UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File No. 1-4018

 

Dover Corporation

(Exact name of Registrant as specified in its charter)

 

 

(Registrant’s telephone number)
(212) 922-1640

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12-b-2 of the Securities Exchange Act.

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

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

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of the close of business June 30, 2005 was $7,366,031,332. The Registrant’s closing price as reported on the New York Stock Exchange-Composite Transactions for June 30, 2005 was $36.38 per share.

 

The number of outstanding shares of the Registrant’s common stock as of February 24, 2006 was 203,302,588.

 

Documents Incorporated by Reference:

 

 

Special Notes Regarding Forward-looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, earnings, cash flow, changes in operations, competitors, industries in which Dover companies operate and the U.S. and global economies. Statements in this 10-K that are not historical are hereby identified as “forward-looking statements.” Such statements may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “seeks,” “projects,” “expects,” “believes”, “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” use of the future tense and similar words or phrases. Forward-looking statements are subject to inherent uncertainties and risks, including among others: increasing price and product/service competition by foreign and domestic competitors including new entrants; the impact of technological developments and changes on Dover companies, particularly the companies in Dover’s Electronics and Technologies segments; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; changes in the cost or availability of raw materials, particularly steel or energy; changes in customer demand; the extent to which Dover companies are successful in expanding into new geographic markets, particularly outside of North America; the relative mix of products and services which impacts margins and operating efficiencies; the achievement of lower costs and expenses; domestic and foreign governmental and public policy changes including environmental regulations and tax policies (including domestic and foreign export subsidy programs, research and experimentation credits and other similar programs); unforeseen developments in contingencies such as litigation; protection and validity of patent and other intellectual property rights; the success of the Company’s acquisition program; the cyclical nature of the business of some of Dover’s companies; the impact of natural disasters, such as hurricanes, and their effect on global energy markets; and continued events in the Middle East and possible future terrorist threats and their effect on the worldwide economy. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations. In light of these risks, uncertainties and changes in circumstances, actual events and results may vary significantly from those included in or contemplated or implied by such statements. Readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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

 

PART I

 

 

Overview

 

Dover Corporation (“Dover” or the “Company”), incorporated in 1947 in the State of Delaware, became a publicly traded company in 1955. It is a diversified industrial manufacturing corporation encompassing operating companies that manufacture a broad range of specialized industrial products and sophisticated manufacturing equipment and seek to expand their range of related services. Additional information is contained in Items 7 and 8.

 

The Company reports its results in six reportable business segments, Diversified, Electronics, Industries, Resources, Systems and Technologies, and discusses their operations in 13 groups. Diversified builds products for use in the defense, aerospace and automotive aftermarket industries, heat transfer equipment, specialized bearings, construction and agricultural cabs, as well as color measurement and control systems for printing presses. Electronics designs and manufactures a wide variety of electronic, electromechanical, and plastic components for original equipment manufacturers (“OEMs”) serving numerous end markets including hearing aids, telecom infrastructure and cell phones, defense and aerospace electronics, and medical/life sciences. In addition, this segment manufactures ATM hardware and software for retail applications and financial institutions, and chemical proportioning and dispensing systems for janitorial/sanitation applications. Industries produces equipment and components for use in waste handling, bulk transport and automotive service industries. Resources manufactures products primarily for the petroleum and natural gas, automotive fueling, fluid handling, engineered components, material handling and chemical equipment industries. Systems manufactures refrigeration systems, display cases, walk in coolers, food service cooking equipment and other products for the supermarket/restaurant industries. In addition, this segment manufactures specialized machinery for use in the beverage and food processing industries. Technologies builds sophisticated automated assembly and testing equipment for the electronics industry, and industrial printers and consumables for coding and marking.

 

Business Strategy

 

The Company operates with certain fundamental strategies. First, it seeks to acquire and own businesses with proprietary, engineered industrial products which make them leaders in the niche markets they serve. To ensure success, the Dover companies place emphasis on new product development to better serve customers and expansion into new markets to serve new customers. Second, these businesses are committed to operational excellence and all of Dover’s operating companies are expected to be market leaders as measured by market share, customer service, innovation, profitability and return on invested capital. Third, the Company is committed to an autonomous operating culture with high ethical standards, trust, respect and open communication, to allow individual growth and operational effectiveness.

 

Management Philosophy

 

The Company practices a highly decentralized management style. The presidents of the operating companies are given a great deal of autonomy and have a high level of independent responsibility for their businesses and their performance. This is in keeping with the Company’s operating philosophy that independent operations are better able to serve customers by focusing closely on their products and markets, and reacting quickly to customer needs. The Company’s executive management role is to provide management oversight, allocate and manage capital, assist in major acquisitions, evaluate, motivate and, as necessary, replace operating company management, and also provide selected other services.

 

Acquisitions

 

Dover has a long-standing acquisition program, which seeks to acquire and develop “platform” businesses that are market leaders as measured by market share, customer service, innovation, profitability and return on invested capital. Ideal acquisition candidates are generally manufacturers of high value-added, engineered products sold to a broad customer base of industrial or commercial users. One of the most critical factors in the decision to acquire a business is the Company’s judgment of the skill, energy, ethics and compatibility of the top executives at the

acquisition target. Keeping with the Company’s decentralized structure, Dover generally expects that acquired companies will continue to be operated by the management team in place at acquisition, with a high degree of autonomy.

 

The Company has traditionally focused on acquiring new businesses that can operate independently from other Dover companies (“stand-alones”). Beginning in 1993, the Company began increasing the number of “add-on” businesses it acquired — businesses that could be added on to existing Dover companies. In recent years, including 2005, the Company has indicated an intention to buy larger stand-alones, while continuing to acquire “add-on” businesses to enhance companies already owned.

 

From January 1, 2000 through December 31, 2005, the Company made 68 acquisitions at a total acquisition cost of $2,900.8 million. These acquisitions have had a substantial impact on the Company’s revenue and earnings since 2000. During the three years 2001-2003, the overall number of Company acquisitions and dollars invested was lower than in previous years. This largely reflected the general economic conditions and the lack of attractive acquisition candidates. In 2004, the Company acquired eight add-on businesses for an aggregate of $514.3 million. During 2005, the Company acquired a total of ten businesses (eight add-ons) for an aggregate cost of $1,091.8 million, the highest annual acquisition investment level in its history. For more details regarding acquisitions completed over the past two years, see Note 2 to the Consolidated Financial Statements in Item 8. The Company’s future growth depends in large part on finding and acquiring successful businesses, as a substantial number of the Company’s current businesses operate in relatively mature markets. While the Company expects all of its businesses to generate annual internal growth of 5 – 7%, sustained internal growth at these levels is difficult to achieve.

 

Divestitures

 

In 2006, Dover is entering the second year of a strategic review of its portfolio of businesses, a process that has improved the Company’s focus on key markets for long-term growth. While the Company generally expects to hold businesses that it buys, it periodically reassesses the portfolio of businesses to verify that those businesses continue to be essential contributors to Dover’s long-term growth strategy. On occasion, there are situations in which one of Dover’s companies is a very attractive acquisition for another company based on specific market conditions. In those circumstances, Dover might make an opportunistic sale, such as the 2005 sale of Hydratight Sweeney and the agreement to sell Tranter PHE. In addition, the Company will strategically divest operations that cannot meet Dover’s long-term performance goals, such as the 2005 sales of Somero Enterprises and Koolant Koolers. Based on these criteria, the Company has from time to time divested businesses. Over the past five years, the Company has discontinued 26 and sold 21 operations for an aggregate pre-tax consideration of approximately $619 million. For more details, see the “Discontinued Operations” discussion below and Note 7 to the Consolidated Financial Statements in Item 8.

 

Reportable Segments

 

The Company reports its results in six segments and discusses their operations in 13 groups. The segment structure is based on markets served and allows the management of each segment to focus its attention on particular markets, to provide oversight capacity to acquire additional businesses and to foster leadership development. Below is a listing of each segment and the descriptions of each group therein. For additional financial information about Dover’s reportable segments, see Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

 

Diversified

 

Industrial Equipment

 

The Industrial Equipment group produces parts for vehicle markets, including boats, construction equipment, automotive, powersports, aerospace and commercial airlines. Specifically, it fabricates operator cabs and rollover structures for sale to OEM manufacturers in the construction, agriculture, and commercial equipment markets, and it produces standard and custom high volume sheet metal enclosures for the electronics, telecommunications and electrical markets. In addition, the group sells internal engine components and other engine accessories to the motorsport and powersport markets that include high performance racing, motorcycles, all-terrain vehicles, snowmobiles and watercraft. Products include forged and cast pistons, connecting rods, crankshafts and cylinder

liners along with their complementary components, including piston rings, bearings, gaskets, and a variety of other internal valve train and engine components. The Industrial Equipment group also designs, manufactures and maintains fluid control assemblies and structural components for the global aerospace and U.S. defense industries, supporting the full product life cycle from the original design and build through the aftermarket. It specializes in complex fluid control assemblies with typical end-use applications such as submarines, aircraft control systems and engine thrust reverser systems, land and amphibious utility vehicle actuation systems, helicopter rotary systems, engine pneumatic ducting and cooling systems, aircraft environmental control systems, and general airframe and engine components. The businesses share common customers throughout the commercial aerospace and defense industries and sell directly to their end users: OEMs, airlines and government agencies.

