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DOV > SEC Filings for DOV > Form 10-K on 14-Feb-2014All Recent SEC Filings

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Form 10-K for DOVER CORP


14-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition for the three years ended December 31, 2013. The MD&A should be read in conjunction with our Consolidated Financial Statements and Notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Form 10-K, particularly in Item 1A. "Risk Factors" and in the "Special Note Regarding Forward-Looking Statements" preceding Part I of this Form 10-K.

OVERVIEW AND OUTLOOK

Dover is a diversified global manufacturer focusing on innovative equipment and components, specialty systems, and support services provided through its four major operating segments: Energy, Engineered Systems, Printing & Identification, and Communication Technologies. The Company's entrepreneurial business model encourages, promotes, and fosters deep customer engagement, which has led to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation. Unless the context indicates otherwise, references herein to "Dover," "the Company," and words such as "we," "us," and "our" include Dover Corporation and its subsidiaries.

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

We delivered solid growth during 2013, as our consolidated revenue increased 7.7%, representing organic growth of 2.9% and acquisition-related growth of 4.8%. The impact from foreign currency translation was negligible. Gross profit increased $232.7 million, or 7.5%, to $3.3 billion. We saw momentum in the second half of the year, as broad-based order and shipment activity was particularly strong at our businesses serving the refrigeration and food equipment, fast moving consumer goods, fluids, drilling and downstream energy markets. In the consumer electronics market, revenue growth was due to increased microelectronic mechanical ("MEMs") microphone volumes resulting from new OEM product introductions and overall smartphone market growth. This growth was offset in part by the continued market decline of two OEM customers, principally affecting our speaker and receiver volumes. Overall, productivity initiatives and the leveraging of higher volumes, more than offset normal pricing concessions. For further discussion related to our consolidated and segment results, see "Consolidated Results of Operations" and "Segment Results of Operations", respectively, within Management's Discussion and Analysis of Financial Condition and Results of Operations.

Bookings increased 8.2% over the prior year to $8.7 billion, representing growth across all segments, with strong growth of 12.7% in Engineered Systems, and increases of 5.9% in Communications Technologies, 5.5% in Energy and 2.4% in Printing & Identification. Overall, the book-to-bill of 1.00 slightly improved over the prior year. Backlog increased 4.6% to $1.6 billion.

From a geographic perspective for the year, our North American markets were solid. Our European markets continued to show improvement throughout the year with incremental growth, driven by our short cycle business activity, complemented by project shipments. China and the rest of the world markets were strong.

On May 23, 2013, Dover announced its Board of Directors approved a preliminary plan to spin-off certain of its communication technologies businesses into a stand-alone, publicly-traded company known as Knowles Corporation ("Knowles"). On February 6, 2014, Dover announced that its Board of Directors approved the separation of Knowles from Dover through the pro rata distribution by Dover of 100% of the common stock of Knowles to Dover's stockholders on February 28, 2014. In addition, on February 10, 2014, the U.S. Securities and Exchange Commission declared Knowles' Registration Statement on Form 10 effective. As a result, the following is expected to occur: (1) the distribution of Knowles' shares would be made on February 28, 2014 to Dover stockholders of record as of the close of business on February 19, 2014, the record date for the distribution, (2) on the distribution date, Dover stockholders will receive one share of Knowles common stock for every two shares of Dover


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common stock held as of the record date, and (3) following the distribution, Knowles will be an independent, publicly traded company on the New York Stock Exchange (utilizing ticker symbol "KN") and Dover will retain no ownership interest in Knowles. The distribution has been structured to be tax-free to Dover and its shareholders for U.S. federal income tax purposes. The results of operations, financial condition and cash flows for the businesses to be transferred to Knowles and included in the spin-off are, and will continue to be, presented within Dover's consolidated financial statements as continuing operations within the Communication Technologies segment until the spin-off is complete (which is expected to occur on February 28, 2014), upon which the financial presentation of these businesses will be included within Dover's discontinued operations. One-time costs associated with the transaction are expected to be in the range of $60.0 to $70.0 million, of which $30.1 million has been incurred by Dover through December 31, 2013. Following the spin-off of Knowles, Dover expects to align its segment structure to ensure it is properly organized to execute its future growth plans.

