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

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition for the three years ended December 31, 2017, 2016 and 2015. The MD&A should be read in conjunction with our Consolidated Financial Statements and Notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Form 10-K, particularly in Item 1A. "Risk Factors" and in the "Special Note Regarding Forward-Looking Statements" preceding Part I of this Form 10-K.

Throughout this MD&A, we refer to measures used by management to evaluate performance, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). Please see "Non-GAAP Disclosures" at the end of this Item 7 for further detail on these financial measures. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Reconciliations within this MD&A provide more details on the use and derivation of these measures.

OVERVIEW

Dover is a diversified global manufacturer delivering innovative equipment and components, specialty systems, consumable supplies, software and digital solutions and support services through four operating segments: Engineered Systems, Fluids, Refrigeration & Food Equipment and Energy.

For the year ended December 31, 2017, consolidated revenue from continuing operations was $7.8 billion, an increase of $1.0 billion or 15.2%, as compared to the prior year. This increase included organic revenue growth of 7.8%, acquisition-related growth of 9.7% and a favorable impact of 0.4% from foreign currency, partially offset by a 2.7% impact from dispositions. Overall, customer pricing had a favorable impact of 0.6% on revenue for the year.

Within our Engineered Systems segment, revenue increased $210.0 million, or 8.9%, from the prior year, reflecting organic growth of 5.6%, acquisition-related growth of 6.7% and a favorable impact from foreign currency of 0.9%, partially offset by a 4.3% impact from dispositions. Organic growth was broad-based across both the Printing & Identification and Industrials platforms. Our Fluids segment revenue increased $550.3 million, or 32.4%, comprised of acquisition-related growth of 29.3%, organic growth of 2.8% and a favorable foreign currency impact of 0.3%. The organic growth was principally driven by industrial pump activity and solid hygienic and pharma markets partially offset by continued weakness in transport markets. Within our Refrigeration & Food Equipment segment, revenue decreased $21.2 million, or 1.3%, from the prior year, including a 5.1% decline due to a disposition, partially offset by organic revenue growth of 3.4% and a favorable impact from foreign currency translation of 0.4%. The organic growth was driven primarily by demand for refrigeration systems and heat exchangers in our Refrigeration business. Our Energy segment revenue increased $297.8 million, or 26.9%, from the prior year, comprised of organic revenue growth of 26.8% and acquisition-related growth of 0.2%, partially offset by an unfavorable impact from foreign currency translation of 0.1%. The increase in organic revenue within our Energy segment was driven primarily by increases in U.S. rig count and well completions.

Gross profit was $2.9 billion for the year ended December 31, 2017, an increase of $418.4 million, or 16.9%, as compared to the prior year. The increase was primarily due to the growth in sales volumes as well as the benefits of prior restructuring actions, and a reduction to a voluntary product recall accrual of $7.2 million compared to charge of $23.2 million in 2016. Gross profit margin was 36.9% for the year ended December 31, 2017 compared to 36.4% for the prior year. For further discussion related to our consolidated and segment results, see "Consolidated Results of Operations" and "Segment Results of Operations," respectively, within MD&A.

Bookings increased 17.0% over the prior year at $8.0 billion for the year ended December 31, 2017. Included in this result was a 9.6% increase in organic bookings, a 9.8% increase in acquisition-related bookings and a 0.2% favorable impact due to foreign exchange rates, which were partially offset by a 2.6% decline due to dispositions. Bookings increased 35.7%, 30.7% and 11.6% within our Fluids, Energy and Engineered Systems segments, respectively, while bookings in our Refrigeration & Food Equipment segment decreased 3.8%. Overall, our book-to-bill increased from the prior year to 1.02. Backlog as of December 31, 2017 was $1.2 billion, up from $1.1 billion from the prior year.

From a geographic perspective, our U.S., European and China markets all grew organically year-over-year.

On December 7, 2017, we announced that our Board of Directors approved a plan to spin-off our upstream energy businesses within the our Energy segment, collectively, the “Wellsite” business, through a U.S. tax-free spin-off to shareholders. We expect to complete the separation in May of 2018, subject to the satisfaction or waiver of certain customary conditions. We have incurred $15.3 million of costs associated with the transaction which were recorded as a corporate expense in selling, general and administrative expenses in the Consolidated Statement of Earnings. These transaction costs primarily relate to professional fees associated with preparation of regulatory filings and separation activities within finance, legal and information system functions. Upon separation, the historical results of Wellsite will be presented as discontinued operations.

During the fourth quarter of 2017, we recorded rightsizing and other related costs of $56.3 million to better align our cost structure in preparation for the Wellsite separation. The $56.3 million is comprised of $45.8 million of restructuring costs and $10.5 million of other charges. These costs relate to actions taken on employee reductions, facility consolidations and site closures and product line divestitures and exits. These charges were broad based across all segments as well as corporate, with costs incurred of $9.2 million in Engineered Systems, $8.2 million in Fluids, $15.3 million in Refrigeration & Food Equipment, $7.3 million in Energy and $16.3 million at Corporate. These charges were recorded in cost of goods and services, selling, general and administrative expenses, gain on sale of businesses, and other expense (income), net in the Consolidated Statement of Earnings.

We recorded a net tax benefit of $50.9 million primarily relating to the enactment of the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) during the fourth quarter of 2017. The benefit was comprised of a $172.0 million benefit related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate, offset by a $115.0 million provisional tax expense related to the deemed repatriation of unremitted earnings of foreign subsidiaries and $11.0 million of anticipated local withholding tax expense associated with planned cash distributions to the U.S from non-U.S. subsidiaries. The net tax benefit in the fourth quarter of 2017 also included a benefit of $4.9 million related to decreases in statutory tax rates of foreign jurisdictions. On a full year basis, the effective tax rate for 2017 was 16.7%.

For the full year 2017, Dover made a total of three acquisitions totaling $43.1 million, net of cash acquired and including contingent consideration. We completed the acquisition of Caldera Graphics S.A.S. ("Caldera") for approximately $32.9 million, net of cash acquired and including contingent consideration. Caldera enhances our ability to serve the global digital textile printing market with their high-quality technical software designed for the digital printing industry. Caldera is included in the Printing & Identification platform within the Engineered Systems segment. See Note 3 — Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for further details regarding the businesses acquired during the year. Subsequently, in January 2018,we acquired Ettlinger Group, a leading manufacturer of filtering solutions for the plastics recycling industry, for €50.0 million (approximately $60.0 million) and Rosario Handel B.V., a manufacturer of decorator and base coating machinery used in the production of beverage, food and aerosol cans for €13.5 million (approximately $16.2 million). These acquisitions enhance our ability to serve our respective markets within the Fluids and Refrigeration & Food Equipment segments.

In addition, in 2017, as part of the regular review of our portfolio and the fit of our businesses, we completed the divestitures of Performance Motorsports International ("PMI"), a manufacturer of pistons and other engine related components, and the consumer and industrial winch business of Warn Industries Inc. ("Warn"), both within our Engineered Systems segment. These disposals did not represent strategic shifts in operations and, therefore, did not qualify for presentation as discontinued operations. We sold the PMI and Warn businesses for total consideration of $147.3 million and $250.3 million, respectively. The disposition of PMI resulted in pre-tax gain on sale of $88.4 million, and we recorded a 25% equity method investment at fair value as well as a subordinated note receivable. The disposition of Warn resulted in a pre-tax gain on sale of $116.9 million and we also recorded $5.2 million of disposition costs. See Note 4 — Disposed and Discontinued Operations in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding these disposed businesses.

During the year ended December 31, 2017, we purchased 1.1 million shares of our common stock for a total cost of $105.0 million, or $99.11 per share. We also continued our long history of increasing our annual dividend payments to shareholders and paid a total of $284.0 million in dividends to our shareholders.

