DOVER CORPORATION
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition for the three years ended December
31, 2019 , 2018 and 2017. The MD&A should be read in conjunction with our
Consolidated Financial Statements and Notes included in Item 8 of this Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed elsewhere in this Form 10-K, particularly in Item 1A. "Risk
Factors" and in the "Special Note Regarding Forward-Looking Statements"
preceding Part I of this Form 10-K.
Throughout this MD&A, we refer to measures used by management to evaluate
performance, including a number of financial measures that are not defined under
accounting principles generally accepted in the United States of America
("GAAP"). Please see "Non-GAAP Disclosures" at the end of this Item 7 for
further detail on these financial measures. We believe these measures provide
investors with important information that is useful in understanding our
business results and trends. Reconciliations within this MD&A provide more
details on the use and derivation of these measures.
OVERVIEW
Dover Corporation is a diversified global manufacturer and solutions provider delivering innovative equipment and components, consumable supplies, aftermarket parts, software and digital solutions and support services. EffectiveOctober 1, 2019 , Dover transitioned from a three-segment to a five-segment structure as a result of a change to its management structure and operating model. Dover's five segments are structured around businesses with similar business models, go-to-market strategies and manufacturing practices. This new structure increases management efficiency and better aligns Dover's operations with its strategic initiatives and capital allocation priorities, and provides greater transparency about our performance to external stakeholders. Dover's five operating and reportable segments are as follows: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment. For the year endedDecember 31, 2019 , consolidated revenue from continuing operations was$7.1 billion , an increase of$0.1 billion or 2.1%, as compared to the prior year. This increase included organic revenue growth of 3.8% and acquisition-related growth of 0.8%, partially offset by an unfavorable impact of 2.0% from foreign currency translation and a 0.5% impact from dispositions. Overall, customer pricing had a favorable impact of 1.0% on revenue for the year. Within our Engineered Products segment, revenue increased$64.4 million , or 3.9%, from the prior year, reflecting organic growth of 5.4%, offset by an unfavorable impact from foreign currency translation of 1.5%. Organic revenue growth was driven by strong activity in the refuse truck and digital solutions product lines within our waste handling business, as well as solid revenue growth in our vehicle service business. Our Fueling Solutions segment revenue increased$154.6 million , or 10.5% from prior year, reflecting organic growth of 10.5%, acquisition-related growth of 3.4%, partially offset by an unfavorable foreign currency impact of 3.0%, and a 0.4% impact from a disposition. Organic growth was principally driven by continued strong demand in the global retail fueling industry, particularly inthe United States ,Europe andAsia . Our Imaging & Identification segment revenue decreased$25.4 million or 2.3%, from the prior year, reflecting organic growth of 1.2%, more than offset by an unfavorable foreign currency impact of 3.5%. The organic revenue growth was driven by increased equipment shipments and expanded service revenue in our marking and coding business, along with increased service revenue and increased printer and ink volumes in our digital printing business. The significant foreign currency impact was due to our broad international customer base, in particular inAsia andEurope . Our Pumps & Process Solutions segment revenue increased$6.6 million or 0.5%, from the prior year, reflecting organic growth of 3.9%, acquisition related growth of 0.5%, partially offset by unfavorable impacts from disposition of 2.0% and foreign currency of 1.9%. Organic growth was broad-based across the segment and was driven by industrial, biopharma and thermal management markets, along with continued strong demand from our OEM customers for rotating equipment components, as well as pump and other equipment for plastics and polymer production. 29 -------------------------------------------------------------------------------- Table of Contents Our Refrigeration & Food Equipment segment revenue decreased$56.5 million , or 3.9%, from the prior year, caused by an organic revenue decline of 2.7% and an unfavorable impact from foreign currency translation of 1.2%. The organic decline was driven primarily by reduced new food retail store construction activity with keyU.S. retail refrigeration customers, reduced demand for heat exchanger products inAsia , and softer demand from national restaurant chain customers in our foodservice equipment business. Gross profit was$2.6 billion for the year endedDecember 31, 2019 , an increase of$61.4 million , or 2.4%, as compared to the prior year. The increase was primarily due to growth in sales volumes benefited by favorable pricing, product mix and strong volume gains, as well as the benefits from prior restructuring actions, partially offset by increased material costs due, in part, toU.S. Section 232 and 301 tariff exposure. Gross profit margin was 36.7% for the year endedDecember 31, 2019 compared to 36.6% for the prior year. For further discussion related to our consolidated and segment results, see "Consolidated Results of Operations" and "Segment Results of Operations," respectively, within MD&A. Bookings decreased 0.4% over the prior year to$7.3 billion for the year endedDecember 31, 2019 . Included in this result was a 1.3% increase in organic bookings, a 0.8% increase in acquisition-related bookings offset by a 2.1% unfavorable impact due to foreign exchange rates, and a 0.3% decline due to dispositions. Organic bookings increased 6.9% within our Fueling Solutions, 3.3% within our Pumps & Process Solutions and 2.3% within our Imaging & Identification segments, while bookings in our Engineered Products and Refrigeration & Food Equipment segments decreased 4.0% and 0.7% respectively. Overall, our book-to-bill increased from the prior year to 1.02. Backlog as ofDecember 31, 2019 was$1.5 billion , up from$1.4 billion from the prior year. Backlog as ofDecember 31, 2019 included$0.5 billion ,$0.2 billion ,$0.1 billion ,$0.4 billion and$0.3 billion in the Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions and Refrigeration & Food Equipment segments, respectively. From a geographic perspective, revenue for theU.S. , our largest market, grew by 3.6% organically over the prior year, which was led by growth in our Engineered Products and Fueling Solutions segments.Asia andEurope also grew organically by 2.4 % and 6.5%, respectively, over the prior year. During the year endedDecember 31, 2019 , we executed several rightsizing programs to further optimize operations. Rightsizing charges included restructuring costs of$26.8 million and other costs of$5.3 million for the year endedDecember 31, 2019 . Restructuring expense was comprised primarily of broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation, operational optimization and IT centralization. These restructuring charges were broad-based across all segments as well as corporate, with costs incurred of$3.2 million in Engineered Products,$4.9 million in Fueling Solutions,$6.4 million in Imaging & Identification,$5.7 million in Pumps & Process Solutions,$3.7 million in Refrigeration & Food Equipment and$3.0 million at Corporate. Other costs were comprised primarily of other charges related to the restructuring actions. We incurred other costs of$0.4 million in Pumps & Process Solutions,$2.4 million in Refrigeration & Food Equipment and$2.6 million at corporate. We expect to incur total rightsizing charges, comprised of$8 million of restructuring charges and$1 million of other costs, in 2020 for these initiatives. During the year endedDecember 31, 2019 , we made a total of three acquisitions totaling$216.4 million , net of cash acquired including contingent consideration. We acquired the assets ofBelanger, Inc. ("Belanger"), a leading full-line car wash equipment manufacturer for$175 million , net of cash acquired. The acquisition of Belanger strengthens our position in the vehicle wash business within the Fueling Solutions segment. Additionally, we acquired the assets ofAll-Flow Pump Company, Limited business ("All-Flo"), a growing manufacturer of specialty pumps for$40 million . The All-Flo acquisition strengthens our position in the growing market for air-operated double-diaphragm pumps within the Pumps & Process Solutions segment. We also completed one immaterial acquisition. See Note 4 - Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for further details regarding the businesses acquired during the year. Subsequently, onJanuary 24, 2020 , we acquiredSys-Tech Solutions, Inc. ("Systech"). Systech is a leading provider of software and solutions for product traceability, regulatory compliance and brand protections and will strengthen the portfolio of solutions offered by our Imaging & Identification segment to customers in pharmaceutical and consumer products industries. Also onJanuary 24, 2020 , we entered into a definitive agreement to acquire So. Cal.Soft-Pak, Incorporated ("Soft-Pak") Software Solutions. Soft-Pak is a leading specialized provider of integrated back office, route management and customer relationship management software solutions to the waste and recycling fleet industry and will further strengthen the digital offerings of ourEnvironmental Solutions Group in the Engineered Products segment. The transaction is subject to 30 -------------------------------------------------------------------------------- Table of Contents satisfaction of customary closing conditions and is expected to close in the first quarter of 2020. The combined purchase price for both acquisitions is approximately$210 million , subject to customary post-closing adjustments. OnMarch 29, 2019 we entered into a definitive agreement to sell Finder for total consideration of approximately$23.6 million net of estimated selling costs. Finder met the criteria to be classified as held for sale as ofMarch 31, 2019 and based on the total consideration from the sale, net of selling costs, a loss on the assets held for sale of$46.9 million was recorded. The loss was comprised of an impairment on assets held for sale of$21.6 million and foreign currency translation losses reclassified from accumulated other comprehensive losses to current earnings of$25.3 million . Finder was subsequently sold onApril 2, 2019 , which generated total cash proceeds of$24.2 million . OnNovember 4, 2019 , we issued €500 million of 0.750% euro-denominated notes due 2027 and$300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of$296.9 million , net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the$450 million 4.30% notes due 2021. The remainder of the proceeds will be used for general corporate purposes. The early extinguishment of debt required us to pay a make whole premium to the bondholders resulting in a loss of$23.5 million . During the year endedDecember 31, 2019 , we purchased 1.3 million shares of our common stock for a total cost of$143.3 million , or$106.64 per share. As ofDecember 31, 2019 , 8.4 million shares remain authorized for repurchase under our current share repurchase authorization. We also continued our 64 year history of increasing our annual dividend payments to shareholders and paid a total of$282.2 million in dividends to our shareholders. 31 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED RESULTS OF OPERATIONS Years Ended December 31, % / Point Change (dollars in thousands, except per share figures) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenue$ 7,136,397 $ 6,992,118 $ 6,820,886 2.1 % 2.5 % Cost of goods and services 4,515,459 4,432,562 4,291,839 1.9 % 3.3 % Gross profit 2,620,938 2,559,556 2,529,047 2.4 % 1.2 % Gross profit margin 36.7 % 36.6 % 37.1 % 0.10