As previously disclosed, in the fourth quarter of 2012 in connection with our periodic review for our businesses' strategic fit within Dover, we announced our intention to divest DEK International and Everett Charles Technologies (including the Multitest business, collectively "ECT") within the Printing & Identification segment. These businesses were reclassified to discontinued operations, and in 2013, we recorded a pre-tax goodwill impairment charge of $54.5 million, as well as a $25.5 million tax benefit in the discontinued operations deferred income tax provision for 2013. The Company completed the sale of ECT in the fourth quarter of 2013 for total proceeds of $92.7 million, which resulted in an after-tax loss on sale of $2.8 million. In 2013, the Company signed a definitive agreement to sell DEK. Based on the anticipated proceeds from this sale, the Company recognized an impairment loss of $14.0 million in the fourth quarter of 2013. Management intends to complete the sale of DEK in the first half of 2014.

Other actions that we undertook in order to strengthen our position in 2014 and beyond included raising 300.0 million in the Euro debt market in 2013. Some of the proceeds were used to repay commercial paper of approximately $381.0 million in the fourth quarter of 2013. In addition, we expanded our competitive position with ten business acquisitions during the year for net cash consideration of approximately $323.0 million, notably in the fluids and downstream energy spaces. Dover expects additional acquisitions to be closed in the first quarter of 2014.

Under our November 2012 $1.0 billion share repurchase program, we repurchased 6.0 million shares during the year for a total of $457.3 million. There is $292.6 million remaining under this program, and we expect to complete the balance of this program in the first quarter of 2014. In addition, we continued our history of increasing our annual dividend payments to shareholders by paying $247.8 million in dividends in 2013.

Regarding our business activity, near term we expect:

continued positive performance in Energy driven by expanding international activity, and the ongoing improvement in drilling;

strong results in our Fluids markets from the benefits of our recent acquisitions and positive markets;

solid results in our refrigeration and food equipment markets; and

normal seasonality in our fast moving consumer goods markets.

If global or domestic economic conditions accelerate or deteriorate, our operating results for 2014 could be materially different than currently projected.


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CONSOLIDATED RESULTS OF OPERATIONS

As discussed in Note 4. Disposed and Discontinued Operations to the Consolidated Financial Statements in Item 8 of this Form 10-K, in the fourth quarter of 2012, we reclassified certain businesses in the Printing & Identification segment to discontinued operations based on our decision to divest these businesses. The results of operations of these businesses have been removed from the results of continuing operations and are presented within results of discontinued operations for all periods presented.

                                           Years Ended December 31,                      % / Point Change
(dollars in thousands, except
per share figures)                   2013            2012            2011         2013 vs. 2012     2012 vs. 2011
Revenue                          $ 8,729,813     $ 8,104,339     $ 7,369,154           7.7  %           10.0  %
Cost of goods and services         5,390,032       4,997,274       4,524,351           7.9  %           10.5  %
Gross profit                       3,339,781       3,107,065       2,844,803           7.5  %            9.2  %
Gross profit margin                     38.3 %          38.3 %          38.6 %           -              (0.3 )

Selling and administrative
expenses                           1,985,849       1,841,688       1,720,954           7.8  %            7.0  %
Selling and administrative as
a percent of revenue                    22.7 %          22.7 %          23.4 %           -              (0.7 )

Interest expense, net                120,742         121,141         115,525          (0.3 )%            4.9  %
Other expense (income), net           (4,222 )         6,665          (1,938 )          nm                nm

Provision for income taxes           271,607         304,452         237,076         (10.8 )%           28.4  %
Effective tax rate                      21.9 %          26.8 %          23.5 %        (4.9 )             3.3

Earnings from continuing
operations                           965,805         833,119         773,186          15.9  %            7.8  %

Earnings (loss) from
discontinued operations, net          37,324         (22,049 )       122,057            nm                nm

Earnings from continuing
operations per common share -
diluted                          $      5.57     $      4.53     $      4.09          23.0  %           10.8  %


