10-Q 1 a2018063010-q.htm 10-Q Document

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

FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to

Commission File Number: 1-4018
doverlogoa05.jpg
(Exact name of registrant as specified in its charter)
Delaware
53-0257888
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3005 Highland Parkway
 
Downers Grove, Illinois
60515
(Address of principal executive offices)
(Zip Code)
(630) 541-1540
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12-b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o  No  þ

The number of shares outstanding of the Registrant’s common stock as of July 12, 2018 was 147,703,621.



Dover Corporation
Form 10-Q
Table of Contents

Page
 
 
 
 
 
 
 
 
 
 
 







Item 1. Financial Statements

DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
1,798,094

 
$
1,737,371

 
$
3,435,765

 
$
3,320,581

Cost of goods and services
1,132,858

 
1,083,263

 
2,167,700

 
2,090,620

Gross profit
665,236

 
654,108

 
1,268,065

 
1,229,961

Selling, general and administrative expenses
428,775

 
421,270

 
863,801

 
846,987

Operating earnings
236,461

 
232,838

 
404,264

 
382,974

Interest expense
32,125

 
36,854

 
67,765

 
73,213

Interest income
(2,563
)
 
(2,335
)
 
(4,620
)
 
(4,910
)
Gain on sale of businesses

 

 

 
(90,093
)
Other (income) expense, net
(4,538
)
 
259

 
(4,568
)
 
(171
)
Earnings before provision for income taxes
211,437

 
198,060

 
345,687

 
404,935

Provision for income taxes
44,981

 
55,585

 
69,822

 
107,372

Earnings from continuing operations
166,456

 
142,475

 
275,865

 
297,563

(Loss) earnings from discontinued operations, net
(26,497
)
 
21,583

 
(4,472
)
 
38,742

Net earnings
$
139,959

 
$
164,058

 
$
271,393

 
$
336,305

 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
1.10

 
$
0.92

 
$
1.80

 
$
1.91

Diluted
$
1.08

 
$
0.90

 
$
1.77

 
$
1.89

(Loss) earnings per share from discontinued operations:
 
 
 
 
 
 
Basic
$
(0.17
)
 
$
0.14

 
$
(0.03
)
 
$
0.25

Diluted
$
(0.17
)
 
$
0.14

 
$
(0.03
)
 
$
0.25

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.92

 
$
1.05

 
$
1.77

 
$
2.16

Diluted
$
0.91

 
$
1.04

 
$
1.74

 
$
2.14

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
151,744

 
155,703

 
153,124

 
155,622

Diluted
153,938

 
157,513

 
155,573

 
157,457

Dividends paid per common share
$
0.47

 
$
0.44

 
$
0.94

 
$
0.88

 

See Notes to Condensed Consolidated Financial Statements



1


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
139,959

 
$
164,058

 
$
271,393

 
$
336,305

Other comprehensive (loss) earnings, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
(65,159
)
 
26,174

 
(12,851
)
 
66,071

Reclassification of foreign currency translation losses to earnings

 

 

 
3,875

Total foreign currency translation adjustments
(65,159
)
 
26,174

 
(12,851
)
 
69,946

Pension and other post-retirement benefit plans:
 
 
 
 
 
 
 
Amortization of actuarial losses included in net periodic pension cost
1,068

 
1,353

 
3,007

 
2,691

Amortization of prior service costs included in net periodic pension cost
1,252

 
702

 
1,995

 
1,404

Total pension and other post-retirement benefit plans
2,320

 
2,055

 
5,002

 
4,095

Changes in fair value of cash flow hedges:
 
 
 
 
 
 
 
Unrealized net gains (losses) arising during period
2,105

 
(1,876
)
 
3,467

 
(1,798
)
Net (gains) losses reclassified into earnings
(457
)
 
159

 
(710
)
 
(58
)
Total cash flow hedges
1,648

 
(1,717
)
 
2,757

 
(1,856
)
Other

 
(578
)
 

 
(241
)
Other comprehensive (loss) earnings
(61,191
)
 
25,934

 
(5,092
)
 
71,944

Comprehensive earnings
$
78,768

 
$
189,992

 
$
266,301

 
$
408,249



See Notes to Condensed Consolidated Financial Statements


2


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

 
June 30, 2018
 
December 31, 2017
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
242,814

 
$
753,964

Receivables, net of allowances of $32,435 and $34,479
1,281,260

 
1,183,514

Inventories
764,053

 
677,043

Prepaid and other current assets
159,601

 
175,626

Total current assets
2,447,728

 
2,790,147

Property, plant and equipment, net
805,009

 
787,940

Goodwill
3,715,365

 
3,686,372

Intangible assets, net
1,228,605

 
1,282,624

Other assets and deferred charges
276,463

 
245,723

Assets of discontinued operations

 
1,865,553

Total assets
$
8,473,170

 
$
10,658,359

Liabilities and Stockholders' Equity
Current liabilities:
 

 
 

Notes payable and current maturities of long-term debt
$
284,630

 
$
581,102

Accounts payable
938,425

 
882,007

Accrued compensation and employee benefits
183,396

 
228,118

Accrued insurance
100,721

 
101,619

Other accrued expenses
295,038

 
334,435

Federal and other income taxes
11,717

 
14,697

Total current liabilities
1,813,927

 
2,141,978

Long-term debt
2,974,940

 
2,986,702

Deferred income taxes
336,147

 
348,201

Noncurrent income tax payable
98,954

 
108,497

Other liabilities
408,611

 
425,548

Liabilities of discontinued operations

 
264,253

Stockholders' equity:
 

 
 

Total stockholders' equity
2,840,591

 
4,383,180

Total liabilities and stockholders' equity
$
8,473,170

 
$
10,658,359



See Notes to Condensed Consolidated Financial Statements


3


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

 
Common stock $1 par value
 
Additional paid-in capital
 
Treasury stock
 
Retained earnings
 
Accumulated other comprehensive (loss) earnings
 
Total stockholders' equity
Balance at December 31, 2017
$
256,992

 
$
942,485

 
$
(5,077,039
)
 
$
8,455,501

 
$
(194,759
)
 
$
4,383,180

Adoption of ASU 2018-02 (1)

 

 

 
12,856

 
(12,856
)
 

Cumulative catch-up adjustment related to Adoption of Topic 606 (1)

 

 

 
175

 

 
175

Net earnings

 

 

 
271,393

 

 
271,393

Dividends paid

 

 

 
(142,322
)
 

 
(142,322
)
Separation of Apergy

 

 

 
(939,743
)
 
32,928

 
(906,815
)
Common stock issued for the exercise of share-based awards
402

 
(21,604
)
 

 

 

 
(21,202
)
Stock-based compensation expense

 
11,147

 

 

 

 
11,147

Common stock acquired, including accelerated share repurchase program

 
(140,000
)
 
(604,977
)
 

 

 
(744,977
)
Other comprehensive (loss), net of tax

 

 

 

 
(5,092
)
 
(5,092
)
Other, net

 
(4,896
)
 

 

 

 
(4,896
)
Balance at June 30, 2018
$
257,394

 
$
787,132

 
$
(5,682,016
)
 
$
7,657,860

 
$
(179,779
)
 
$
2,840,591

 (1) See Note 20 — Recent Accounting Pronouncements and Note 3 — Revenue for additional information.