(0.50)
Selling, general and administrative expenses 1,599,098 1,716,444 1,722,161 (6.8) % (0.3) % Selling, general and administrative expenses as a percent of revenue 22.4 % 24.5 % 25.2 % (2.10)
(0.70)
Loss on assets held for sale 46,946 - - nm* nm* Operating Earnings 974,894 843,112 806,886 15.6 % 4.5 % Interest expense 125,818 130,972 144,948 (3.9) % (9.6) % Interest income (4,526) (8,881) (8,491) (49.0) % 4.6 % Loss on extinguishment of debt 23,543 - - nm* nm* Other income, net (12,950) (4,357) (2,251) 197.2 % 93.6 % Gain on sale of businesses - - (203,135) nm*
nm*
Earnings before provision for income taxes and discontinued operations 843,009 725,378 875,815 16.2 % (17.2) % Provision for income taxes 165,091 134,233 129,152 23.0 % 3.9 % Effective tax rate 19.6 % 18.5 % 14.7 % 1.1 3.8 Earnings from continuing operations 677,918 591,145 746,663 14.7 % (20.8) % (Loss) earnings from discontinued operations, net - (20,878) 65,002 nm*
nm*
Earnings from continuing operations per common share - diluted$ 4.61 $ 3.89 $ 4.73 18.5 %
(17.8) %
(Loss) earnings from discontinued operations per common share -diluted $ -$ (0.14) $ 0.41 nm* nm* * nm: not meaningful Revenue For the year endedDecember 31, 2019 , revenue increased$144.3 million , or 2.1% to$7.1 billion compared with 2018, reflecting organic growth of 3.8% led by our Fueling Solutions and Engineered Products segments, partially offset by our Refrigeration & Food Equipment segment. Revenue also increased due to acquisition-related growth of 0.8% from our Pumps & Process Solutions and Fueling Solutions segments, partially offset by an unfavorable impact from foreign currency translation of 2.0%, particularly in our Fueling Solutions and Imaging & Identification segments and a 0.5% impact from dispositions within our Pumps & Process Solutions and Fueling Solutions segments. Customer pricing favorably impacted revenue by approximately 1.0% in 2019. For the year endedDecember 31, 2018 , revenue increased$171.2 million , or 2.5% to$7.0 billion compared with 2017, reflecting organic growth of 3.7%, led by our Fueling Solutions and Engineered Products segments, partially offset by our Refrigeration & Food Equipment segment, acquisition-related growth of 0.5% from our Pumps & Process Solutions and Refrigeration & Food Equipment segments and a favorable impact from foreign currency translation of 0.8%. Revenue growth was partially offset by a 2.5% impact from dispositions within our Engineered Products segment. Customer pricing favorably impacted revenue by approximately 1.0% in 2018. 32 -------------------------------------------------------------------------------- Table of Contents Gross Profit For the year endedDecember 31, 2019 , gross profit increased$61.4 million , or 2.4%, to$2.6 billion compared with 2018, primarily due to organic volume growth, pricing actions, and productivity initiatives including the benefits of rightsizing actions and cost reduction initiatives, as well as reduced rightsizing costs, partially offset by increased material costs, due, in part, toU.S. Section 232 and 301 tariff exposure. Gross profit margin increased 10 basis points as compared to the prior year. For the year endedDecember 31, 2018 , gross profit increased$30.5 million , or 1.2% to$2.6 billion compared with 2017, primarily due to growth in sales volumes and benefits of prior restructuring actions partially offset by the loss of gross profits due to divestitures. Gross profit margin decreased 50 basis points as compared to prior year due to unfavorable product mix and rising material costs in our Refrigeration & Food Equipment segment and the impact of inefficiencies due to facility consolidations principally in our Fueling Solutions segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year endedDecember 31, 2019 , decreased$117.3 million , or 6.8% to$1.6 billion compared with 2018, primarily due to benefits from rightsizing actions started in 2018 and a decrease in restructuring costs of$23.7 million from$41.6 million in 2018 to$17.9 million in 2019. As a percentage of revenue, selling, general and administrative expenses decreased 210 basis points in 2019 to 22.4%, reflecting the leverage of costs on a higher revenue base and the decrease in expenses. Selling, general and administrative expenses for the year endedDecember 31, 2018 , decreased$5.7 million , or 0.3% to$1.7 billion compared with 2017 primarily due to benefits from prior restructuring actions and decreases from dispositions within our Engineered Products segment, offset by an increase in restructuring costs of$6.0 million from$35.6 million in 2017 to$41.6 million in 2018. As a percentage of revenue, selling, general and administrative expenses decreased 70 basis points in 2018 to 24.5%, reflecting the leverage of costs on a higher revenue base and the decrease in expenses.
Research and development costs, including qualifying engineering costs, are
expensed when incurred and amounted to
Loss on assets held for sale
OnMarch 29, 2019 , we entered into a definitive agreement to sell Finder for total consideration of approximately$23.6 million net of estimated selling costs. As ofMarch 31, 2019 , Finder met the criteria to be classified as held for sale and based on the total consideration from the sale, net of selling costs, we recorded a loss on the assets held for sale of$46.9 million . The loss was comprised of an impairment on assets held for sale of$21.6 million and foreign currency translation losses reclassified from accumulated other comprehensive losses to current earnings of$25.3 million . We subsequently sold Finder onApril 2, 2019 , which generated total cash proceeds of$24.2 million . Non-Operating Items Interest Expense, net For the year endedDecember 31, 2019 , interest expense, net of interest income, decreased$0.8 million , or 0.7%, to$121.3 million compared with 2018 primarily due to the$350 million 5.45% 10-year notes that were paid inMarch 2018 that resulted in lower outstanding long-term debt and lower interest expense compared to 2018, partially offset by lower interest income. For the year endedDecember 31, 2018 , interest expense, net of interest income, decreased$14.4 million , or 10.5%, to$122.1 million compared with 2017 due to the$350 million that was paid inMarch 2018 that resulted in lower outstanding long-term debt and lower interest expense compared to 2017. 33 -------------------------------------------------------------------------------- Table of Contents Loss on extinguishment of debt OnDecember 4, 2019 , the Company extinguished the €300,000 2.125% notes due 2020 and the$450,000 4.30% notes due 2021. The Company was required to pay a make whole premium to the bondholders for the early extinguishment of debt, resulting in a loss of$23.5 million . Other income, net For the years endedDecember 31, 2019 , 2018 and 2017, other income, net was$13.0 million ,$4.4 million and$2.3 million , respectively. For the year endedDecember 31, 2019 , other income increased compared to 2018 primarily due to increased earnings from our equity method investments and reduction of non-operating losses from our defined benefit and post-retirement benefit plans. For the year endedDecember 31, 2018 , other income increased compared to 2017 primarily due to lower foreign exchange losses resulting from the re-measurement and settlement of foreign currency denominated balances.
Gain on sale of businesses
There were no dispositions in the year 2019 aside from the sale of Finder as described above, and no significant dispositions in 2018 aside from the spin-off of Apergy, whose results are presented as discontinued operations. For the year endedDecember 31, 2017 , gain on sale of businesses was$203.1 million . The gain was primarily due to the sales of PMI and the consumer and industrial winch business of Warn, both within the Engineered Products segment, in which we recognized gains on sale of$88.4 million and$116.9 million , respectively. Other immaterial dispositions completed during the year were recorded as a net loss of$2.2 million . The disposals in 2017 did not represent strategic shifts in operations and, therefore, did not qualify for presentation as discontinued operations.
Income Taxes
Our businesses have a global presence with 46.8%, 52.5% and 37.8% of our pre-tax earnings in 2019, 2018 and 2017, respectively, generated in foreign jurisdictions. Foreign earnings are generally subject to local country tax rates that differ from the 21.0%U.S. statutory tax rate. As a result of our non-U.S. business locations, our effective foreign tax rate is typically lower than theU.S. statutory tax rate.
Our effective tax rate was 19.6% for the year ended
OnDecember 22, 2017 , theU.S. bill commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted which reduced theU.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effectiveJanuary 1, 2018 . As a result of the reduction in theU.S. corporate income tax rate, we revalued our ending net deferred tax liabilities as ofDecember 31, 2017 and recognized a provisional tax benefit of$172.0 million . The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year endedDecember 31, 2017 . For the year endedDecember 31, 2017 , we recorded provisional tax expense related to the deemed repatriation of$111.6 million payable over eight years. OnDecember 22, 2017 , theSEC staff issuedSAB 118 to address the application ofU.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with theSAB 118 guidance, we recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in our consolidated financial statements for the year endedDecember 31, 2017 . In accordance withSAB 118, we finalized the financial reporting impact of the Tax Reform Act in the fourth quarter of 2018. For the year endedDecember 31, 2018 , we recorded a$4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Reform Act. 34
--------------------------------------------------------------------------------
Table of Contents
For the year ended
We believe it is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations and the expiration of various statutes of limitation, our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to$15.3 million . We believe adequate provision has been made for all income tax uncertainties.