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Revenue

Our 2013 consolidated revenue increased $625.5 million, or 7.7% to $8.7 billion, reflecting organic growth of 2.9% and growth from acquisitions of 4.8%. The impact from foreign currency translation was negligible. Increased volume in 2013 across all segments drove a revenue increase of 3.0% as compared to 2012. We saw momentum in the second half of the year, as broad-based order and shipment activity was particularly strong at our businesses serving the refrigeration and food equipment, fast moving consumer goods, fluids, drilling and downstream energy markets. In the consumer electronics market, revenue growth was due to increased microelectronic mechanical ("MEMs") microphone volumes resulting from new OEM product introductions and overall smartphone market growth. This growth was offset in part by the continued market decline of two OEM customers, principally affecting our speaker and receiver volumes. Overall, productivity initiatives and the leveraging of higher volumes, more than offset normal pricing concessions.

The majority of the 4.8% acquisition-related revenue growth in 2013 as compared to the prior year was generated from acquisitions made in the second half of 2012 and the first half of 2013 within our Engineered Systems and Energy segments, including Anthony International, Power Soak, Ebsray Pumps, The Curotto-Can, Inc. and UPCO, Inc. These acquisitions accounted for approximately 80.0% of acquisition-related revenue growth as compared to the prior year.

Our 2012 consolidated revenue increased 10.0% to $8.1 billion compared with 2011, reflecting organic growth of 5.5%, growth from acquisitions of 5.8% and an unfavorable impact from currency translation of 1.3%. All four of our segments generated 2013 organic revenue growth, with the majority attributed to volume increases driven by strength in the energy, handset, refrigeration and food equipment, and many of the other industrial markets served by our Engineered Systems segment. Approximately 3.0% of our growth was generated by new products, particularly in our Communication Technologies segment, and geographic market expansion in our Energy segment. Pricing had a negligible impact to 2012 revenue, as price increases implemented to offset higher commodity costs, were partly offset by lower strategic pricing initiatives. Revenues generated outside of the U.S. increased by 9.0% compared with 2011, with growth in Canada and Asia offsetting weakness in Europe.

Over 80.0% of the 2012 revenue growth from acquisitions was generated by Sound Solutions, Maag Pump Systems, and Production Control Services, three of our more significant recent acquisitions made in the second half of 2011 and first half of 2012.

Gross Profit

Our gross profit increased $232.7 million, or 7.5%, in 2013 compared with 2012, reflecting the benefit of increased sales volumes, favorable net material costs, and benefits from productivity initiatives. The benefit from these factors were partly offset with higher depreciation and amortization expense of $52.2 million and higher restructuring costs of $8.2 million. Gross profit margin as a percentage of revenue remained at 38.3% year over year, with the operating leverage achieved by the higher volumes being offset by the impact of normal pricing concessions, business mix and higher labor costs across all segments.

Our gross profit increased $262.3 million or 9.2% in 2012 compared with 2011, reflecting the benefit of increased sales volumes, favorable net material costs, and benefits from productivity initiatives. Gross profit margin as a percentage of revenue contracted 30 basis points in 2012 to 38.3% from 38.6% in 2011 with the reduction in large part due to the integration of Sound Solutions, which generated lower than anticipated revenue in 2012, more than offsetting the operating leverage achieved by our other businesses.

Selling and Administrative Expenses

Selling and administrative expenses increased $144.2 million, or 7.8%, in 2013 compared with 2012 primarily due to general increases across the segments in support of higher volumes. The current year expense also included $30.1 million in one-time transaction costs related to the spin-off of Knowles and higher depreciation and amortization expense of $11.8 million. These expenses were partially offset by a $6.8 million gain associated with the sale of land in Switzerland in the first quarter of 2013 and a one-time pension curtailment gain of $4.4 million recognized in the third quarter of 2013 as a result of the Company's announcement to freeze future service benefits for the U.S. benefit plans after January 1, 2024. As a percentage of revenue, selling and administrative expenses remained constant at 22.7%, as the higher acquisition-related depreciation and amortization was more than offset by the leveraging of higher revenue volumes.


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Selling and administrative expenses increased $120.7 million or 7.0% in 2012 compared with 2011 due primarily to general increases across the segments in support of higher volumes. As a percentage of revenue, selling and administrative expenses decreased to 22.7% in 2012 compared with 23.4% in 2011. This 70 basis point improvement is largely a result of leverage from the higher revenue levels, which more than offset higher acquisition-related amortization and increased restructuring charges.

