10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 1-4018
Dover Corporation
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 53-0257888 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
3005 Highland Parkway | |
Downers Grove, Illinois | 60515 |
(Address of principal executive offices) | (Zip Code) |
(630) 541-1540
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12-b-2 of the Exchange Act.
|
| | |
Large accelerated filer þ | | Accelerated filer o |
Non-accelerated filer o | (Do not check if smaller reporting company) | Smaller reporting company 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 October 13, 2015 was 154,965,665.
Dover Corporation
Form 10-Q
Table of Contents
Item 1. Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | $ | 1,787,582 |
| | $ | 2,009,575 |
| | $ | 5,261,711 |
| | $ | 5,774,781 |
|
Cost of goods and services | 1,114,974 |
| | 1,235,153 |
| | 3,307,376 |
| | 3,524,400 |
|
Gross profit | 672,608 |
| | 774,422 |
| | 1,954,335 |
| | 2,250,381 |
|
Selling and administrative expenses | 395,688 |
| | 426,160 |
| | 1,233,017 |
| | 1,298,388 |
|
Operating earnings | 276,920 |
| | 348,262 |
| | 721,318 |
| | 951,993 |
|
Interest expense, net | 31,983 |
| | 31,231 |
| | 96,008 |
| | 95,847 |
|
Other income, net | (367 | ) | | (1,032 | ) | | (5,810 | ) | | (7,074 | ) |
Earnings before provision for income taxes and discontinued operations | 245,304 |
| | 318,063 |
| | 631,120 |
| | 863,220 |
|
Provision for income taxes | 58,821 |
| | 92,380 |
| | 171,813 |
| | 256,915 |
|
Earnings from continuing operations | 186,483 |
| | 225,683 |
| | 459,307 |
| | 606,305 |
|
(Loss) earnings from discontinued operations, net | (385 | ) | | 6,161 |
| | 268,697 |
| | (364 | ) |
Net earnings | $ | 186,098 |
| | $ | 231,844 |
| | $ | 728,004 |
| | $ | 605,941 |
|
| | | | | | | |
Earnings per share from continuing operations: | | | | | | | |
Basic | $ | 1.20 |
| | $ | 1.36 |
| | $ | 2.90 |
| | $ | 3.62 |
|
Diluted | $ | 1.19 |
| | $ | 1.34 |
| | $ | 2.87 |
| | $ | 3.57 |
|
| | | | | | | |
Earnings (loss) per share from discontinued operations: | | | | | | |
Basic | $ | — |
| | $ | 0.04 |
| | $ | 1.70 |
| | $ | — |
|
Diluted | $ | — |
| | $ | 0.04 |
| | $ | 1.68 |
| | $ | — |
|
| | | | | | | |
Net earnings per share: | | | | | | | |
Basic | $ | 1.20 |
| | $ | 1.40 |
| | $ | 4.59 |
| | $ | 3.62 |
|
Diluted | $ | 1.19 |
| | $ | 1.38 |
| | $ | 4.55 |
| | $ | 3.57 |
|
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 155,300 |
| | 166,021 |
| | 158,507 |
| | 167,401 |
|
Diluted | 156,560 |
| | 168,343 |
| | 160,112 |
| | 169,761 |
|
| | | | | | | |
Dividends paid per common share | $ | 0.42 |
| | $ | 0.40 |
| | $ | 1.22 |
| | $ | 1.15 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Net earnings | $ | 186,098 |
| | $ | 231,844 |
| | $ | 728,004 |
| | $ | 605,941 |
|
| | | | | | | |
Other comprehensive (loss) earnings, net of tax | | | | | | | |
Foreign currency translation adjustments: | | | | | | | |
Foreign currency translation losses during period | (57,213 | ) | | (70,369 | ) | | (101,755 | ) | | (76,771 | ) |
Reclassification of foreign currency translation gains to earnings upon sale of subsidiaries | — |
| | (8,406 | ) | | (3,117 | ) | | (8,406 | ) |
Total foreign currency translation | (57,213 | ) | | (78,775 | ) | | (104,872 | ) | | (85,177 | ) |
| | | | | | | |
Pension and other postretirement benefit plans: | | | | | | | |
Amortization of actuarial losses included in net periodic pension cost | 2,575 |
| | 1,287 |
| | 7,763 |
| | 4,172 |
|
Amortization of prior service costs included in net periodic pension cost | 1,227 |
| | 1,516 |
| | 3,682 |
| | 4,300 |
|
Total pension and other postretirement benefit plans | 3,802 |
| | 2,803 |
| | 11,445 |
| | 8,472 |
|
| | | | | | | |
Changes in fair value of cash flow hedges: | | | | | | | |
Unrealized net gains (losses) arising during period | 185 |
| | (466 | ) | | 536 |
| | (861 | ) |
Net (gains) losses reclassified into earnings | (678 | ) | | 169 |
| | (207 | ) | | (20 | ) |
Total cash flow hedges | (493 | ) | | (297 | ) | | 329 |
| | (881 | ) |
| | | | | | | |
Other | 393 |
| | 927 |
| | 884 |
| | 1,546 |
|
| | | | | | | |
Other comprehensive loss | (53,511 | ) | | (75,342 | ) | | (92,214 | ) | | (76,040 | ) |
| | | | | | | |
Comprehensive earnings | $ | 132,587 |
| | $ | 156,502 |
| | $ | 635,790 |
| | $ | 529,901 |
|
See Notes to Condensed Consolidated Financial Statements.
DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Current assets: | | | |
Cash and cash equivalents | $ | 662,673 |
| | $ | 681,581 |
|
Receivables, net of allowances of $18,937 and $18,894 | 1,193,844 |
| | 1,186,746 |
|
Inventories, net | 810,715 |
| | 863,737 |
|
Prepaid and other current assets | 84,224 |
| | 101,482 |
|
Deferred tax assets | 63,373 |
| | 63,276 |
|
Total current assets | 2,814,829 |
| | 2,896,822 |
|
Property, plant and equipment, net | 824,032 |
| | 837,069 |
|
Goodwill | 3,441,780 |
| | 3,491,557 |
|
Intangible assets, net | 1,230,312 |
| | 1,369,520 |
|
Other assets and deferred charges | 167,867 |
| | 168,246 |
|
Assets of discontinued operations | — |
| | 327,171 |
|
Total assets | $ | 8,478,820 |
| | $ | 9,090,385 |
|
| | | |
Current liabilities: | |
| | |
|
Notes payable and current maturities of long-term debt | $ | 461,305 |
| | $ | 777,956 |
|
Accounts payable | 622,807 |
| | 615,332 |
|
Accrued compensation and employee benefits | 215,569 |
| | 272,822 |
|
Accrued insurance | 103,615 |
| | 95,896 |
|
Other accrued expenses | 248,052 |
| | 266,277 |
|
Federal and other taxes on income | 17,351 |
| | 11,071 |
|
Total current liabilities | 1,668,699 |
| | 2,039,354 |
|
Long-term debt | 2,224,943 |
| | 2,253,041 |
|
Deferred income taxes | 569,203 |
| | 564,207 |
|
Other liabilities | 449,671 |
| | 482,340 |
|
Liabilities of discontinued operations | — |
| | 50,718 |
|
Stockholders' equity: | |
| | |
|
Total stockholders' equity | 3,566,304 |
| | 3,700,725 |
|
Total liabilities and stockholders' equity | $ | 8,478,820 |
| | $ | 9,090,385 |
|
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock $1 Par Value | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Earnings (Loss) | | Treasury Stock | | Total Stockholders' Equity |
Balance at December 31, 2014 | $ | 255,893 |
| | $ | 900,833 |
| | $ | 7,074,782 |
| | $ | (158,931 | ) | | $ | (4,371,852 | ) | | $ | 3,700,725 |
|
Net earnings | — |
| | — |
| | 728,004 |
| | — |
| | — |
| | 728,004 |
|
Dividends paid | — |
| | — |
| | (192,744 | ) | | — |
| | — |
| | (192,744 | ) |
Common stock issued for the exercise of share-based awards | 181 |
| | (3,530 | ) | | — |
| | — |
| | — |
| | (3,349 | ) |
Tax benefit from the exercise of share-based awards | — |
| | 521 |
| | — |
| | — |
| | — |
| | 521 |
|
Share-based compensation expense | — |
| | 25,525 |
| | — |
| | — |
| | — |
| | 25,525 |
|
Common stock acquired | — |
| | — |
| | — |
| | — |
| | (600,164 | ) | | (600,164 | ) |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (92,214 | ) | | — |
| | (92,214 | ) |
Balance at September 30, 2015 | $ | 256,074 |
| | $ | 923,349 |
| | $ | 7,610,042 |
| | $ | (251,145 | ) | | $ | (4,972,016 | ) | | $ | 3,566,304 |
|
Preferred Stock: $100 par value per share; 100,000 shares authorized; no shares issued.
See Notes to Condensed Consolidated Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Operating Activities of Continuing Operations | | | |
Net earnings | $ | 728,004 |
| | $ | 605,941 |
|
| | | |
Adjustments to reconcile net earnings to cash from operating activities: | | | |
(Earnings) loss from discontinued operations, net | (268,697 | ) | | 364 |
|
Depreciation and amortization | 235,383 |
| | 225,902 |
|
Share-based compensation | 25,525 |
| | 24,710 |
|
Cash effect of changes in assets and liabilities: | | | |
Accounts receivable | (40,528 | ) | | (209,881 | ) |
Inventories | 22,058 |
| | (107,093 | ) |
Prepaid expenses and other assets | (1,441 | ) | | (15,944 | ) |
Accounts payable | 33,979 |
| | 91,147 |
|
Accrued compensation and employee benefits | (63,487 | ) | | (20,843 | ) |
Accrued expenses and other liabilities | (5,943 | ) | | 7,111 |
|
Accrued and deferred taxes, net | (16,623 | ) | | (71,996 | ) |
Other, net | (15,774 | ) | | (24,032 | ) |
Net cash provided by operating activities of continuing operations | 632,456 |
| | 505,386 |
|
| | | |
Investing Activities of Continuing Operations | |
| | |
|
Additions to property, plant and equipment | (111,279 | ) | | (108,777 | ) |
Acquisitions (net of cash and cash equivalents acquired) | (6,500 | ) | | (365,550 | ) |
Proceeds from the sale of property, plant and equipment | 9,471 |
| | 9,943 |
|
Proceeds from the sale of businesses | 689,314 |
| | 178,112 |
|
Other | — |
| | (21,766 | ) |
Net cash provided by (used in) investing activities of continuing operations | 581,006 |
| | (308,038 | ) |
| | | |
Financing Activities of Continuing Operations | |
| | |
|
Cash received from Knowles Corporation, net of cash distributed | — |
| | 359,837 |
|
Purchase of common stock | (600,164 | ) | | (392,588 | ) |
Proceeds from exercise of share-based awards, including tax benefits | 3,626 |
| | 18,268 |
|
Change in commercial paper and notes payable, net | (316,800 | ) | | (75,980 | ) |
Dividends paid to stockholders | (192,744 | ) | | (192,633 | ) |
Payments to settle employee tax obligations on exercise of share-based awards | (4,808 | ) | | (19,800 | ) |
Reduction of long-term debt | (76 | ) | | (1,613 | ) |
Net cash used in financing activities of continuing operations | (1,110,966 | ) | | (304,509 | ) |
| | | |
Cash Flows from Discontinued Operations | |
| | |
|
Net cash (used in) provided by operating activities of discontinued operations | (91,689 | ) | | 45,766 |
|
Net cash used in investing activities of discontinued operations | (1,984 | ) | | (17,637 | ) |
Net cash (used in) provided by discontinued operations | (93,673 | ) | | 28,129 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents | (27,731 | ) | | (18,616 | ) |
| | | |
Net decrease in cash and cash equivalents | (18,908 | ) | | (97,648 | ) |
Cash and cash equivalents at beginning of period | 681,581 |
| | 803,882 |
|
Cash and cash equivalents at end of period | $ | 662,673 |
| | $ | 706,234 |
|
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission ("SEC") rules for interim periods, do not include all of the information and notes for complete financial statements as required by accounting principles generally accepted in the United States of America. As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Dover Corporation ("Dover" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2014, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business, properties, and other matters. The year-end condensed consolidated balance sheet was derived from audited financial statements. Certain amounts in the prior year have been reclassified to conform to the current year presentation.