Earnings from Continuing Operations
For the year endedDecember 31, 2019 , earnings from continuing operations increased$86.8 million , or 14.7%, to$677.9 million , or$4.61 per share, compared with earnings from continuing operations of$591.1 million , or$3.89 per share, for the year endedDecember 31, 2018 . Earnings increased due to organic volume growth, pricing actions, and productivity initiatives including the benefits of restructuring actions and cost reduction initiatives. Additionally, after-tax rightsizing costs were lower by$32.9 million in 2019 compared to 2018. These benefits more than offset increases in material costs due, in part, toU.S. Section 232 and 301 tariff exposure, as well as a loss due to the after-tax extinguishment of debt of$18.4 million and a loss on assets held for sale of$46.9 million . Diluted earnings per share also improved due to the benefit of the prior and current year share repurchases. For the year endedDecember 31, 2018 , earnings from continuing operations decreased$155.5 million , or 20.8%, to$591.1 million , or$3.89 per share, compared with earnings from continuing operations of$746.7 million , or$4.73 per share, for the year endedDecember 31, 2017 . Earnings decreased primarily because we did not record any gains from dispositions in 2018 compared to 2017 when we recorded net after-tax gains from dispositions of$172.6 million . In 2018, we recorded a net tax benefit primarily from the Tax Reform Act of$4.2 million , whereas in 2017, we recorded a net tax benefit of$54.9 million . Additionally, after-tax rightsizing costs were higher by$23.7 million in 2018 compared to 2017. Excluding these items, earnings from continuing operations increased in 2018 as a result of higher earnings due to increased sales volumes. Diluted earnings per share also improved due to the benefit of the share repurchase programs announced inNovember 2017 .
Discontinued Operations
There were no discontinued operations for the year ended
The results of discontinued operations forDecember 31, 2018 and 2017 include the historical results of Apergy prior to its distribution onMay 9, 2018 . The years endedDecember 31, 2018 and 2017 included costs incurred by the Company to complete the spin-off of Apergy amounting to$46.4 million and$15.3 million , respectively, reflected in selling, general and administrative expenses in discontinued operations. Due to lump-sum payments made in 2018 for Apergy participants in the DoverU.S. Pension Plan, non-cash settlement costs of approximately$9.2 million were classified within discontinued operations.
Refer to Note 5 - Discontinued and Disposed Operations in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on disposed and discontinued operations.
35
--------------------------------------------------------------------------------
Table of Contents
Rightsizing Activities, which includes Restructuring and Other Costs
During the year ended December 31, 2019 , rightsizing activities included
restructuring charges of $26.8 million and other costs of $5.3 million .
Restructuring expense was comprised primarily of broad-based selling, general
and administrative expense reduction initiatives and broad-based operational
efficiency initiatives focusing on footprint consolidation, operational
optimization and IT centralization designed to increase operating margin,
enhance operations and position the Company for sustained growth and investment.
Other costs were comprised primarily of other charges related to the
restructuring actions. These rightsizing charges were recorded in cost of goods
and services and selling, general and administrative expenses in the
Consolidated Statement of Earnings. We expect to incur total rightsizing
charges, comprised of $8 million in restructuring charges and $1 million in
other costs, in 2020 for these initiatives. Additional programs, beyond the
scope of the announced programs may be implemented during 2020 with related
restructuring charges. We recorded the following rightsizing costs for the year
ended December 31, 2019 :
Year Ended December 31, 2019
Engineered Fueling Imaging & Pumps & Process Refrigeration & Food
(dollars in thousands) Products Solutions Identification Solutions Equipment Corporate Total
Restructuring (GAAP) $ 3,155 $ 4,943 $ 6,426 $ 5,666 $ 3,671 $ 2,961 $ 26,822
Other costs, net (5) (58) (76) 462 2,371 2,637 5,331
Rightsizing (non-GAAP) $ 3,150 $ 4,885 $ 6,350 $ 6,128 $ 6,042 $ 5,598 $ 32,153
During the year ended December 31, 2018 , rightsizing activities included
restructuring charges of $58.5 million and other costs of $14.3 million .
Restructuring expense was comprised primarily of several programs in order to
further optimize operations, including 1) alignment of our cost structure in
preparation for the Apergy separation, 2) broad-based selling, general and
administrative expense reduction initiatives and 3) initiation of footprint
consolidation actions. Other costs were comprised primarily of other charges
related to the restructuring actions. These rightsizing charges were recorded in
cost of goods and services, selling, general and administrative expenses and
other income, net in the Consolidated Statement of Earnings. We recorded the
following rightsizing costs for the year ended December 31, 2018 :
Year Ended December 31, 2018
Engineered Fueling Imaging & Pumps & Process Refrigeration & Food
(dollars in thousands) Products Solutions Identification Solutions Equipment Corporate Total
Restructuring (GAAP) $ 7,158 $ 15,478 $ 13,882 $ 10,266 $ 3,475 $ 8,244 $ 58,503
Other costs, net 128 (146) (1,237) 3,109 6,474 5,997 14,325
Rightsizing (non-GAAP) $ 7,286 $ 15,332 $ 12,645 $ 13,375 $ 9,949 $ 14,241 $ 72,828
During the year ended December 31, 2017 , restructuring charges were $52.3
million . We commenced broad-based rightsizing actions in the fourth quarter of
2017 in connection with our planned spin-off of Apergy. A portion of our
restructuring charges in 2017 were not classified as rightsizing. Rightsizing
charges included restructuring charges of $38.9 million and other costs of $10.5
million . Restructuring initiatives in 2017 included headcount reductions,
facility consolidations and product line exits. Other costs were comprised
primarily of other charges related to the restructuring actions.
See Note 11 - Restructuring Activities in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details regarding our recent restructuring activities.
36
--------------------------------------------------------------------------------
Table of Contents
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of
each of our five operating and reportable segments (Engineered Products, Fueling
Solutions, Imaging & Identification, Pumps & Process Solutions, and
Refrigeration & Food Equipment). Each of these segments is comprised of various
product and service offerings that serve multiple markets. See Note 19 - Segment
Information in the Consolidated Financial Statements in Item 8 of this Form 10-K
for a reconciliation of segment revenue, earnings and margin to our consolidated
revenue, earnings from continuing operations and margin. Segment EBITDA and
segment EBITDA margin, which are presented in the segment discussion that
follows, are non-GAAP measures and do not purport to be alternatives to segment
earnings (EBIT) as a measure of operating performance. We believe that these
measures are useful to investors and other users of our financial information in
evaluating ongoing operating profitability as they exclude the depreciation and
amortization expense related primarily to capital expenditures and acquisitions
that occurred in prior years, as well as in evaluating operating performance in
relation to our competitors. For further information, see "Non-GAAP Disclosures"
at the end of this Item 7.
Additionally, we believe the following operational metrics are useful to investors and others users of our financial information in assessing the performance of our segments:
•Bookings represent total orders received from customers in the current reporting period. This metric is an important measure of performance and an indicator of revenue order trends.
•Backlog represents an estimate of the total remaining bookings at a point in time for which performance obligations have not yet been satisfied. This metric is useful as it represents the aggregate amount we expect to recognize as revenue in the future.
•Book-to-bill is a ratio of the amount of bookings received from customers during a period divided by the amount of revenue recorded during that same period. This metric is a useful indicator of demand.
37
--------------------------------------------------------------------------------
Table of Contents
Engineered Products
Our Engineered Products segment is a provider of a wide range of products,
software and services that have broad customer applications across a number of
markets, including aftermarket vehicle service, solid waste handling, industrial
automation, aerospace and defense, industrial winch and hoist, and fluid
dispensing.