CONSOLIDATED RESULTS OF OPERATIONS

Years Ended December 31,% / Point Change
(dollars in thousands, except per share figures)2017201620152017 vs. 20162016 vs. 2015
Revenue$7,830,436$6,794,342$6,956,31115.2%(2.3)%
Cost of goods and services4,940,0594,322,3734,388,16714.3%(1.5)%
Gross profit2,890,3772,471,9692,568,14416.9%(3.7)%
Gross profit margin36.9%36.4%36.9%0.5(0.5)
Selling, general and administrative expenses1,975,9321,757,5231,647,38212.4%6.7%
Selling, general and administrative expenses as a percent of revenue25.2%25.9%23.7%(0.7)2.2
Interest expense145,208136,401131,6766.5%3.6%
Interest income(8,502)(6,759)(4,419)25.8%53.0%
Other expense (income), net7,034(7,930)(7,105)(188.7)%11.6%
Gain on sale of businesses(203,138)(96,598)—nm*nm*
Provision for income taxes162,178180,440204,729(10.1)%(11.9)%
Effective tax rate16.7%26.2%25.6%(9.5)0.6
Earnings from continuing operations811,665508,892595,88159.5%(14.6)%
Earnings from discontinued operations, net——273,948—%nm*
Earnings from continuing operations per common share - diluted5.153.25$3.7458.5%(13.1)%
Earnings from discontinued operations per common share -diluted$—$—$1.72—%nm*
  • nm: not meaningful

Revenue

For the year ended December 31, 2017, revenue increased $1.0 billion, or 15.2% to $7.8 billion compared with 2016, reflecting organic growth of 7.8%, acquisition-related growth of 9.7% and a favorable impact from foreign currency translation of 0.4%, partially offset by a 2.7% impact from dispositions. Growth in organic revenue was largely driven by improved market conditions in U.S. oil and gas-related end markets for the Energy segment, as well as strong broad-based activity in the Engineered Systems segment. Organic growth also reflected strong shipments in our Pumps and Hygienic & Pharma businesses in the Fluids segment and solid retail refrigeration activity in the Refrigeration & Food Equipment segment. Acquisition-related growth of 9.7% was led by the Fluids and Engineered Systems segments, largely due to the full-year benefit from the 2016 acquisitions of Wayne Fueling Systems Ltd. ("Wayne") within our Fluids segment and Ravaglioli S.p.A Group ("RAV") within our Engineered Systems segment, as well as the 2017 acquisition of Caldera Graphics S.A.S. ("Caldera") within our Engineered Systems segment. Overall customer pricing was favorable, impacting consolidated revenue 0.6%.

For the year ended December 31, 2016, revenue decreased $162.0 million, or 2.3% to $6.8 billion compared with 2015, reflecting an organic decline of 5.4%, a 3.0% impact from dispositions and an unfavorable impact of 1.0% from foreign currency translation, offset by growth from acquisitions of 7.1%. Decline in organic revenue was attributable to weakness in U.S. oil and gas-related end markets as well as reduced capital spending by our customers. Acquisition-related growth of 7.1% was largely driven by the acquisitions of Tokheim Group S.A.S. ("Tokheim") and Wayne within our Fluids segment and RAV within our Engineered Systems segment, as well as the full-year benefit from the fourth quarter 2015 acquisitions.

Gross Profit

For the year ended December 31, 2017, gross profit increased $418.4 million, or 16.9%, to $2.9 billion compared with 2016, primarily due to growth in sales volumes and benefits of prior restructuring actions, as well as a reduction of a product recall accrual of $7.2 million compared to a fourth quarter 2016 charge of $23.2 million. Gross profit margin increased 50 basis points primarily due to margin improvements in our Engineered Systems and Energy segments.

For the year ended December 31, 2016, gross profit decreased $96.2 million, or 3.7% to $2.5 billion compared with 2015, primarily due to the decline in sales volumes and a product recall charge of $23.2 million, partially offset by supply chain cost containment initiatives and the benefits of prior restructuring actions. Gross profit margin declined 50 basis points primarily due to margin declines in our Energy segment.

Selling, General and Administrative Expenses

For the year ended December 31, 2017, selling, general and administrative expenses increased $218.4 million, or 12.4% to $2.0 billion compared with 2016, primarily reflecting the impact of acquisitions in 2016, including acquisition-related amortization expense of $15.7 million, Wellsite separation costs of $15.3 million, higher restructuring charges of $10.8 million, disposition-related costs for Warn of $5.2 million and increased compensation costs. As a percentage of revenue, selling, general and administrative expenses decreased 70 basis points in 2017 to 25.2%, reflecting the leverage of costs on a higher revenue base, partially offset by the aforementioned increases in expenses.

For the year ended December 31, 2016, selling, general and administrative expenses increased $110.1 million, or 6.7% to $1.8 billion compared with 2015 reflecting the impact of acquisition-related depreciation and amortization expense, acquisition-related deal costs and increased headcount. The increase is also impacted by increased investment in DBS, offset by lower restructuring charges and the benefits of previously implemented cost reduction actions. As a percentage of revenue, selling, general and administrative expenses increased 220 basis points in 2016 to 25.9%, reflecting deleveraging of fixed administrative costs and acquisition-related costs on lower revenue.

Non-Operating Items

Interest Expense

For the year ended December 31, 2017, interest expense, net of interest income, increased $7.1 million, or 5.4%, to $136.7 million compared with 2016 due to the full year impact of the fourth quarter 2016 issuance of the €600 million of 1.25% euro-denominated notes and higher interest rates on commercial paper in 2017.

For the year ended December 31, 2016, interest expense, net of interest income, increased $2.4 million, or 1.9%, to $129.6 million compared with 2015. This increase was due to higher interest rates on commercial paper year over year and the fourth quarter 2016 issuance of the €600 million of 1.25% euro-denominated notes, offset in part by the full year impact of lower interest on $400.0 million, 3.15% notes which replaced the $300.0 million, 4.875% notes in October 2015.

Other expense (income), net

For the years ended December 31, 2017, 2016 and 2015, other expense (income), net was $7.0 million, $(7.9) million and $(7.1) million, respectively. For the year ended December 31, 2017, other expense was primarily due to a net foreign exchange loss of $7.2 million resulting from the re-measurement and settlement of foreign currency denominated balances. For the year ended December 31, 2016, other income was primarily due to earnings on equity method investments of $3.3 million and a net foreign exchange gain of $2.9 million. For the year ended December 31, 2015, other income was primarily due to earnings on equity method investments of $3.3 million and an insurance settlement for property damage of $3.6 million, partially offset by a net foreign exchange loss of $1.6 million.

Gain on sale of businesses

For the year ended December 31, 2017, gain on sale of businesses was $203.1 million. The gain was primarily due to the sales of PMI and Warn, both within the Engineered Systems segment, in which we recognized gains on sale of $88.4 million and $116.9 million, respectively. Other immaterial dispositions completed during the year were recorded as a net loss of $2.2 million.

For the year ended December 31, 2016, gain on sale of businesses was $96.6 million. The gain was primarily due to the sales of Texas Hydraulics ("THI"), a custom manufacturer of fluid power components within the Engineered Systems segment, and Tipper Tie, a global supplier of processing and clip packaging machines within the Refrigeration & Food Equipment segment. Upon disposal of THI and Tipper Tie, we recognized gains on sale of $11.9 million and $85.0 million, respectively.

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

Income Taxes

Our businesses span the globe with 36.2%, 39.0% and 33.8% of our pre-tax earnings in 2017, 2016 and 2015, respectively, generated in foreign jurisdictions. Foreign earnings are generally subject to local country tax rates that are below the 35.0% U.S. statutory tax rate as of December 31, 2017. As a result, our effective non-U.S. tax rate is typically significantly lower than the U.S. statutory tax rate. Effective January 1, 2018, the U.S. statutory rate will decrease to 21.0%.

Our effective tax rate was 16.7% for the year ended December 31, 2017, compared to 26.2% for the year ended December 31, 2016. The 2017 and 2016 rates were impacted by $46.9 million and $13.6 million, respectively, of favorable net discrete items. We recorded a provisional net tax benefit in the fourth quarter of 2017 of $50.9 million primarily related to the Tax Reform Act. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions we made, and actions we may take as a result of the Tax Reform Act. We recorded a $172.0 million benefit related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate. We also recorded provisional tax expense of $115.0 million related to the deemed repatriation of unremitted earnings of foreign subsidiaries. We plan to make cash distributions to the U.S from non-U.S. subsidiaries of up to an estimated $450.0 million, and consequently we have recorded $11.0 million of anticipated local withholding tax expense associated with these planned distributions. The net tax benefit in the fourth quarter of 2017 also included a benefit of $4.9 million related to decreases in statutory tax rates of foreign jurisdictions. For the year ended December 31, 2016, the discrete items were primarily driven by the adjustment of tax accounts to the U.S. tax return filed.

For the year ended December 31, 2015, our effective tax rate on continuing operations was 25.6%. The effective tax rate was impacted by favorable net discrete items totaling $17.5 million, principally related to settlements of uncertain tax matters.

We believe it is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state, and foreign examinations and the expiration of various statutes of limitation, our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $14.1 million. We believe adequate provision has been made for all income tax uncertainties.