 

Process Equipment

 

The Process Equipment group manufactures color measurement and control systems for printing presses for the catalog, book, publication and newspaper printing markets; designs and manufactures copper-brazed compact heat exchangers, including heat exchangers and design software for district heating and district cooling substations; and designs and manufactures bearings for certain rotating machinery applications, including turbo machinery, motors and generators for use in the energy, industrial, utility, naval and commercial marine industries. These product lines include polymer, ceramic and magnetic designs for specific customer applications, as well as hydrodynamic bearing design applications.

 

The Diversified segment has operations and manufacturing facilities in North America, Europe and Asia, and its products are sold primarily in the Americas and Europe.

 

Electronics

 

Components

 

The Components group designs and manufactures advanced micro-acoustic components, precision frequency control products, plastic quick disconnect couplings, specialty ceramic capacitors, RF and microwave filters and switches, and electromagnetic assemblies.

 

Specifically, the group designs and manufactures miniaturized transducers and electromechanical components for use in hearing aids, cell phones and high-end headsets, frequency control products including crystal oscillators, frequency translators, clock and data recovery products, SAW filters, and hybrid circuits for use in numerous telecom infrastructure systems, defense and aerospace electronics and other industrial applications. The plastic quick disconnect couplings are used by OEMs serving the industrial, biopharmaceutical, life sciences, chemical, and printing markets. Specialty capacitor products include single, multi-layer, variable capacitors as well as custom assemblies and planar arrays sold to customers in the communications, defense and aerospace, medical and automotive markets. Electromagnetic assemblies include stators for regulating fuel pressure for the heavy truck markets, phenolic brake pistons, and electronic valve components for irrigation applications.

 

Commercial Equipment

 

The Commercial Equipment group manufactures a line of ATM machines, and chemical and solvent dispensing systems. The ATM business provides hardware, software and services for retail and financial institution customers and its machines are found in banks, credit unions, major retail chains, convenience stores, airports, hotels, office buildings, restaurants, shopping centers, supermarkets and casinos. The proportioning and dispensing systems are used to dilute and dispense concentrated chemicals and solvents used by restaurants, hospitals, schools, universities and other large institutions, and building service contractors for janitorial/sanitation and equipment maintenance applications.

 

Electronics’ products are sold to OEMs and their manufacturing service providers in North America, Europe, and Asia by direct sales as well as through an extensive network of independent representatives. Electronics’ products are manufactured in the U.S., Canada, the Dominican Republic, Brazil, Europe and Asia.

Industries

 

Mobile Equipment

 

The Mobile Equipment group manufactures a wide variety of refuse collection bodies (refuse trucks), tank trailers including aluminum, stainless steel and steel trailers that carry petroleum, chemical, edible, dry bulk and waste products, including specialty trailers focused on the heavy haul, oil field and recovery niches, and waste processing equipment. Specifically, these products include manual and automated side loaders, front loaders, rear loaders and a variety of recycling units and container lifts for the refuse collection industry as well as for commercial and industrial applications. They are sold to municipal customers, national accounts, and independent waste haulers through a network of distributors, and directly in certain geographic areas. Also, the group manufactures a line of dump truck bodies/hoists for sale to municipal, landscaping, mining and hauling customers. The waste processing equipment products include self-contained compactors, stationary compactors, and vertical balers and recycling equipment including conveyor systems, horizontal auto-tie, two ram, and shear balers. The tank trailers are marketed both directly and indirectly through distributors to customers in the construction, trucking, railroad, oil field, towing and recovery, and heavy haul industries, as well as to various government agencies. The bailing equipment is sold primarily in the U.S. to distribution centers, malls, stadiums, arenas, hotels/motels, warehouses, office complexes, retail stores, and environmental businesses.

 

Service Equipment

 

The Service Equipment group manufactures vehicle collision measuring and repair systems, including frame pulling equipment, computerized measuring, frame specifications, and vehicle inspection products, vehicle wash systems and vehicle service lifts. The vehicle collision measuring equipment is marketed worldwide in over 45 countries throughout Europe, Asia and the Americas, utilizing direct sales personnel, manufacturer representatives and distributors, along with service and training organizations. The group’s vehicle wash systems are sold primarily in the U.S. and Canada to major oil companies, as well as to investors, and sales are made through distributors throughout the U.S who install the equipment and provide after-sale service and support. The vehicle service lifts are sold through equipment distributors, and directly to a wide variety of markets, including independent service and repair shops, national chains and franchised service facilities, new car and truck dealers, national and local governments, and government maintenance and repair locations.

 

The Industries segment has operations and manufacturing facilities in the U.S., Argentina, Thailand, and Europe.

 

Resources

 

Fluid Solutions

 

The Fluid Solutions group manufactures pumps and compressors for the transfer of liquid and gas products; supplies engineered products, including valves, electronic controls, loading arms, swivels, and couplings; produces vehicle fuel dispensing products; designs and manufactures engineered liquid filtration equipment and systems for the petroleum refining, chemical, food and beverage, pulp and paper, hydrometallurgy, and other process industries; and produces a wide range of air-operated double-diaphragm pumps. The pumps and compressors are used in a wide variety of markets, including the refined fuels, LPG, pulp and paper, wastewater, food/sanitary, military/marine, transportation, and chemical process industries. The pump technologies include positive displacement, sliding vane and eccentric disc pumps in addition to centrifugal process pumps. Its compressor technologies include reciprocating, rotary vane, and screw compressors. The engineered products are used for the transfer, monitoring, measurement, and protection of hazardous, liquid and dry bulk commodities in the chemical, petroleum and transportation industries.

 

The fuel dispensing products offer an extensive line of conventional, vapor recovery, and Clean Energy (LPG, CNG, and Hydrogen) nozzles, swivels and breakaways, as well as a tank pressure management system. The Fluid Solutions group provides a complete line of environmental products for both aboveground and underground storage tanks, suction system equipment, flexible piping, and secondary containment systems. It also offers an array of tire inflation and vacuum systems, as well as unattended fuel management, integrated tank monitoring, and

Point-of-Sale card systems. The liquid filtration product range includes mechanically self-cleaning, backwashing, bag, cartridge, belt, drum and vacuum table filters, marketed and sold globally through distributors. The double-diaphragm pumps are made of a variety of metals and engineered plastics. These pumps are used in a broad variety of fluid transfer applications in general industrial, process industry, and specialized applications.

 

Material Handling

 

The Material Handling group manufactures and sells a variety of modular automation and workholding components; highly engineered welded hydraulic cylinders, custom hydraulic swivels, and electric slip rings; worm gear and planetary winches; worm gear and planetary hoists; traction (constant pull) winches; rotation drives and speed reducers; capstan drives; high capacity bumper/winch packages; electronic monitoring systems and other related products; and a full line of off-road equipment and accessories that enhance the performance of four-wheel-drive (“4WD”) vehicles, ATVs and utility vehicles. Modular automation and workholding products include manual toggle clamps, pneumatic and hydraulic clamps, automation power clamps, automation shuttles and lifters, grippers, slides, end-effectors, and other “end of robot arm” devices. The welded hydraulic cylinders are used for work platform, aerial utility truck, material handling, construction, and mining industry OEMs throughout North America. The winch related products primarily serve the construction, marine, lumber, railroad, refuse, petroleum, military towing and recovery, and utility markets, through OEMs and an extensive dealer network. The products related to off-road equipment include recreational winches, winch mounts, 4WD hubs and other accessories. The group also markets electric and hydraulic hoists to commercial, industrial and severe customers around the world and provides a range of patented, technologically advanced 4WD and all-wheel drive powertrain systems to automotive OEMs around the world, but primarily in North America.

 

Oil and Gas Equipment

 

The Oil and Gas Equipment group manufactures products that primarily serve the upstream oil and gas exploration and production industries, including polycrystalline diamond cutters used in drill bits; sucker rods and accessories; precision quartz-resonator pressure transducers for “downhole” data collection; natural gas wells production control devices; various control valves, butterfly valves, and control instrumentation primarily for oil and gas production applications; piston rings, seal rings, engineered valves, packings and various other replacement parts and components for compressors used in the natural gas production and distribution markets, as well as in the petrochemical and petroleum refining industries; and compressor repair services through company owned service centers.

 

Resources’ products are sold to OEMs directly, and to other markets through a global network of distributors, primarily in North America, Europe and Asia. Its products are manufactured in North America, South America, Europe and Asia.