Years Ended December 31, % Change
(dollars in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue $ 1,697,557 $ 1,633,147 $ 1,626,856 3.9 % 0.4 %
Segment earnings (EBIT) (1) $ 291,848 $ 252,368 $ 437,078 15.6 % (42.3) %
Depreciation and amortization 41,032 44,995 48,271 (8.8) % (6.8) %
Segment EBITDA (1) $ 332,880 $ 297,363 $ 485,349 11.9 % (38.7) %
Segment margin (1) 17.2 % 15.5 % 26.9 %
Segment EBITDA margin (1) 19.6 % 18.2 % 29.8 %
Other measures:
Bookings $ 1,708,321 $ 1,803,555 $ 1,677,319 (5.3) % 7.5 %
Backlog $ 452,142 $ 442,519 $ 333,953 2.2 % 32.5 %
Components of revenue growth:
Organic growth 5.4 % 6.6 %
Dispositions - % (7.5) %
Foreign currency translation (1.5) % 1.3 %
Total revenue growth 3.9 % 0.4 %
(1) Segment earnings (EBIT) and segment EBITDA for 2017 includes a gain of
2019 Versus 2018
Engineered Products segment revenue for the year endedDecember 31, 2019 increased$64.4 million , or 3.9% compared to the prior year, comprised of broad-based organic growth of 5.4%, partially offset by a 1.5% unfavorable impact from foreign currency translation. Organic revenue growth was driven by strong activity in the refuse truck and digital solutions product lines within our waste handling business, as well as solid revenue growth in our vehicle service business. Customer pricing favorably impacted revenue by approximately 1.9% in 2019. Engineered Products segment earnings for the year endedDecember 31, 2019 increased$39.5 million , or 15.6%, compared to the prior year. This increase was primarily driven by solid conversion on organic volume growth, pricing actions, and productivity initiatives, including the benefits of rightsizing actions and cost reduction initiatives, as well as a reduction in rightsizing costs. These benefits more than offset increases in material costs driven byU.S. Section 232 tariffs, most notably commodity cost increases impacting steel, and Section 301 tariffs, along with unfavorable foreign currency translation. Segment margin increased from 15.5% to 17.2% as compared to the prior year. Bookings for the year endedDecember 31, 2019 decreased 5.3% compared to the prior year, reflecting an organic decline of 4.0% and an unfavorable impact from foreign currency translation of 1.3%. The decrease was primarily due to the timing of orders in our waste handling and vehicle services businesses. Segment book-to-bill was 1.01. 38
-------------------------------------------------------------------------------- Table of Contents 2018 Versus 2017 Engineered Products segment revenue for the year endedDecember 31, 2018 increased$6.3 million , or 0.4%, compared to the prior year, comprised of broad-based organic growth of 6.6% with particular strength in our waste handling, industrial winch, and aerospace and defense businesses and a favorable impact from foreign currency translation of 1.3%. This increase was partially offset by a 7.5% decrease from the dispositions of PMI in the first quarter of 2017 and the consumer and industrial winch business of Warn in the fourth quarter of 2017. Customer pricing favorably impacted revenue by approximately 1.9% in 2018. Engineered Products segment earnings for the year endedDecember 31, 2018 decreased$184.7 million , or 42.3%, compared to the prior year. The decline in earnings was impacted by gains of$205.3 million recognized in 2017 from the sales of PMI and Warn, the lost earnings from those divested businesses of$25.6 million , and incremental rightsizing costs in 2018. This was partially offset by disposition costs in 2017 of$5.2 million , solid conversion on organic volume growth, favorable pricing, and productivity initiatives, including the benefits of prior year and current year restructuring initiatives. Partially offsetting this favorable operational performance were increases in material costs, primarily driven byU.S. Section 232 tariffs, most notably commodity cost increases impacting steel, and Section 301 tariffs. Segment margin decreased from 26.9% to 15.5% as compared to the prior year primarily due to the gain from the sales of PMI and Warn, lost earnings and disposition costs from 2017 divested businesses and incremental rightsizing costs. 39 -------------------------------------------------------------------------------- Table of Contents Fueling Solutions
Our Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
Years Ended December 31, % Change
(dollars in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue $ 1,620,177 $ 1,465,590 $ 1,338,062 10.5 % 9.5 %
Segment earnings (EBIT) $ 231,873 $ 152,255 $ 159,180 52.3 % (4.4) %
Depreciation and amortization 75,045 68,463 67,835 9.6 % 0.9 %
Segment EBITDA $ 306,918 $ 220,718 $ 227,015 39.1 % (2.8) %
Segment margin 14.3 % 10.4 % 11.9 %
Segment EBITDA margin 18.9 % 15.1 % 17.0 %
Other measures:
Bookings 1,613,764 1,513,019 1,376,714 6.7 % 9.9 %
Backlog 205,842 208,574 187,046 (1.3) % 11.5 %
Components of revenue growth:
Organic growth 10.5 % 9.9 %
Acquisitions 3.4 % - %
Dispositions (0.4) % - %
Foreign currency translation (3.0) % (0.4) %
Total revenue growth 10.5 % 9.5 %
2019 Versus 2018
Fueling Solutions segment revenue for the year ended December 31, 2019 increased
$154.6 million , or 10.5%, compared to the prior year, attributable to organic
growth of 10.5% and acquisition-related growth of 3.4%, partially offset by an
unfavorable foreign currency translation impact of 3.0% and a 0.4% decrease from
a disposition. The organic growth was principally driven by continued strong
demand in the global retail fueling industry, particularly in the United States ,
Europe and Asia . Growth was also driven by the acquisition of Belanger. Customer
pricing favorably impacted revenue by approximately 1.0% in 2019.
Fueling Solutions segment earnings for the year ended December 31, 2019
increased $79.6 million , or 52.3%, compared to the prior year. The increase was
driven by volume leverage, pricing initiatives, productivity actions,
acquisitions, and benefits of selling, general and administrative cost
reductions realized, as well as decreased rightsizing costs. This growth was
partially offset by increased material costs due, in part, to U.S. Section 232
and 301 tariff exposure. Segment margin increased 390 basis points compared to
the prior year.
Bookings for the year ended December 31, 2019 increased 6.7% compared to the
prior year, reflecting organic growth of 6.9% and acquisition-related growth of
3.2%, partially offset by a unfavorable impact from foreign currency translation
of 3.1%, and a disposition related decline of 0.3%. Book to bill was 1.00.
40--------------------------------------------------------------------------------
Table of Contents
2018 Versus 2017
Fueling Solutions segment revenue for the year endedDecember 31, 2018 increased$127.5 million , or 9.5%, compared to the prior year, attributable to organic growth of 9.9% and an unfavorable foreign currency translation impact of 0.4%. The organic growth was principally driven by continued strength in retail fueling, especially in theAsia Pacific region. Transport revenue improved over the prior year and the rail business experienced strong growth, in part, due to softer volumes experienced in last year's second half and the continued rebound of aftermarket volumes. Customer pricing favorably impacted revenue by approximately 0.5% in 2018. Fueling Solutions segment earnings for the year endedDecember 31, 2018 decreased$6.9 million , or 4.4%, compared to the prior year, primarily driven by increased material costs due, in part, toU.S. Section 232 and 301 tariff exposure, the negative productivity impacts of footprint consolidation and supply chain disruptions and increased rightsizing costs. Segment margin decreased 150 basis points primarily due to cost impacts driven by footprint consolidations and temporary supply chain disruptions impacting production. 41
-------------------------------------------------------------------------------- Table of Contents Imaging & Identification
Our Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
Years Ended December 31, % Change
(dollars in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue $ 1,084,471 $ 1,109,843 $ 1,041,188 (2.3) % 6.6 %
Segment earnings (EBIT) $ 229,484 $ 198,902 $ 167,404 15.4 % 18.8 %
Depreciation and amortization 30,530 30,882 37,176 (1.1) % (16.9) %
Segment EBITDA $ 260,014 $ 229,784 $ 204,580 13.2 % 12.3 %
Segment margin 21.2 % 17.9 % 16.1 %
Segment EBITDA margin 24.0 % 20.7 % 19.6 %
Other measures:
Bookings $ 1,092,915 $ 1,106,303 $ 1,061,260 (1.2) % 4.2 %
Backlog $ 125,775 $ 118,057 $ 125,378 6.5 % (5.8) %
Components of revenue growth:
Organic growth 1.2 % 4.6 %
Acquisitions - % 0.3 %
Foreign currency translation (3.5) % 1.7 %
Total revenue growth (2.3) % 6.6 %
2019 Versus 2018
Imaging & Identification segment revenue for the year ended December 31, 2019
decreased $25.4 million , or 2.3% compared to the prior year, comprised of
organic growth of 1.2%, more than offset by an unfavorable impact from foreign
currency translation of 3.5%. The organic revenue growth was driven by increased
equipment shipments and expanded service revenue in our marking and coding
business, along with increased service revenue and increased printer and ink
volumes in our digital printing business. The significant foreign currency
impact was due to our broad international customer base, in particular in Asia
and Europe . Customer pricing favorably impacted revenue by approximately 1.0% in
2019.
Imaging & Identification segment earnings for the year ended December 31, 2019
increased $30.6 million , or 15.4%, compared to the prior year. This increase was
primarily driven by productivity initiatives, including the benefits of
restructuring actions, favorable pricing, and conversion on revenue growth, as
well as reduced rightsizing costs. As a result, segment margin increased from
17.9% to 21.2% as compared to the prior year.
Segment bookings for the year ended
2018 Versus 2017
Imaging & Identification segment revenue for the year ended
42
--------------------------------------------------------------------------------
Table of Contents
complemented by growth in our marking and coding businesses, acquisition-related
growth of 0.3% and a favorable impact from foreign currency translation of 1.7%.
Customer pricing favorably impacted revenue by approximately 0.5% in 2018.
Imaging & Identification segment earnings for the year ended December 31, 2018
increased $31.5 million , or 18.8%, compared to the prior year. This increase was
primarily driven by solid conversion on organic volume growth, favorable pricing
and productivity initiatives, including the benefits of restructuring actions,
as well as the net benefit of an earn-out reversal recorded in the second
quarter of 2018. Partially offsetting the favorable operational performance were
incremental rightsizing costs in 2018 as well as increases in material costs,
primarily driven by U.S. Section 301 tariffs. Segment margin increased from
16.1% to 17.9% as compared to the prior year.