Earnings from Continuing Operations

For the year ended December 31, 2017, earnings from continuing operations increased $302.8 million, or 59.5%, to $811.7 million, or EPS of $5.15, compared with earnings from continuing operations of $508.9 million, or EPS of $3.25, for the year ended December 31, 2016. The 2017 results include a net benefit of $172.6 million, or EPS of $1.09, from dispositions, a net tax benefit primarily from the Tax Cuts and Jobs Act of $50.9 million, or EPS of $0.32, and a net benefit of $4.6 million, or EPS of $0.03, from a reduction to a previously recorded product recall accrual. Results also included rightsizing and other costs of $39.1 million, or EPS of $0.25, Wellsite separation related costs of $9.7 million, or EPS of $0.06, and disposition costs of $3.2 million, or EPS of $0.02. Excluding these aforementioned benefits and costs, earnings from continuing operations increased 39% in 2017 as a result of higher earnings due to increased sales volumes, partially offset by higher weighted average shares outstanding relative to 2016.

For the year ended December 31, 2016, earnings from continuing operations decreased $87.0 million, or 14.6%, to $508.9 million, or EPS of $3.25, compared with earnings from continuing operations of $595.9 million, or EPS of $3.74, for the year ended December 31, 2015. The 2016 and 2015 results include discrete tax benefits of $13.6 million, or EPS of $0.09, and $17.5 million, or EPS of $0.11, respectively. Excluding these discrete tax benefits, earnings from continuing operations decreased 14.4% in 2016 primarily due to lower revenues, a product recall charge of $23.2 million and acquisition-related expenses. EPS decreased in 2016 as a result of lower earnings, partially offset by lower weighted average shares outstanding relative to 2015.

Discontinued Operations

There were no earnings from discontinued operations for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, earnings from discontinued operations of $273.9 million primarily includes the gain on sale of $265.6 million as a result of the sale of Datamax O'Neil and Sargent Aerospace and $6.3 million of earnings attributable to those businesses prior to their disposal.

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

Restructuring Activities

2017 Restructuring Activities

The Company incurred $59.2 million of restructuring charges for the year ended December 31, 2017, including a $45.8 million charge in the fourth quarter of 2017 for rightsizing costs to better align our cost structure in preparation for the Wellsite separation. The restructuring programs are described below.

•The Engineered Systems segment recorded $11.8 million of restructuring charges related to programs across the segment focused on headcount reductions and various site and product line moves and exits to lower ongoing operating expenses.
•The Fluids segment recorded $15.7 million of restructuring charges as a result of programs and projects across the segment, principally related to headcount reductions and facility consolidations, principally focused on achieving acquisition integration benefits.
•The Refrigeration & Food Equipment segment recorded restructuring charges of $14.1 million, related to headcount reductions, facility consolidations and product line exits, primarily within its Refrigeration business to improve margin performance.
•The Energy segment incurred restructuring charges of $7.8 million related to various programs across the segment focused on facility consolidations, product line exits and workforce reductions.
•Corporate recorded $9.8 million of restructuring charges primarily related to headcount reductions, corporate office consolidation and a shared facility exit in South America.

We anticipate that much of the benefit of these 2017 programs will be realized in 2018 and into 2019. We expect the programs currently underway to be substantially completed in the next 12 months. In light of our continued focus on improving our operating efficiency, it is possible that additional programs may be implemented throughout 2018.

2016 Restructuring Activities

The Company incurred $40.2 million of restructuring charges for the year ended December 31, 2016, including the programs described below.

•The Engineered Systems segment recorded $3.1 million of restructuring charges relating to headcount reductions across various businesses primarily related to optimization of administrative functions within the Printing & Identification platform and U.S. manufacturing consolidation within Industrials.
•The Fluids segment recorded $16.9 million of restructuring charges principally related to headcount reductions and facility consolidations at various businesses across the segment.
•The Refrigeration & Food Equipment segment recorded restructuring charges of $0.9 million, primarily related to headcount reductions.
•The Energy segment incurred restructuring charges of $18.5 million related to various programs across the segment focused on workforce reductions and field service consolidations. These programs were initiated to better align cost base with the significantly lower demand environment.

Restructuring initiatives in 2015 included targeted facility consolidations at certain businesses, headcount reductions and actions taken to optimize the Company's cost structure. We incurred restructuring charges of $55.2 million for the year ended December 31, 2015 relating to such activities. See Note 9 — Restructuring Activities in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details regarding our recent restructuring activities.

SEGMENT RESULTS OF OPERATIONS

The summary that follows provides a discussion of the results of operations of each of our four reportable operating segments (Engineered Systems, Fluids, Refrigeration & Food Equipment and Energy). Each of these segments is comprised of various product and service offerings that serve multiple end markets. See Note 17 — Segment Information in the Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation of segment revenue, earnings and margin to our consolidated revenue, earnings from continuing operations and margin. Segment EBITDA and segment EBITDA margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. For further information, see "Non-GAAP Disclosures" at the end of this Item 7.

Engineered Systems

Our Engineered Systems segment is comprised of two platforms, Printing & Identification and Industrials, and is focused on the design, manufacture and service of critical equipment, consumables and components serving the fast-moving consumer goods, digital textile printing, vehicle service, environmental solutions and industrial end markets.

Years Ended December 31,% Change
(dollars in thousands)2017201620152017 vs. 20162016 vs. 2015
Revenue:
Printing & Identification$1,094,014$1,022,502$943,6707.0%8.4%
Industrials1,482,2741,343,7811,399,24310.3%(4.0)%
$2,576,288$2,366,283$2,342,9138.9%1.0%
Segment earnings$590,430$391,829$376,96150.7%3.9%
Segment margin22.9%16.6%16.1%
Segment EBITDA$671,849$465,776$436,87544.2%6.6%
Segment EBITDA margin26.1%19.7%18.6%
Other measures:
Depreciation and amortization$81,419$73,947$59,91410.1%23.4%
Bookings
Printing & Identification$1,114,340$1,026,453$937,2158.6%9.5%
Industrials1,527,5171,339,8101,369,43814.0%(2.2)%
$2,641,857$2,366,263$2,306,65311.6%2.6%
Backlog
Printing & Identification$129,752$98,924$98,28831.2%0.6%
Industrials310,463252,780250,72522.8%0.8%
$440,215$351,704$349,01325.2%0.8%
Components of revenue growth:
Organic growth5.6%1.7%
Acquisitions6.7%4.4%
Dispositions(4.3)%(3.9)%
Foreign currency translation0.9%(1.2)%
Total revenue growth8.9%1.0%

2017 Versus 2016

Engineered Systems segment revenue for the year ended December 31, 2017 increased $210.0 million, or 8.9% compared to the prior year, primarily driven by acquisition-related growth of 6.7% from RAV and Alliance Wireless Technologies ("AWTI") in the fourth quarter of 2016 and Caldera in the second quarter of 2017, and broad-based organic growth of 5.6%. This increase was also driven by a favorable impact from foreign currency translation of 0.9%, partially offset by a 4.3% impact from dispositions. Customer pricing favorably impacted revenue by approximately 0.3% in 2017.

•Printing & Identification revenue (representing 42.5% of segment revenue) increased $71.5 million, or 7.0%, compared to the prior year. Organic revenue of 4.6%, acquisition-related growth of 0.9% from Caldera and a favorable impact from foreign currency translation of 1.5% all contributed to year over year growth. Organic revenue growth was driven by our marking and coding and digital printing businesses.
•Industrials revenue (representing 57.5% of segment revenue) increased $138.5 million, or 10.3%, compared to the prior year. The increase reflects acquisition-related growth of 11.1% from the RAV and AWTI acquisitions, organic revenue growth of 6.4% and a favorable impact from foreign currency translation of 0.5%. This increase was partially offset by the impact of dispositions of 7.7%. Organic revenue growth was broad-based, with particular strength in our environmental solutions business.

Engineered Systems segment earnings for the year ended December 31, 2017 increased $198.6 million, or 50.7%, compared to the prior year. The increase was primarily driven by $193.4 million of incremental gains on the sale of divested businesses including Warn and PMI in 2017 and THI in 2016, partially offset by $17.3 million of lower earnings due to divested businesses, $8.8 million of incremental restructuring expenses and $5.2 million of Warn divestiture costs. Excluding these items, adjusted segment earnings increased $36.5 million or 9.3% compared to the prior year driven by leverage on organic growth in our marking and coding and industrial businesses, partially offset by increases in material costs, most notably steel, and key strategic investments. Segment margin increased from 16.6% to 22.9% as compared to the prior year primarily due to the 2017 gains on dispositions.

Segment bookings for the year ended December 31, 2017 increased 11.6% compared to the prior year. Bookings for our Industrials platform for the year ended December 31, 2017 increased 14.0%, compared to the prior year, due primarily to the impact of acquisitions and broad-based organic growth. Our Printing & Identification bookings for the year ended December 31, 2017 increased 8.6%, compared to the prior year, driven by strong activity in our marking and coding and digital printing businesses. Segment book-to-bill was 1.03.

