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, 2016, 2015 and 2014. 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 AND OUTLOOK

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: Energy, Engineered Systems, Fluids and Refrigeration & Food Equipment.

For the year ended December 31, 2016, consolidated revenue from continuing operations was $6.8 billion, a decrease of $0.2 billion or 2.3%, as compared to the prior year. This decrease included a decline in organic revenue of 5.4%, a 3.0% impact from dispositions and an unfavorable impact of 1.0% from foreign currency, partially offset by acquisition-related growth of 7.1%. Overall, customer pricing had a minimal unfavorable impact of 0.2% on revenue for the year.

Our Energy segment revenue decreased $375.2 million, or 25.3%, from the prior year, comprised of an organic revenue decline of 24.4% and an unfavorable impact from foreign currency translation of 0.9%. The decline in organic revenue within our Energy segment was largely attributable to a significantly lower U.S. rig count and end customer capital spending compared to the prior year. Within our Engineered Systems segment, revenue increased $23.4 million, or 1.0%, from the prior year, primarily driven by organic growth of 1.7% and acquisition-related growth of 4.4%, partially offset by a 3.9% impact from a disposition and an unfavorable impact from foreign currency of 1.2%. Organic growth was primarily driven by strong markets in our Printing & Identification platform. Our Fluids segment revenue increased $301.3 million, or 21.5%, comprised primarily of acquisition-related growth of 27.8%, offset by an organic decline of 5.1% and an unfavorable foreign currency impact of 0.9%. The decline in organic revenue impacted both the Fluids Transfer and Pumps end markets as a result of weak longer cycle oil and gas markets and the associated effect of reduced capital spending by our customers. Within our Refrigeration & Food Equipment segment, revenue decreased $111.1 million, or 6.4%, from the prior year, including a 6.4% decline due to dispositions, an unfavorable impact from foreign currency translation of 0.2%, offset by modest organic revenue growth of 0.2%.

Gross profit was $2.5 billion for the year ended December 31, 2016, a decrease of $96.2 million, or 3.7%, as compared to the prior year. The decrease was primarily a result of the decline in revenue partially offset by supply chain cost containment initiatives and the benefits of prior restructuring actions. Gross profit margin was 36.4% for the year ended December 31, 2016 compared to 36.9% 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 were flat over the prior year at $6.8 billion for the year ended December 31, 2016. Included in this result was a 3.6% decline from organic bookings, 3.1% decline due to dispositions and 0.8% impact as a result of unfavorable foreign exchange rates, which were offset by 7.5% increase due to acquisition-related bookings. Bookings declined 23.7% and 4.2% within our Energy and Refrigeration & Food Equipment segments, respectively, while bookings in our Fluids and Engineered Systems segments increased 26.0% and 2.6%, respectively. Overall, our book-to-bill remained flat from the prior year at 1.00. Backlog as of December 31, 2016 was $1.1 billion, up from $994.6 million from the prior year.

From a geographic perspective, our US activity, excluding Energy, was flat year-over-year, on an organic basis. Including Energy, our U.S. activity declined due to weakness in oil and gas-related end markets. Both European and China activities improved year-over-year on an organic basis.

During the year we continued to adjust our cost structure to better align with the current economic environment resulting in full year 2016 restructuring charges of $40.2 million. These actions were concentrated within our Energy and Fluids segments with charges of $18.5 million and $16.9 million, respectively, for the year ended December 31, 2016.

For the full year 2016, Dover made a total of six acquisitions for a net cash consideration totaling $1.6 billion. We completed the acquisition of the dispenser and system businesses of Tokheim Group S.A.S ("Tokheim") in the first quarter of 2016, as well as the acquisitions of Fairbanks Environmental LTD and ProGauge in the retail fueling space in the second quarter of 2016. These businesses joined our Fluids segment. In the third quarter of 2016, we also acquired Alliance Wireless Technologies, Inc. ("AWTI") in the Engineered Systems segment. During the fourth quarter of 2016, the Company completed the acquisitions of Ravaglioli S.p.A. Group ("RAV"), a provider of automotive service equipment, and Wayne Fueling Systems Ltd. ("Wayne"), a provider of fuel dispensing, payment systems and monitoring and optimization software for retail and commercial fuel stations. These acquisitions were acquired to complement and expand upon existing operations within the Engineered Systems and Fluids segments, respectively. See Note 2 — Acquisitions in the Consolidated Financial Statements in Item 8 of this Form 10-K for further details regarding the businesses acquired during the year.