As discussed in Note 4 Discontinued Operations, the Company reclassified two businesses within the Engineered Systems segment to discontinued operations in the fourth quarter of 2014 based on its intention at that time to divest these businesses, which were subsequently sold in 2015. Therefore, the Company has classified the results of operations, cash flows, and related assets and liabilities for these businesses as discontinued operations for all periods presented.
It is the opinion of management that these financial statements reflect all adjustments necessary for a fair statement of the interim results. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.
2. 2014 Spin-off of Knowles Corporation ("Knowles")
On February 28, 2014, Dover completed the distribution of Knowles to its stockholders. The transaction was completed through the pro rata distribution of 100% of the common stock of Knowles to Dover's shareholders of record as of the close of business on February 19, 2014. Each Dover shareholder received one share of Knowles 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 distributed to Knowles as part of the separation on February 28, 2014:
|
| | | |
Assets: | |
Cash and cash equivalents | $ | 40,045 |
|
Other current assets | 340,945 |
|
Non-current assets | 1,678,820 |
|
| $ | 2,059,810 |
|
| |
Liabilities: | |
Current liabilities | $ | 252,673 |
|
Non-current liabilities | 383,940 |
|
| $ | 636,613 |
|
| |
Net assets distributed to Knowles Corporation | $ | 1,423,197 |
|
Knowles incurred $100,000 of borrowings under its revolving credit facility and $300,000 of borrowings under its term loan facility to finance a cash payment of $400,000 to Dover immediately prior to the distribution. Dover received total net cash of $359,955
upon separation, of which $359,837 was received during the nine months ended September 30, 2014, which reflects cash held by Knowles on the distribution date and retained by it in connection with its separation from Dover. Dover utilized the net proceeds from Knowles to pay down commercial paper and to repurchase shares of its common stock in 2014.
In addition to the net assets reflected above, the Company also allocated approximately $26,695 of accumulated other comprehensive earnings to Knowles, relating primarily to foreign currency translation gains, offset by unrecognized losses on pension obligations. Also, the Company was required to reallocate a portion of its goodwill from continuing operations to a reporting unit included in the Knowles distribution.
The historical results of Knowles, 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 4 Discontinued Operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
3. Acquisitions
During the nine months ended September 30, 2015, the Company acquired a product line in the Refrigeration & Food Equipment segment for a net cash consideration of $6,500. The Company assigned $2,076 to goodwill, $2,500 to customer intangibles, and $300 to other intangibles. Useful lives for customer and other intangibles were 7 years and 3 years, respectively. The goodwill identified by this acquisition reflects the benefits expected to be derived from product line expansion and operational synergies. Upon consummation of the acquisition, this business is now wholly-owned by Dover.
The Company has substantially completed the purchase price allocation for the 2015 acquisition. However, if additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including through asset appraisals and learning more about the newly acquired business, the Company will refine its estimates of fair value to allocate the purchase price more accurately; any such revisions are not expected to be significant. See Note 7 Goodwill and Other Intangible Assets for purchase price adjustments.
The unaudited condensed consolidated statements of earnings include the results of this business from the date of acquisition.
Pro Forma Information
The following unaudited pro forma information illustrates the impact of both 2015 and 2014 acquisitions on the Company’s revenue and earnings from continuing operations for the three and nine months ended September 30, 2015 and 2014. In 2014, the Company acquired Heidelberg CSAT GmbH, MS Printing Solutions, Timberline Manufacturing Company, WellMark Holdings, Inc., SweatMiser, and Liquip International for total consideration of $366,532, and Accelerated Companies for consideration of $435,722.
The 2015 and 2014 pro forma information assumes that the 2015 and 2014 acquisitions had taken place at the beginning of the prior year. Pro forma earnings are also adjusted to reflect the comparable impact of additional depreciation and amortization expense (net of tax) resulting from the fair value measurement of tangible and intangible assets relating to 2015 and 2014 acquisitions.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue from continuing operations: | | | | | | | |
As reported | $ | 1,787,582 |
| | $ | 2,009,575 |
| | $ | 5,261,711 |
| | $ | 5,774,781 |
|
Pro forma | 1,787,582 |
| | 2,079,626 |
| | 5,262,218 |
| | 6,019,415 |
|
Earnings from continuing operations: | | | | |
As reported | $ | 186,483 |
| | $ | 225,683 |
| | $ | 459,307 |
| | $ | 606,305 |
|
Pro forma (1) | 186,483 |
| | 231,805 |
| | 465,430 |
| | 624,180 |
|
Basic earnings per share from continuing operations: | | | | |
As reported | $ | 1.20 |
| | $ | 1.36 |
| | $ | 2.90 |
| | $ | 3.62 |
|
Pro forma (1) | 1.20 |
| | 1.40 |
| | 2.94 |
| | 3.73 |
|
Diluted earnings per share from continuing operations: | | | | |
As reported | $ | 1.19 |
| | $ | 1.34 |
| | $ | 2.87 |
| | $ | 3.57 |
|
Pro forma (1) | 1.19 |
| | 1.38 |
| | 2.91 |
| | 3.68 |
|
| |
(1) | For pro forma presentation purposes, the 2015 pro forma earnings amount excludes certain one-time adjustments made in 2015 for 2014 acquisitions, since as noted above, the pro forma information assumes that the 2014 acquisitions had taken place at the beginning of 2013. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
4. Discontinued Operations
On March 2, 2015, the Company completed the sale of Datamax O'Neil for total proceeds of $185,000, which resulted in a net gain on sale of $87,781. On April 24, 2015, the Company completed the sale of Sargent Aerospace for total proceeds of $500,000, which resulted in a net gain on sale of $177,769. The Company paid approximately $82,800 of taxes relating to the net gain on sale of these businesses which is reflected in the cash flows of discontinued operations. These businesses were previously included in the results of the Engineered Systems segment and were reclassified to discontinued operations in the fourth quarter of 2014 in connection with their impending sale at that time.
The results of discontinued operations for the nine months ended September 30, 2015 and the three and nine months ended September 30, 2014 reflect the net earnings of these businesses prior to their respective sale dates. The results for the nine months ended September 30, 2014 also include the historical results of Knowles prior to its distribution on February 28, 2014. Costs incurred by Dover to complete the spin-off of Knowles totaled $27,055 for the nine months ended September 30, 2014, which are also reflected in the results of discontinued operations. See also Note 2 2014 Spin-off of Knowles Corporation.