2016 Versus 2015

Engineered Systems segment revenue for the year ended December 31, 2016 increased $23.4 million, or 1.0%, compared to the prior year, primarily driven by organic growth of 1.7% and acquisition-related growth of 4.4% due to the acquisition of JK Group in the fourth quarter of 2015 and RAV in the fourth quarter of 2016, partially offset by a 3.9% impact from disposition and an unfavorable impact from foreign currency translation of 1.2%. Customer pricing favorably impacted revenue by approximately 0.3% in 2016.

•Printing & Identification revenue (representing 43.2% of 2016 segment revenue) increased $78.8 million, or 8.4%, compared to the prior year. The growth in organic revenue of 4.8% and acquisition-related growth of 6.0% was partially offset by the negative impact of foreign currency translation of 2.5%. Organic revenue growth was primarily driven by solid activity in our global marking and coding and digital printing businesses.
•Industrials revenue (representing 56.8% of 2016 segment revenue) decreased $55.5 million, or 4.0%, compared to the prior year. The decrease was primarily due to the impact of the disposition in the first quarter of 2016 of THI of 6.4%, a decrease in organic revenue of 0.4% and a minimal unfavorable impact of foreign currency translation of 0.4%. These declines were partially offset by acquisition-related growth of 3.3% from JK Group and RAV. The organic revenue decline was primarily impacted by reduced demand in our environmental solutions business, along with general softness in industrials markets. This decrease was partially offset by strong growth in our vehicle service business.

Engineered Systems segment earnings for the year ended December 31, 2016 increased $14.9 million, or 3.9%, compared to the prior year, driven primarily by leverage on organic revenue growth, acquisitions and productivity improvements. Segment margin increased from the prior year, reflecting productivity gains and favorable customer pricing.

Fluids

Our Fluids segment, serving the Fueling & Transport, Pumps, and Hygienic & Pharma end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas and industrial end markets. In the first quarter of 2017, we aligned our financial reporting around these key end markets to provide more detailed information after acquiring four companies in the retail fueling market in 2016.

Years Ended December 31,% Change
(dollars in thousands)2017201620152017 vs. 20162016 vs. 2015
Revenue:
Fueling & Transport$1,337,662$847,701$596,86457.8%42.0%
Pumps668,698625,513591,4206.9%5.8%
Hygienic & Pharma244,470227,360210,9897.5%7.8%
Total$2,250,830$1,700,574$1,399,27332.4%21.5%
Segment earnings$305,108$200,921$262,11751.9%(23.3)%
Segment margin13.6%11.8%18.7%
Segment EBITDA$425,228$286,145$318,19548.6%(10.1)%
Segment EBITDA margin18.9%16.8%22.7%
Other measures:
Depreciation and amortization$120,120$85,224$56,07840.9%52.0%
Bookings2,310,9851,702,9301,351,19135.7%26.0%
Backlog399,742331,238243,45920.7%36.1%
Components of revenue growth:
Organic growth (decline)2.8%(5.1)%
Acquisitions29.3%27.8%
Dispositions—%(0.3)%
Foreign currency translation0.3%(0.9)%
Total revenue growth32.4%21.5%

2017 Versus 2016

Fluids segment revenue for the year ended December 31, 2017 increased $550.3 million, or 32.4%, compared to the prior year, comprised of acquisition-related growth of 29.3% primarily due to Wayne, organic growth of 2.8% and a favorable foreign currency translation impact of 0.3%. Customer pricing did not have a significant impact to revenue in 2017.

•Fueling & Transport revenue (representing 59.4% of segment revenue) increased $490.0 million, or 57.8%, compared to the prior year, primarily driven by acquisition-related growth from Wayne, and improving European and Asian retail fueling markets, partially offset by weak transport markets.
•Pumps revenue (representing 29.7% of segment revenue) increased $43.2 million, or 6.9%, compared to the prior year, largely reflecting increased industrial demand.
•Hygienic & Pharma revenue (representing 10.9% of segment revenue) increased $17.1 million, or 7.5%, compared to the prior year. This revenue increase was primarily driven by new product development and solid market activity.

Fluids segment earnings for the year ended December 31, 2017 increased $104.2 million, or 51.9%, compared to the prior year, primarily driven by volume growth, including acquisitions, productivity gains and the benefits of the retail fueling integration.

Segment year over year earnings also includes a benefit from a reduction of $7.2 million to a voluntary product recall accrual compared to a $23.2 million charge in 2016. Segment margin increased overall by 180 basis points.

Bookings for the year ended December 31, 2017 increased 35.7% compared to the prior year, reflecting acquisition-related growth of 30.0% and organic growth of 5.7%. Book to bill was 1.03.

2016 Versus 2015

Fluids segment revenue for the year ended December 31, 2016 increased $301.3 million, or 21.5%, compared to the prior year, comprised of acquisition-related growth of 27.8% primarily due to Tokheim and Wayne, partially offset by an organic revenue decline of 5.1% and an unfavorable foreign currency translation impact of 0.9%. The decline in organic revenue impacted the Fueling & Transport, Pumps and Hygienic & Pharma end markets as a result of weak longer cycle oil and gas markets and the associated effect of reduced capital spending by our customers. Customer pricing favorably impacted revenue by approximately 0.6% in 2016.

•Fueling & Transport revenue (representing 49.8% of 2016 segment revenue) increased $250.8 million, or 42.0%, compared to the prior year. The increase was primarily due to the Tokheim, Wayne, Fairbanks, and ProGuage acquisitions, partially offset by weak transport and chemical/industrial markets.
•Pumps revenue (representing 36.8% of 2016 segment revenue) increased $34.1 million, or 5.8%, compared to the prior year, primarily driven by our fourth quarter of 2015 acquisitions partially offset by the impacts of lower activity in upstream oil and gas-related end markets.
•Hygienic & Pharma revenue (representing 13.4% of 2016 segment revenue) increased $16.4 million, or 7.8%, compared to the prior year. This increase was primarily a result of new product development, specifically in single-use products, and strong activity in medical and bioprocessing markets.

Fluids segment earnings for the year ended December 31, 2016 decreased $61.2 million, or 23.3%, compared to the prior year, primarily driven by the impact of acquisitions, including increased acquisition-related depreciation and amortization expense and acquisition-related deal costs of approximately $14.7 million. The decrease was also impacted by a $23.2 million charge due to a voluntary product recall. These were partially offset by productivity improvements, cost controls and the benefits of restructuring programs. Segment margin decreased 690 basis points as a result of lower organic volume, impact of acquisitions, the recall charge and deal costs.

Refrigeration & Food Equipment

Our Refrigeration & Food Equipment segment is a provider of innovative and energy efficient equipment and systems serving the commercial refrigeration and food equipment end markets.

Years Ended December 31,% Change
(dollars in thousands)2017201620152017 vs. 20162016 vs. 2015
Revenue:
Refrigeration$1,305,530$1,261,633$1,336,8293.5%(5.6)%
Food Equipment293,575358,706394,601(18.2)%(9.1)%
Total$1,599,105$1,620,339$1,731,430(1.3)%(6.4)%
Segment earnings$193,822$283,628$221,299(31.7)%28.2%
Segment margin12.1%17.5%12.8%
Segment EBITDA$251,029$348,645$287,373(28.0)%21.3%
Segment EBITDA margin15.7%21.5%16.6%
Other measures:
Depreciation and amortization$57,207$65,017$66,074(12.0)%(1.6)%
Bookings1,582,6061,645,8071,717,100(3.8)%(4.2)%
Backlog244,972258,329247,352(5.2)%4.4%
Components of revenue decline:
Organic growth3.4%0.2%
Dispositions(5.1)%(6.4)%
Foreign currency translation0.4%(0.2)%
Total revenue decline(1.3)%(6.4)%

2017 Versus 2016

Refrigeration & Food Equipment segment revenue for the year ended December 31, 2017 decreased $21.2 million, or 1.3%, compared to the prior year, primarily driven by a 5.1% decline due to dispositions, offset, in part, by organic revenue growth of 3.4% and a favorable impact from foreign currency translation of 0.4%. Customer pricing favorably impacted revenue by approximately 1.7% in 2017.

•Refrigeration revenue (representing 81.6% of segment revenue) increased $43.9 million, or 3.5%, compared to the prior year, primarily driven by growth in CO2 and industrial refrigeration systems as well as strong demand for heat exchanger products, especially in Asia.
•Food Equipment revenue (representing 18.4% of segment revenue) decreased $65.1 million, or 18.2%, compared to the prior year, primarily due to the disposition of Tipper Tie in the fourth quarter of 2016. Excluding divestitures, revenues increased $17.2 million, or 6.2%, compared to prior year driven by strong shipments in can-shaping equipment.