See Notes to Condensed Consolidated Financial Statements


4


DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net earnings
$
271,393

 
$
336,305

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Loss (earnings) from discontinued operations, net
4,472

 
(38,742
)
Depreciation and amortization
137,928

 
139,628

Stock-based compensation expense
10,403

 
16,861

Gain on sale of businesses

 
(90,093
)
Cash effect of changes in assets and liabilities:
 
 
 
Accounts receivable, net
(108,003
)
 
(62,209
)
Inventories
(85,340
)
 
(80,444
)
Prepaid expenses and other assets
(32,336
)
 
(3,641
)
Accounts payable
64,592

 
72,454

Accrued compensation and employee benefits
(51,002
)
 
(21,725
)
Accrued expenses and other liabilities
(32,894
)
 
(39,519
)
Accrued and deferred taxes, net
2,075

 
(22,709
)
Other, net
(6,548
)
 
(7,934
)
Net cash provided by operating activities
174,740

 
198,232

Investing Activities:
 

 
 

Additions to property, plant and equipment
(96,364
)
 
(78,966
)
Acquisitions, net of cash and cash equivalents acquired
(68,557
)
 
(25,568
)
Proceeds from sale of property, plant and equipment
2,411

 
2,177

Proceeds from sale of businesses
2,069

 
121,175

Other
(13,762
)
 
21,151

Net cash (used in) provided by investing activities
(174,203
)
 
39,969

Financing Activities:
 

 
 

Cash received from Apergy, net of cash distributed
689,643

 

Repurchase of common stock, including prepayment under an accelerated share repurchase program

(744,977
)
 

Change in commercial paper and notes payable
53,584

 
(157,444
)
Dividends paid to stockholders
(142,322
)
 
(137,182
)
Payments to settle employee tax obligations on exercise of share-based awards
(21,202
)
 
(12,028
)
Repayment of long-term debt
(350,000
)
 

Other
(1,563
)
 
(2,912
)
Net cash used in financing activities
(516,837
)
 
(309,566
)
Cash Flows from Discontinued Operations
 

 
 

Net cash provided by operating activities of discontinued operations
19,336

 
40,163

Net cash used in investing activities of discontinued operations
(23,705
)
 
(13,592
)
Net cash (used in) provided by discontinued operations
(4,369
)
 
26,571

Effect of exchange rate changes on cash and cash equivalents
9,519

 
(2,764
)
Net decrease in cash and cash equivalents
(511,150
)
 
(47,558
)
Cash and cash equivalents at beginning of period
753,964

 
349,146

Cash and cash equivalents at end of period
$
242,814

 
$
301,588



See Notes to Condensed Consolidated Financial Statements

5

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


1. Basis of Presentation

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim periods and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. These unaudited interim Condensed Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes for Dover Corporation ("Dover" or the "Company") for the year ended December 31, 2017, included in the Company's Annual Report on Form 10-K/A filed with the SEC on February 16, 2018. The year end Condensed Consolidated Balance Sheet was derived from audited financial statements. Certain amounts in the prior year have been reclassified to conform to the current year presentation.  

On May 9, 2018, the Company completed a pro-rata distribution of the common stock of Apergy Corporation ("Apergy") to the Company's shareholders of record as of the close of business on April 30, 2018. Apergy holds entities conducting upstream energy businesses previously included in the Energy segment. As discussed in Note 5 - Discontinued and Disposed Operations, the Apergy businesses met the criteria to be reported as discontinued operations because the spin-off is a strategic shift in business that has a major effect on the Company's operations and financial results. Therefore, the Company is reporting the historical results of Apergy, including the results of operations, cash flows, and related assets and liabilities, as discontinued operations for all periods presented herein. Subsequent to the spin-off of Apergy, effective the second quarter of 2018, the Company no longer has the Energy segment and is aligned into three reportable segments. See Note 17 —Segment Information for additional information regarding the updated segments, including segment results for the three and six months ended June 30, 2018 and 2017. Unless otherwise noted, the accompanying Notes to the Consolidated Financial Statements have all been revised to reflect the effect of the separation of Apergy and all prior year balances have been revised accordingly to reflect continuing operations only.

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Condensed Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.

2. Spin-off of Apergy Corporation

On May 9, 2018, Dover completed the distribution of Apergy to its shareholders. The transaction was completed through the pro rata distribution of 100% of the common stock of Apergy to Dover's shareholders of record as of the close of business on April 30, 2018. Each Dover shareholder received one share of Apergy common stock for every two shares of Dover common stock held as of the record date.

The following is a summary of the assets and liabilities transferred to Apergy as part of the separation on May 9, 2018:
Assets:
 
 
Cash and cash equivalents
 
$
10,357

Current assets
 
462,620

Non-current assets
 
1,438,760

 
 
$
1,911,737

Liabilities:
 
 
Current liabilities
 
$
185,354

Non-current liabilities
 
119,568


 
$
304,922

 
 
 
Net assets distributed to Apergy Corporation
 
$
1,606,815

Less: Cash received from Apergy Corporation
 
700,000

Net distribution to Apergy Corporation
 
$
906,815


6



In connection with the spin-off from the company, Apergy issued and sold $300.0 million in aggregate principal amount of its 6.375% senior notes due May 2026 in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended, and incurred $415.0 million in borrowings under its new senior secured term loan facility to fund a one-time cash payment of $700.0 million to Dover. Dover received net cash of $689.6 million upon separation, which reflects $10.4 million of cash held by Apergy on the distribution date and retained by it in connection with its separation from Dover. Dover utilized the proceeds of $700.0 million from Apergy as the primary source of funding for $1 billion of share repurchases started in December 2017. See Note 18 — Share Repurchases for further information.
Included within the net assets distributed to Apergy is approximately $33 million of accumulated other comprehensive earnings attributable to Apergy, relating primarily to foreign currency translation gains, offset by unrecognized losses on pension obligations.
The historical results of Apergy, including the results of operations, cash flows, and related assets and liabilities have been reclassified to discontinued operations for all periods presented herein. See Note 5 Discontinued Operations. Pursuant to the separation of Apergy from Dover, and the related separation and distribution agreements, any liabilities due from Dover to Apergy are not significant and will be paid in the near future.