43-------------------------------------------------------------------------------- Table of Contents Pumps & Process Solutions
Our Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
Years Ended December 31, % Change
(dollars in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue $ 1,338,528 $ 1,331,893 $ 1,217,235 0.5 % 9.4 %
Segment earnings (EBIT) (1) $ 240,081 $ 237,549 $ 209,451 1.1 % 13.4 %
Depreciation and amortization 67,584 71,982 67,986 (6.1) % 5.9 %
Segment EBITDA (1) $ 307,665 $ 309,531 $ 277,437 (0.6) % 11.6 %
Segment margin (1) 17.9 % 17.8 % 17.2 %
Segment EBITDA margin (1) 23.0 % 23.2 % 22.8 %
Other measures:
Bookings 1,393,830 1,386,875 1,236,376 0.5 % 12.2 %
Backlog 353,073 315,230 272,704 12.0 % 15.6 %
Components of revenue growth:
Organic growth 3.9 % 7.4 %
Acquisitions 0.5 % 1.4 %
Dispositions (2.0) % (0.4) %
Foreign currency translation (1.9) % 1.0 %
Total revenue growth 0.5 % 9.4 %
(1) Segment earnings (EBIT) and segment EBITDA for 2019 include a
2019 Versus 2018
Pumps & Process Solutions segment revenue for the year endedDecember 31, 2019 increased$6.6 million , or 0.5%, compared to the prior year, attributable to organic growth of 3.9% and acquisition-related growth of 0.5%. This increase was partially offset by an unfavorable foreign currency translation impact of 1.9% and a 2.0% decrease from a disposition. The organic growth was principally driven by biopharma and thermal management markets, along with strong continued demand from our OEM customers for rotating and reciprocating machinery components. Customer pricing favorably impacted revenue by approximately 1.4% in 2019. Pumps & Process Solutions segment earnings for the year endedDecember 31, 2019 increased$2.5 million , or 1.1%, compared to the prior year. Segment earnings includes a loss on assets held for sale for Finder in the first quarter of 2019 of$46.9 million . Segment earnings increased significantly excluding the loss on sale of Finder driven by volume leverage, pricing initiatives, and productivity actions, as well as reduced rightsizing costs. These benefits were partially offset by increased material costs due, in part, toU.S. Section 232 and 301 tariff exposure, inflation costs, and unfavorable product and regional mix. Segment margin increased to 17.9% from 17.8% in the prior year, an increase of 10 basis points. . Bookings for the year endedDecember 31, 2019 increased 0.5% compared to the prior year, reflecting organic growth of 3.3% and acquisition-related growth of 0.5%, offset by a unfavorable impact from foreign currency translation of 1.9% and disposition related decline of 1.4%. Ending backlog was 12.0% higher than prior year, driven by growth in polymer processing, rotating and reciprocating machinery, and connection solutions businesses. Book to bill was 1.04. 44 -------------------------------------------------------------------------------- Table of Contents 2018 Versus 2017 Pumps & Process Solutions segment revenue for the year endedDecember 31, 2018 increased$114.7 million , or 9.4%, compared to the prior year, attributable to organic growth of 7.4%, acquisition-related growth of 1.4% and a favorable foreign currency translation impact of 1.0%. This increase was partially offset by a 0.4% decrease from dispositions. The organic growth was principally driven by industrial pump activity, strength in ourMiddle East market, solid biopharma and medical markets, continued infrastructure spending by our OEM customers, and polymer demand increase. Additionally, the revenue increase was driven by the acquisition ofEttlinger Group ("Ettlinger"). Customer pricing favorably impacted revenue by approximately 1.0% in 2018. Pumps & Process Solutions segment earnings for the year endedDecember 31, 2018 increased$28.1 million , or 13.4%, compared to the prior year, primarily driven by increased volume and productivity gains. This growth was partially offset by increased material costs due, in part, toU.S. Section 232 and 301 tariff exposure and increased rightsizing costs. Segment margin increased 60 basis points for the year endedDecember 31, 2018 compared to the prior year. 45 -------------------------------------------------------------------------------- Table of Contents Refrigeration & Food Equipment
Our Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
Years Ended December 31, % Change
(dollars in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue $ 1,396,617 $ 1,453,093 $ 1,599,105 (3.9) % (9.1) %
Segment earnings (EBIT) $ 118,832 $ 136,119 $ 193,822 (12.7) % (29.8) %
Depreciation and amortization 51,360 60,477 57,207 (15.1) % 5.7 %
Segment EBITDA $ 170,192 $ 196,596 $ 251,029 (13.4) % (21.7) %
Segment margin 8.5 % 9.4 % 12.1 %
Segment EBITDA margin 12.2 % 13.5 % 15.7 %
Other measures:
Bookings 1,446,755 1,474,717 1,582,606 (1.9) % (6.8) %
Backlog 320,577 268,991 244,972 19.2 % 9.8 %
Components of revenue decline:
Organic (decline) growth (2.7) % (7.9) %
Acquisitions - % 0.7 %
Dispositions - % (2.6) %
Foreign currency translation (1.2) % 0.7 %
Total revenue decline (3.9) % (9.1) %
2019 Versus 2018
Refrigeration & Food Equipment segment revenue for the year ended December 31,
2019 decreased $56.5 million , or 3.9%, compared to the prior year, reflecting an
organic revenue decline of 2.7% and an unfavorable impact from foreign currency
translation of 1.2%. The organic revenue decrease for the year ended December
31, 2019 was driven principally by reduced new food retail store construction
activity with key U.S. Retail Refrigeration customers, reduced demand for heat
exchanger products in Asia , and softer demand from national restaurant chain
customers in our foodservice equipment business. These reductions were partially
offset by increased project activity for can-shaping equipment and strong growth
in the core door case product line within food retail industry which primarily
serves store remodel applications. Customer pricing minimally impacted revenue
in 2019.
Refrigeration & Food Equipment segment earnings for the year ended December 31,
2019 decreased $17.3 million , or 12.7%, compared to the prior year. Segment
margin decreased to 8.5% from 9.4% in the prior year due to reduced volumes,
unfavorable business mix in retail refrigeration, volume ramp costs for our door
case product line, and costs incurred as a result of plant consolidations at our
foodservice equipment business. These reductions were partially offset by
improved productivity and benefits from prior year rightsizing actions, as well
as reduced rightsizing costs.
Bookings for the year ended December 31, 2019 decreased 1.9% compared to the
prior year, primarily driven by reduced demand in our U.S. retail refrigeration
and foodservice equipment businesses, partially offset by increased market
demand for aluminum can-shaping equipment driven by beverage companies shifting
from plastic to aluminum containers. Bookings decreased 0.7% organically and
decreased 1.2% due to foreign currency translation. Ending backlog was 19.2%
higher than
46
--------------------------------------------------------------------------------
Table of Contents
prior year, driven by fourth quarter bookings growth in our retail refrigeration
and can-shaping equipment businesses. Book to bill for the full year was 1.04.
2018 Versus 2017
Refrigeration & Food Equipment segment revenue for the year endedDecember 31, 2018 decreased$146.0 million , or 9.1%, compared to the prior year, reflecting an organic revenue decline of 7.9%, the impact from product line dispositions of 2.6%, partially offset by acquisition-related growth of 0.7% and a favorable impact from foreign currency translation of 0.7%. Customer pricing favorably impacted revenue by approximately 0.8% in 2018. Refrigeration & Food Equipment organic revenue declined principally due to weak capital spending and deferred remodel programs by keyU.S. retail refrigeration customers, as well as a product re-design and SKU rationalization program in our refrigeration door system product line. Additionally, the foodservice equipment and can-shaping businesses also had year over year shortfalls due to project timing and market softness. These were partially offset by increased demand for heat exchanger products, most notably inEurope , and by the addition of sales from our Rosario acquisition. Refrigeration & Food Equipment segment earnings for the year endedDecember 31, 2018 decreased$57.7 million , or 29.8%, compared to the prior year. Segment margin decreased to 9.4% from 12.1% in the prior year, as benefits from rightsizing actions, productivity gains and lower rightsizing costs were more than offset by volume reductions, unfavorable product mix in our can-shaping business, costs associated with product re-design and SKU rationalization in our refrigeration door system product line and a favorable$1.7 million disposition gain in 2017 due to a working capital adjustment. Segment margin was also impacted by rising material costs, most notably steel, inclusive of commodity pricing impacts attributable toU.S. Section 232 tariffs. 47 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchase of outstanding shares, adequacy of available commercial paper and bank lines of credit and the ability to attract long-term capital with satisfactory terms. We generate substantial cash from the operations of our businesses and remain in a strong financial position, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
Years Ended December 31,
Cash Flows from Continuing Operations (in thousands) 2019 2018 2017
Net cash flows provided by (used in):
Operating activities $ 945,306 $ 789,193 $ 739,409
Investing activities (384,255) (245,480) 208,335
Financing activities (558,042) (897,838) (592,933)
Operating Activities
Cash provided by operating activities for the year ended December 31, 2019
increased $156.1 million compared to 2018. This increase was driven primarily by
higher continuing earnings of $147.0 million , excluding a loss from discontinued
operations, depreciation and amortization, a loss on assets held for sale and a
loss on extinguishment of debt.
Cash provided by operating activities for the year ended December 31, 2018
increased $49.8 million compared to 2017. This increase was primarily driven by
higher continuing earnings of $46.9 million , excluding non-cash activity from
depreciation and amortization and gain on sale of businesses, and significantly
lower tax payments in 2018 due to a lower tax rate as well as tax payments made
in 2017 for dispositions. The increase was offset by higher investments in
working capital relative to the prior year in support of organic bookings and
timing of year end revenue.
Pension and Other Post-Retirement Activity: Total cash used in conjunction with
pension plans during 2019 was $21.4 million , including contributions to our
international pension plans and payments of benefits under our non-qualified
supplemental pension plan.
The funded status of our U.S. qualified defined benefit pension plan is
dependent upon many factors, including returns on invested assets, the level of
market interest rates and the level of funding. We contribute cash to our plans
at our discretion, subject to applicable regulations and minimum contribution
requirements. Due to the overfunded status of this plan, the Company did not
make contributions in 2019, 2018 or 2017 and does not expect to make
contributions in the near term.
Our international pension plans are located in regions where often it is not
economically advantageous to pre-fund the plans due to local regulations. Total
cash contributions to ongoing international defined benefit pension plans in
2019, 2018 and 2017 totaled $7.2 million , $6.0 million and $8.0 million ,
respectively. In 2020, we expect to contribute approximately $4.6 million to our
non-U.S. plans.