Refrigeration & Food Equipment segment earnings for the year ended December 31, 2017 decreased $89.8 million, or 31.7%, compared to the prior year, primarily related to the $85.0 million gain on sale of Tipper Tie in 2016 as well as $10.1 million of lower earnings in 2017 due to the divestiture, an increase of $13.1 million of restructuring expenses in 2017 compared to the prior year, and a $4.0 million loss on sale of a non-US business in 2017. Segment margin decreased 540 basis points to 12.1% primarily driven by the aforementioned gain on sale of Tipper Tie in 2016 and increase in restructuring expenses. Excluding the impact of dispositions and restructuring, segment earnings increased $20.8 million, or 11.0%, and segment margins increased 80 basis points reflecting increased organic volume and improved productivity which more than offset increased materials cost, most notably steel.

Bookings for the year ended December 31, 2017 decreased 3.8% compared to the prior year, driven by the impact of dispositions. Excluding dispositions bookings increased 1.5%, led by growth in heat exchangers and can shaping equipment. Book to bill was 0.99.

2016 Versus 2015

Refrigeration & Food Equipment segment revenue for the year ended December 31, 2016 decreased $111.1 million, or 6.4%, compared to the prior year, comprised of a 6.4% decline due to dispositions, an unfavorable impact from foreign currency translation of 0.2%, offset by organic revenue growth of 0.2%. Customer pricing had a minimal unfavorable impact of 0.3% on the segment's revenue in 2016.

•Refrigeration revenue (representing 77.9% of 2016 segment revenue) decreased $75.2 million, or 5.6%, compared to the prior year, primarily driven by the full-year impact of the disposition of the walk-in cooler business of Hillphoenix in the fourth quarter of 2015. Excluding the disposition, Hillphoenix grew by 1.3% overcoming loss of revenue at large big box retailers.
•Food Equipment revenue (representing 22.1% of 2016 segment revenue) decreased $35.9 million, or 9.1%, compared to the prior year, largely driven by the disposition of Tipper Tie in the fourth quarter of 2016.

Refrigeration & Food Equipment segment earnings for the year ended December 31, 2016 increased $62.3 million, or 28.2%, compared to the prior year, primarily due to the $85.0 million gain on sale of Tipper Tie. The increase in earnings was partially offset by dispositions, manufacturing inefficiencies of $15.0 million and unfavorable product mix in our retail refrigeration business. Segment margin increased 470 basis points as a result of the aforementioned gain on sale.

Energy

Our Energy segment, serving the Drilling & Production, Bearings & Compression and Automation end markets, is a provider of customer-driven solutions and services for safe and efficient production and processing of fuels worldwide and has a strong presence in the bearings and compression components and automation markets.

Years Ended December 31,% Change
(dollars in thousands)2017201620152017 vs. 20162016 vs. 2015
Revenue:
Drilling & Production$951,088$719,229$1,009,41632.2%(28.7)%
Bearings & Compression304,884276,807306,38710.1%(9.7)%
Automation150,229112,402167,87733.7%(33.0)%
Total$1,406,201$1,108,438$1,483,68026.9%(25.3)%
Segment earnings$188,427$55,336$173,190240.5%(68.0)%
Segment margin13.4%5.0%11.7%
Segment EBITDA$319,423$186,756$314,96971.0%(40.7)%
Segment EBITDA margin22.7%16.8%21.2%
Other measures:
Depreciation and amortization$130,996$131,420$141,779(0.3)%(7.3)%
Bookings1,424,1441,089,9221,429,26030.7%(23.7)%
Backlog149,579134,181155,58611.5%(13.8)%
Components of revenue growth (decline):
Organic growth (decline)26.8%(24.4)%
Acquisitions0.2%—%
Foreign currency translation(0.1)%(0.9)%
Total revenue growth (decline)26.9%(25.3)%

2017 Versus 2016

Energy segment revenue for the year ended December 31, 2017 increased $297.8 million, or 26.9%, compared to the prior year, composed of an organic revenue growth of 26.8%, acquisition growth of 0.2%, partially offset by an unfavorable impact from foreign currency translation of 0.1%. The increase is driven by significant growth in U.S. rig count and increased well completion activity and strong results in the Bearings & Compression end market. Customer pricing did not have a significant impact to revenue in 2017.

•Drilling & Production revenue (representing 67.6% of segment revenue) increased $231.9 million, or 32.2%, compared to the prior year, due to significant growth in U.S. rig count and increases in well completion activity.
•Bearings & Compression revenue (representing 21.7% of segment revenue) increased $28.1 million, or 10.1%, compared to the prior year, as a result of increased original equipment manufacturer (OEM) demand and aftermarket demand.
•Automation revenue (representing approximately 10.7% of segment revenue) increased $37.8 million, or 33.7%, compared to the prior year. This increase was driven by higher demand from well service and exploration and production companies.

Energy segment earnings for the year ended December 31, 2017 increased $133.1 million, or 240.5%, compared to the prior year, primarily driven by higher volume across our business and a reduction in restructuring expenses of $10.7 million compared

to the prior year. Segment margin increased significantly by 840 basis points from the prior year to 13.4% due to strong conversion on increased volumes and lower restructuring expenses.

Bookings for the year ended December 31, 2017 increased 30.7% compared to the prior year, reflecting the impact of market strength. Segment book-to-bill was 1.01.

2016 Versus 2015

Energy segment revenue for the year ended December 31, 2016 decreased $375.2 million, or 25.3%, compared to the prior year, composed of an organic decline of 24.4% and an unfavorable impact from foreign currency translation of 0.9%. This result was driven by significant declines in market fundamentals, especially with regard to U.S. rig count and end customer capital spending. These reductions broadly impacted our end markets. Customer pricing unfavorably impacted revenue by approximately 1.5% in 2016.

•Drilling & Production revenue (representing 64.9% of 2016 segment revenue) decreased $290.2 million, or 28.7%, compared to the prior year, due to year over year declines in U.S. rig count and end-customer capital spending in our North American markets.
•Bearings & Compression revenue (representing 25.0% of 2016 segment revenue) decreased $29.6 million, or 9.7%, compared to the prior year, as U.S. OEM end-user demand weakened within its end markets, especially with oil and gas customers.
•Automation revenue (representing 10.1% of 2016 segment revenue) decreased $55.5 million, or 33.0%, compared to the prior year. This decrease was driven by customer project delays, as low oil prices and market uncertainties continued to drive reduced capital spending by well service and exploration and production companies.

Energy segment earnings for the year ended December 31, 2016 decreased $117.9 million, or 68.0%, compared to the prior year, primarily driven by significantly lower volume across our businesses, especially within the Drilling & Production and Automation end markets. Segment margin decreased 670 basis points from the prior year due to lower volumes and price reductions. Decreased restructuring charges of $12.3 million and lower acquisition-related depreciation and amortization of $14.1 million partially offset the impact of volume.

FINANCIAL CONDITION

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchase of outstanding shares, adequacy of available commercial paper and bank lines of credit and the ability to attract long-term capital with satisfactory terms. We generate substantial cash from the operations of our businesses and remain in a strong financial position, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions.

Cash Flow Summary

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

Years Ended December 31,
Cash Flows from Continuing Operations (in thousands)201720162015
Net cash flows provided by (used in):
Operating activities$821,559$861,975$949,059
Investing activities176,373(1,503,843)(34,578)
Financing activities(594,739)633,608(1,091,886)

Operating Activities

Cash provided by operating activities for the year ended December 31, 2017 decreased $40.4 million compared to 2016. This decline was driven primarily by timing of year end revenue, increased tax payments of $167.6 million, which includes $69.0 million of federal and state tax payments for dispositions, as well as $9.5 million of cash paid for Wellsite separation. This decline was offset by higher continuing earnings of $183.7 million, excluding non-cash activity from depreciation and amortization, gain on sale of businesses and the impact of the Tax Reform Act.

Cash provided by operating activities for the year ended December 31, 2016 decreased $87.1 million compared to 2015. This decline was driven primarily by lower continuing earnings of $149.9 million, excluding depreciation and amortization and gain on sale of businesses, partially offset by improvements in working capital (excluding acquisitions and dispositions), as well as lower cash outflows for employee incentives and net tax payments.

Pension and Other Post-Retirement Activity: Total cash used in conjunction with pension plans during 2017 was $20.5 million including contributions to our international pension plans and payments of benefits under our non-qualified supplemental pension plan.

