence of cash flows from the businesses sold in 2011.

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). 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 is available to repay debt, pay dividends, fund acquisitions, and repurchase our common stock. For further information, see the Non-GAAP Disclosures at the end of this Item 7.

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)
2012
 
2011