Our non-qualified supplemental pension plans are funded through Company assets
as benefits are paid. In 2019, 2018 and 2017 a total of $13.6 million , $19.4
million , and $11.6 million in benefits were paid under these plans,
respectively. See Note 17 - Employee Benefit Plans in the Consolidated Financial
Statements in Item 8 of this Form 10-K for further discussion regarding our
post-retirement plans.
48
--------------------------------------------------------------------------------
Table of Contents
Adjusted Working Capital : We believe adjusted working capital (a non-GAAP
measure calculated as accounts receivable, plus inventory, less accounts
payable) provides a meaningful measure of our operational results by showing
changes caused solely by revenue.
Adjusted Working Capital (dollars in thousands) December 31, 2019 December 31, 2018
Accounts receivable $ 1,217,190 $ 1,231,859
Inventories 806,141 748,796
Less: Accounts payable 983,293 969,531
Adjusted working capital $
1,040,038
Adjusted working capital increased fromDecember 31, 2018 by$28.9 million , or 2.9%, to$1.04 billion atDecember 31, 2019 , which reflected a decrease in accounts receivable of$14.7 million , an increase in inventory of$57.3 million and an increase in accounts payable of$13.8 million . We continue to focus on improving working capital management by reducing our accounts receivable balance and increasing our accounts payable balance atDecember 31, 2019 compared to the prior year. However, inventories increased atDecember 31, 2019 compared to 2018 given planned footprint moves and a higher backlog going into 2020.
Investing Activities
Cash flow from investing activities is derived from cash inflows from proceeds from sales of businesses, property, plant and equipment and short-term investments, offset by cash outflows for capital expenditures and acquisitions. The majority of the activity in investing activities was comprised of the following: •Acquisitions: In 2019, we deployed$215.7 million to acquire three businesses. In comparison, we acquired two businesses in 2018 for an aggregate purchase price of approximately$68.6 million . Total acquisition spend in 2017 was$27.2 million and was comprised of two businesses. See Note 4 - Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information with respect to recent acquisitions. •Proceeds from sale of businesses: In 2019, we generated cash proceeds of$24.2 million , due to the sale of Finder. Cash proceeds of$3.9 million in 2018 was primarily due to cash received on a sale in 2017. In 2017, we generated cash proceeds of$372.7 million primarily from the sale of PMI and Warn. •Capital spending: Capital expenditures, primarily to support growth initiatives, productivity and new product launches, were$186.8 million in 2019,$171.0 million in 2018 and$170.1 million in 2017. Our capital expenditures increased$15.8 million in 2019 compared to 2018, and remained relatively flat in 2018 compared to 2017. We anticipate that capital expenditures and any additional acquisitions we make in 2020 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, or by accessing the public debt or equity markets.
Financing Activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our common stock and payment of dividends, offset by net borrowing activity. The majority of financing activity was attributed to the following: •Long-term debt, commercial paper and notes payable, net: During 2019, we issued €500 million of 0.750% euro-denominated notes due 2027 and$300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of$296.9 million , net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the$450 million 4.30% notes due 2021. The early extinguishment of debt resulted in a pre-tax loss of$23.5 million . Net borrowings decreased by$93.3 million due to the issuance of debt, early extinguishment of debt, and decrease in borrowings from commercial paper. 49 -------------------------------------------------------------------------------- Table of Contents During 2018, we repaid the Company's$350.0 million 5.45% notes, which matured onMarch 15, 2018 , and decreased net borrowings from commercial paper by$10.7 million . During 2017, we decreased net borrowings from commercial paper by$182.6 million with the cash proceeds from the sale of PMI and Warn. •Cash received from Apergy, net of cash distributed: In connection with the separation of Apergy from Dover onMay 9, 2018 , Apergy incurred borrowings to fund a one-time cash payment of$700.0 million to Dover in connection with Dover's contribution to Apergy of stock and assets relating to the businesses spun off with Apergy. Dover received net cash of$689.6 million upon separation, which reflects$10.4 million of cash held by Apergy at the time of distribution and retained by it in connection with its separation from Dover. •Repurchase of common stock: During the year endedDecember 31, 2019 , we repurchased 1,343,622 shares of common stock at a total cost of$143.3 million . For the year endedDecember 31, 2018 , we used$45.0 million to repurchase 440,608 shares under ourJanuary 2015 authorization, which expired onJanuary 9, 2018 . Under a share repurchase authorization adopted by the Board of Directors inFebruary 2018 , we also repurchased 1,753,768 shares of common stock at a total cost of$150.0 million and used$700 million to repurchase a total of 8,542,566 shares through an accelerated share repurchase transaction which concluded inDecember 2018 . We funded the accelerated share repurchase primarily with funds received from Apergy in connection with the consummation of the Apergy spin-off. For the year endedDecember 31, 2017 , we used$105.0 million to repurchase 1,059,682 shares under theJanuary 2015 authorization. •Dividend payments: Total dividend payments to common shareholders were$282.2 million in 2019,$283.6 million in 2018 and$284.0 million in 2017. Our dividends paid per common share increased 2% to$1.94 per share in 2019 compared to$1.90 per share in 2018, which represents the 64th consecutive year that our dividend has increased. The number of common shares outstanding decreased from 2018 to 2019 due to our share repurchase programs. •Net Proceeds from the exercise of share-based awards: Payments to settle tax obligations on share exercises were$37.4 million ,$46.3 million and$18.4 million in 2019, 2018 and 2017, respectively. These tax payments generally increase or decrease correspondingly to the number of exercises in a particular year.
Cash Flows from Discontinued Operations
There were no cash flows from discontinued operations for the year endedDecember 31, 2019 . Our cash flows from discontinued operations for the years endedDecember 31, 2018 and 2017 (used) generated$(14.3) million and$48.5 million , respectively. These cash flows primarily reflect the operating results of Apergy prior to its separation during the second quarter of 2018. Cash flows used in discontinued operations for the year endedDecember 31, 2018 primarily reflects cash payments of spin-off costs of$46.4 million and capital expenditures of$23.7 million , partially offset by cash provided by operations of approximately$55.4 million . Cash flows generated for the years endedDecember 31, 2017 primarily reflects cash provided by operating activities of approximately$96.2 million , respectively, partially offset by capital expenditures.
Liquidity and Capital Resources
Free Cash Flow
In addition to measuring our cash flow generation and usage based upon the
operating, investing and financing classifications included in the Consolidated
Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure)
which represents net cash provided by operating activities minus capital
expenditures. We believe that free cash flow is an important measure of
operating performance because it provides management and investors a measurement
of cash generated from operations that may be available for mandatory payment
obligations and investment opportunities, such as funding acquisitions, paying
dividends, repaying debt and repurchasing our common stock.
50--------------------------------------------------------------------------------
Table of Contents The following table reconciles our free cash flow to cash flow provided by operating activities:
Years Ended December 31,
Free Cash Flow (dollars in thousands) 2019 2018 2017
Cash flow provided by operating activities $ 945,306 $ 789,193 $ 739,409
Less: Capital expenditures (186,804) (170,994) (170,068)
Free cash flow$ 758,502 $ 618,199 $ 569,341 Free cash flow as a percentage of revenue 10.6 % 8.8 % 8.3 % Free cash flow as a percentage of earnings from continuing operations 111.9 % 104.6 % 76.3 % For 2019, we generated free cash flow of$758.5 million , representing 10.6% of revenue and 111.9% of earnings from continuing operations. Free cash flow in 2018 was$618.2 million or 8.8% of revenue and 104.6% of earnings from continuing operations. Free cash flow in 2017 was$569.3 million , or 8.3% of revenue and 76.3% of earnings from continuing operations. The full year increase in 2019 free cash flow reflects higher cash flow provided by operations due to higher operating earnings, as previously mentioned, partially offset by higher capital expenditures. The 2018 increase in free cash flow compared to 2017 is due to higher operating earnings. Cash payments related to restructuring initiatives were$33.3 million ,$52.0 million , and$22.6 million in 2019, 2018, and 2017, respectively. Capitalization We use commercial paper borrowings for general corporate purposes, including the funding of acquisitions and the repurchase of our common stock. OnOctober 4, 2019 , we entered into a$1 billion five-year unsecured revolving credit facility with a syndicate of banks (the "Credit Agreement") that replaced a similar existing credit facility that was set to expire inNovember 2020 . The Credit Agreement will expire onOctober 4, 2024 . This facility is used primarily as liquidity back-up for our commercial paper program. We have not drawn down any loans under this facility nor do we anticipate doing so. If we were to draw down a loan, at our election, the loan would bear interest at a base rate plus an applicable margin. Under this facility, we are required to pay a facility fee and to maintain an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of not less than 3.0 to 1. We were in compliance with this covenant and our other long-term debt covenants atDecember 31, 2019 and had a coverage ratio of 10.6 to 1. We are not aware of any potential impairment to our liquidity and expect to remain in compliance with all of our debt covenants.
On
OnNovember 4, 2019 , we issued €500 million of 0.750% euro-denominated notes due 2027 and$300 million of 2.950% notes due 2029. The proceeds from the sale of euro-denominated notes of €494.7 million, net of discounts and issuance costs, were used in part to redeem the €300 million 2.125% notes due 2020. The proceeds from the sale of notes of$296.9 million , net of discounts and issuance costs, and the remaining funds from the sale of the euro-denominated notes, were used to fund the redemption of the$450 million 4.30% notes due 2021. Such redemption payments were made onDecember 4, 2019 , which required us to pay a make whole premium to the bondholders, resulting in a loss of$23.5 million . The remainder of the proceeds will be used for general corporate purposes. We also have a current shelf registration statement filed with theSEC that allows for the issuance of additional debt securities that may be utilized in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.