The funded status of our U.S. qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Due to the overfunded status of this plan, the Company made no contributions in 2017, 2016 and 2015 and expects to make minimal contributions, if any, in the near term.

Our international pension obligations are located in regions where it is not economically advantageous to pre-fund the plans due to local regulations. Total cash contributions to ongoing international defined benefit pension plans in 2017, 2016 and 2015 totaled $8.0 million, $8.4 million and $8.4 million, respectively. In 2018, we expect to contribute approximately $3.5 million to our non-U.S. plans. Our non-qualified supplemental pension plans are funded through Company assets as benefits are paid. During 2017 a total of $11.6 million benefits were paid under these plans. See Note 15 — Employee Benefit Plans in the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding our post-retirement plans.

Adjusted Working Capital: We believe adjusted working capital (a non-GAAP measure calculated as accounts receivable, plus inventory, less accounts payable) provides a meaningful measure of our operational results by showing changes caused solely by revenue.

Adjusted Working Capital (dollars in thousands)December 31, 2017December 31, 2016
Accounts receivable$1,385,567$1,265,201
Inventories878,635870,487
Less: Accounts payable979,446830,318
Adjusted working capital$1,284,756$1,305,370

Adjusted working capital decreased from December 31, 2016 by $20.6 million, or 1.6%, to $1.3 billion at December 31, 2017, which reflected an increase in receivables of $120.4 million, an increase in inventory of $8.1 million and an increase in accounts payable of $149.1 million. Excluding acquisitions, dispositions and the effects of foreign currency translation, adjusted working capital decreased by $6.8 million, or 0.5%, and $39.9 million, or 3.1%, for the years ended December 31, 2017 and 2016, respectively.

Investing Activities

Cash flow from investing activities is derived from cash inflows from proceeds from sales of businesses, property, plant and equipment and short-term investments, partially offset by cash outflows for capital expenditures and acquisitions. The majority of the activity in investing activities was comprised of the following:

•Acquisitions: In 2017, we deployed $36.0 million to acquire three businesses. In comparison, we acquired six business in 2016 for an aggregate purchase price of approximately $1,561.7 million. Total acquisition spend in 2015 was $567.8 million and was comprised of four businesses. See Note 3 — Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information with respect to recent acquisitions.
•Proceeds from sale of businesses: In 2017, we generated cash proceeds of $372.7 million, primarily from the sale of PMI and Warn. Cash proceeds of $206.4 million in 2016 were primarily from the sale of THI and Tipper Tie. In 2015, we generated cash proceeds of $689.3 million primarily from the sale of Datamax O'Neil and Sargent Aerospace.
•Capital spending: Capital expenditures, primarily to support productivity and new product launches, were $196.7 million in 2017, $165.2 million in 2016 and $154.3 million in 2015. Our capital expenditures increased $31.5 million in the 2017 period as compared to 2016, primarily within Fluids.

We anticipate that capital expenditures and any additional acquisitions we make in 2018 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, or by accessing the public debt or equity markets.

Financing Activities

Our cash flow from financing activities generally relates to the use of cash for purchases of our common stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of share-based awards. The majority of financing activity was attributed to the following:

•Long-term debt, commercial paper and notes payable, net: During 2017, we decreased net borrowings from commercial paper by $183.2 million with the cash proceeds from the sale of PMI and Warn. In November 2016, we issued €600.0 million of 1.25% euro-denominated notes due in 2026. The proceeds of $656.4 million from this issuance, net of discounts and issuance costs, were primarily used for payment of a portion of the purchase price of the acquisition of Wayne. During the 2016 period, we increased net borrowings from commercial paper by $254.8 million primarily for purposes of funding acquisitions. During 2015, we decreased net borrowings from commercial paper by $327.0 million, we repaid the $300.0 million of 4.875% notes, which matured October 15, 2015, and we issued $400.0 million of 3.150% notes realizing cash proceeds of $394.3 million, net of discounts and issuance costs.
•Treasury purchases: In January 2015, our Board of Directors approved a new standing share repurchase authorization, whereby the Company was authorized to repurchase up to 15 million shares of its common stock over the following

three years. These share repurchases are opportunistic buybacks made as part of management's capital allocation strategy. These repurchases are also made to offset the dilutive impact of shares issued under our equity compensation plans. In 2017, we used $105.0 million to repurchase 1.1 million shares under this authorization. During 2016, we did not purchase any shares under this program. In 2015, we completed the repurchase of 8.2 million shares at a total cost of $600.2 million under this authorization. As of December 31, 2017, the number of shares available for repurchase under the January 2015 share repurchase authorization was 5.7 million. In February 2018, the Company's Board of Directors approved a new standing share repurchase authorization, whereby the Company may repurchase up to 20 million shares of its common stock through December 31, 2020. This share repurchase authorization replaces the January 2015 share repurchase authorization which expired on January 9, 2018.

•Dividend payments: Total dividend payments to common shareholders were $284.0 million in 2017, $268.3 million in 2016 and $258.0 million in 2015. Our dividends paid per common share increased 6% to $1.82 per share in 2017 compared to $1.72 per share in 2016. This represents the 62nd consecutive year that our dividend has increased.
•Net Proceeds from the exercise of share-based awards: There were no proceeds from the exercise of share-based awards in 2017. With the adoption of Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718), this activity is reflected in operating activities for the year ended December 31, 2017, and we have elected to reflect this cash flow presentation prospectively. Proceeds from the exercise of share-based awards were $8.4 million and $4.0 million in 2016 and 2015, respectively. These proceeds have fluctuated in recent periods due to the volatility in our stock price and a larger number of cashless exercises of equity awards. Payments to settle tax obligations on these exercises were $18.4 million, $15.7 million and $5.0 million in 2017, 2016 and 2015, respectively. These tax payments generally increase or decrease correspondingly to the number of exercises in a particular year.

Cash Flows from Discontinued Operations

There were no cash flows from discontinued operations in 2017 and 2016. In 2015, cash used in discontinued operations totaled $115.9 million which reflect the operating results of Datamax O'Neil and Sargent Aerospace (prior to their sale in 2015), as well as $110.5 million of taxes paid relating to the gain on the sale of Sargent Aerospace.

Liquidity and Capital Resources

Adjusted Free Cash Flow

In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure adjusted free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures, plus the add back of cash taxes paid for gains on dispositions (which reflect tax payments on disposition-related investing activities) and cash paid for Wellsite separation costs. We believe that adjusted free cash flow is an important measure of operating performance because it provides management and investors a measurement of cash generated from operations that is available for mandatory payment obligations and investment opportunities, such as funding acquisitions, paying dividends, repaying debt and repurchasing our common stock.

The following table reconciles our adjusted free cash flow to cash flow provided by operating activities:

Years Ended December 31,
Adjusted Free Cash Flow (dollars in thousands)201720162015
Cash flow provided by operating activities$821,559$861,975$949,059
Less: Capital expenditures(196,735)(165,205)(154,251)
Plus: Cash taxes paid for gains on dispositions69,040869—
Plus: Cash paid on Wellsite separation9,508——
Adjusted free cash flow$703,372$697,639$794,808
Adjusted free cash flow as a percentage of revenue9.0%10.3%11.4%

For 2017, we generated adjusted free cash flow of $703.4 million, representing 9.0% of revenue. Adjusted free cash flow in 2016 was $697.6 million or 10.3% of revenue, and $794.8 million, or 11.4% of revenue in 2015. The full year decrease in 2017 adjusted free cash flow reflects lower cash flow provided by operations as a result of timing of revenue at year end and higher capital expenditures, primarily within our Fluids segment.

The 2016 decrease in adjusted free cash flow compared to 2015 reflects lower earnings from continuing operations before depreciation and amortization, higher capital expenditures and timing of revenue at year end, principally in the energy related businesses.

Capitalization

We use commercial paper borrowings for general corporate purposes, including the funding of acquisitions and the repurchase of our common stock. We maintain a $1.0 billion five-year unsecured committed revolving credit facility (the "Credit Agreement") with a syndicate of banks which expires on November 10, 2020. This facility is used primarily as liquidity back-up for our commercial paper program. We have not drawn down any loans under this facility nor do we anticipate doing so. If we were to draw down a loan, at our election, the loan would bear interest at a base rate plus an applicable margin. Under this facility, we are required to pay a facility fee and to maintain an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of not less than 3.0 to 1. We were in compliance with this covenant and our other long-term debt covenants at December 31, 2017 and had a coverage ratio of 11.4 to 1.0. We are not aware of any potential impairment to our liquidity and expect to remain in compliance with all of our debt covenants.

On March 15, 2018, the outstanding 5.45% notes with a principal value of $350.0 million will mature. These notes have been classified as a current maturity of long-term debt as of December 31, 2017. We expect to use a combination of cash and commercial paper to pay off the notes at maturity.