 

Systems

 

Food Equipment

 

The Food Equipment group manufactures refrigeration systems, display cases, walk-in coolers and freezers, electrical distribution products, and provides engineering services for sale to the supermarket industry, as well as to commercial/industrial refrigeration, “big box” retail and convenience store customers. In addition, the group manufactures commercial foodservice cooking equipment, cook-chill production systems, refrigeration products, custom food storage and preparation products, kitchen ventilation, air handling systems and conveyer systems. The commercial foodservice cooking equipment products serve the institutional and commercial foodservice markets worldwide through a network of dealers, distributors, national chain accounts, manufacturer’s representatives, and a direct sales force, with the primary market being North America.

 

Packaging Equipment

 

The Packaging Equipment group manufactures high-speed trimming, necking, bottom reforming, re-profiling, and flanging equipment for the beverage can-making industry. It also develops and manufactures a wide variety of packaging machines that employ a clip as the means of flexible package closure, and bowl chopping machines. In

addition, the group designs and manufactures shaping, bottom rim coating, and inspection equipment as enhancements to its core product line and high-speed trimming and burnishing equipment for the plastic container industry, with an emphasis on containers for dry foods, condiments and specialty beverages. The packaging machines and clips are sold worldwide primarily for use with meat, poultry and other food products. International sales of the packaging related products, primarily in Europe, represent 65% of the packaging product sales.

 

The Systems segment manufacturing facilities and distribution operations are in North America and Europe, with additional distribution facilities in South America and Asia.

 

Technologies

 

Circuit Assembly and Test

 

The Circuit Assembly and Test group (“CAT”) manufactures equipment and consumable products related to the assembly, test and repair of printed circuit boards and semiconductor packages used in computers, automotive applications, consumer electronics, space, telecommunications, medical systems, and aircraft. The assembly equipment companies offer a broad array of equipment including solder paste deposition, component placement and automated soldering systems. The test companies provide bare circuit board testers, fixtures for both bare and loaded circuit board testing, semi-conductor test handlers and contactors, and precision electrical compliant contacts. The repair equipment companies supply solder management tools, repair workstations and fluid dispensing systems.

 

Product Identification and Printing

 

The Product Identification and Printing group (“PIP”) is a worldwide supplier of industrial marking and coding systems. Its primary printing products are based on Continuous Ink Jet (“CIJ”) technology, which is used for marking variable information (such as date codes or serial numbers) on consumer products. It provides a broad array of printing technologies, including laser, Drop on Demand (“DOD”), Thermal Transfer on Line (“TTOL”) and direct thermal. PIP provides solutions for product marking on primary packaging, secondary packaging such as cartons, and pallet marking for use in warehouse logistics operations. PIP also manufactures bar code printers and related products and narrow web printing presses used for producing pressure sensitive labels, small folding cartons and flexible packaging. The markets served by PIP include food, beverage, cosmetics, pharmaceutical, electronics, automotive and other applications where variable marking is required.

 

The Technologies segment has operations and manufacturing facilities in North America, Europe and Asia.

 

Discontinued Operations

 

Companies that are considered discontinued operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” are presented separately in the consolidated statements of operations and balance sheets and are not included in continuing operations. Earnings from discontinued operations includes charges to reduce these businesses to estimated fair value less costs to sell. Fair value is determined by using quoted market prices, when available, or other accepted valuation techniques. All interim and full year reporting periods presented reflect the discontinued operations discussed below on a comparable basis. Please refer to Note 7 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

 

Earnings from discontinued operations for the year were $35.7 million or $0.17 diluted earnings per share (“EPS”) compared to earnings of $18.6 million or $0.09 EPS in the prior year. In the fourth quarter of 2005, Dover sold Koolant Koolers, which previously reported within the Service Equipment group of the Industries segment and discontinued a minor business in the Resources segment in the Material Handling group. Earlier in 2005, the Company discontinued and sold Somero Enterprises, which previously reported within the Mobile Equipment group of the Industries segment. Dover also discontinued and entered into an agreement to sell Tranter PHE, which previously reported within the Process Equipment group of the Diversified segment, and discontinued one other business, which previously reported within the Packaging group of the Systems segment. Also during 2005, Dover

discontinued Hydratight Sweeney, a business in the Diversified segment, that was sold on May 17, 2005, and discontinued one minor business from the Industries segment, that was subsequently sold on April 1, 2005.

 

Charges to reduce these discontinued businesses to their estimated fair values have been recorded in earnings from discontinued operations, net of tax. During 2005, the Company discontinued a business in the Systems segment, resulting in a goodwill and intangible asset impairment of approximately $55.0 million. No charges related to the write off of goodwill or other long-lived asset impairments were recorded in 2004. For 2003, pre-tax charges were recorded to write off goodwill of $17.3 million and other long-lived asset impairments and other charges were recorded of $0.2 million.

 

Also, during 2005, in connection with the completion of a federal income tax audit, the Company adjusted its tax reserves relating to certain discontinued operations, resulting in tax benefits of $25.7 million.

 

During 2004, the Company discontinued and sold one business in the Technologies segment in the first quarter of 2004 and sold five businesses that were discontinued in 2003 for a net after tax loss of $2.4 million.

 

During 2003, the Company discontinued five businesses, three in the Diversified segment and one business in each of the Industries and Resources segments, all of which were classified as held for sale as of December 31, 2003. In the aggregate, these businesses were not material to the Company’s results. In addition, during 2003, the Company disposed of five businesses that were previously discontinued in 2002 for a net after tax gain of $4.9 million.

 

Also, during 2003, in connection with the completion of a federal income tax audit and commercial resolution of other issues, the Company adjusted certain reserves established in connection with the sales of previously discontinued operations and recorded a gain on the sales of discontinued operations, net of tax, of $16.6 million, and additional tax benefits of $5.1 million related to losses previously incurred on sales of businesses. These amounts were offset by charges of $13.6 million, net of tax, to reduce discontinued businesses to their estimated fair value, and a loss on the sale of discontinued operations, net of tax, of $6.0 million related to contingent liabilities from previously discontinued operations.

 

Raw Materials

 

Dover’s operating companies use a wide variety of raw materials, primarily metals and semi-processed or finished components, which are generally available from a number of sources. As a result, shortages or the loss of any single supplier have not had, and are not likely to have, a material impact on operating profits. During 2002, steel tariffs were imposed on the importation of certain steel products, which had a slight adverse impact on a number of Dover operating companies that use large amounts of steel. These tariffs remained in effect throughout most of 2003 and were repealed late in the year. In 2004, there were meaningful increases in raw material costs, particularly steel, and higher energy costs, including an estimated increase in unrecovered steel costs of $35 million. These increases primarily affected the Company’s industrial segments. In 2005, the impact of commodity prices moderated and most of the operating companies were able to offset cost increases with surcharges and price increases.

 

Research and Development

 

Dover’s operating companies are encouraged to develop new products as well as to upgrade and improve existing products to satisfy customer needs, expand revenue opportunities domestically and internationally, maintain or extend competitive advantages, improve product reliability and reduce production costs. During 2005, $192.2 million was spent on research and development, including qualified engineering costs, compared with $181.4 million and $151.5 million in 2004 and 2003, respectively.

 

For the Technologies and Electronics companies, efforts in these areas tend to be particularly significant because the rate of product development by their customers is often quite high. In general, the Technologies companies that provide electronic assembly equipment and services believe that their customers expect the performance capabilities of such equipment to improve significantly over time, with a concurrent lowering of operating costs and increasing efficiency. Significant new product development and introduction costs were incurred in 2003-2004, and moderated in 2005. Likewise, Electronics companies developing specialty electronic

components for the datacom and telecom commercial markets believe that their customers expect a continuing rate of product performance improvement and reduced costs. The result has been that product life cycles in these markets generally average less than five years with meaningful sales price reductions over that time period.

 

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

 

Intellectual Property

 

Dover companies own many patents, trademarks, licenses and other forms of intellectual property, which have been acquired over a number of years and, to the extent relevant, expire at various times over a number of years. A large portion of the Dover companies’ intellectual property consists of confidential and proprietary information constituting trade secrets that the companies seek to protect in various ways, including confidentiality agreements with employees and suppliers where appropriate. While the Dover companies’ intellectual property is important to their success, the loss or expiration of any of these rights, or any groups of related rights, probably would not materially affect the Company on a consolidated basis. The Company believes that its companies’ commitment to continuous engineering improvements, new product development and improved manufacturing techniques, as well as strong sales, marketing and service efforts, are significant to their general leadership position in the niche markets that they serve.

 

Seasonality

 

In general, operations of the Dover companies, while not seasonal, tend to have stronger revenue in the second and third quarters, particularly companies serving the consumer electronics, transportation, construction, waste hauling, petroleum, commercial refrigeration and food service markets. Companies serving the major equipment markets, such as power generation, chemical and processing industries, tend to have long lead times geared to seasonal, commercial or consumer demands, and tend to delay or accelerate product ordering and delivery to coincide with those market trends.

 

Customers

 

Dover’s companies serve thousands of customers, no one of which accounted for more than 10% of the Company’s consolidated revenue in 2005. One customer within the Systems segment accounted for approximately 20% of Systems revenue during 2005. Within each of the other five segments, no customer accounted for more than 10% of that segment’s revenue in 2005.