At
51
--------------------------------------------------------------------------------
Table of Contents
We utilize the net debt to net capitalization calculation (a non-GAAP measure)
to assess our overall financial leverage and capacity and believe the
calculation is useful to investors for the same reason. Net debt represents
total debt minus cash and cash equivalents. Net capitalization represents net
debt plus stockholders' equity. The following table provides a reconciliation of
net debt to net capitalization to the most directly comparable GAAP measures:
Net Debt to Net Capitalization Ratio (dollars
in thousands) December 31, 2019 December 31, 2018 December 31, 2017
Current maturities of long-term debt $ - $ - $ 350,402
Commercial paper 84,700 220,318 230,700
Notes payable and current maturities of
long-term debt 84,700 220,318 581,102
Long-term debt 2,985,716 2,943,660 2,986,702
Total debt 3,070,416 3,163,978 3,567,804
Less: Cash and cash equivalents (397,253) (396,221) (753,964)
Net debt 2,673,163 2,767,757 2,813,840
Add: Stockholders' equity 3,032,660 2,768,666 4,383,180
Net capitalization $ 5,705,823 $ 5,536,423 $ 7,197,020
Net debt to net capitalization 46.8 % 50.0 % 39.1 %
Our net debt to net capitalization ratio decreased to 46.8% at December 31, 2019
compared to 50.0% at December 31, 2018 . The decrease in this ratio was driven
primarily by the increase in stockholders' equity of $264.0 million for the
period as a result of increase in current earnings of $677.9 million , offset by
$143.3 million in share repurchases and $282.2 million of dividends paid. Net
debt decreased $94.6 million during the period primarily due to a reduction in
commercial paper, partially offset by a net increase in long-term debt after
debt issuances and redemptions in 2019.
Our net debt to net capitalization ratio increased to 50.0% at December 31, 2018
compared to 39.1% at December 31, 2017 primarily due to the reduction in
stockholders' equity as a result of the $906.8 million distribution of Apergy,
$895.0 million in share repurchases and $283.6 million of dividends paid, offset
by $570.3 million of current earnings. Net debt decreased $46.1 million during
the period primarily due to a reduction in current maturities of long term debt,
partially offset by a reduction in cash levels to fund dividends and other
operating purposes.
Our ability to obtain debt financing at comparable risk-based interest rates is
partly a function of our existing cash flow-to-debt and debt-to-capitalization
levels as well as our current credit standing. Our credit ratings, which are
independently developed by the respective rating agencies, were as follows as of
December 31, 2019 :
Short Term Rating Long Term Rating Outlook
Moody's P-2 Baa1 Stable
Standard & Poor's A-2 BBB+ Stable
Operating cash flow and access to capital markets are expected to satisfy our
various cash flow requirements, including acquisitions and capital expenditures.
Acquisition spending and/or share repurchases could potentially increase our
debt.
We believe that existing sources of liquidity are adequate to meet anticipated funding needs at current risk-based interest rates for the foreseeable future.
Off-Balance Sheet Arrangements and Contractual Obligations
As ofDecember 31, 2019 , we had approximately$158.5 million outstanding in letters of credit, surety bonds, and performance and other guarantees with financial institutions, which expire on various dates through 2028. These letters of credit and bonds are primarily issued as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote. 52 -------------------------------------------------------------------------------- Table of Contents We have also provided typical indemnities in connection with sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities. A summary of our consolidated contractual obligations and commitments as ofDecember 31, 2019 and the years when these obligations are expected to be due is as follows: Payments Due by Period (in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Other Long-term debt (1)$ 2,985,716 $ - $ - $ -$ 2,985,716 $ - Interest payments (2) 1,336,429 98,673 197,346 197,346 843,064 - Operating lease obligations 179,557 45,838 63,535 30,150 40,034 - Purchase obligations 35,552 34,885 667 - - - Finance lease obligations 11,502 2,199 3,923 2,471 2,909 - Supplemental and post-retirement benefits (3) 77,824 14,936 20,840 13,561 28,487 - Income tax payable - deemed repatriation tax (4) 52,000 - 3,050 21,559 27,391 - Unrecognized tax benefits (5) 101,052 - - - - 101,052 Total obligations$ 4,779,632 $ 196,531 $ 289,361 $ 265,087 $ 3,927,601 $ 101,052 _________
(1) See Note 12 - Borrowings and Lines of Credit to the Consolidated Financial Statements.
Amounts represent principal payments for all long-term debt, including current
maturities, net of unamortized discounts and deferred issuance costs.
(2) Amounts represent estimate of future interest payments on long-term debt using the
interest rates in effect at
(3) Amounts represent estimated benefit payments under our unfunded supplemental and
post-retirement benefit plans and our unfunded non-
plans. See Note 17 - Employee Benefit Plans to the Consolidated Financial Statements.
We also expect to contribute approximately
defined benefit plans in 2020, which amount is not reflected in the above table.
(4) Amounts represent a tax imposed by the Tax Reform Act for a one-time deemed
repatriation of unremitted earnings of foreign subsidiaries, including current payable.
(5) Due to the uncertainty of the potential settlement of future unrecognized tax benefits,
we are unable to estimate the timing of the related payments, if any, that will be made
subsequent to 2019. This amount does not include the potential indirect benefits
resulting from deductions or credits for payments made to other jurisdictions. This
amount includes accrued interest and penalties.
Financial Instruments and Risk Management
The diverse nature of our businesses' activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity prices. We periodically use derivative financial instruments to manage some of these risks. We do not hold or issue derivative instruments for trading or speculative purposes. We are exposed to credit loss in the event of nonperformance by counterparties to our financial instrument contracts; however, nonperformance by these counterparties is considered unlikely as our policy is to contract with highly-rated, diversified counterparties.
Interest Rate Exposure
As ofDecember 31, 2019 and during the three year period then ended, we did not have any open interest rate swap contracts; however, we may in the future enter into interest rate swap agreements to manage our exposure to interest rate changes. We issue commercial paper, which exposes us to changes in variable interest rates; however, maturities are typically three months or less so a change in rates over this period would not have a material impact on our pre-tax earnings. We consider our current risk related to market fluctuations in interest rates to be minimal since our debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-interest rate debt will increase as interest rates fall and 53 -------------------------------------------------------------------------------- Table of Contents decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the 2019 year-end fair value of our long-term debt by approximately$275.2 million . However, since we have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.
Foreign Currency Exposure
We conduct business in various non-U.S. countries, includingCanada , substantially all of the European countries,Mexico ,Brazil ,China ,India and other Asian countries. Therefore, we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. We will occasionally use derivative financial instruments to offset such risks, when it is believed that the exposure will not be limited by our normal operating and financing activities. We have formal policies to mitigate risk in this area by using fair value and/or cash flow hedging programs. Changes in the value of the currencies of the countries in which we operate affect our results of operations, financial position and cash flows when translated intoU.S. dollars, our reporting currency. The strengthening of theU.S. dollar could result in unfavorable translation effects as the results of foreign operations are translated intoU.S. dollars. We have generally accepted the exposure to exchange rate movements relative to our investment in non-U.S. operations. We may, from time to time, for a specific exposure, enter into fair value hedges. Additionally, we have designated the €600 million and €500 million of euro-denominated notes issuedNovember 9, 2016 andNovember 4, 2019 , respectively, as a hedge of our net investment in euro-denominated operations. We had also designated the €300 million notes due in 2020 as a net investment hedge prior to our redemption of the notes. Due to the high degree of effectiveness between the hedging instruments and the exposure being hedged, fluctuations in the value of the euro-denominated debt due to exchange rate changes are offset by changes in the net investment. Accordingly, changes in the value of the euro-denominated debt are recognized in the cumulative translation adjustment section of other comprehensive income to offset changes in the value of the net investment in euro-denominated operations. Due to the fluctuations of the euro relative to theU.S. dollar, theU.S. dollar equivalent of this debt increases or decreases, resulting in the recognition of a pre-tax gain (loss) of$22.4 million ,$45.2 million and$(125.3) million in other comprehensive income for the years endedDecember 31, 2019 , 2018, and 2017 respectively.
Commodity Price Exposure
Certain of our businesses are exposed to volatility in the prices of certain commodities, such as aluminum, steel, copper and various precious metals, among others. Our primary exposure to commodity pricing volatility relates to the use of these materials in purchased component parts or the purchase of raw materials. When possible, we maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire.