Non-Operating Items

Interest expense, net, decreased $0.4 million, or 0.3%, to $120.7 million in 2013 primarily due to lower average levels of cash on hand at reduced interest rates, which offset higher interest expense related to the euro-denominated debt issued in the fourth quarter of 2013.

In 2012, our interest expense, net, increased 4.9% to $121.1 million due primarily to lower average levels of cash on hand at reduced interest rates, leading to $4.4 million less of interest income in 2012 as compared with 2011.

Other expense (income), net in 2013, 2012, and 2011 includes $6.1 million, $9.5 million, and $7.5 million, respectively, of net foreign exchange losses resulting from the remeasurement and settlement of foreign currency denominated balances. The 2013 net foreign exchange losses are more than offset by other nonrecurring items, including approximately $7.4 million related to insurance settlements for property damage, as well as several other miscellaneous items, none of which were individually significant. Other expense (income), net in 2012 and 2011 included royalty income and other miscellaneous non-operating gains and losses, none of which are individually significant.

Income Taxes

We operate globally, and 37.3%, 38.4%, and 42.9% of our pre-tax earnings in 2013, 2012, and 2011, respectively, were generated in foreign jurisdictions, where such earnings are generally subject to local country tax rates that are well below the 35.0% U.S. statutory rate. We also benefit from tax holidays and incentives in a number of the foreign jurisdictions in which we operate. As a result, our blended effective foreign or non-U.S. tax rate is typically significantly lower than the U.S. statutory rate.

The 2013 effective tax rate on continuing operations was 21.9% compared to the 2012 rate of 26.8%. The 2013 rate was impacted by $77.0 million of favorable net discrete items, principally related to the conclusion of certain U.S. federal, state and international tax audits, a favorable court interpretation of tax law, certain cross-border tax consequences and the effect of the American Tax Relief Act of 2012 signed into law on January 2, 2013. The 2012 effective tax rate was impacted by other favorable net discrete items totaling $16.1 million, principally related to settlements with U.S. federal and state taxing authorities. After adjusting for discrete items, the effective tax rates were 28.2% for both 2013 and 2012.

We believe it is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitation, our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $37.2 million. Some portion of such change may be reported as discontinued operations. We believe adequate provision has been made for all income tax uncertainties.

The 2011 effective tax rate on continuing operations was 23.5%. The effective tax rate in 2011 was favorably impacted by net discrete and other items totaling $40.7 million, arising principally from settlements with the U.S. federal and state taxing authorities. After adjusting for discrete and other items, the effective tax rate for 2011 was 27.5%.

Earnings from Continuing Operations

Earnings from continuing operations increased 15.9% to $965.8 million, or $5.57 diluted earnings per share ("EPS") in 2013, compared with earnings from continuing operations of $833.1 million, or $4.53 EPS, in 2012. The increase in 2013 earnings from continuing operations is primarily the result of higher revenues and benefits from productivity and cost containment initiatives, offset in part by higher labor costs across all segments, as well as higher acquisition-related expenses, including depreciation and amortization. The EPS increase reflects the increase in earnings, as well as the impact of lower weighted average shares outstanding for the 2013 period relative to 2012.


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Earnings from continuing operations increased 7.8% to $833.1 million, or $4.53 EPS in 2012, compared with earnings from continuing operations of $773.2 million, or $4.09 EPS, in 2011. The increase in 2012 earnings from continuing operations is primarily the result of higher revenues and benefits from productivity and cost containment initiatives, offset in part by higher acquisition-related expenses and increased restructuring charges relative to 2011. The EPS increase reflects the increase in earnings, as well as the impact of lower weighted average shares outstanding for the 2012 period relative to 2011. Further, we repurchased incrementally more common shares in 2012 as compared to 2011.

Discontinued Operations

Management evaluates Dover's businesses periodically for their strategic fit within Dover's operations. Accordingly, in 2012, the Company announced its intention to divest DEK International and Everett Charles Technologies (including the Multitest business, collectively "ECT") within the Printing & Identification segment, which serve the electronic assembly and test markets. These businesses were reclassified to discontinued operations in the fourth quarter of 2012. The Company completed the sale of ECT in the fourth quarter of 2013 for total proceeds of $92.7 million. Additionally, in 2013, the Company signed a definitive agreement to sell DEK. Management plans to complete the sale of this business in the first half of 2014.