3. Revenue

Revenue from contracts with customers
Effective January 1, 2018, the Company adopted Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606” or “ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Accordingly, all periods prior to January 1, 2018 are presented in accordance with ASC Topic 605, Revenue Recognition ("Topic 605” or “ASC 605”).
Under Topic 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms are identified and collectability is probable. Once the Company has entered a contract, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized as control of promised goods or services transfers to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The amount of revenue recognized takes into account variable consideration, such as discounts and volume rebates.
A majority of the Company’s revenue is short cycle in nature with shipments within one year from order. A small portion of the Company’s revenue derives from contracts extending over one year. The Company's payment terms generally range between 30 to 90 days and vary by the location of businesses, the type of products manufactured to be sold and the volume of products sold, among other factors.
Disaggregation of Revenue
Revenue from contracts with customers is disaggregated by end markets, segments and geographic location, as it best depicts the nature and amount of the Company’s revenue.

7

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

The following table presents revenue disaggregated by end market and segment:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2018
Printing & Identification
$
299,834

 
$
582,356

Industrials
403,155

 
792,259

Total Engineered Systems segment
702,989

 
1,374,615

Fueling & Transport
363,355

 
682,659

Pumps
173,306

 
335,615

Process Solutions
157,005

 
303,490

Total Fluids segment
693,666

 
1,321,764

Refrigeration
330,232

 
608,887

Food Equipment
71,534

 
131,114

Total Refrigeration & Food Equipment segment
401,766

 
740,001

Intra-segment eliminations
(327
)
 
(615
)
Total Consolidated Revenue
$
1,798,094

 
$
3,435,765


The following table presents revenue disaggregated by geography based on the location of the Company's customer:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2018
United States
$
932,207

 
$
1,785,209

Europe
402,234

 
789,412

Asia
219,032

 
413,635

Other Americas
168,197

 
301,341

Other
76,424

 
146,168

Total
$
1,798,094

 
$
3,435,765


The majority of revenue from our Engineered Systems, Fluids and Refrigeration and Food Equipment segments is generated from sales to customers within the United States and Europe. Each segment also generates revenue across the other geographies, with no significant concentration of any segment’s remaining revenue.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer, and is the unit of accounting under ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A majority of the Company’s contracts have a single performance obligation which represents, in most cases, the equipment or product being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation, extended warranty and/or maintenance services. These contracts require judgment in determining the number of performance obligations.

The Company has elected to use the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component if it is expected, at contract inception, that the period between when Dover transfers a promised good or service to a customer, and when the customer pays for that good or service, will be one year or less. Thus, the Company may not consider an advance payment to be a significant financing component, if it is received less than one year before product completion.

The majority of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation.


8

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

The Company may also offer service-type warranties that provide services to the customer, in addition to the assurance that the product complies with agreed-upon specifications. If a warranty is determined to be a service-type warranty, it represents a distinct service and is treated as a separate performance obligation.

For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.

Over 95% of the Company’s performance obligations are recognized at a point in time that relate to the manufacture and sale of a broad range of products and components. Revenue is recognized when control transfers to the customer upon shipment or completion of installation, testing, certification, or other substantive acceptance provisions required under the contract. Less than 5% of the Company’s revenue is recognized over time and relates to the sale of engineered to order equipment or services.

For revenue recognized over time, there are two types of methods for measuring progress and both are relevant to the Company: (1) input methods and (2) output methods. Although this may vary by business, input methods generally are based on costs incurred relative to estimated total costs. Output methods generally are based on a measurement of progress, such as milestone achievement. The businesses use the method and measure of progress that best depicts the transfer of control to the customer of the goods or services to date relative to the remaining goods or services promised under the contract.

Transaction Price Allocated to the Remaining Performance Obligations

At June 30, 2018, we estimated that $65.2 million in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. We expect to recognize approximately 56% of our unsatisfied (or partially unsatisfied) performance obligations as revenue in 2019, with the remaining balance to be recognized in 2020 and thereafter.

Remaining consideration, including variable consideration, from contracts with customers is included in the amounts presented above and primarily consists of extended warranties on products and multi-year maintenance agreements, which are typically recognized as the performance obligation is satisfied.

The Company applied the standard's practical expedient that permits the omission of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers:
 
June 30, 2018
 
At Adoption
Contract assets
$
13,803

 
$
11,932

Contract liabilities - current
44,992

 
48,268

Contract liabilities - non-current
10,305

 
9,916


Contract assets primarily relate to the Company's right to consideration for work completed but not billed at the reporting date and are recorded in Prepaid and other current assets in the Condensed Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in Other accrued expenses and non-current contract liabilities are recorded in Other liabilities in the Condensed Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.


9

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

Significant changes in contract assets and liabilities balances during the period are as follows:
 
Contract Assets
Opening balance at January 1, 2018
$
11,932

Cumulative catch-up adjustment upon transition
356

Changes in the estimate of the stage of completion
7,211

Transferred to receivables from contract assets recognized during the period
(5,618
)
Other
(78
)
Closing balance at June 30, 2018
$
13,803

 
Contract Liabilities
Opening balance at January 1, 2018
$
58,184

Cumulative catch-up adjustment upon transition

Revenue recognized that was included in the contract liability balance at the beginning of the period
(39,484
)
Increases due to cash received, excluding amounts recognized as revenue during the period
36,271

Other
326

Closing balance at June 30, 2018
$
55,297


Contract Costs

Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within Cost of goods and services in the Condensed Consolidated Statements of Earnings.

Critical Accounting Estimates

Estimates are used to determine the amount of variable consideration in contracts, the standalone selling price among separate performance obligations and the measure of progress for contracts where revenue is recognized over time. The Company reviews and updates these estimates regularly.

Some contracts with customers include variable consideration primarily related to volume rebates. The Company estimates variable consideration at the most likely amount to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Changes in Accounting Policies

The Company adopted Topic 606, effective January 1, 2018, using the modified retrospective method, applying Topic 606 to contracts that are not complete as of the date of initial application. Under the modified retrospective method, the cumulative effect of applying the standard has been recognized at the date of initial application, January 1, 2018. The comparative information has not been adjusted and continues to be reported under Topic 605. The Company's accounting policy has been updated to align with Topic 606, and no significant changes to revenue recognition have occurred as a result of the change.