On November 9, 2016, we issued €600.0 million of 1.25% euro-denominated notes due 2026. The proceeds of $656.4 million from the sale of the notes, net of discounts and issuance costs, were used for payment of a portion of the purchase price of the acquisition of Wayne.

We also have a current shelf registration statement filed with the SEC that allows for the issuance of additional debt securities that may be utilized in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.

At December 31, 2017, our cash and cash equivalents totaled $754.0 million, of which approximately $609.8 million was held outside the United States. Cash and cash equivalents are held primarily in bank deposits with highly rated banks. We regularly hold cash in excess of near-term requirements in bank deposits or invest the funds in government money market instruments or short-term investments, which consist of investment grade time deposits with original maturity dates at the time of purchase of no greater than three months. As a result of the Tax Reform Act, during 2018 we intend to repatriate a significant amount of cash held outside the United States and use the proceeds to pay down commercial paper and/or pay off a portion of the $350.0 million notes that will mature on March 15, 2018.

We utilize the net debt to net capitalization calculation (a non-GAAP measure) to assess our overall financial leverage and capacity and believe the calculation is useful to investors for the same reason. Net debt represents total debt minus cash and cash equivalents. Net capitalization represents net debt plus stockholders' equity. The following table provides a reconciliation of net debt to net capitalization to the most directly comparable GAAP measures:

Net Debt to Net Capitalization Ratio (dollars in thousands)December 31, 2017December 31, 2016December 31, 2015
Current maturities of long-term debt$350,402$6,950$122
Commercial paper230,700407,600151,000
Notes payable and current maturities of long-term debt581,102414,550151,122
Long-term debt2,986,7023,206,6372,603,655
Total debt3,567,8043,621,1872,754,777
Less: Cash and cash equivalents(753,964)(349,146)(362,185)
Net debt2,813,8403,272,0412,392,592
Add: Stockholders' equity4,383,1803,799,7463,644,575
Net capitalization$7,197,020$7,071,787$6,037,167
Net debt to net capitalization39.1%46.3%39.6%

Our net debt to net capitalization ratio decreased to 39.1% at December 31, 2017 compared to 46.3% at December 31, 2016. The decrease in this ratio was driven primarily by the $458.2 million decrease in net debt, as a result of $404.8 million higher cash and cash equivalents due to the aforementioned cash flow activity. The decrease was also impacted by the repayment of commercial paper partially offset by foreign currency translation on our euro-denominated notes.

Our net debt to net capitalization ratio increased to 46.3% at December 31, 2016 compared to 39.6% at December 31, 2015 primarily due to changes in net debt during the period. Net debt increased $879.5 million during the period primarily due to an increase in long-term debt outstanding due to the €600 million notes issued in the fourth quarter of 2016 and an increase in commercial paper borrowings.

Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash-flow-to-debt and debt-to-capitalization levels as well as our current credit standing. Our credit ratings, which are independently developed by the respective rating agencies, were as follows as of December 31, 2017:

Short Term RatingLong Term RatingOutlook
Moody'sP-2A3Negative
Standard & Poor'sA-2BBB+Stable
FitchF2A-Negative

Operating cash flow and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions and capital expenditures. Acquisition spending and/or share repurchases could potentially increase our debt.

We believe that existing sources of liquidity are adequate to meet anticipated funding needs at current risk-based interest rates for the foreseeable future.

Off-Balance Sheet Arrangements and Contractual Obligations

As of December 31, 2017, we had approximately $135.4 million outstanding in letters of credit with financial institutions, which expire at various dates in 2018 through 2039. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.

We have also provided typical indemnities in connection with sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.

A summary of our consolidated contractual obligations and commitments as of December 31, 2017 and the years when these obligations are expected to be due is as follows:

Payments Due by Period
(in thousands)TotalLess than 1 Year1-3 Years3-5 YearsMore than 5 YearsOther
Long-term debt (1)$3,336,713$350,011$356,292$448,831$2,181,579$—
Interest payments (2)1,491,087122,697226,318182,139959,933—
Rental commitments270,71472,22092,56948,74057,185—
Purchase obligations58,15257,545607———
Capital leases15,2773,4544,3992,3625,062—
Supplemental and post-retirement benefits (3)111,66519,97518,95431,41941,317—
Income tax payable - deemed repatriation tax (4)114,9476,44918,39218,39271,714—
Uncertain tax positions (5)84,452————84,452
Total obligations$5,483,007$632,351$717,531$731,883$3,316,790$84,452
(1)See Note 10 — Borrowings and Lines of Credit to the Consolidated Financial Statements. Amounts represent principal payments for all long-term debt, including current maturities, net of unamortized discounts and deferred issuance costs.
(2)Amounts represent estimate of future interest payments on long-term debt using the interest rates in effect at December 31, 2017.
(3)Amounts represent estimated benefit payments under our unfunded supplemental and post-retirement benefit plans and our unfunded non-U.S. qualified defined benefit plans. See Note 15 — Employee Benefit Plans to the Consolidated Financial Statements. We also expect to contribute approximately $3.5 million to our non-U.S. qualified defined benefit plans in 2018, which amount is not reflected in the above table.
(4)Amounts represent a tax imposed by the Tax Reform Act for a one-time deemed repatriation of unremitted earnings of foreign subsidiaries, including current payable.
(5)Due to the uncertainty of the potential settlement of future uncertain tax positions, we are unable to estimate the timing of the related payments, if any, that will be made subsequent to 2017. These amounts do not include the potential indirect benefits resulting from deductions or credits for payments made to other jurisdictions.

Financial Instruments and Risk Management

The diverse nature of our businesses’ activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency exchange rates and commodity prices. We periodically use derivative financial instruments to manage some of these risks. We do not hold or issue derivative instruments for trading or speculative purposes. We are exposed to credit loss in the event of nonperformance by counterparties to our financial instrument contracts; however, nonperformance by these counterparties is considered unlikely as our policy is to contract with highly-rated, diversified counterparties.

Interest Rate Exposure

As of December 31, 2017 and during the three year period then ended, we did not have any open interest rate swap contracts. However, we may in the future enter into interest rate swap agreements to manage our exposure to interest rate changes. We issue commercial paper, which exposes us to changes in variable interest rates; however, maturities are typically three months or less so a change in rates over this period would not have a material impact on our pre-tax earnings.

We consider our current risk related to market fluctuations in interest rates to be minimal since our debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-interest rate debt will increase as interest rates fall and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the 2017 year-end fair value of our long-term debt by approximately $857.4 million. However, since we have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.

Foreign Currency Exposure

We conduct business in various non-U.S. countries, primarily in Canada, substantially all of the European countries, Mexico, Brazil, Argentina, China, India and other Asian countries. Therefore, we have foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. We will occasionally use derivative financial instruments to offset such risks, when it is believed that the exposure will not be limited by our normal operating and financing activities. We have formal policies to mitigate risk in this area by using fair value and/or cash flow hedging programs.

Changes in the value of the currencies of the countries in which we operate affect our results of operations, financial position and cash flows when translated into U.S. dollars, our reporting currency. The strengthening of the U.S. dollar could result in unfavorable translation effects as the results of foreign operations are translated into U.S. dollars. We have generally accepted the exposure to exchange rate movements relative to our investment in non-U.S. operations. We may, from time to time, for a specific exposure, enter into fair value hedges.

Additionally, the Company has designated the €300.0 million and €600.0 million of euro-denominated notes issued December 4, 2013 and November 9, 2016, respectively, as a hedge of a portion of its net investment in euro-denominated operations. Due to the high degree of effectiveness between the hedging instruments and the exposure being hedged, fluctuations in the value of the euro-denominated debt due to exchange rate changes are offset by changes in the net investment. Accordingly, changes in the value of the euro-denominated debt are recognized in the cumulative translation adjustment section of other comprehensive income (loss) to offset changes in the value of the net investment in euro-denominated operations. Due to the fluctuations of the euro relative to the U.S. dollar, the U.S. dollar equivalent of this debt increases or decreases, resulting in the recognition of a loss of $125.3 million and a gain of $53.8 million in other comprehensive income for the years ended December 31, 2017 and 2016, respectively.

Commodity Price Exposure

Certain of our businesses are exposed to volatility in the prices of certain commodities, such as aluminum, steel, copper and various precious metals, among others. Our primary exposure to commodity pricing volatility relates to the use of these materials in purchased component parts or the purchase of raw materials. When possible, we maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire. We may, from time to time, for a specific exposure, enter into cash flow hedges to mitigate our risk to commodity pricing; however, such contracts outstanding at December 31, 2017 were not significant.