 

The Components group within the Electronics segment serves the military, space, aerospace, commercial and datacom/telecom infrastructure markets. Its customers include some of the largest operators in these markets. In addition, many of the OEM customers of the Components group outsource their manufacturing to Electronic Manufacturing Services (“EMS”) companies. The CAT group customers include many of the largest global EMS companies, particularly some of the newer EMS companies in China.

 

In the other Dover segments, customer concentrations are quite varied. Companies supplying the automotive and commercial refrigeration industries tend to deal with a few large customers that are significant within those industries. This also tends to be true for companies supplying the power generation, aerospace and chemical industries. In the other markets served, there is usually a much lower concentration of customers, particularly where the companies provide a substantial number of products and services applicable to a broad range of end use applications.

 

Backlog

 

Backlog generally is not a significant factor in most of Dover’s businesses, as most of the products of Dover companies have relatively short order-to-delivery periods. It is more relevant to those businesses that produce larger

and more sophisticated machines or have long-term government contracts, primarily in the Diversified segment, as well as the Mobile Equipment group within the Industries segment, the CAT group within the Technologies segment and the Components group within the Electronics segment. Total Company backlog as of December 31, 2005 and 2004 was $1,276.5 million and $996.0 million, respectively.

 

Competition

 

Dover’s competitive environment is complex because of the wide diversity of the products its companies manufacture and the markets they serve. In general, most Dover companies are market leaders, which compete with only a few companies and the key competitive factors are customer service, product quality and innovation. Dover usually is a more significant competitor domestically, where its principal markets are, than in foreign markets; however, Dover companies are becoming increasingly global where greater competition exists.

 

In the Technologies segment, Dover companies compete globally against a few very large companies, primarily operating in Japan, Europe and elsewhere in the Far East. Their primary competitors are Japanese and European manufacturers.

 

Within the other segments, competition is primarily domestic, although an increasing number of Dover companies see more international competitors and several serve markets which are predominantly international, particularly certain companies in the Electronics, Systems, Resources and Diversified segments.

 

International

 

For foreign revenue, including exports, and an allocation of the assets of the Company’s continuing operations, see Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

 

Although international operations are subject to certain risks, such as price and exchange rate fluctuations and foreign governmental restrictions, Dover intends to increase its expansion into foreign markets, including South America, Asia and Eastern Europe.

 

The countries where most of Dover’s foreign subsidiaries and affiliates are based are France, Germany, the U.K., the Netherlands, Sweden, Switzerland and, with increased emphasis, China.

 

Environmental Matters

 

Dover believes its operations generally are in substantial compliance with applicable regulations. In a few instances, particular plants and businesses have been the subject of administrative and legal proceedings with governmental agencies or private parties relating to the discharge or potential discharge of regulated substances. Where necessary, these matters have been addressed with specific consent orders to achieve compliance. Dover believes that continued compliance will not have a material impact on the Company’s financial position and will not require significant expenditures or adjustments to reserves.

 

Employees

 

The Company had approximately 31,650 employees in continuing operations as of December 31, 2005.

 

Other Information

 

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

 

 

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause our actual results to vary materially

from recent results or from anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion in “SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS” included in this Annual Report on Form 10-K.

 

Cyclical Economic Conditions May Affect our Financial Performance

 

A meaningful portion of the Company’s revenue, most notably from the Circuit Assembly and Test group in the Technologies segment, is derived from companies in capital goods markets that are subject to inherently unpredictable business cycles. As a result, the revenue and operating performance of these companies in any one period are not necessarily predictive of their revenue and operating performance in other periods, and could have a material impact on Dover’s consolidated financial position.

 

In addition, Dover is subject to substantially the same risk factors as other U.S.-based industrial manufacturers. However, except as noted above, the structure of Dover and the many different markets its companies serve mitigate the possibility that any of these risk factors will materially impact Dover’s consolidated financial position.

 

 

Not Applicable.

 

 

The number, type, location and size of the Company’s properties as of December 31, 2005 are shown on the following charts, by segment:

 

 

 

The facilities are generally well maintained and suitable for the operations conducted. In 2006, the Company expects to make modest increases in capacity for a few businesses experiencing strong growth demands.

 

 

A few of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under Federal and State statutes which provide for the allocation of such costs among “potentially responsible parties.” In each instance the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other “potentially responsible parties” involved and is anticipated to be immaterial to the Company. In addition, a few of the Company’s subsidiaries are involved in ongoing remedial activities at certain plant sites, in cooperation with regulatory agencies, and appropriate reserves have been established.

 

The Company and certain of its subsidiaries are also parties to a number of other legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of products of Dover companies, exposure to hazardous substances or patent infringement, litigation and administrative proceedings involving employment matters, and commercial disputes. Management and legal counsel periodically review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred, the availability and extent of insurance coverage, and established reserves. While it is not possible at this time to predict the outcome of these legal actions or any need for additional reserves, in the opinion of management, based on these reviews, it is very unlikely that the disposition of the lawsuits and the other matters mentioned above will have a material adverse effect on the Company’s financial position, results of operations, cash flows or competitive position.

 

 

No matter was submitted to a vote of the Company’s security holders in the last quarter of 2005.

Executive Officers of the Registrant

 

All officers are elected annually at the first meeting of the Board of Directors following the annual meeting of stockholders and are subject to removal at any time by the Board of Directors. The executive officers of Dover as of February 28, 2006, and their positions with the Company (and, where relevant, prior business experience) for the past five years are as follows:

 

 

PART II

 

 

The principal market in which the Company’s common stock is traded is the New York Stock Exchange. Information on the high and low sales prices of such stock, and the frequency and the amount of dividends paid during the last two years is as follows:

 

 

The number of holders of record of the Company’s Common Stock as of January 31, 2006 was approximately 13,500. This figure includes participants in the Company’s 401(k) program.

 

In 2005, pursuant to the Dover Corporation 1996 Non-Employee Directors’ Stock Compensation Plan (the “Directors’ Plan”), the Company issued an aggregate of 12,860 shares of its Common Stock to ten outside directors (after withholding an aggregate of 3,790 additional shares to satisfy tax obligations), as compensation for serving part or all of the year as directors of the Company during 2005.

 

Under the Directors’ Plan as amended effective November 4, 2004, non-employee Directors receive annual compensation in an amount set by the Board, payable partly in cash and partly in Dover’s common stock as such allocations may be adjusted from time to time by the Board of Directors, subject to the limitation set forth in the Directors’ Plan on the maximum number of shares that may be granted to any Director in any year (10,000 shares). For 2004, annual compensation was set at $90,000, payable 25% in cash and 75% in common stock. For 2005, annual compensation was set at $120,000, payable 40% in cash and 60% in common stock. The 2005 compensation of $120,000 was paid by $48,000 in cash and 1,800 shares, based on the fair market value of Dover’s common stock on November 15, 2005. In each of 2004 and 2005, the chair of the Audit Committee received additional compensation of $10,000.

 

The table listed below presents shares of the Company’s stock which were acquired by the Company during the fourth quarter. These shares were acquired by the Company from the holders of its employee stock options when they tendered shares as full or partial payment of the exercise price of such options. These shares are applied against the exercise price at the market price on the date of exercise.

 

 

 

Selected Dover Corporation financial information for the years 2001 through 2005 is set forth in the following 5-year Consolidated Table.

 

 

 

All results and data in this section reflect continuing operations, which exclude discontinued operations unless otherwise noted.

 

 

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K, particularly this Item 7, contains forward-looking statements within the meaning of applicable law. Forward-looking statements are subject to inherent uncertainties and risks. It is important that you read “SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS” inside the front cover of this Annual Report of Form 10-K for more information about these forward-looking statements and their inherent uncertainties and risks.

 

 

Liquidity and Capital Resources

 

Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, adequacy of commercial paper and available bank lines of credit, and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from operations and remains in a strong financial position, with enough liquidity available for reinvestment in existing businesses and strategic acquisitions while managing the capital structure on a short and long-term basis.

 

The following table is derived from the Consolidated Statements of Cash Flows:

 

 

Cash flows provided by operating activities during 2005 increased $82.1 million, or 14%, compared to 2004, which included a tax refund of approximately $41 million. The increase in cash flows provided by operations reflected higher net earnings and incremental decreases in working capital, which was partially offset by an $18.0 million pension contribution, higher benefits and compensation payouts and an increase in tax payments of approximately $83 million in 2005.

 

Cash used in investing activities during 2005 increased $547.5 million compared to 2004, reflecting an increase in acquisition and capital expenditure activity, partially offset by proceeds from the disposition of businesses and sale of property and equipment. Acquisition expenditures in 2005 were $1,091.8 million compared to $506.1 million in 2004. Capital expenditures in 2005 increased $49.6 million to $152.1 million as compared to $102.5 million in 2004, primarily due to investments in plant expansions, plant machinery and information systems. Proceeds from the disposition of businesses increased $85.4 million to $159.3 million. The Company currently anticipates that any additional acquisitions made during 2006 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, established lines of credit or public debt markets. Capital expenditures for 2006 are expected to increase moderately over 2005 levels.