Summarized results of the Company’s discontinued operations are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | $ | — |
| | $ | 83,260 |
| | $ | 72,869 |
| | $ | 490,517 |
|
| | | | | | | |
Gain (loss) on sale, net of tax | (31 | ) | | 512 |
| | 265,550 |
| | (3,661 | ) |
| | | | | | | |
(Loss) earnings from operations before taxes | (100 | ) | | 10,279 |
| | 8,608 |
| | 14,642 |
|
Provision for income taxes | (254 | ) | | (4,630 | ) | | (5,461 | ) | | (11,345 | ) |
(Loss) earnings from operations, net of tax | (354 | ) | | 5,649 |
| | 3,147 |
| | 3,297 |
|
| | | | | | | |
(Loss) earnings from discontinued operations, net of tax | $ | (385 | ) | | $ | 6,161 |
| | $ | 268,697 |
| | $ | (364 | ) |
Assets and liabilities of discontinued operations are summarized below:
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Assets of Discontinued Operations: | | | |
Accounts receivable | $ | — |
| | $ | 46,691 |
|
Inventories, net | — |
| | 58,401 |
|
Prepaid and other current assets | — |
| | 8,571 |
|
Total current assets | — |
| | 113,663 |
|
Property, plant and equipment, net | — |
| | 31,573 |
|
Goodwill and intangible assets, net | — |
| | 181,798 |
|
Other assets and deferred charges | — |
| | 137 |
|
Total assets | $ | — |
| | $ | 327,171 |
|
| | | |
Liabilities of Discontinued Operations: | |
| | |
|
Accounts payable | $ | — |
| | $ | 21,199 |
|
Other current liabilities | — |
| | 17,675 |
|
Total current liabilities | — |
| | 38,874 |
|
Deferred income taxes | — |
| | 8,752 |
|
Other liabilities | — |
| | 3,092 |
|
Total liabilities | $ | — |
| | $ | 50,718 |
|
At December 31, 2014, the assets and liabilities of discontinued operations relate to Sargent Aerospace and Datamax O'Neil, which were sold in 2015. Any remaining assets or liabilities relating to these businesses or other businesses previously sold are reflected in continuing operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
5. Inventories, net
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Raw materials | $ | 342,173 |
| | $ | 352,016 |
|
Work in progress | 147,225 |
| | 147,715 |
|
Finished goods | 433,631 |
| | 483,912 |
|
Subtotal | 923,029 |
| | 983,643 |
|
Less reserves | (112,314 | ) | | (119,906 | ) |
Total | $ | 810,715 |
| | $ | 863,737 |
|
6. Property, Plant and Equipment, net |
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Land | $ | 54,409 |
| | $ | 55,076 |
|
Buildings and improvements | 536,881 |
| | 537,474 |
|
Machinery, equipment and other | 1,741,132 |
| | 1,698,638 |
|
Subtotal | 2,332,422 |
| | 2,291,188 |
|
Less accumulated depreciation | (1,508,390 | ) | | (1,454,119 | ) |
Total | $ | 824,032 |
| | $ | 837,069 |
|
Depreciation expense totaled $38,191 and $37,723 for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, depreciation expense was $116,807 and $112,548, respectively.
7. Goodwill and Other Intangible Assets
The following table provides the changes in carrying value of goodwill by segment for the nine months ended September 30, 2015:
|
| | | | | | | | | | | | | | | | | | | |
| Energy | | Engineered Systems | | Fluids | | Refrigeration & Food Equipment | | Total |
Balance at December 31, 2014 | $ | 1,048,735 |
| | $ | 1,270,178 |
| | $ | 609,663 |
| | $ | 562,981 |
| | $ | 3,491,557 |
|
Acquisitions | — |
| | — |
| | — |
| | 2,076 |
| | 2,076 |
|
Purchase price adjustments | 8,604 |
| | — |
| | — |
| | — |
| | 8,604 |
|
Disposition of business (1) | — |
| | (19,128 | ) | | — |
| | — |
| | (19,128 | ) |
Foreign currency translation | (8,923 | ) | | (12,586 | ) | | (17,426 | ) | | (2,394 | ) | | (41,329 | ) |
Balance at September 30, 2015 | $ | 1,048,416 |
| | $ | 1,238,464 |
| | $ | 592,237 |
| | $ | 562,663 |
| | $ | 3,441,780 |
|
| |
(1) | Amount reflects additional goodwill allocated to Sargent Aerospace upon its disposition, based on the fair value of this business relative to the remaining entities within the Engineered Systems segment. |
During the nine months ended September 30, 2015, the Company recorded adjustments totaling $8,604 to goodwill relating to the finalization of the purchase price allocation to assets acquired and liabilities assumed for the 2014 acquisition of Accelerated Companies.
Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other Intangibles" provides guidance on an entity's subsequent measurement and recognition of goodwill and other intangibles, including required impairment testing. Dover performs its annual impairment testing in the fourth quarter; however, it is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company has considered the economic environments in which its businesses operate, particularly the Energy segment due to the weakening of the oil and gas markets. The Company has determined that no triggering event has occurred which would require impairment testing at this time.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
|
| | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | |
Trademarks | $ | 137,004 |
| | $ | 42,487 |
| | $ | 138,650 |
| | $ | 34,097 |
|
Patents | 147,867 |
| | 113,173 |
| | 150,404 |
| | 108,484 |
|
Customer Intangibles | 1,408,808 |
| | 567,273 |
| | 1,429,906 |
| | 484,449 |
|
Unpatented Technologies | 91,167 |
| | 53,394 |
| | 92,480 |
| | 45,812 |
|
Drawings & Manuals | 34,736 |
| | 15,163 |
| | 36,377 |
| | 13,087 |
|
Distributor Relationships | 64,614 |
| | 36,802 |
| | 64,614 |
| | 34,377 |
|
Other | 24,087 |
| | 15,335 |
| | 24,214 |
| | 12,737 |
|
Total | 1,908,283 |
| | 843,627 |
| | 1,936,645 |
| | 733,043 |
|
Unamortized intangible assets: | | | | | | | |
Trademarks | 165,656 |
| | | | 165,918 |
| | |
Total intangible assets, net | $ | 1,230,312 |
| | | | $ | 1,369,520 |
| | |
Amortization expense totaled $38,983 and $36,758 for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, amortization expense was $118,576 and $113,354, respectively.