Shipping and handling charges are not considered a separate performance obligation. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities must be accrued.
Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (e.g., sales, use, value added, and some excise taxes) are excluded from revenue. The Company's policy elections related to shipping and handling and taxes have not changed with the adoption of Topic 606.


10

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

Under Topic 605, revenue was generally recognized when all of the following criteria were met: a) persuasive evidence of an arrangement exists, b) price is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurred or services have been rendered. The majority of the Company's revenue is generated through the manufacture and sale of a broad range of specialized products and components and revenue was recognized upon transfer of title and risk of loss, which was generally upon shipment. In limited cases, the Company's revenue arrangements with customers required delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue was recognized. The Company included shipping costs billed to customers in Revenue and the related shipping costs in Cost of goods and services.

Impact on Financial Statements

The adoption of Topic 606 impacted certain contracts for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin. For these contracts, the Company now recognizes revenue over time based on the method and measure of progress that best depicts the transfer of control to the customer of the goods or services to date relative to the remaining goods or services promised under the contract.

The Company recorded a cumulative catch-up adjustment to retained earnings at January 1, 2018 for $0.2 million, related to the impact of adopting Topic 606 under the modified retrospective method.

The impact of adopting Topic 606 was not material to the Company’s consolidated financial statements as of and for the three and six months ended June 30, 2018.

4. Acquisitions

2018 Acquisitions

During the six months ended June 30, 2018, the Company acquired two businesses in separate transactions for total consideration of $68,557, net of cash acquired. These businesses were acquired to complement and expand upon existing operations within the Fluids and Refrigeration & Food Equipment segments. The goodwill recorded as a result of these acquisitions reflects the benefits expected to be derived from product line expansions and operational synergies. The goodwill is non-deductible for U.S. federal income tax purposes for these acquisitions.

On January 2, 2018, the Company acquired 100% of the voting stock of Ettlinger Group ("Ettlinger"), within the Fluids segment for $53,218, net of cash acquired. In connection with this acquisition, the Company recorded goodwill of $36,070 and intangible assets of $19,730, primarily related to customer intangibles. The intangible assets are being amortized over 8 to 15 years.

On January 12, 2018, the Company acquired 100% of the voting stock of Rosario Handel B.V. ("Rosario"), within the Refrigeration & Food Equipment segment for total consideration of $15,339, net of cash acquired. In connection with this acquisition, the Company recorded goodwill of $10,402 and a customer intangible asset of $4,149. The customer intangible asset is being amortized over 10 years.

2017 Acquisitions

During the six months ended June 30, 2017, the Company acquired Caldera Graphics S.A.S. ("Caldera") within the Engineered Systems segment for $32,680, net of cash acquired and including contingent consideration. In connection with this acquisition, the Company recorded goodwill of $24,649 and intangible assets of $8,169, primarily related to customer intangibles. The goodwill is non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over 7 to 15 years.

Pro Forma Information

The following unaudited pro forma information illustrates the impact of 2018 and 2017 acquisitions on the Company’s revenue and earnings from operations for the six months ended June 30, 2018 and 2017, respectively. In the year 2017, the Company acquired two businesses in separate transactions for total net consideration of $34,300.
 
The unaudited pro forma information assumes that the 2018 and 2017 acquisitions had taken place at the beginning of the prior year, 2017 and 2016, respectively. Unaudited pro forma earnings are adjusted to reflect the comparable impact of additional depreciation and amortization expense, net of tax, resulting from the fair value measurement of intangible and tangible assets relating to the year of acquisition.

11

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


The unaudited pro forma effects for the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
As reported
$
1,798,094

 
$
1,737,371

 
$
3,435,765

 
$
3,320,581

Pro forma
1,798,094

 
1,746,950

 
3,436,081

 
3,342,851

Earnings:
 
 
 
 
As reported
$
166,456

 
$
142,475

 
$
275,865

 
$
297,563

Pro forma
168,158

 
142,167

 
279,714

 
296,459

Basic earnings per share:
 
 
 
 
As reported
$
1.10

 
$
0.92

 
$
1.80

 
$
1.91

Pro forma
1.11

 
0.91

 
1.83

 
1.90

Diluted earnings per share:
 
 
 
 
As reported
$
1.08

 
$
0.90

 
$
1.77

 
$
1.89

Pro forma
1.09

 
0.90

 
1.80

 
1.88


5. Discontinued and Disposed Operations

Discontinued Operations

The Apergy businesses, as discussed in Note 2, met the criteria to be reported as discontinued operations because the spin-off is a strategic shift in business that has a major effect on the Company's operations and financial results. Therefore, the results of discontinued operations for the three and six months ended June 30, 2018 and 2017 include the historical results of Apergy prior to its distribution on May 9, 2018. The three and six months ended June 30, 2018 included costs incurred by Dover to complete the spin-off of Apergy amounting to $34,638 and $46,384, respectively, reflected in selling, general and administrative expenses. There were no such costs for the three and six months ended June 30, 2017. See Note 2 Spin-off of Apergy Corporation for further information.

Summarized results of the Company's discontinued operations are as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
119,647

 
$
256,156

 
$
403,688

 
$
486,430

Cost of goods and services
76,277

 
160,817

 
254,205

 
305,771

Gross profit
43,370

 
95,339

 
149,483

 
180,659

Selling, general and administrative expenses
64,990

 
62,773

 
144,114

 
122,347

Operating (loss) earnings
(21,620
)
 
32,566

 
5,369

 
58,312

Other (income) expense, net
(134
)
 
(165
)
 
349

 
484

(Loss) earnings from discontinued operations before taxes
(21,486
)
 
32,731

 
5,020

 
57,828

Provision for income taxes
5,011

 
11,148

 
9,492

 
19,086

(Loss) earnings from discontinued operations, net of tax
$
(26,497
)
 
$
21,583

 
$
(4,472
)
 
$
38,742



12

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

Assets and liabilities of discontinued operations are summarized below:

 
December 31, 2017
Assets of Discontinued Operations
 
Accounts receivable
$
202,052

Inventories, net
201,591

Prepaid and other current assets
14,035

Total current assets
417,678

Property, plant and equipment, net
211,832

Goodwill and intangible assets, net
1,232,843

Other assets and deferred charges
3,200

Total assets
$
1,865,553

 
 
Liabilities of Discontinued Operations
 

Accounts payable
$
97,439

Other current liabilities
59,482

Total current liabilities
156,921

Deferred income taxes
90,641

Other liabilities
16,691

Total liabilities
$
264,253


On May 9, 2018, all assets and liabilities of Apergy were spun-off. Therefore, as of June 30, 2018, there were no assets and liabilities classified as discontinued operations.