Critical Accounting Policies and Estimates
Our consolidated financial statements and related financial information are based on the application ofU.S. GAAP. The preparation of financial statements in accordance withU.S. GAAP requires the use of estimates, assumptions, judgments and interpretations of accounting principles that affect the amount of assets, liabilities, revenue and expenses on the consolidated financial statements. These estimates also affect supplemental information contained in our disclosures, including information regarding contingencies, risk and our financial condition. The significant accounting policies used in the preparation of our consolidated financial statements are discussed in Note 1 - Description of Business and Summary of Significant Accounting Policies in the Consolidated Financial Statements in Item 8 of this Form 10-K. The accounting assumptions and estimates discussed in the section below are most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. We believe our use of estimates and underlying accounting assumptions conforms toU.S. GAAP and is consistently applied. We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary. Management has discussed our critical accounting policies and estimates with the audit committee of the Board of Directors. Revenue Recognition - EffectiveJanuary 1, 2018 , we adopted Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms 54 -------------------------------------------------------------------------------- Table of Contents are identified and collectability is probable. Once we enter a contract, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized as control of promised goods or services transfers to the customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The amount of revenue recognized takes into account variable consideration, such as discounts and volume rebates. The majority of our revenue is generated through the manufacture and sale of a broad range of specialized products and components, with revenue recognized upon transfer of title and risk of loss, which is generally upon shipment. Service revenue represents less than 5% of our total revenue and is recognized as the services are performed. In limited cases, our revenue arrangements with customers require delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue is recognized. We include shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services. Inventories - Inventories for the majority of our subsidiaries, including all international subsidiaries, are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Other domestic inventories are stated at cost, determined on the last-in, first-out (LIFO) basis, which is less than market value. Under certain market conditions, estimates and judgments regarding the valuation of inventories are employed by us to properly value inventories.Goodwill and Other Intangible Assets - We have significant goodwill and intangible assets on our consolidated balance sheets as a result of current and past acquisitions. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. In addition, the testing of goodwill and intangibles for impairment requires significant use of judgment and assumptions, particularly as it relates to the determination of fair value. Our indefinite-lived intangible assets and reporting units are tested and reviewed for impairment on an annual basis during the fourth quarter, or more frequently when indicators of impairment exist, when some portion but not all of a reporting unit is disposed of or classified as assets held for sale, or when a change in the composition of reporting units occurs for other reasons, such as a change in segments. When performing an impairment test, we estimate fair value using the income-based valuation method. Under the income-based valuation method, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rate based on our most recent views of the long-term outlook for each reporting unit. Actual results may differ from these estimates. The discount rates used in these analyses vary by reporting unit and are based on a capital asset pricing model and published relevant industry rates. We use discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in our internally developed forecasts. Discount rates used in our 2019 reporting unit valuations ranged from 8.0% to 9.5%. Concurrent with the timing of the annual impairment test, effectiveOctober 1, 2019 , we changed our management structure which resulted in a change in our operating segments and reporting units. As a result, management tested goodwill for impairment before and after the segment change under the old and new reporting unit structures. We performed a quantitative goodwill impairment test for each of our seven reporting units under the old structure and fifteen reporting units under the new structure, concluding that the fair values of all of its reporting units were substantially in excess of their carrying values. As such, no goodwill impairment was recognized. While we believe the assumptions used in the 2019 impairment analysis are reasonable and representative of expected results, actual results may differ from expectations. Employee Benefit Plans - The valuation of our pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. Inherent in these valuations are key assumptions, including discount rates, investment returns, projected salary increases and benefits and mortality rates. Annually, we review the actuarial assumptions used in our pension reporting and compare them with external benchmarks to ensure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on our pension expense and related funding requirements. Our expected long-term rate of return on plan assets is reviewed annually based on actual and forecasted returns, economic trends and and portfolio allocation. Our discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans' expected benefit payment streams. The plans' expected cash flows are then discounted by the resulting year-by-year spot rates. As disclosed in Note 17 - Employee Benefit Plans to the Consolidated Financial Statements, the 2019 weighted-average discount rates used to measure our qualified defined benefit obligations ranged from 1.18% to 3.40%, a general decrease from the 2018 rates, which ranged from 1.83% to 4.35%. The lower 2019 discount rates in theU.S. are reflective of decreased market interest rates over this period. A 25 basis point decrease in the discount rates used for these plans would have increased the post-retirement benefit obligations by approximately$31.3 million from the 55 -------------------------------------------------------------------------------- Table of Contents amount recorded in the consolidated financial statements atDecember 31, 2019 . Our pension expense is also sensitive to changes in the expected long-term rate of return on plan assets. A decrease of 25 basis points in the expected long-term rate of return on assets would have increased our defined benefit pension expense by approximately$1.5 million . Income Taxes - We have significant amounts of deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Reserves are also estimated, using more likely than not criteria, for ongoing audits regarding federal, state and non-U.S. issues that are currently unresolved. We routinely monitor the potential impact of these situations and believe that we have established the proper reserves. Reserves related to tax accruals and valuations related to deferred tax assets can be impacted by changes in tax codes and rulings (as further described below with respect toU.S. tax law), changes in statutory tax rates and our future taxable income levels. The provision for uncertain tax positions provides a recognition threshold and measurement attribute for financial statement tax benefits taken or expected to be taken in a tax return and disclosure requirements regarding uncertainties in income tax positions. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We record interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes. OnDecember 22, 2017 , the Tax Reform Act was enacted which permanently reduced theU.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effectiveJanuary 1, 2018 . As a result of the reduction in theU.S. corporate income tax rate, we revalued our ending net deferred tax liabilities as ofDecember 31, 2017 and recognized a provisional tax benefit of$172.0 million . The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year endedDecember 31, 2017 . For the year endedDecember 31, 2017 , we recorded provisional tax expense related to the deemed repatriation of$111.6 million payable over eight years. OnDecember 22, 2017 , theSEC staff issuedSAB 118 to address the application ofU.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with theSAB 118 guidance, we recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year endedDecember 31, 2017 . In accordance withSAB 118, we finalized the financial reporting impact of the Tax Reform Act in the fourth quarter of 2018. For the year endedDecember 31, 2018 , we recorded a$4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions we made as a result of the Tax Reform Act. Risk, Retention, Insurance - We have significant accruals and reserves related to the self-insured portion of our risk management program. These accruals require the use of estimates and judgment with regard to risk exposure and ultimate liability. We estimate losses under these programs using actuarial assumptions, our experience and relevant industry data. We review these factors quarterly and consider the current level of accruals and reserves adequate relative to current market conditions and experience. Contingencies - We have established liabilities for environmental and legal contingencies at both the business and corporate levels. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The valuation of liabilities for these contingencies is reviewed on a quarterly basis to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional liabilities for emerging issues. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations. Restructuring - We establish liabilities for restructuring activities at an operation when management has committed to an exit or reorganization plan and when termination benefits are probable and can be reasonably estimated based on circumstances at the time the restructuring plan is approved by management or when termination benefits are communicated. Exit costs may include contractual terminations and asset impairments as a result of an approved restructuring plan. The accrual of both severance and exit costs requires the use of estimates. Though we believe that these estimates accurately reflect the anticipated costs, actual results may be different than the estimated amounts. Disposed and Discontinued Operations - From time to time we sell or discontinue or dispose of certain operations for various reasons. Estimates are used to adjust, if necessary, the assets and liabilities of discontinued operations to their estimated fair value. These estimates include assumptions relating to the proceeds anticipated as a result of the sale. Fair 56 -------------------------------------------------------------------------------- Table of Contents value is established using internal valuation calculations along with market analysis of similar-type entities. The adjustments to fair value of these operations provide the basis for the gain or loss when sold. Changes in business conditions or the inability to sell an operation could potentially require future adjustments to these estimates. As noted previously, in 2019, we recorded an impairment on assets held for sale due to the sale of Finder. In 2018 and 2017, no impairment charges were recorded due to operations sold, discontinued, or disposed. Stock-Based Compensation - We are required to recognize in our Consolidated Statements of Earnings the expense associated with all share-based payment awards made to employees and directors, including stock appreciation rights ("SARs"), restricted stock units and performance share awards. We use the Black-Scholes valuation model to estimate the fair value of SARs granted to employees. The model requires that we estimate the expected life of the SAR, expected forfeitures and the volatility of our stock using historical data. For additional information related to the assumptions used, see Note 15 - Equity and Cash Incentive Program to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Recent Accounting Standards
See Note 1 - Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements and recently adopted accounting standards.
Non-GAAP Disclosures
In an effort to provide investors with additional information regarding our results as determined by GAAP, we also disclose non-GAAP information which we believe provides useful information to investors. Segment EBITDA, segment EBITDA margin, free cash flow, free cash flow as a percentage of revenue, free cash flow as a percentage of earnings from continuing operations, net debt, net capitalization, net debt to net capitalization ratio, adjusted working capital, organic revenue growth and rightsizing costs are not financial measures under GAAP and should not be considered as a substitute for earnings, cash flows from operating activities, debt or equity, working capital, revenue or restructuring costs as determined in accordance with GAAP, and they may not be comparable to similarly titled measures reported by other companies. We believe that segment EBITDA and segment EBITDA margin are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment earnings, which is the most directly comparable GAAP measure. We do not present segment net income because corporate expenses are not allocated at a segment level. Segment EBITDA margin is calculated as segment EBITDA divided by segment revenue. We believe the net debt to net capitalization ratio, free cash flow and free cash flow ratios are important measures of liquidity. Net debt to net capitalization ratio is helpful in evaluating our capital structure and the amount of leverage we employ. Free cash flow and free cash flow ratios provide both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase our common stock. Free cash flow as a percentage of revenue equals free cash flow divided by revenue. Free cash flow as a percentage of earnings from continuing operations equals free cash flow divided by earnings from continuing operations. We believe that reporting adjusted working capital, which is calculated as accounts receivable, plus inventory, less accounts payable, provides a meaningful measure of our operational results by showing the changes caused solely by revenue. We believe that reporting organic revenue growth, which exclude the impact of foreign currency exchange rates and the impact of acquisitions and divestitures, provides a useful comparison of our revenue performance and trends between periods. We believe that reporting rightsizing costs, which include restructuring and other charges, is important as it enables management and investors to better understand the financial impact of our broad-based cost reduction and operational improvement initiatives.
Reconciliations of non-GAAP measures can be found above in this Item 7, MD&A.
© Edgar Online, source