8. Restructuring Activities
The following table details restructuring charges incurred by segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Energy | $ | 6,183 |
| | $ | 213 |
| | $ | 26,561 |
| | $ | 1,703 |
|
Engineered Systems | 3,694 |
| | 172 |
| | 8,796 |
| | 3,193 |
|
Fluids | 1,382 |
| | 456 |
| | 3,537 |
| | 994 |
|
Refrigeration & Food Equipment | 91 |
| | — |
| | (434 | ) | | 10 |
|
Corporate | 169 |
| | 603 |
| | 280 |
| | 1,760 |
|
Total | $ | 11,519 |
| | $ | 1,444 |
| | $ | 38,740 |
| | $ | 7,660 |
|
| | | | | | | |
These amounts are classified in the unaudited Condensed Consolidated Statements of Earnings as follows: |
| | | | | | | |
Cost of goods and services | $ | 3,943 |
| | $ | 93 |
| | $ | 13,871 |
| | $ | 1,825 |
|
Selling and administrative expenses | 7,576 |
| | 1,351 |
| | 24,869 |
| | 5,835 |
|
Total | $ | 11,519 |
| | $ | 1,444 |
| | $ | 38,740 |
| | $ | 7,660 |
|
The restructuring expenses of $11,519 and $38,740 incurred in the three and nine months ended September 30, 2015 related to restructuring programs initiated during 2015 and 2014. These programs are designed to better align the Company's costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures to further optimize operations. The Company expects the programs currently underway to be substantially completed in the next twelve to eighteen months.
The $11,519 of restructuring charges incurred during the third quarter of 2015 primarily included the following items:
| |
• | The Energy segment incurred restructuring charges of $6,183 related to various programs across the segment focused on workforce reductions and field and service consolidations. These programs were initiated to better align cost base with the anticipated demand environment. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
| |
• | The Engineered Systems segment recorded $3,694 of restructuring charges relating to headcount reductions across various businesses primarily related to optimization of administrative functions within the Printing & Identification platform and U.S. manufacturing consolidation within the Industrial platform. |
| |
• | The remaining segments and corporate incurred restructuring charges primarily related to headcount reductions. |
The following table details the Company’s severance and other restructuring accrual activity:
|
| | | | | | | | | | | |
| Severance | | Exit | | Total |
Balance at December 31, 2014 | $ | 15,358 |
| | $ | 6,663 |
| | $ | 22,021 |
|
Restructuring charges | 22,174 |
| | 16,566 |
| | 38,740 |
|
Payments | (27,975 | ) | | (8,927 | ) | | (36,902 | ) |
Foreign currency translation | (516 | ) | | (345 | ) | | (861 | ) |
Other, including write-offs of fixed assets | 2,210 |
| | (9,470 | ) | | (7,260 | ) |
Balance at September 30, 2015 | $ | 11,251 |
| | $ | 4,487 |
| | $ | 15,738 |
|
The accrual balance at September 30, 2015 primarily reflects restructuring plans initiated during the year, as well as ongoing lease commitment obligations for facilities closed in earlier periods.
9. Borrowings
Borrowings consist of the following:
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Short-term | | | |
Current portion of long-term debt | $ | 300,105 |
| | $ | 299,956 |
|
Commercial paper | 161,200 |
| | 478,000 |
|
| $ | 461,305 |
| | $ | 777,956 |
|
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Long-term | | | |
4.875% 10-year notes due October 15, 2015 | $ | 299,984 |
| | $ | 299,836 |
|
5.45% 10-year notes due March 15, 2018 | 349,175 |
| | 348,928 |
|
2.125% 7-year notes due December 1, 2020 (Euro-denominated) | 335,355 |
| | 363,970 |
|
4.30% 10-year notes due March 1, 2021 | 449,859 |
| | 449,839 |
|
6.65% 30-year debentures due June 1, 2028 | 199,543 |
| | 199,517 |
|
5.375% 30-year debentures due October 15, 2035 | 296,804 |
| | 296,685 |
|
6.60% 30-year notes due March 15, 2038 | 248,014 |
| | 247,948 |
|
5.375% 30-year notes due March 1, 2041 | 345,949 |
| | 345,830 |
|
Other | 365 |
| | 444 |
|
Total long-term debt | 2,525,048 |
| | 2,552,997 |
|
Less current installments | (300,105 | ) | | (299,956 | ) |
| $ | 2,224,943 |
| | $ | 2,253,041 |
|
The Company maintains a $1.0 billion unsecured revolving credit facility that expires on November 10, 2016. The Company primarily uses this facility as liquidity back-up for its commercial paper program and has not drawn down any loans under the $1.0 billion 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. Under the credit facility, the Company is required to maintain an interest coverage ratio of EBITDA to consolidated net interest expense of not less than 3.0 to 1. The Company was in compliance with this covenant and its other long-term debt covenants at September 30, 2015, and it expects to remain in compliance with all of its debt covenants.
On October 15, 2015, the Company utilized commercial paper to repay the outstanding principal balance of $300.0 million on its then due 4.875% 10-year notes. The Company intends to issue new notes in the fourth quarter of 2015.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Interest expense and interest income for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Interest expense | $ | 33,098 |
| | $ | 32,501 |
| | $ | 99,156 |
| | $ | 99,125 |
|
Interest income | (1,115 | ) | | (1,270 | ) | | (3,148 | ) | | (3,278 | ) |
Interest expense, net | $ | 31,983 |
| | $ | 31,231 |
| | $ | 96,008 |
| | $ | 95,847 |
|
Letters of Credit
As of September 30, 2015, the Company had approximately $114,559 outstanding in letters of credit and guarantees with financial institutions, which expire at various dates in the last quarter of 2015 through 2020. These letters of credit are primarily maintained as security for insurance, warranty, and other performance obligations.