Disposed Operations

2018

There were no other dispositions aside from the spin-off of Apergy during the six months ended June 30, 2018.

2017

On February 14, 2017, the Company completed the sale of Performance Motorsports International ("PMI"), which was a wholly owned subsidiary of the Company that manufactures pistons and other engine related components serving the motorsports and powersports markets. Total consideration for the transaction was $147,313, including cash proceeds of $118,706. We recognized a pre-tax gain on sale of $88,402 for the six months ended June 30, 2017 within gain on sale of businesses in the Condensed Consolidated Statements of Earnings and recorded a 25% equity method investment at fair value of $18,607 as well as a subordinated note receivable of $10,000.

During the six months ended June 30, 2017, the Company recorded a working capital adjustment for the sale of Tipper Tie in the fourth quarter of 2016 for $1,691. This adjustment is included within gain on sale of businesses in the Condensed Consolidated Statements of Earnings.

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


13

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

6. Inventories
 
June 30, 2018
 
December 31, 2017
Raw materials
$
392,774

 
$
400,009

Work in progress
172,959

 
128,296

Finished goods
307,850

 
251,402

Subtotal
873,583

 
779,707

Less reserves
(109,530
)
 
(102,664
)
Total
$
764,053

 
$
677,043


7. Property, Plant and Equipment, net
 
June 30, 2018
 
December 31, 2017
Land
$
54,032

 
$
54,918

Buildings and improvements
520,396

 
517,049

Machinery, equipment and other
1,527,842

 
1,472,852

Property, plant and equipment, gross
2,102,270

 
2,044,819

Total accumulated depreciation
(1,297,261
)
 
(1,256,879
)
Property, plant and equipment, net
$
805,009

 
$
787,940


Depreciation expense totaled $32,947 and $32,564 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, depreciation expense was $65,111 and $64,149, respectively.
 
8. Goodwill and Other Intangible Assets

Accounting Standards Codification ("ASC") 350, “Intangibles - Goodwill and Other Intangibles” provides guidance on an entity's subsequent measurement and subsequent recognition of goodwill and other intangibles, including subsequent changes to carrying amounts, including impairment and fair value adjustments. In accordance with the guidance set forth in ASC 350, and in connection with the separation of Apergy, the Company was required to calculate the portion of goodwill included in the Apergy distribution. Using a relative fair value approach, the Company reallocated $3,546 of goodwill from a reporting unit that included Apergy to a reporting unit now included within the Engineered Systems segment. Refer to See Note 17 —Segment Information for further information.

Further, the Company realigned its remaining businesses and reallocated goodwill among its reporting units based on their relative fair value and tested goodwill for impairment in the second quarter of 2018. The Company concluded that no impairment indicators exist.

The changes in the carrying value of goodwill by reportable operating segments were as follows:
 
Engineered Systems
 
Fluids
 
Refrigeration & Food Equipment
 
Total
Balance at December 31, 2017
$
1,645,389

 
$
1,504,284

 
$
536,699

 
$
3,686,372

Reallocation due to Apergy separation
3,546

 

 

 
3,546

Acquisitions

 
36,070

 
10,402

 
46,472

Purchase price adjustments
44

 

 

 
44

Foreign currency translation
(9,596
)
 
(10,950
)
 
(523
)
 
(21,069
)
Balance at June 30, 2018
$
1,639,383

 
$
1,529,404

 
$
546,578

 
$
3,715,365


During the six months ended June 30, 2018, the Company recorded additions of $46,472 to goodwill as a result of the acquisitions discussed in Note 4 — Acquisitions. The net goodwill transferred to Apergy on May 9, 2018 amounted to $899,888.


14

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

The Company’s definite-lived and indefinite-lived intangible assets by major asset class were as follows:
 
June 30, 2018
 
December 31, 2017
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer intangibles
$
1,413,880

 
$
604,476

 
$
809,404

 
$
1,405,361

 
$
559,447

 
$
845,914

Trademarks
217,126

 
65,392

 
151,734

 
217,621

 
58,523

 
159,098

Patents
145,059

 
125,950

 
19,109

 
145,577

 
123,135

 
22,442

Unpatented technologies
157,161

 
78,745

 
78,416

 
152,913

 
71,284

 
81,629

Distributor relationships
85,145

 
35,235

 
49,910

 
85,794

 
32,092

 
53,702

Drawings & manuals
32,522

 
22,182

 
10,340

 
32,739

 
20,767

 
11,972

Other
28,105

 
15,152

 
12,953

 
23,095

 
12,028

 
11,067

Total
2,078,998

 
947,132

 
1,131,866

 
2,063,100

 
877,276

 
1,185,824

Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
96,739

 

 
96,739

 
96,800

 

 
96,800

Total intangible assets, net
$
2,175,737

 
$
947,132

 
$
1,228,605

 
$
2,159,900

 
$
877,276

 
$
1,282,624


Amortization expense was $36,356 and $37,844, respectively, including acquisition-related intangible amortization of $35,945 and $37,295 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, amortization expense was $72,817 and $75,479, respectively, including acquisition-related intangible amortization of $71,834 and $74,398, respectively.

9. Restructuring Activities

The Company's restructuring charges by segment were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Engineered Systems
$
1,860

 
$
756

 
$
3,235

 
$
1,818

Fluids
3,497

 
1,068

 
5,548

 
4,507

Refrigeration & Food Equipment
234

 
19

 
146

 
1,525

Corporate
2,544

 

 
3,293

 

Total
$
8,135

 
$
1,843

 
$
12,222

 
$
7,850

These amounts are classified in the Condensed Consolidated Statements of Earnings as follows:
Cost of goods and services
$
2,192

 
$
157

 
$
4,399

 
$
4,235

Selling, general and administrative expenses
5,943

 
1,686

 
7,823

 
3,615

Total
$
8,135

 
$
1,843

 
$
12,222

 
$
7,850


The restructuring expenses of $8,135 and $12,222 incurred during the three and six months ended June 30, 2018, respectively, were related to restructuring programs initiated during 2018 and 2017. The three and six months ended June 30, 2018 restructuring expense includes $6,808 and $9,857, respectively, related to rightsizing restructuring programs largely initiated in the fourth quarter of 2017 and designed to better align the Company's cost structure in preparation for the Apergy separation. The Company also executed restructuring programs to better align the Company's costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures to further optimize operations. The Company expects the programs currently underway to be substantially completed in the next 12 months.