 

Cash provided by financing activities during 2005 totaled $272.8 million as compared to cash used in financing activities of $101.0 million during 2004. The net change in cash provided by financing activities was primarily due to a net increase in borrowings of $439.5 million that were used to fund current year acquisitions partially offset by cash used in the repurchase of treasury shares $51.9 million and dividends paid of $133.9 million.

 

Adjusted working capital (a non-GAAP measure; calculated as accounts receivable, plus inventory, less accounts payable) increased from December 31, 2004 by $16.4 million or 1.3% to $1,292.1 million, primarily driven by increases in receivables of $127.1 million, increases in payables of $56.9 million offset by decreases in inventory of $53.8 million. Excluding the impact of acquisitions on working capital of $80.7 million and changes in

foreign currency of $49.3 million, working capital decreased by $15.0 million or 3% from December 31, 2004. The increase in receivables was driven by increased revenue activity and acquisitions of $54.0 million, partially offset by decreases due to foreign currency fluctuations of $48.9 million. The inventory balance decrease was driven by operations and decreases due to foreign currency fluctuations of $23.8 million, partially offset by acquisitions of $59.5 million. Increases in accounts payable were a result of a concerted effort by management to better align the payable cycle with the Company’s cash receipts cycle, acquisitions of $32.8 million, partially offset by a decrease due to foreign currency fluctuations of $23.4 million.

 

In addition to measuring its cash flow generation and usage based upon the operating, investing and financing classifications included in the Consolidated Statements of Cash Flow, the Company also measures free cash flow (a non-GAAP measure). Management believes that free cash flow is an important measure of operating performance because it provides both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase Dover’s common stock. For further information see Non-GAAP Disclosures at the end of this Item 7.

 

Free cash flow for the year ended December 31, 2005 was $507.5 million or 8.3% of revenue compared to $475.0 million or 9.1% of revenue in the prior year period, which included a tax refund of approximately $41 million in the first quarter of 2004. The 2005 increase in free cash flow reflected higher net earnings and incremental decreases in working capital, which was partially offset by pension contributions of $18.0 million to the Knowles Electronics Holdings, Inc. pension plan, higher benefits and compensation payouts and increased capital expenditures of $49.6 million and tax payments of approximately $83 million. The following table is a reconciliation of free cash flow with cash flows from operating activities.

 

 

At December 31, 2005, the Company’s net property, plant, and equipment totaled $816.7 million compared to $727.0 million at the end of 2004. The increase in net property, plant and equipment reflected acquisitions of $100.3 million, capital expenditures of $152.1 million, partially offset by decreases related to foreign currency fluctuation of $22.7 million and depreciation.

 

The aggregate of current and deferred income tax assets and liabilities increased from a $425.9 million net liability at the beginning of the year to $428.2 million at year-end 2005. This resulted primarily from decreases in current tax liabilities, increases in deferred tax assets from accruals and net operating loss carryforwards (primarily acquisition related), partially offset by an increase in deferred tax liabilities related to intangible assets.

 

Dover’s consolidated pension benefit obligation increased by $160.7 million in 2005. The increase was due principally to acquisitions of $96.2 million and actuarial losses related to lower discount rate assumptions. Offsetting this, plan assets increased $111.0 million due to acquisitions of $68.5 million, gains on plan investments during the year and Company contributions of $18.0 million, which were partially offset by the payouts of benefits. During 2005, plan amendments created an increase in the benefit obligation of $9.7 million. Due to the decrease in the net funded status of the plans and the increase in the amortization of unrecognized losses, it is estimated that pension expense will increase from $26.7 million to approximately $41 million in 2006. The Company anticipates discretionary contributions to its pension benefit plans of under $25 million in 2006.

The Company utilizes the total debt and net debt to total capitalization calculations (a non-GAAP measure) to assess its overall financial leverage and capacity and believes the calculations are useful to its stockholders for the same reasons. The following table provides a reconciliation of total debt and net debt to total capitalization to the most directly comparable GAAP measures:

 

 

The total debt level of $1,538.4 million as of December 31, 2005 increased $446.1 million from December 31, 2004 as a result of an increase in borrowings to fund acquisitions made in 2005. On October 26, 2005, the Company closed a $1 billion 5-year unsecured revolving credit facility with a syndicate of banks that replaces the Company’s $400 million 364-day facility and its 5-year $600 million facility. This facility is primarily used to support the Company’s commercial paper borrowings and had no outstanding balance at December 31, 2005. In addition, on October 13, 2005, Dover issued $300 million of 4.875% notes due 2015 and $300 million of 5.375% debentures due 2035. The net proceeds from the notes and debentures were used to fund acquisitions. The notes and debentures are redeemable at the option of Dover in whole or in part at any time at a redemption price that includes a make-whole premium, with accrued interest to the redemption date.

 

Also, on November 25, 2005, the Company entered into a 3 year, € 75 million credit facility. This facility had no outstanding balance as of December 31, 2005.

 

Dover’s long-term debt instruments had a book value of $1,345.4 million on December 31, 2005 and a fair value of approximately $1,406.0 million. On December 31, 2004, the Company’s long-term debt instruments had a book value of $1,005.7 million and a fair value of approximately $1,093.0 million.

 

The Company was in compliance with the covenants related to its debt as of December 31, 2005 and 2004.

 

The Company believes that existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending may increase Company debt. However, management anticipates that the debt to capital ratio will remain generally consistent with historical levels. Operating cash flow and access to capital markets are expected to satisfy the Company’s various cash flow requirements, including for acquisition spending and capital expenditures.

 

Management is not aware of any potential impairment to the Company’s liquidity, and the Company is in compliance with all of its long-term debt covenants. It is anticipated that in 2006 any funding requirements above cash generated from operations will be met through the issuance of commercial paper or, depending upon market conditions, through the issuance of long-term debt or some combination of the two.

 

During the third quarter 2005, Dover entered into several treasury rate locks related to the October 13, 2005 notes and debentures. The contracts were settled on October 13, 2005 and the resulting gain of $3.0 million is being deferred and amortized over the life of the related notes and debentures.

 

As of December 31, 2005, the Company had two interest rate swaps outstanding for a total notional amount of $100.0 million, designated as fair value hedges of the $150.0 million 6.25% Notes due on June 1, 2008. One $50 million interest rate swap exchanged fixed-rate interest for variable-rate interest. The other $50 million swap is

designated in foreign currency, and exchanges fixed-rate interest for variable-rate interest, and also hedges a portion of the Company’s net investment in foreign operations. The swap agreements reduced the effective interest rate on the notes to 5.12%. There was no hedge ineffectiveness as of December 31, 2005, and the aggregate fair value of these interest rate swaps of $0.9 million was determined through market quotation and is reported in other assets and long-term debt.

 

During 2005, the Company entered into derivative contracts to hedge potential foreign currency volatility on current assets and liabilities. The contracts were designated as cash flow hedges and were considered by management to be highly effective. The derivative foreign exchange contracts settled during 2005 and resulted in a gain of approximately $0.6 million, which is recognized in Other (income), expense, net.

 

At December 31, 2005, the Company had open foreign exchange forward purchase contracts expiring through December 2006 related to hedges of foreign currency exposures as follows:

 

 

The Company’s credit ratings, which are independently developed by the respective rating agencies, are as follows for the years ended December 31:

 

 

A summary of the Company’s undiscounted long-term debt, commitments and obligations as of December 31, 2005 and the years when these obligations come due is as follows:

 

 

 

2005 COMPARED TO 2004

 

Consolidated Results of Operations

 

Revenue for 2005 of $6,078.4 million was up $861.3 million or 17% from 2004, primarily driven by increases at all six segments led by $291.7 million at Resources and $147.8 million at Electronics. Resources’ revenue increased due to positive market fundamentals, acquisitions and improved operating efficiencies. Electronics’ revenue was impacted by the acquisition of two significant Components companies in the third quarter of 2005 along with operating improvements in the core businesses.

Revenue would have increased 16% to $6,066.1 million, if 2004 foreign currency translation rates were applied to 2005 results. Acquisitions completed during 2005 contributed $209.3 million to revenue and contributed operating profit before purchase accounting write-offs of $32.6 million. Gross profit of $2,079.4 million in 2005 represented a 16% increase compared to $1,793.7 million in 2004, while gross profit margin remained essentially flat at 34.2% and 34.4%, respectively.

 

For the year, consolidated revenue growth was 16.5%, with 8.2% from organic growth and 8.1% from acquisitions. Earnings growth of 20% was generated by 13.8% of organic growth, with 6.4% from acquisitions. Selling and administrative expenses for 2005 were $1,378.9 million, or 22.7% of revenue, compared to $1,205.3 million or 23.1% of revenue in 2004. The increase in selling and administrative expenses included increases in compensation and pension benefits along with the impact of the 2005 acquisitions. Operating earnings of $700.5 million for 2005 increased $112.1 million compared to the prior year due primarily to the 17% increase in revenue, benefits from improved operating efficiencies and improved global economic conditions. Operating margin for 2005 and 2004 was essentially flat at 11.5% and 11.3%, respectively.