10. 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 or collar contracts designated as cash flow hedges. At September 30, 2015 and December 31, 2014, the Company had contracts with U.S. dollar equivalent notional amounts of $33,026 and $47,047, respectively, to exchange foreign currencies, principally the U.S. dollar, Chinese Yuan, Euro, and pound sterling. 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 $79,858 and $52,392 at September 30, 2015 and December 31, 2014, 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.
The Company also had an outstanding floating-to-floating cross currency swap agreement for a total notional amount of $50,000 in exchange for Swiss francs CHF 65,100, which matured on October 15, 2015. This transaction hedged a portion of the Company’s net investment in CHF-denominated operations. The agreement qualified as a net investment hedge and the effective portion of the change in fair value is reported within the cumulative translation adjustment section of other comprehensive income. These cumulative losses will remain in other comprehensive income until the Company liquidates its Swiss-franc-denominated operations.
The fair values at September 30, 2015 and December 31, 2014 reflected losses of $16,285 and $15,567, respectively, due to the strengthening of the Swiss franc relative to the U.S. dollar over the term of the arrangement. The Company settled this hedge by payment of cash at fair value upon maturity on October 15, 2015.
The following table sets forth the fair values of derivative instruments held by the Company as of September 30, 2015 and December 31, 2014 and the balance sheet lines in which they are recorded:
|
| | | | | | | | | |
| Fair Value Asset (Liability) | | |
| September 30, 2015 | | December 31, 2014 | | Balance Sheet Caption |
Foreign currency forward / collar contracts | $ | 1,182 |
| | $ | 973 |
| | Prepaid / Other assets |
Foreign currency forward / collar contracts | (505 | ) | | (810 | ) | | Other accrued expenses |
Net investment hedge - cross currency swap | (16,285 | ) | | (15,567 | ) | | Accrued expenses |
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Additionally, the Company has designated the €300.0 million of Euro-denominated notes issued December 4, 2013 as a hedge of a portion of its net investment in Euro-denominated operations. Due to the high degree of effectiveness between the hedging instruments and the exposure being hedged, fluctuations in the value of the Euro-denominated debt due to exchange rate changes are offset by changes in the net investment. Accordingly, changes in the value of the Euro-denominated debt are recognized in the cumulative translation adjustment section of other comprehensive income to offset changes in the value of the net investment in Euro-denominated operations.
Amounts recognized in other comprehensive earnings (loss) for the gains (losses) on its net investment hedges were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Gain on Euro-denominated debt | $ | 300 |
| | $ | 26,357 |
| | $ | 28,675 |
| | $ | 29,722 |
|
Gain (loss) on Swiss franc cross-currency swap | 3,331 |
| | 5,489 |
| | (718 | ) | | 5,466 |
|
Total gain on net investment hedges before tax | 3,631 |
| | 31,846 |
| | 27,957 |
| | 35,188 |
|
Tax expense | (1,271 | ) | | (11,146 | ) | | (9,785 | ) | | (12,316 | ) |
Net gain on net investment hedges, net of tax | $ | 2,360 |
| | $ | 20,700 |
| | $ | 18,172 |
| | $ | 22,872 |
|
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 September 30, 2015 and December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | |
Foreign currency cash flow hedges | $ | — |
| | $ | 1,182 |
| | $ | — |
| | $ | — |
| | $ | 973 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | |
Foreign currency cash flow hedges | — |
| | 505 |
| | — |
| | — |
| | 810 |
| | — |
|
Net investment hedge derivative | — |
| | 16,285 |
| | — |
| | — |
| | 15,567 |
| | — |
|
In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.
The estimated fair value of long-term debt at September 30, 2015 and December 31, 2014 was $2,875,049 and $3,002,701, respectively, compared to the carrying value of $2,525,048 and $2,552,997, respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy.
The carrying values of cash and cash equivalents, trade receivables, accounts payable, and notes payable are reasonable estimates of their fair values as of September 30, 2015 and December 31, 2014 due to the short-term nature of these instruments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
11. Income Taxes
The effective tax rates for continuing operations for the three months ended September 30, 2015 and 2014 were 24.0% and 29.0%, respectively. Reflected in the effective tax rate for the three months ended September 30, 2015 and 2014 are favorable discrete items of $8,131 and $5,524, respectively. Excluding these discrete items, the effective tax rates for the three months ended September 30, 2015 and 2014 were 27.3% and 30.8%, respectively. The 2015 discrete items principally resulted from the conclusion of certain state tax audits and an adjustment of our tax accounts to the return filed. The 2014 discrete items were primarily the result of the release of a valuation allowance on net operating losses outside the U.S. The reduction in the effective tax rate year over year is principally due to a change in the geographic mix of earnings as well as restructuring of foreign operations.
The effective tax rates for continuing operations for the nine months ended September 30, 2015 and 2014 were 27.2% and 29.8%, respectively. Reflected in the effective tax rate for the nine months ended September 30, 2015 and 2014 are favorable discrete items of $8,131 and $7,429, respectively, resulting from the same items as noted above. Excluding these discrete items, the effective tax rate for the nine months ended September 30, 2015 and 2014 was 28.5% and 30.6%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2015 relative to the prior year is due to the same factors discussed above.
Additionally, in the second quarter of 2015, the Company generated a $325,000 gain for tax purposes on the sale of Sargent Aerospace. The tax liability resulting from the sale was $108,000 which reflects utilization of the $8,600 tax benefit generated in the first quarter by the sale of Datamax O'Neil. This gain and related tax provision are reflected within discontinued operations. See Note 4 Discontinued Operations for further discussion.
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 $18,200. A portion of these unrecognized tax benefits relate to companies reported as discontinued operations.
12. Equity Incentive Program
The Company typically grants equity awards annually at its regularly scheduled first quarter Compensation Committee meeting. In the first quarter of 2015, the Company issued stock-settled appreciation rights ("SARs") covering 1,144,529 shares, performance share awards of 61,611 and restricted stock units of 145,545.
The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.
The assumptions used in determining the fair value of the SARs awarded during the respective periods are as follows:
|
| | | | | | | |
| SARs |
| 2015 | | 2014 |
Risk-free interest rate | 1.51 | % | | 1.70 | % |
Dividend yield | 2.24 | % | | 1.98 | % |
Expected life (years) | 5.1 |
| | 5.3 |
|
Volatility | 27.19 | % | | 30.81 | % |
| | | |
Grant price | $ | 73.28 |
| | $ | 82.51 |
|
Fair value per share at date of grant | $ | 14.55 |
| | $ | 19.84 |
|
The performance share awards granted in 2014 and 2015 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
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 compensation cost in the period of change.