The $8,135 of restructuring charges incurred during the second quarter of 2018 primarily included the following items:

The Engineered Systems segment recorded $1,860 of restructuring charges related to programs focused on headcount reduction.


15

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

The Fluids segment recorded $3,497 of restructuring charges as a result of programs and projects across the segment, principally related to headcount reductions and facility consolidations, focused on achieving acquisition integration benefits.

Corporate recorded $2,544 of restructuring charges primarily related to headcount reductions.

The Company’s severance and exit accrual activities were as follows:
 
Severance
 
Exit
 
Total
Balance at December 31, 2017
$
25,681

 
$
5,591

 
$
31,272

Restructuring charges
8,420

 
3,802

 
12,222

Payments
(21,848
)
 
(5,876
)
 
(27,724
)
Other, including foreign currency translation
(1,743
)
 
369

(1)
(1,374
)
Balance at June 30, 2018
$
10,510

 
$
3,886

 
$
14,396

(1)
Other activity in exit reserves primarily represents the non-cash write-off of certain long-lived assets and inventory in connection with certain facility closures and product exits.

10. Borrowings

Borrowings consisted of the following:
 
June 30, 2018
 
December 31, 2017
Short-term
 
 
 
Current portion of long-term debt and short-term borrowings
$
1,330

 
$
350,402

Commercial paper
283,300

 
230,700

Notes payable and current maturities of long-term debt
$
284,630

 
$
581,102


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

 
$

 
$
349,918

2.125% 7-year notes due December 1, 2020 (euro-denominated)
351,103

 
349,932

 
354,349

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

 
449,016

 
448,831

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

 
395,032

 
394,695

1.25% 10-year notes due November 9, 2026 (euro-denominated)
702,206

 
692,400

 
701,058

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

 
199,004

 
198,954

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

 
295,686

 
295,561

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

 
247,770

 
247,713

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

 
343,739

 
343,600

Other


 
2,361

 
2,034

Total long-term debt


 
2,974,940

 
3,336,713

Less long-term debt current portion
 
 

 
(350,011
)
Net long-term debt


 
$
2,974,940

 
$
2,986,702

(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were
$16.8 million and $17.6 million as of June 30, 2018 and December 31, 2017, respectively. Total deferred debt issuance costs were $14.0 million and $14.9 million as of June 30, 2018 and December 31, 2017, respectively.

On March 15, 2018, the outstanding 5.45% notes with a principal value of $350.0 million matured. The repayment of debt was funded by the Company's commercial paper program and through a reduction of existing cash balances.


16

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

The Company maintains a $1.0 billion five-year unsecured revolving credit facility (the "Credit Agreement") with a syndicate of banks which expires on November 10, 2020. The Company was in compliance with all covenants in the Credit Agreement and other long-term debt covenants at June 30, 2018 and had a coverage ratio of 10.9 to 1.0. The Company uses the Credit Agreement as liquidity back-up for its commercial paper program and has not drawn down any loans under the facility and does not anticipate doing so. The Company generally uses commercial paper borrowings for general corporate purposes, funding of acquisitions and repurchases of its common stock.

As of June 30, 2018, the Company had approximately $141.8 million outstanding in letters of credit and performance and other guarantees which expire on various dates in 2018 through 2028. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations.

11. Financial Instruments

Derivatives

The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations and certain commodity risks. In order to manage these risks, the Company has hedged portions of its forecasted sales and purchases to occur within the next twelve months that are denominated in non-functional currencies, with currency forward contracts designated as cash flow hedges. At June 30, 2018 and December 31, 2017, the Company had contracts with U.S. dollar equivalent notional amounts of $221,577 and $115,580, respectively, to exchange foreign currencies, principally the Pound Sterling, Chinese Yuan, Swedish Krona, Swiss Franc, Canadian Dollar and Euro. The Company believes it is probable that all forecasted cash flow transactions will occur.

In addition, the Company had outstanding contracts with a total notional amount of $91,858 and $59,952 as of June 30, 2018 and December 31, 2017, respectively, that are not designated as hedging instruments. These instruments are used to reduce the Company's exposure for operating receivables and payables that are denominated in non-functional currencies. Gains and losses on these contracts are recorded in other expense (income), net in the Condensed Consolidated Statements of Earnings.

The following table sets forth the fair values of derivative instruments held by the Company as of June 30, 2018 and December 31, 2017 and the balance sheet lines in which they are recorded:
 
Fair Value Asset (Liability)
 
 
 
June 30, 2018
 
December 31, 2017
 
Balance Sheet Caption
Foreign currency forward
$
4,059

 
$
358

 
Prepaid / Other current assets
Foreign currency forward
(1,290
)
 
(2,243
)
 
Other accrued expenses

For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in accumulated other comprehensive loss as a separate component of the Condensed Consolidated Statement of Stockholders' Equity and is reclassified into cost of goods and services in the Condensed Consolidated Statements of Earnings during the period in which the hedged transaction is recognized. The amount of gains or losses from hedging activity recorded in earnings is not significant, and the amount of unrealized gains and losses from cash flow hedges that are expected to be reclassified to earnings in the next twelve months is not significant; therefore, additional tabular disclosures are not presented. There are no amounts excluded from the assessment of hedge effectiveness and the Company's derivative instruments that are subject to credit risk contingent features were not significant.

The Company is exposed to credit loss in the event of nonperformance by counterparties to the financial instrument contracts held by the Company; however, nonperformance by these counterparties is considered unlikely as the Company’s policy is to contract with highly-rated, diversified counterparties.

The Company has designated the €600,000 and €300,000 of euro-denominated notes issued November 9, 2016 and December 4, 2013, respectively, as hedges of a portion of its net investment in euro-denominated operations. Changes in the value of the euro-denominated debt are recognized in foreign currency translation adjustments within other comprehensive earnings (loss) of the Condensed Consolidated Statements of Comprehensive Earnings to offset changes in the value of the net investment in euro-denominated operations.


17

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

Amounts recognized in other comprehensive earnings (loss) for the gains (losses) on net investment hedges were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Gain (loss) on euro-denominated debt
$
57,998

 
$
(35,318
)
 
$
13,889

 
$
(65,839
)
Tax (expense) benefit
(12,180
)
 
12,362

 
(2,917
)
 
23,044

Net gain (loss) on net investment hedges, net of tax
$
45,818

 
$
(22,956
)
 
$
10,972

 
$
(42,795
)

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Level 2
 
Level 2
Assets:
 
 
 
Foreign currency cash flow hedges
$
4,059

 
$
358

Liabilities:
 
 
 
Foreign currency cash flow hedges
1,290

 
2,243


In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.