 

Net interest expense increased 17.8% to $72.2 million for 2005, compared to $61.3 million for 2004. The primary reason for the increase in net interest expense was higher outstanding borrowings used to fund 2005 acquisitions.

 

Other (Income) Expense, net for 2005 of ($15.3) million was driven primarily by foreign exchange gains. Other (Income) Expense, net of ($1.6) million for 2004 included gains on dispositions, favorable settlements and miscellaneous credits of $9.5 million, which were largely offset by foreign exchange losses of $7.9 million.

 

The 2005 effective tax rate for continuing operations was 26.3% compared to 25.4% in 2004 and includes a $9.5 million U.S. tax provision related to the repatriation of $373.7 million of dividends, a $25.5 million benefit primarily related to the resolution of U.S. tax issues, and a $5.5 million first quarter benefit related to a favorable federal tax court decision. Excluding the repatriation provision, the full year 2005 effective tax rate for continuing operations was 24.8%. Dover expects the 2006 effective tax rate to be between 28% and 30% for continuing operations.

 

Earnings from continuing operations for 2005 were $474.5 million or $2.32 per diluted share compared to $394.2 million or $1.92 per diluted share from continuing operations in 2004. For 2005, net earnings were $510.1 million or $2.50 per diluted share, including $35.7 million or $0.17 per diluted share in earnings from discontinued operations, compared to $412.8 million or $2.02 per diluted share for 2004, which included $18.6 million or $0.09 per diluted share in earnings from discontinued operations. Refer to Note 7 in the Consolidated Financial Statements for additional information on discontinued operations.

 

Segment Results of Operations

Diversified

 

 

Diversified’s revenue and earnings increases were driven by both the Industrial Equipment Group and the Process Equipment Group due to growth in the aerospace, defense, heat exchanger, and oil and gas markets.

 

Industrial Equipment’s revenue and earnings increased 27% and 17%, respectively, over the prior year. The revenue increase was driven primarily by strength in the aerospace and construction markets. The margin decrease resulted from unfavorable product mix and acquisition-related costs, partially offset by volume increases and moderating raw material pricing. The automotive and powersports business was down as gains from the North

American professional racing market were not enough to offset a weak powersports market. Bookings increased 23%, generating a book-to-bill ratio of 1.08, and backlog increased 22%.

 

Process Equipment full-year revenue and earnings rose 19% and 33%, respectively, and margin grew to over 15%, reflecting double digit revenue growth in all areas, and significant earnings and margin growth in the oil and gas market for bearings. In addition, overall growth was driven by the expanding HVAC markets for heat exchangers, as well as productivity gains. Bookings increased 20%, backlog grew 30%, and the book-to-bill ratio was 1.08.

Electronics

 

 

The increase in both revenue and earnings at Electronics was primarily driven by the acquisition of two significant Components companies, Knowles Electronics and Colder Products, in the third quarter of 2005 and operating improvements within core businesses, although these gains were partially offset by decreases in Commercial Equipment and purchase accounting amortization.

 

Components operating earnings increased 128% in 2005 compared to the prior year on a 46% increase in revenue, reflecting the impact of the acquisitions, and revenue and earnings growth in almost all of the other Components businesses. The margin grew to exceed 11% and was aided by the two recent acquisitions and included $5.3 million of integration costs related to a 2004 Vectron acquisition, which has essentially been completed. Bookings increased 57%, backlog grew 81%, and the book-to-bill ratio was 1.07.

 

Commercial Equipment full year revenue was flat, with earnings down 23% and a substantial decrease in margin, reflecting some market softness and the effect of Hurricane Katrina, which disrupted the ATM operations significantly in the third quarter of 2005. Bookings decreased 2%, backlog grew 23%, and the book-to-bill ratio was 1.01.

Industries

 

 

Revenue and earnings increases in Industries were driven primarily by the Mobile Equipment group, due to strong military sales and strength in environmental markets. Industries earnings increase was partially offset by a decrease at the Service Equipment group. Bookings and backlog both exceeded prior-year levels on improved strength in the environmental and military markets.

 

Strong military sales and strength in the oil field industry contributed to Mobile Equipment revenue and earnings increases of 15% and 45%, respectively, with significant margin improvement. Earnings were also positively impacted by a gain of approximately $1 million on the sale of a facility and cost control initiatives. Bookings increased 14% driven by strong demand for trailer and refuse products, generating a book-to-bill ratio of 1.05 and a backlog increase of 15%.

Service Equipment revenue and margin were flat while earnings declined moderately, reflecting overall end market conditions and weakness in the automotive service industry. Earnings were negatively impacted by product mix, new product introduction costs, and a facility shutdown. Bookings were essentially flat, backlog increased 18% and the book-to-bill ratio was 1.01.

Resources

 

 

In 2005, Resources had record revenue, earnings, margin, bookings and backlog, reflecting positive market fundamentals, acquisitions and improved operating efficiencies.

 

Oil and Gas Equipment led the segment in 2005 with increases in revenue and earnings of 52% and 62%, respectively, due to continued robust demand for its energy-related products. Bookings increased by 49%, resulting in a book-to-bill ratio of 1.03 and backlog increased 58%.

 

Fluid Solutions revenue and earnings increased 14% and 20%, respectively, due to strong refining, petrochemical, and transportation markets, partially offset by weakness in the retail petroleum markets. Bookings were up 12%, and backlog was up 6%, with a book-to-bill ratio of 1.01.

 

Material Handling realized an increase in revenue of 14% while earnings, which included strategic realignment costs at one of the businesses grew 6%. The increase in revenue was driven by demand in the construction, crane, aerial lift, petroleum, and military markets, partially offset by slow demand from the automotive industry. Bookings were up 11%, and backlog was up 20%, with a book-to-bill ratio of 1.03.

Systems

 

 

Systems revenue and earnings increases were driven by both Food Equipment and Packaging Equipment, reflecting strength in the supermarket equipment and can machinery markets.

 

Food Equipment revenue increased 14% in 2005 compared to the prior year, due to higher supermarket and foodservice equipment sales, resulting in an earnings increase of 42%. Margin improved due to volume leverage, pricing initiatives and productivity gains. Bookings increased 13%, and backlog was up 26%, with a book-to-bill ratio of 1.05.

 

Packaging Equipment revenue and earnings in 2005 increased 13% and 18%, respectively, over the prior year and margin rose 80 bps due to strength in the can machinery market, particularly in Eastern Europe, Asia and the Middle East, driven by both new lines and can size conversions. The package closure business experienced continued weak market conditions in Western Europe, particularly Germany. The book-to-bill ratio was 1.14, bookings increased 22% and backlog increased 89%.

Technologies

 

Revenue and earnings increases in 2005 reflected strength in the product identification market, offset by costs of $8 million related to restructuring charges that are expected to have a positive impact on the segment’s future financial performance.

 

CAT revenue was essentially flat and earnings declined 24% in 2005 compared to the prior year, reflecting restructuring charges of approximately $6 million, principally related to certain facility closures, and general sales declines, except at the screen printer and wave solder companies. The book-to-bill ratio was 1.04, bookings increased 4% and backlog increased 32%.

 

Product Identification and Printing (“PIP”) reported a revenue increase of 31%, while earnings increased 22%. The revenue and earnings increases were primarily attributable to the impact of the Datamax acquisition at the end of 2004, partially offset by approximately $2 million of restructuring costs, weakness in printing equipment markets and price competitiveness for marking equipment. The book-to-bill ratio for the quarter was 1.01, bookings increased 31% and backlog increased 5%.

 

2004 COMPARED WITH 2003

 

Consolidated Results of Operations

 

Revenue for 2004 of $5,217.1 million was up $1,050.9 million or 25% from 2003, primarily driven by increases of $367.3 million at Technologies and $350.3 million at Resources. Technologies’ revenue was impacted by positive trends in the global electronics industry, particularly in the back-end semiconductor market, as well as expansion of the Chinese manufacturing capacity. Resources’ revenue increased due to improved market conditions and the full year impact of the 2003 acquisition of Warn Industries.

 

Revenue would have increased 22% to $5,097.1 million if 2003 foreign currency translation rates were applied to 2004 results. Acquisitions completed during 2004 contributed $104.1 million to revenue and contributed gross profit of $38.6 million. Gross profit of $1,793.7 million in 2004 represented a 26% increase compared to $1,426.3 million in 2003. The gross profit margin was essentially flat for both 2004 and 2003 at 34.4% and 34.2% as volume increases in 2004 were offset by rising commodity prices.

 

Selling and administrative expenses for 2004 were $1,205.3 million or 23.1% of revenue, compared to $1,003.2 million or 24.1% of revenue in 2003. The increase in selling and administrative expenses included the costs related to Sarbanes-Oxley requirements and increases in compensation and pension benefits. Operating earnings of $588.3 million for 2004 increased $165.3 million compared to the prior year due primarily to the 25% increase in revenue, benefits from the Company’s restructuring programs undertaken during 2002 and 2001, and slightly improved global economic conditions. Operating margin for 2004 was 11.3% compared to 10.2% for 2003.