The fair value and average attainment used in determining compensation cost for the performance shares issued in 2014 and 2015 is as follows for the nine months ended September 30, 2015:
|
| | | | | | | |
| Performance shares |
| 2015 | | 2014 |
Fair value per share at date of grant | $ | 73.28 |
| | $ | 82.51 |
|
Average attainment rate reflected in expense | 31.78 | % | | 50.16 | % |
Stock-based compensation is reported within selling and administrative expenses in the accompanying unaudited Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Pre-tax compensation expense | $ | 6,674 |
| | $ | 8,297 |
| | $ | 25,525 |
| | $ | 24,710 |
|
Tax benefit | (2,368 | ) | | (2,914 | ) | | (9,049 | ) | | (8,749 | ) |
Total stock-based compensation expense, net of tax | $ | 4,306 |
| | $ | 5,383 |
| | $ | 16,476 |
| | $ | 15,961 |
|
13. Commitments and Contingent Liabilities
Litigation
A few of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under federal and state statutes that provide for the allocation of such costs among "potentially responsible parties." In each instance, the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other "potentially responsible parties" involved and is anticipated to be immaterial to the Company. In addition, a few of the Company’s subsidiaries are involved in ongoing remedial activities at certain current and former plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established. At September 30, 2015 and December 31, 2014, the Company has reserves totaling $30,725 and $32,890, 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 September 30, 2015 and December 31, 2014, these reserves are 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Warranty Accruals
Estimated warranty program claims are provided for at the time of sale. Amounts provided for are based on historical costs and adjusted new claims. The changes in the carrying amount of product warranties through September 30, 2015 and 2014 are as follows:
|
| | | | | | | |
| 2015 | | 2014 |
Beginning Balance, January 1 | $ | 49,388 |
| | $ | 42,924 |
|
Provision for warranties | 36,821 |
| | 42,242 |
|
Settlements made | (41,842 | ) | | (41,717 | ) |
Other adjustments, including acquisitions and currency translation | (1,245 | ) | | 2,780 |
|
Ending balance, September 30 | $ | 43,122 |
| | $ | 46,229 |
|
14. Employee Benefit Plans
Retirement Plans
The Company offers defined contribution retirement plans which cover the majority of its U.S. employees, as well as employees in certain other countries. In addition, the Company sponsors qualified defined benefit pension plans covering certain employees of the Company and its subsidiaries. The plans’ benefits are generally based on years of service and employee compensation. The Company also provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law.
The following tables set forth the components of the Company’s net periodic expense relating to retirement benefit plans:
Qualified Defined Benefits
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| U.S. Plan | | Non-U.S. Plans | | U.S. Plan | | Non-U.S. Plans |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Service Cost | $ | 3,915 |
| | $ | 3,722 |
| | $ | 1,655 |
| | $ | 1,282 |
| | $ | 11,746 |
| | $ | 11,164 |
| | $ | 5,006 |
| | $ | 4,327 |
|
Interest Cost | 5,790 |
| | 6,314 |
| | 1,482 |
| | 1,710 |
| | 17,372 |
| | 18,943 |
| | 4,444 |
| | 5,716 |
|
Expected return on plan assets | (10,392 | ) | | (10,398 | ) | | (2,012 | ) | | (1,771 | ) | | (31,178 | ) | | (31,195 | ) | | (6,042 | ) | | (5,882 | ) |
Amortization: | | | | | | | | | | | | | | | |
Prior service cost | 225 |
| | 271 |
| | 22 |
| | 22 |
| | 673 |
| | 812 |
| | 67 |
| | 76 |
|
Recognized actuarial loss | 3,155 |
| | 2,073 |
| | 665 |
| | 183 |
| | 9,465 |
| | 6,217 |
| | 2,001 |
| | 626 |
|
Transition obligation | — |
| | — |
| | (15 | ) | | 1 |
| | — |
| | — |
| | 3 |
| | 3 |
|
Curtailments, special termination benefits, and settlements (1) | — |
| | — |
| | 2 |
| | 2 |
| | 810 |
| | — |
| | 5 |
| | 5 |
|
Net periodic expense | $ | 2,693 |
| | $ | 1,982 |
| | $ | 1,799 |
| | $ | 1,429 |
| | $ | 8,888 |
| | $ | 5,941 |
| | $ | 5,484 |
| | $ | 4,871 |
|
| |
(1) | One-time charges of $810 reflected in pension expense for the nine months ended September 30, 2015 represents curtailments, special termination benefits, and settlements for certain businesses classified as held for sale; therefore, this amount has been reflected in the results of discontinued operations. |
The net periodic expense reflected above for non-U.S. plans for the nine months ended September 30, 2014 excludes certain non-U.S. plans sponsored by Knowles that were distributed as part of the separation on February 28, 2014. The historical expense relating to these plans was not significant for the nine months ended September 30, 2014. The expense relating to these plans is reflected in earnings from discontinued operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Non-Qualified Supplemental Benefits
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Service Cost | $ | 934 |
| | $ | 830 |
| | $ | 2,804 |
| | $ | 2,490 |
|
Interest Cost | 1,266 |
| | 1,537 |
| | 3,797 |
| | 4,611 |
|
Amortization: | | | | | | | |
Prior service cost | 1,731 |
| | 1,944 |
| | 5,195 |
| | 5,831 |
|
Recognized actuarial loss (gain) | 71 |
| | (107 | ) | | 214 |
| | (320 | ) |
Net periodic expense | $ | 4,002 |
| | $ | 4,204 |
| | $ | 12,010 |
| | $ | 12,612 |
|
Post-Retirement Plans
The Company also maintains post retirement benefit plans, although these plans are effectively 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 September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Service Cost | $ | 41 |
| | $ | 63 |
| | $ | 122 |
| | $ | 187 |
|
Interest Cost | 128 |
| | 156 |
| | 384 |
| | 470 |
|
Amortization: | | | | | | | |
Prior service cost | (93 | ) | | (103 | ) | | (279 | ) | | (307 | ) |
Recognized actuarial (gain) loss | (8 | ) | | 14 |
| | (23 | ) | | 40 |
|
Net periodic expense | $ | 68 |
| | $ | 130 |
| | $ | 204 |
| | $ | 390 |
|
The total amount amortized out of accumulated other comprehensive income into net periodic benefit expense totaled $5,753 and $4,298 for the three months ended September 30, 2015 and 2014, respectively, and $17,316 and $12,978 for the nine months months ended September 30, 2015 and 2014, respectively. The amortization included in other comprehensive income for the nine months ended September 30, 2014 includes insignificant amounts related to plans sponsored by Knowles that were transfered as part of the separation in 2014.