In addition, in 2016, as part of the regular review of our portfolio and the fit of our businesses, we completed the divestitures of the Texas Hydraulics and Tipper Tie businesses. These disposals did not represent strategic shifts in operations and, therefore, did not qualify for presentation as discontinued operations. Upon disposal of these businesses, we recognized total proceeds for Texas Hydraulics and Tipper Tie of $47.3 million and $158.9 million, which resulted in an after-tax gain on sale of $11.2 million and $57.0 million, respectively. See Note 3 — Disposed and Discontinued Operations in the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding these disposed businesses.

For the year ended December 31, 2016, we continued our history of increasing our annual dividend payments to shareholders and paid a total of $267.7 million in dividends to our shareholders.

Looking Forward

In 2017, we expect total consolidated revenue growth of 10% to 12% as compared to 2016. This increase will be comprised of growth from acquisitions of approximately 10%, organic revenue growth of 3% to 5%, partially offset by the impact from dispositions of approximately 1% and a negative impact from foreign currency translation of approximately 2%. We expect all of our segments to contribute to our overall organic growth. Within the Energy segment, we are encouraged by the recovery in the North American rig count and oil prices and have developed our full year estimate on an average U.S. rig count of 680 to 700 and an average price per barrel of oil of approximately $55.

We anticipate corporate expense in 2017 to be approximately $125 million, up $12 million from current year results, primarily reflecting increases in compensation and increased investments as we further implement Dover Business Services ("DBS") across the company.

We expect to generate free cash flow in 2017 of approximately 11% of revenue. In total, we expect full year diluted earnings per share from continuing operations ("EPS") to be in the range of $3.40 to $3.60. Our 2017 guidance includes the impact of disposed businesses, the net benefit from restructuring activities and the impact of foreign currency translation.

CONSOLIDATED RESULTS OF OPERATIONS

		Years Ended December 31,												% / Point Change
(dollars in thousands, except per share figures)		2016				2015				2014				2016 vs. 2015			2015 vs. 2014
Revenue		$	6,794,342			$	6,956,311			$	7,752,728			(2.3	)%		(10.3	)%
Cost of goods and services		4,322,373				4,388,167				4,778,479				(1.5	)%		(8.2	)%
Gross profit		2,471,969				2,568,144				2,974,249				(3.7	)%		(13.7	)%
Gross profit margin		36.4		%		36.9		%		38.4		%		(0.5	)		(1.5	)
Selling, general and administrative expenses		1,757,523				1,647,382				1,758,765				6.7	%		(6.3	)%
Selling, general and administrative expenses as a percent of revenue		25.9		%		23.7		%		22.7		%		2.2			1.0
Interest expense		136,401				131,676				131,689				3.6	%		—	%
Interest income		(6,759		)		(4,419		)		(4,510		)		53.0	%		(2.0	)%
Other income, net		(7,930		)		(7,105		)		(5,902		)		11.6	%		20.4	%
Gain on sale of businesses		(96,598		)		—				—				nm*			nm*
Provision for income taxes		180,440				204,729				316,067				(11.9	)%		(35.2	)%
Effective tax rate		26.2		%		25.6		%		28.9		%		0.6			(3.3	)
Earnings from continuing operations		508,892				595,881				778,140				(14.6	)%		(23.4	)%
Earnings (loss) from discontinued operations, net		—				273,948				(2,905		)		nm*			nm*
Earnings from continuing operations per common share - diluted		$	3.25			$	3.74			$	4.61			(13.1	)%		(18.9	)%

• nm: not meaningful

Revenue

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 growth of 7.1% was largely driven by the acquisitions of 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. Overall customer pricing was slightly unfavorable, impacting consolidated revenue 0.2%.

For the year ended December 31, 2015, revenue decreased $796.4 million, or 10.3% to $7.0 billion compared with 2014, reflecting an organic decline of 9.8%, an unfavorable impact of 3.9% from foreign currency translation and a decline due to a disposition of 0.1%, offset by acquisition-related growth of 3.5%. Acquisition growth was largely driven by the acquisitions of JK Group within our Engineered Systems segment and Gala Industries and Reduction Engineering Scheer within our Fluids segment.

Gross Profit

For the year ended December 31, 2016, our 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.