 

Net interest expense decreased 2% to $61.3 million for 2004, compared to $62.3 million for 2003. The primary reason for the decrease in net interest expense was income related to the Company’s outstanding interest rate swaps related to a portion of its long-term debt.

 

Other (Income) Expense, net, for 2004 was ($1.6) million and includes gains on dispositions, favorable settlements and miscellaneous credits of $9.5 million, which were largely offset by foreign exchange losses of $7.9 million. Other (Income) Expense, net, of $9.7 million for 2003 primarily related to foreign exchange losses of

$6.2 million. The foreign exchange losses in both 2004 and 2003 primarily relate to the appreciation of the Euro against the U.S. dollar.

 

Dover’s effective 2004 tax rate for continuing operations was 25.4% compared to the 2003 rate of 23.0%. The low effective tax rate for both years is largely due to the continuing benefit from tax credit programs such as those for research and experimentation combined with the benefit from U.S. export programs, lower effective foreign tax rates from the utilization of net operating loss carry forwards and the recognition of certain capital loss benefits, which were higher in 2003.

 

Earnings from continuing operations for 2004 were $394.2 million or $1.92 per diluted share compared to $270.1 million or $1.33 per diluted share from continuing operations in 2003. For 2004, net earnings were $412.8 million or $2.02 per diluted share, including $18.6 million or $0.09 per diluted share in earnings from discontinued operations, compared to $292.9 million or $1.44 per diluted share for 2003, which included $22.8 million or $0.11 per diluted share in earnings from discontinued operations. Refer to Note 7 in the Consolidated Financial Statements for additional information on discontinued operations.

 

Segment Results of Operations

Diversified

 

 

Diversified revenue and earnings increases were driven by both the Industrial Equipment Group and the Process Equipment Group.

 

Industrial Equipment revenue and earnings increased 23% and 34%, respectively, primarily due to the continued recovery of the commercial and defense aerospace markets, increased cab sales volumes with key customers in the construction/agriculture equipment markets, and the recovery of the automotive racing and powersports markets. Solid execution of performance improvement plans as well as the addition of new customers and improved operating efficiencies all contributed to the earnings and margin increases. Bookings increased 32%, generating a book-to-bill ratio of 1.12, and backlog increased 33%.

 

Process Equipment revenue increased 15%, while earnings increased 21%, primarily due to the addition of new key customers for its color and ink control products, moving its customer base from small and medium size printers in the aftermarket to large printers and the high-end new press OEM market. In the heat pump and boiler markets, order activity was steady throughout the year, and production capacity was increased with both capital investments and productivity programs to meet the growing demand. Cost reduction activities and favorable currency rates also contributed to the earnings and margin increases. Bookings increased 23%, generating a book-to-bill ratio of 1.07, and backlog increased 33%.

Electronics

 

Electronics revenue and earnings growth in 2004 was primarily due to increases in the ATM business and the impact of acquisitions on the Components group.

 

Components revenue and earnings increases of 30% and 61%, respectively, were primarily due to acquisitions made at the end of 2003 and during 2004 as well as stronger demand from communication equipment customers, which peaked in the second quarter of 2004. Bookings increased 27% over the 2003 period, resulting in a book-to-bill ratio of 1.00, and backlog increased 30%.

 

Commercial equipment revenue and earnings increased 26% and 16%, respectively, primarily due to increases in the ATM business in 2004, which marked the transition from serving primarily low-end retail ATM markets to entering the mid to high-end market of major retail and financial institutions. Costs associated with these endeavors reduced margin. Orders finished strong with a bookings increase of 29%, resulting in a book-to-bill ratio of 1.02, and backlog increased 97%, primarily due to strong demand in the ATM business.

 

Industries

 

Industries revenue and earnings increases reflected continued market share gains helped by considerable new product introductions in the Mobile Equipment group, which was the largest contributor to the revenue and earnings increases.

 

Mobile Equipment revenue and earnings were up 23% and 42%, respectively, over the prior year due to an increase in buying in municipal markets, increases in market share within the national account segment, and further penetration into the independent hauler segment. Recycling products had a strong year as baler sales increased behind new product introductions and product redesigns. The Mobile Equipment group increased its market share due in part to a large one-time order from a national account, by leveraging its broad product line, and by focusing engineering efforts on identifying customer needs. Bookings increased 10% over the 2003 period, resulting in a book-to-bill ratio of 1.06, and backlog increased 21%.

 

Service Equipment revenue increased 15%, while earnings increased 7%. Much of the increase in revenue was due to new lower margin product categories introduced in the latter half of 2003. Earnings were also hampered by escalating steel costs and pricing pressures from low-cost Asian car wash imports. Sales to major oil companies were up for the year, but investor sales were flat as hurricanes and heavy rain reduced near-term car wash volume and, therefore, made current investors reconsider their replacement and expansion plans for the year. Bookings increased 14% over the 2003 period, resulting in a book-to-bill ratio of 1.01, and backlog increased 19%.

Resources

 

Resources 2004 revenue increased 37% while earnings increased 60%, driven by strength in the Oil and Gas Equipment group and in the Material Handling group, which serves the construction equipment, mobile crane, recovery vehicle, and power sports markets.

 

Oil and Gas Equipment revenue increased 31% primarily due to an acquisition, as well as organic growth. Earnings increased 36% due to increased volume and strong gas compression and transmission markets in 2004, both in the OEM equipment and the maintenance and service sectors. Bookings increased 38% over the 2003 period, resulting in a book-to-bill ratio of 1.04, and backlog increased 212%.

 

Fluid Solutions 2004 revenue and earnings increased 14% and 30% respectively, when compared to 2003, primarily due to an increase in retail service station construction and remodeling, the opening of a new manufacturing facility in China, an expanded presence in Brazil, and stronger growth in the rail tank car market. The group’s earnings benefited from restructuring and consolidation initiatives in 2003, generating strong earnings leverage as a result of these initiatives. Bookings increased 15% over the 2003 period, resulting in a book-to-bill ratio of 1.03, and backlog increased 37%.

 

Material Handling revenue and earnings increased 79% and 113%, respectively, which includes the results of Warn Industries, which was acquired in October 2003. The group achieved record revenue in power sports products, strong growth in its branded truck products, and continued growth in powertrain products driven by increased demand for light trucks and sport utility vehicles. Also, strong growth was achieved in robotics tooling and through major industrial catalog sales. These strengths were dampened by slow growth in the automotive tooling and work holding markets. The petroleum, military, construction equipment, and mobile crane markets rebounded in early 2004 and provided increased opportunities for growth and the business has been able to realize synergy in sales and engineering from prior acquisitions. Orders finished strong with a bookings increase of 89%, resulting in a book-to-bill ratio of 1.06, and backlog increased 61%.

 

Systems

 

Systems 2004 revenue was flat while 2004 earnings decreased by 14% primarily due to weakness in the Food Equipment Group, which experienced slower market conditions and a rise in commodity costs.

 

Food Equipment revenue was essentially flat while earnings decreased 18%. Continued weakness in municipal spending negatively impacted the institutional equipment market for the third consecutive year. 2004 saw numerous chain restaurant new-store openings being delayed or put on hold. Despite slower overall market conditions and consolidations in the supermarket industry, revenue continued to grow through expansion of its customer base by

offering industry-leading product innovations and strong customer service. In addition, the group was heavily impacted by the rise in commodity costs, and a slowdown in new construction and remodels by two of its major customers. Bookings increased 11% over the 2003 period, resulting in a book-to-bill ratio of 1.06, and backlog increased 37%.

 

Packaging equipment revenue increased 4%, while earnings were essentially flat. Despite weakness in the German market and the result of a consolidating retail environment, international sales were strong driven by strength in Eastern Europe, primarily Russia, Poland, Romania, Hungary and the Baltic states. The U.S. business moderately increased amid continued pricing pressures. Earnings were negatively impacted by investments in product development, start-up costs associated with opening a new facility in the Czech Republic, and increases in commodity costs. Bookings increased 15% over the 2003 period, resulting in a book-to-bill ratio of 1.05, and backlog increased 48%.

 

Technologies

 

Technologies revenue and earnings increases were due primarily to the continued recovery of the overall electronics industry, which commenced in 2003. Particularly strong was the mid-year activity in the back-end semiconductor markets. However, by the fourth quarter, the semiconductor and related markets had slowed significantly as did the level of Chinese contract manufacturers’ capital expenditures.

 

CAT experienced 42% revenue growth and 159% earnings growth in 2004 compared to 2003. Most of this growth came from the companies serving the back-end semiconductor markets and from new technology requirements in solder paste management and soldering. In addition, the group acquired a test handling company Rasco GmbH in June 2004, which contributed to the overall growth in revenue and earnings. Revenue was also positively impacted by increased sales of circuit assembly feeders and strong market acceptance of selective soldering machines, and product breadth that addresses the specific needs of the North American, European and Asian markets. The memory, chip attach and special application segments also contributed to the revenue and earnings growth. Bookings increased 33% over the 2003 period, resulting in a book-to-bill ratio of 0.98, and backlog increased 3%.