Critical Accounting Policies and Estimates

Our consolidated financial statements and related public financial information are based on the application of 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 we report. These estimates can also affect supplemental information contained in our public disclosures, including information regarding contingencies, risk and our financial condition. The significant accounting policies used in the preparation of our consolidated financial statements are discussed in Note 1 — Description of Business and Summary of Significant Accounting Policies in the Consolidated Financial Statements in Item 8 of this Form 10-K. The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. We believe our use of estimates and underlying accounting assumptions conforms to GAAP and is consistently applied. We review valuations based on estimates for reasonableness on a consistent basis.

Revenue Recognition - Revenue is recognized when all of the following conditions are satisfied: a) persuasive evidence of an arrangement exists, b) price is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurred or services have been rendered. The majority of our revenue is generated through the manufacture and sale of a broad range of specialized products and components, with revenue recognized upon transfer of title and risk of loss, which is generally upon shipment. Service revenue represents less than 5% of our total revenue and is recognized as the services are performed. In limited cases, our revenue arrangements with customers require delivery, installation, testing, certification, or other acceptance provisions to be satisfied before revenue is recognized. We include shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.

Inventories - Inventories for the majority of our subsidiaries, including all international subsidiaries, are stated at net realizable value, determined on the first-in, first-out (FIFO) basis, or cost. Other domestic inventories are stated at cost, determined on the last-in, first-out (LIFO) basis, which is less than market value. Under certain market conditions, estimates and judgments regarding the valuation of inventories are employed by us to properly value inventories.

Goodwill and Other Intangible Assets - We have significant goodwill and intangible assets on our consolidated balance sheets as a result of current and past acquisitions. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. In addition, the testing of goodwill and intangibles for impairment requires significant use of judgment and assumptions, particularly as it relates to the determination of fair market value. Our indefinite-lived intangible assets and reporting units are tested and reviewed for impairment on an annual basis during the fourth quarter, or more frequently when indicators of impairment exist.

When performing an impairment test, we estimate fair value using the income-based valuation method. Under the income-based valuation method, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rate based on our most recent views of the long-term outlook for each reporting unit. Actual results may differ from these estimates. The discount rates used in these analyses vary by reporting unit and are based on a capital asset pricing model and published relevant industry rates. We use discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in our internally developed forecasts. Discount rates used in our 2017 reporting unit valuations ranged from 8.5% to 10.0%.

We performed the annual goodwill impairment testing of our ten identified reporting units in the fourth quarter of 2017. Based on the impairment tests performed, the fair value of our reporting units exceeded their carrying value, in most cases, by more than 100% and, in no case, less than 80%. As such, no goodwill impairment was recognized. While we believe the assumptions used in the 2017 impairment analysis are reasonable and representative of expected results, if market conditions worsen or persist for an extended period of time, an impairment of goodwill or assets may occur. We will continue to monitor the long-term outlook and forecasts, including estimated future cash flows, for these businesses and the impact on the carrying value of goodwill and assets.

Employee Benefit Plans - The valuation of our pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. Inherent in these valuations are key assumptions, including discount rates, investment returns, projected salary increases and benefits and mortality rates. Annually, we review the actuarial assumptions used in our pension reporting and compare them with external benchmarks to ensure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on our pension expense and related funding requirements. Our expected long-term rate of return on plan assets is reviewed annually based on actual returns, economic trends and portfolio allocation. Our discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. As disclosed in Note 15 — Employee Benefit Plans to the Consolidated Financial Statements, the 2017 weighted-average discount rates used to measure our qualified defined benefit ranged from 1.94% to 3.65%, a decrease from the 2016 rates, which ranged from 2.06% to 4.10%. The lower 2017 discount rates are reflective of decreased market interest rates over this period. A 25 basis point decrease in the discount rates used for these plans would have increased the post-retirement benefit obligations by approximately $36.0 million from the amount recorded in the consolidated financial statements at December 31, 2017. Our pension expense is also sensitive to changes in the expected long-term rate of return on plan assets. A decrease of 25 basis points in the expected long-term rate of return on assets would have increased our defined benefit pension expense by approximately $1.8 million.

Income Taxes - We have significant amounts of deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Reserves are also estimated, using more likely than not criteria, for ongoing audits regarding federal, state and international issues that are currently unresolved. We routinely monitor the potential impact of these situations and believe that we have established the proper reserves. Reserves related to tax accruals and valuations related to deferred tax assets can be impacted by changes in tax codes and rulings (as further described below with respect to U.S. tax law), changes in statutory tax rates and our future taxable income levels. The provision for uncertain tax positions provides a recognition threshold and measurement attribute for financial statement tax benefits taken or expected to be taken in a tax return and disclosure requirements regarding uncertainties in income tax positions. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized

upon ultimate settlement. We record interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes.

On December 22, 2017, the Tax Reform Act was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act also require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities, and included these amounts in its Consolidated Financial Statements for the year ended December 31, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.

Risk, Retention, Insurance - We have significant accruals and reserves related to the self-insured portion of our risk management program. These accruals require the use of estimates and judgment with regard to risk exposure and ultimate liability. We estimate losses under these programs using actuarial assumptions, our experience and relevant industry data. We review these factors quarterly and consider the current level of accruals and reserves adequate relative to current market conditions and experience.

Contingencies - We have established liabilities for environmental and legal contingencies at both the business and corporate levels. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The valuation of liabilities for these contingencies is reviewed on a quarterly basis to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional liabilities for emerging issues. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations.

Restructuring - We establish liabilities for restructuring activities at an operation when management has committed to an exit or reorganization plan and when termination benefits are probable and can be reasonably estimated based on circumstances at the time the restructuring plan is approved by management or when termination benefits are communicated. Exit costs include future minimum lease payments on vacated facilities and other contractual terminations. In addition, asset impairments may be recorded as a result of an approved restructuring plan. The accrual of both severance and exit costs requires the use of estimates. Though we believe that these estimates accurately reflect the anticipated costs, actual results may be different than the estimated amounts.

Disposed and Discontinued Operations - From time to time we sell or discontinue or dispose of certain operations for various reasons. Estimates are used to adjust, if necessary, the assets and liabilities of discontinued operations, including goodwill, to their estimated fair market value. These estimates include assumptions relating to the proceeds anticipated as a result of the sale. Fair value is established using internal valuation calculations along with market analysis of similar-type entities. The adjustments to fair market value of these operations provide the basis for the gain or loss when sold. Changes in business conditions or the inability to sell an operation could potentially require future adjustments to these estimates. No impairment charges were recorded in 2017, 2016 or 2015.

Stock-Based Compensation - We are required to recognize in our Consolidated Statements of Earnings the expense associated with all share-based payment awards made to employees and directors, including stock appreciation rights ("SARs"), restricted stock units and performance share awards. We use the Black-Scholes valuation model to estimate the fair value of SARs granted

to employees. The model requires that we estimate the expected life of the SAR, expected forfeitures and the volatility of our stock using historical data. For additional information related to the assumptions used, see Note 13 — Equity and Cash Incentive Program to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Recent Accounting Standards

See Note 1 — Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements and recently adopted accounting standards.

Non-GAAP Disclosures

In an effort to provide investors with additional information regarding our results as determined by GAAP, we also disclose non-GAAP information which we believe provides useful information to investors. Segment EBITDA, segment EBITDA margin, adjusted free cash flow, net debt, net capitalization, the net debt to net capitalization ratio, adjusted working capital and organic revenue growth are not financial measures under GAAP and should not be considered as a substitute for earnings, cash flows from operating activities, debt or equity, working capital or revenue as determined in accordance with GAAP, and they may not be comparable to similarly titled measures reported by other companies. We believe that segment EBITDA and segment EBITDA margin are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment earnings, which is the most directly comparable GAAP measure. We do not present segment net income because corporate expenses are not allocated at a segment level. Segment EBITDA margin is calculated as segment EBITDA divided by segment revenue.

We believe the net debt to net capitalization ratio and adjusted free cash flow are important measures of liquidity. Net debt to net capitalization ratio is helpful in evaluating our capital structure and the amount of leverage we employ. Adjusted 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 our common stock. Reconciliations of adjusted free cash flow, net debt and net capitalization can be found above in this Item 7, MD&A. We believe that reporting adjusted working capital, which is calculated as accounts receivable, plus inventory, less accounts payable, provides a meaningful measure of our operational results by showing the changes caused solely by revenue. We believe that reporting organic revenue and organic revenue growth, which exclude the impact of foreign currency exchange rates and the impact of acquisitions and divestitures, provides a useful comparison of our revenue performance and trends between periods.

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