Earnings from discontinued operations, net of tax, for the year ended December 31, 2013 totaled $37.3 million, which included a loss on sale of ECT, including impairments, of $35.5 million, net of tax, earnings from operations of the aforementioned businesses prior to sale of $17.9 million before tax, and an income tax benefit of $54.9 million. One-time impairment charges netting to $35.5 million included the following: a $2.8 million loss on the sale of ECT; a $44.2 million goodwill impairment charge resulting from the write-down of the carrying value to fair value, based on the current estimated sales price of ECT; a benefit of $25.5 million to the deferred income tax provision as a result of the elimination of certain deferred tax liabilities; and a $14.0 million impairment loss related to the expected proceeds for the anticipated sale of DEK, of which approximately $9.2 million represented a goodwill impairment charge, of which none is taxable.

Loss from discontinued operations, net of tax, for the year ended December 31, 2012 totaled $22.0 million. Net earnings from operations of $28.8 million reflects net earnings from operations generated by these two businesses, as well as various expense and accrual adjustments relating to other discontinued operations. This activity was more than offset by a goodwill impairment charge determined in connection with the anticipated sale of ECT, at which time the Company recognized a goodwill impairment charge of $63.8 million ($51.9 million after tax), representing a write-down of the reporting unit's carrying value of goodwill to its fair value.

Earnings from discontinued operations, net of tax, for the year ended December 31, 2011 totaled $122.1 million. In 2011, the Company sold three businesses, Paladin Brands, Crenlo LLC, and Heil Trailer International, that had operated within the Engineered Systems segment for total cash proceeds of $512.1 million. These businesses were reclassified to discontinued operations in the third and fourth quarters of 2011. The 2011 earnings from discontinued operations reflects net operating earnings generated by the two businesses discontinued in 2012 and the three business sold in 2011, coupled with tax benefits of $18.0 million relating primarily to discrete tax items settled or resolved during the year. Earnings from discontinued operations also includes a $4.7 million loss on the 2011 sale of the three businesses, inclusive of an after-tax goodwill impairment charge of $76.1 million, representing a write-down of the carrying value of the associated reporting unit's goodwill to its fair value.

Refer to Note 4. Disposed and Discontinued Operations in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on disposed and discontinued operations.

Restructuring Activities

2013 Restructuring Activities

The Company incurred restructuring charges during 2013 totaling $25.9 million related to these programs, as follows:

The Energy segment incurred a net restructuring benefit of $0.7 million, including a net gain on sale of three buildings, relating to facility consolidations within the production sector undertaken to optimize cost structure.

The Engineered Systems segment incurred net restructuring charges of $6.6 million in connection with certain facility consolidations and optimizations and headcount reductions undertaken to optimize its cost structure.


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The Printing & Identification segment incurred restructuring charges of $3.8 million relating to exit plans at targeted facilities, which included certain adjustments and offsets to previously recorded reserves.

The Communication Technologies segment incurred restructuring charges of $16.3 million related principally to a facility consolidation in its capacitor business and headcount reductions in connection with integration activities within its consumer electronic business.

We expect to incur restructuring charges of approximately $5.0 million to $15.0 million in 2014 in connection with the above-mentioned projects, as well as certain other programs to be initiated during the year to rationalize headcount and optimize operations in a few select businesses. We anticipate that much of the benefit of the 2013 and 2014 programs will be realized over the remainder of 2014 and into 2015. We also expect to fund the remainder of the 2013 programs currently underway, as well those commenced in 2014, over the next 12 to 18 months. In light of the economic uncertainty in certain of our end markets and our continued focus on improving our operating efficiency, it is possible that additional programs may be implemented throughout the remainder of 2014.

2012 Restructuring Activities

During 2012, we initiated restructuring actions relating to ongoing cost reduction efforts, including targeted facility consolidations and headcount reductions at certain businesses. As a result, in 2012, we incurred . . .

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