 

PIP reported a 17% increase in revenue and a 15% increase in earnings primarily due to its CIJ applications in primary packaging, and DOD and TTOL applications in secondary packaging and large character printing. CIJ unit volume for the year was at a record level although non-CIJ products were becoming an increasing percentage of the group’s business. In addition, during December, the group completed the acquisition of Datamax International, a Florida-based manufacturer of bar code printers, which was immaterial to the revenue and earnings of the group in 2004 due to the timing of the acquisition. In addition, the group experienced significant growth in label press orders, driven by the strength of the Euro, U.S. tax incentives and improvements in sales strategies. Bookings increased 18% over the 2003 period, resulting in a book-to-bill ratio of 1.01, and backlog increased 36%.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements and related public financial information are based on the application of generally accepted accounting principles in the United States of America (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the public disclosures of the Company, including information regarding

contingencies, risk and its financial condition. The Company believes its use of estimates and underlying accounting assumptions conform to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness on a consistent basis throughout the Company. Primary areas where the financial information of Dover is subject to the use of estimates, assumptions and the application of judgment include the following areas:

 

 

 

New Accounting Standards

 

Effective January, 1 2006, Dover adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which no longer permits the use of the intrinsic value method under Accounting Principles Board Opinion (“APB”) No. 25. Dover adopted SFAS No. 123(R) using the modified prospective method, which requires compensation expense to be recorded for all options granted after January 1, 2006, as well as the unvested portion of previously granted options. Compensation expense will be recorded on a straight line basis, generally over the explicit service period (3 years). For retirement eligible employees, SFAS No. 123(R) clarifies that the recognition of compensation expense should be over the period from the date of grant through the date the employee first becomes eligible to retire and is no longer required to provide service. Dover’s accounting policy related to vesting will be changed to reflect these rules for retirement eligible employees concurrent with the adoption of SFAS No. 123(R) in the first quarter of 2006. See Note 1 to the Consolidated Financial Statements for additional information on the impact of adopting SFAS No. 123(R).

 

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20 “Accounting Changes,” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance that it does not include specific transition provisions. Specifically, SFAS 154 requires retrospective application to prior periods’

financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS 154 does not change the transition provisions of any existing pronouncement. SFAS 154 is effective for Dover for all accounting changes and corrections of errors made beginning January 1, 2006.

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), effective for fiscal years ending after December 15, 2005. FIN 47 clarifies that a conditional asset retirement obligation, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective for the Company no later than the end of 2005. The effect of FIN 47 was immaterial to Dover’s consolidated results of operations, cash flows or financial position.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, An Amendment of APB No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement was effective for the Company beginning July 1, 2005 and was applied prospectively. The effect of the adoption of SFAS 153 was immaterial to Dover’s consolidated results of operations, cash flows or financial position.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4” (“SFAS 151”). SFAS 151 requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. The provisions of SFAS 151 are applicable to inventory costs incurred beginning January 1, 2006. The effect of the adoption of SFAS 151 was immaterial to Dover’s consolidated results of operations, cash flow and financial position.

 

Non-GAAP Disclosures

 

In an effort to provide investors with additional information regarding the Company’s results as determined by GAAP, the Company also discloses non-GAAP information which management believes provides useful information to investors. Free cash flow, net debt, total capitalization, operational working capital, revenue excluding the impact of changes in foreign currency exchange rates and organic revenue growth are not financial measures under GAAP and should not be considered as a substitute for cash flows from operating activities, debt or equity, revenue and working capital as determined in accordance with GAAP and they may not be comparable to similarly titled measures reported by other companies. Management believes the (1) net debt to total capitalization ratio and (2) free cash flow are important measures of operating performance and liquidity. Net debt to total capitalization is helpful in evaluating the Company’s capital structure and the amount of leverage it employs. Free cash flow provides both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase Dover’s common stock. Reconciliations of free cash flow, total debt and net debt can be found above in this Item 7, Management’s Discussion and Analysis. Management believes that reporting operational working capital (also sometimes called “adjusted working capital”), which is calculated as accounts receivable, plus inventory, less accounts payable, provides a meaningful measure of the Company’s operational results by showing the changes caused solely by revenue. In addition, management believes that reporting operational working capital and revenue at constant currency, which excludes the positive or negative impact of fluctuations in foreign currency exchange rates, provides a meaningful measure of the Company’s operational changes, given the global nature of Dover’s businesses. Management also believes that reporting organic revenue growth, which excludes the impact of foreign currency exchange rates and acquisitions, provides a useful comparison of the Company’s revenue performance and trends between periods.

 

 

Interest Rates

 

The Company’s exposure to market risk for changes in interest rates relates primarily to the fair value of long-term fixed interest rate debt, interest rate swaps attached thereto, commercial paper borrowings and investments in

cash equivalents. Generally, the fair market value of fixed-interest rate debt will increase as interest rates fall and decrease as interest rates rise. A 59 basis point increase or decrease in interest rates (10% of the Company’s weighted average long-term debt interest rate) would have an immaterial effect on the fair value of the Company’s long-term debt. Commercial paper borrowings are at variable interest rates, and have maturities of three months or less. A 43 basis point increase or decrease in the interest rates (10% of the Company’s weighted average commercial paper interest rate) on commercial paper borrowings would have an immaterial impact on the Company’s pre-tax earnings. All highly liquid investments, including highly liquid debt instruments purchased with an original maturity of three months or less, are considered cash equivalents. The Company places its investments in cash equivalents with high credit quality issuers and limits the amount of exposure to any one issuer. A 40 basis point decrease or increase in interest rates (10% of the Company’s weighted average interest rate) would have an immaterial impact on the Company’s pre-tax income. As of December 31, 2005, the Company had two interest rate swaps outstanding, as discussed in Note 8 to the Consolidated Financial Statements. The Company does not enter into derivative financial or derivative commodity instruments for trading or speculative purposes.

 

Foreign Exchange

 

The Company conducts business in various foreign countries, primarily in Canada, Europe, Brazil, China and other Asian countries. Therefore, changes in the value of the currencies of these countries affect the Company’s financial position and cash flows when translated into U.S. Dollars. The Company has generally accepted the exposure to exchange rate movements relative to its investment in foreign operations. As of December 31, 2005, the Company had not established a formal company-wide foreign-currency hedging program but may, from time to time, for a specific exposure, enter into fair value hedges. Certain individual operating companies that have foreign exchange exposure have established formal policies to mitigate risk in this area by using fair value and/or cash flow hedging. The Company has mitigated and will continue to mitigate a portion of its currency exposure through operation of decentralized foreign operating companies in which the majority of all costs are local-currency based. A change of 10% or less in the value of all foreign currencies would not have a material effect on the Company’s financial position and cash flows.

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

 

 

(All other schedules are not required and have been omitted)

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Based on its assessment under the criteria set forth in Internal Control — Integrated Framework, management concluded that, as of December 31, 2005, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

In making its assessment of internal control over financial reporting as of December 31, 2005, management has excluded those companies acquired in purchase business combinations during 2005, which included Avborne Accessory Group, Rostone, Fas-Co Coders, Inc., APG, C-Tech Energy Services Inc., Colder Products Company, Harbor Electronics, Inc., Knowles Electronics Holdings Inc., Compressor Valve Engineering, and the Epsilon Product Line. These companies are wholly-owned by the Company and their total revenue for the year ended December 31, 2005 represents less than 4% of the Company’s consolidated total revenue for the same period and their assets represent less than 19% of the Company’s consolidated assets as of December 31, 2005.

 

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Dover Corporation:

 

We have completed integrated audits of Dover Corporation’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidated Financial Statements and Financial Statement Schedule

 

In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Dover Corporation and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for computing depreciation in 2004.

 

Internal Control Over Financial Reporting

 

Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting,” appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management’s Report of Internal Control Over Financial Reporting, management has excluded Epsilon Product Line, Compressor Valve Engineering, Knowles Electronics Holdings Inc., Harbor Electronics, Inc., Colder Products Company, C-Tech Energy Services Inc., APG, Fas-Co Coders, Inc., Rostone (Reunion Industries), and Avborne Accessory Group, Inc. from its assessments of internal control over financial reporting as of December 31, 2005 because they were acquired by the Company in purchase business combinations during 2005. These companies are wholly owned by the Company and their total revenue and assets represent less than 4% and 19% of the Company’s consolidated total revenue and assets, respectively, as reflected in its financial statements for the year ended December 31, 2005.

 

New York, New York
March 3, 2006

DOVER CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The following table is a reconciliation of the share amounts used in computing earnings per share:

 

 

See Notes to Consolidated Financial Statements.

DOVER CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

 

See Notes to Consolidated Financial Statements.

 

DOVER CORPORATION

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE EARNINGS