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 $7,601, and $8,295 for the three months ended September 30, 2015 and 2014, respectively, and $24,612 and $25,537 for the nine months ended September 30, 2015 and 2014.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
15. Other Comprehensive (Loss) Earnings
The amounts recognized in other comprehensive loss were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2015 | | September 30, 2014 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments (1) | $ | (55,942 | ) | | $ | (1,271 | ) | | $ | (57,213 | ) | | $ | (67,629 | ) | | $ | (11,146 | ) | | $ | (78,775 | ) |
Pension and other postretirement benefit plans | 5,753 |
| | (1,951 | ) | | 3,802 |
| | 4,298 |
| | (1,495 | ) | | 2,803 |
|
Changes in fair value of cash flow hedges | (760 | ) | | 267 |
| | (493 | ) | | (457 | ) | | 160 |
| | (297 | ) |
Other | 445 |
| | (52 | ) | | 393 |
| | 941 |
| | (14 | ) | | 927 |
|
Total other comprehensive loss | $ | (50,504 | ) | | $ | (3,007 | ) | | $ | (53,511 | ) | | $ | (62,847 | ) | | $ | (12,495 | ) | | $ | (75,342 | ) |
| |
(1) | Foreign currency translation adjustments for the three months ended September 30, 2015 and 2014 include pre-tax gains of $3,631 and $31,846 on the Company's net investment hedges, respectively, which resulted in a tax expense of $1,271 and $11,146 reflected in other comprehensive income. See also Note 10 Financial Instruments. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2015 | | September 30, 2014 |
| Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation adjustments (2) | $ | (95,087 | ) | | $ | (9,785 | ) | | $ | (104,872 | ) | | $ | (72,861 | ) | | $ | (12,316 | ) | | $ | (85,177 | ) |
Pension and other postretirement benefit plans | 17,316 |
| | (5,871 | ) | | 11,445 |
| | 12,978 |
| | (4,506 | ) | | 8,472 |
|
Changes in fair value of cash flow hedges | 505 |
| | (176 | ) | | 329 |
| | (1,355 | ) | | 474 |
| | (881 | ) |
Other | 1,003 |
| | (119 | ) | | 884 |
| | 1,708 |
| | (162 | ) | | 1,546 |
|
Total other comprehensive loss | $ | (76,263 | ) | | $ | (15,951 | ) | | $ | (92,214 | ) | | $ | (59,530 | ) | | $ | (16,510 | ) | | $ | (76,040 | ) |
| |
(2) | Foreign currency translation adjustments for the nine months ended September 30, 2015 and 2014 include pre-tax gains on the Company's net investment hedges of $27,957 and $35,188 which resulted in tax expense of $9,785 and $12,316 reflected in other comprehensive income for these respective periods. See also Note 10 Financial Instruments. |
Total comprehensive earnings were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net earnings | $ | 186,098 |
| | $ | 231,844 |
| | $ | 728,004 |
| | $ | 605,941 |
|
Other comprehensive loss | (53,511 | ) | | (75,342 | ) | | (92,214 | ) | | (76,040 | ) |
Comprehensive earnings | $ | 132,587 |
| | $ | 156,502 |
| | $ | 635,790 |
| | $ | 529,901 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
Amounts reclassified from accumulated other comprehensive earnings (loss) to earnings (loss) during the three and nine months ended September 30, 2015 and 2014 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 |
| 2014 |
Pension and postretirement benefit plans: | | | | | | | |
Amortization of actuarial losses | $ | 3,868 |
| | $ | 2,164 |
| | $ | 11,660 |
| | $ | 6,566 |
|
Amortization of prior service costs | 1,885 |
| | 2,134 |
| | 5,656 |
| | 6,412 |
|
Total before tax | 5,753 |
| | 4,298 |
| | 17,316 |
| | 12,978 |
|
Tax provision | (1,951 | ) | | (1,495 | ) | | (5,871 | ) | | (4,506 | ) |
Net of tax | $ | 3,802 |
| | $ | 2,803 |
| | $ | 11,445 |
| | $ | 8,472 |
|
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net (gains) losses reclassified into earnings | $ | (1,042 | ) | | $ | 261 |
| | $ | (318 | ) | | $ | (30 | ) |
Tax benefit (provision) | 364 |
| | (92 | ) | | 111 |
| | 10 |
|
Net of tax | $ | (678 | ) | | $ | 169 |
| | $ | (207 | ) | | $ | (20 | ) |
The Company recognizes net periodic pension cost, which includes amortization of net actuarial losses and prior service costs, in both selling and administrative expenses and cost of goods and services, depending on the functional area of the underlying employees included in the plans.
Cash flow hedges consist mainly of foreign currency forward contracts. The Company recognizes the realized gains and losses on its cash flow hedges in the same line item as the hedged transaction, such as revenue, cost of goods and services, or selling & administrative expenses.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
16. Segment Information
For management reporting and performance evaluation purposes, the Company categorizes its operating companies into four distinct reportable segments. Segment financial information and a reconciliation of segment results to consolidated results is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue: | | | | | | | |
Energy | $ | 363,872 |
| | $ | 507,334 |
| | $ | 1,160,339 |
| | $ | 1,467,123 |
|
Engineered Systems | 579,396 |
| | 612,301 |
| | 1,745,683 |
| | 1,793,796 |
|
Fluids | 352,018 |
| | 361,797 |
| | 1,043,765 |
| | 1,053,081 |
|
Refrigeration & Food Equipment | 492,460 |
| | 528,807 |
| | 1,312,672 |
| | 1,462,657 |
|
|