The estimated fair value of long-term debt, net at June 30, 2018 and December 31, 2017, was $3,199,810 and $3,324,776, respectively, compared to the carrying value of $2,974,940 and $2,986,702, respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the fair value hierarchy.

The carrying values of cash and cash equivalents, trade receivables, accounts payable and notes payable are reasonable estimates of their fair values as of June 30, 2018, and December 31, 2017 due to the short-term nature of these instruments.

12. Income Taxes

The effective tax rates for the three months ended June 30, 2018 and 2017 were 21.3% and 28.1%, respectively. The decrease in the effective tax rate for the three months ended June 30, 2018 relative to the prior comparable period was principally due to the decrease in the U.S. statutory tax rate from 35% to 21% and other U.S. tax law changes.
The effective tax rates for the six months ended June 30, 2018 and 2017 were 20.2% and 26.5%, respectively. The decrease in the effective tax rate for the six months ended June 30, 2018 relative to the prior comparable period was primarily driven by the decrease in the U.S. statutory tax rate from 35% to 21% and other U.S. tax law changes.
The discrete items for the three and six months ended June 30, 2018 primarily resulted from the net tax benefit from stock exercises and favorable audit settlements. The discrete items for the three and six months ended June 30, 2017 principally resulted from

18

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

adjustments to the provision based on filed tax returns in foreign jurisdictions and the effect of the settlement of the 2013 IRS audit. Additionally, the discrete items for the six months ended June 30, 2017 also included the gain on the sale of PMI.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”). In accordance with the SAB 118 guidance, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. For the six months ended June 30, 2018, the Company recorded a $1.3 million tax benefit, which resulted in a 0.2% decrease in the effective tax rate, as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Reform Act. In accordance with SAB 118, any additional adjustment to the financial reporting impact of the Tax Reform Act will be completed by the fourth quarter of 2018.

Dover and its subsidiaries file tax returns in the U.S., including various state and local returns and in other foreign jurisdictions.  We believe adequate provision has been made for all income tax uncertainties. The Company is routinely audited by taxing authorities in its filing jurisdictions, and a number of these audits are currently underway. The Company believes that within the next twelve months uncertain tax positions may be resolved and statutes of limitations will expire, which could result in a decrease in the gross amount of unrecognized tax benefits of approximately zero to $9.7 million.

13. Equity Incentive Program

The Company typically grants equity awards annually at its regularly scheduled first quarter meeting of the Compensation Committee of the Board of Directors. Additionally, in the second quarter, the Company granted equity awards to its new President and Chief Executive Officer. During the six months ended June 30, 2018, the Company issued stock-settled appreciation rights ("SARs") covering 757,603 shares, performance share awards of 122,459 and restricted stock units ("RSUs") of 284,721.

In addition, in connection with the separation of Apergy, the Company modified the outstanding equity awards for its employees. The awards were modified such that all individuals received an equivalent fair value both before and after the separation of Apergy. This modification resulted in the issuance of an additional 1,138,008 SARs, 26,316 performance shares, and 47,063 RSUs. The exercise price of these outstanding awards, where applicable, was adjusted to preserve the value of the awards immediately prior to the separation. As no incremental fair value was awarded as a result of the issuance of these additional shares, the modification did not result in additional compensation expense.

The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.

The range of assumptions used in determining the fair value of the SARs awarded during the respective periods were as follows:
 
SARs
 
2018
 
2017
Risk-free interest rate
2.58
%
-
2.87%
 
1.80
%
Dividend yield
1.99
%
-
2.43%
 
2.27
%
Expected life (years)
5.6

-
5.6
 
4.6

Volatility
20.95
%
-
21.20%
 
21.90
%
 
 
 
 
 
 
Grant price (1)
$79.75
-
$82.08
 
$66.84
Fair value per share at date of grant (1)
$14.58
-
$15.41
 
$10.65
(1) Updated to reflect the modification of grants in connection with the separation of Apergy on May 9, 2018.

The performance share awards granted in 2018 and 2017 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing

19

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

stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings in the period of change.  

The fair value and average attainment used in determining stock-based compensation cost for the performance shares issued in 2018 and 2017 is as follows for the six months ended June 30, 2018:
 
Performance shares
 
2018
 
2017
Fair value per share at date of grant (1)
$79.75
-
$82.08
 
$66.84
Average attainment rate reflected in expense
222.25%
 
222.49
%
(1) Updated to reflect the modification of grants in connection with the separation of Apergy on May 9, 2018.

The Company also has granted RSUs, and the fair value of these awards was determined using Dover's closing stock price on the date of grant (updated to reflect the modification of grants in connection with the separation of Apergy).

Stock-based compensation is reported within selling, general and administrative expenses of continuing operations in the Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Pre-tax stock-based compensation expense (continuing)
$
3,658

 
$
4,710

 
$
10,403

 
$
16,861

Tax benefit
(817
)
 
(1,649
)
 
(2,313
)
 
(5,974
)
Total stock-based compensation expense, net of tax
$
2,841

 
$
3,061

 
$
8,090

 
$
10,887


Stock-based compensation expense attributable to Apergy employees for the three months ended June 30, 2018 and 2017 was $174 and $608, respectively. For the six months ended June 30, 2018 and 2017, stock-based compensation expense attributable to Apergy employees was $744 and $1,261, respectively. These costs are reported within earnings from discontinued operations in the Condensed Consolidated Statement of Earnings.

14. Commitments and Contingent Liabilities

Litigation

Certain of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under federal and state statutes that provide for the allocation of such costs among "potentially responsible parties." In each instance, the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other "potentially responsible parties" involved and is anticipated to be immaterial to the Company. In addition, certain of the Company’s subsidiaries are involved in ongoing remedial activities at certain current and former plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established. At June 30, 2018 and December 31, 2017, the Company has reserves totaling $33,992 and $34,991, respectively, for environmental and other matters, including private party claims for exposure to hazardous substances that are probable and estimable.

The Company and certain of its subsidiaries are also parties to a number of other legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of the Company’s products, patent infringement, employment matters, and commercial disputes. Management and legal counsel, at least quarterly, review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and currently accrued to-date, and the availability and extent of insurance coverage. The Company has reserves for legal matters that are probable and estimable and not otherwise covered by insurance, and at June 30, 2018 and December 31, 2017, these reserves were not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.


20

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

Warranty Accruals

Estimated warranty program claims are provided for at the time of sale of the Company's products. Amounts provided for are based on historical costs and adjusted for new claims and are included within other accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet. The changes in the carrying amount of product warranties through June 30, 2018 and 2017, were as follows:
 
2018
 
2017
Beginning Balance, December 31 of the Prior Year
$
59,403

 
$
80,331

Provision for warranties
30,603

 
32,830

Settlements made
(34,746
)
 
(37,623
)
Other adjustments, including acquisitions and currency translation
(480
)
 
178

Ending Balance, June 30
$
54,780

 
$
75,716


15. Employee Benefit Plans

Retirement Plans

The Company offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. In addition, the Company sponsors qualified defined benefit pension plans covering certain employees of the Company and its subsidiaries. The plans’ benefits are generally based on years of service and employee compensation. The Company also provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law.

Upon separation from Dover, Apergy participants in the Dover U.S. pension plan (other than Norris USW participants) fully vested in their benefits and ceased accruing future benefits. Dover retained the obligation and participants will be able to elect lump-sum payments from plan assets post-separation. Such payments could result in a non-cash settlement charge to the Company's fourth quarter 2018 earnings when lump sum payments are expected to be paid out; the amount of which is not currently determinable. Assets and obligations related to the Norris USW participants were moved to a new plan sponsored by Apergy. The separation of Apergy triggered a pension plan curtailment which required a re-measurement of the Plan's benefit obligation in the second quarter, assuming a discount rate of 4.2% and an expected return on assets of 6.8%. The re-measurement resulted in one-time charges of $0.2 million in the second quarter of 2018.

The following tables set forth the components of the Company’s net periodic expense relating to retirement benefit plans:

Qualified Defined Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
U.S. Plan
 
Non-U.S. Plans
 
U.S. Plan
 
Non-U.S. Plans
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
2,303

 
$
3,021

 
$
1,534

 
$
1,343

 
$
5,287

 
$
6,042

 
$
3,111

 
$
2,660

Interest cost
5,153

 
5,430

 
1,343

 
1,285

 
10,255

 
10,859

 
2,721

 
2,549

Expected return on plan assets
(9,745
)
 
(9,953
)
 
(2,037
)
 
(1,833
)
 
(19,956
)
 
(19,906
)
 
(4,128
)
 
(3,637
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
339

 
106

 
(111
)
 
(112
)
 
426

 
213

 
(226
)
 
(222
)
Recognized actuarial loss
870

 
1,395

 
782

 
864

 
2,801

 
2,791

 
1,585

 
1,705

Transition obligation

 

 
1

 
1

 

 

 
2

 
2

Net periodic (income) expense
$
(1,080
)
 
$
(1
)
 
$
1,512

 
$
1,548

 
$
(1,187
)
 
$
(1
)
 
$
3,065

 
$
3,057

Less: Discontinued operations
$
273

 
$
846

 
$
73

 
$
203

 
$
950

 
$
1,692

 
$
247

 
$
405

Net periodic (income) expense - Continuing operations
$
(1,353
)
 
$
(847
)
 
$
1,439

 
$
1,345

 
$
(2,137
)
 
$
(1,693
)
 
$
2,818

 
$
2,652



21

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


Non-Qualified Supplemental Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
660

 
$
618

 
$
1,355

 
$
1,236

Interest cost
808

 
1,019

 
1,701

 
2,038

Amortization:
 
 
 
 
 
 
 
   Prior service cost
1,351

 
1,103

 
2,314

 
2,205

   Recognized actuarial gain
(281
)
 
(298
)
 
(536
)
 
(596
)
Net periodic expense
$
2,538

 
$
2,442

 
$
4,834

 
$
4,883

Less: Discontinued operations
97

 
306

 
351

 
613

Net periodic expense - Continuing operations
$
2,441

 
$
2,136

 
$
4,483

 
$
4,270


Post-Retirement Benefit Plans

The Company also maintains post-retirement benefit plans, although these plans are closed to new entrants. The supplemental and post-retirement benefit plans are supported by the general assets of the Company. The following table sets forth the components of the Company’s net periodic expense relating to its post-retirement benefit plans:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
7

 
$
8

 
$
15

 
$
17

Interest cost
72

 
73

 
145

 
146

Amortization:
 
 
 
 
 
 
 
   Prior service cost
4

 
2

 
7

 
4

   Recognized actuarial gain
(7
)
 
(40
)
 
(15
)
 
(80
)
Net periodic expense
$
76

 
$
43

 
$
152

 
$
87


The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $2,948 and $3,021 for the three months ended June 30, 2018 and 2017, respectively, and $6,358 and $6,022 for the six months ended June 30, 2018 and 2017, respectively.

On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The service cost component is recognized within selling, general and administrative expenses and cost of goods and services, depending on the functional area of the underlying employees included in the plans, and the non-operating components of pension costs are included within other expense (income), net in the Condensed Consolidated Statements of Earnings. See Note 20 — Recent Accounting Pronouncements for additional information.

Defined Contribution Retirement Plans

The Company also offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. The Company’s expense relating to defined contribution plans was $8,563, and $8,794 for the three months ended June 30, 2018 and 2017, respectively, and $18,852 and $18,110 for the six months ended June 30, 2018 and 2017.


22

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

16. Other Comprehensive Earnings

The amounts recognized in other comprehensive (loss) earnings were as follows:
 
Three Months Ended
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
(52,979
)
 
$
(12,180
)
 
$
(65,159
)
 
$
13,812

 
$
12,362

 
$
26,174

Pension and other post-retirement benefit plans
2,948

 
(628
)
 
2,320

 
3,021

 
(966
)
 
2,055

Changes in fair value of cash flow hedges
2,085

 
(437
)
 
1,648

 
(2,642
)
 
925

 
(1,717
)
Other

 

 

 
(657
)
 
79

 
(578
)
Total other comprehensive (loss) earnings
$
(47,946
)
 
$
(13,245
)
 
$
(61,191
)
 
$
13,534

 
$
12,400

 
$
25,934

 
Six Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
(9,934
)
 
$
(2,917
)
 
$
(12,851
)
 
$
46,902

 
$
23,044

 
$
69,946

Pension and other post-retirement benefit plans
6,358

 
(1,356
)
 
5,002

 
6,022

 
(1,927
)
 
4,095

Changes in fair value of cash flow hedges
3,490

 
(733
)
 
2,757

 
(2,855
)
 
999

 
(1,856
)
Other

 

 

 
(274
)
 
33

 
(241
)
Total other comprehensive (loss) earnings
$
(86
)
 
$
(5,006
)
 
$
(5,092
)
 
$
49,795

 
$
22,149

 
$
71,944

Total comprehensive earnings were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,