For the year ended December 31, 2015, our gross profit decreased $406.1 million, or 13.7% to $2.6 billion compared with 2014, primarily due to the significant decline in organic sales volumes, especially in our Energy segment, partially offset by supply chain cost containment initiatives and the benefits of prior restructuring actions. Gross profit margin declined 150 basis points due to an unfavorable product mix as those businesses with historically higher margin contributions experienced significant revenue declines.

Selling, General and Administrative 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, primarily 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.

For the year ended December 31, 2015, selling, general and administrative expenses decreased $111.4 million, or 6.3% to $1.6 billion compared with 2014 reflecting the impact of cost savings realized as the result of restructuring programs and reduced discretionary spending. As a percentage of revenue, selling, general and administrative expenses increased 100 basis points in 2015 to 23.7%, reflecting deleveraging of fixed administrative costs, particularly within the Energy segment. Additionally, higher restructuring costs of $8.9 million in 2015 as compared to 2014 also contributed to higher selling, general and administrative expenses relative to the revenue base.

Non-Operating Items

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 due to higher interest rates on higher balances of commercial paper in 2016 as well as the fourth quarter 2016 issuance of the €600 million of 1.25% euro-denominated notes. This increase was 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. For the year ended December 31, 2015, interest expense, net of interest income, remained relatively flat at $127.3 million compared with 2014 due to higher interest rates on commercial paper year over year offset by lower interest on the Euro-denominated debt and on the $400.0 million notes issued in October 2015.

During 2016, we completed the sale of Texas Hydraulics, 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. These disposals did not represent strategic shifts in operations and, therefore, did not qualify for presentation as discontinued operations. Upon disposal of Texas Hydraulics and Tipper Tie, for the year ended December 31, 2016, we recognized a gain on sale of $11.9 million and $85.0 million, respectively.

For the years ended December 31, 2016, 2015 and 2014, other income, net of $7.9 million, $7.1 million and $5.9 million, respectively, includes earnings on equity method investments of $3.3 million, $3.3 million and $1.7 million, respectively. Other income, net for 2016, 2015 and 2014 also included $2.9 million, ($1.6) million and ($2.1) million, respectively, of net foreign exchange gains (losses) resulting from the re-measurement and settlement of foreign currency denominated balances. The foreign exchange losses in 2015 and 2014 were more than offset by other nonrecurring items including income due to insurance settlements for property damage of $3.6 million and $5.1 million, respectively.

Income Taxes

Our businesses span the globe with 39.0%, 33.8% and 27.8% of our pre-tax earnings in 2016, 2015 and 2014, 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 a result, our effective non-U.S. tax rate is typically significantly lower than the U.S. statutory tax rate.

Our effective tax rate on continuing operations was 26.2% for the year ended December 31, 2016, compared to 25.6% for the year ended December 31, 2015. The 2016 and 2015 rates were impacted by $13.6 million and $17.5 million of favorable net discrete items, principally resulting from the adjustment of the tax accounts to the U.S. tax return filed and settlements of uncertain tax matters, respectively. After adjusting for discrete items, our effective tax rates were 28.1% and 27.8% for the years ended December 31, 2016 and 2015, respectively.

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 $18.9 million. Some portion of such change may be reported as discontinued operations. We believe adequate provision has been made for all income tax uncertainties.

For the year ended December 31, 2014, our effective tax rate on continuing operations was 28.9%. The effective tax rate was impacted by favorable net discrete items totaling $11.3 million, principally related to settlements of uncertain tax matters. After adjusting for discrete and other items, the effective tax rate for the year ended December 31, 2014 was 29.9%.

Earnings from Continuing Operations

For the year ended December 31, 2016, earnings from continuing operations decreased $87.0 million, or 14.6%, to $508.9 million, or $3.25 EPS compared with earnings from continuing operations of $595.9 million, or $3.74 EPS, for the year ended December 31, 2015. These results include discrete tax benefits of $13.6 million, or $0.09 EPS, in 2016 and $17.5 million, or $0.11 EPS, in 2015. Excluding these 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.

For the year ended December 31, 2015, earnings from continuing operations decreased $182.3 million, or 23.4%, to $595.9 million, or $3.74 EPS, compared with earnings from continuing operations of $778.1 million, or $4.61 EPS, for the year ended December 31, 2014. These results include discrete tax benefits of $17.5 million, or $0.11 EPS, in 2015 and $11.3 million, or $0.07 EPS, in 2014. Excluding these discrete tax benefits, earnings from continuing operations decreased 24.6% primarily due to lower revenues and additional restructuring charges, partially offset by benefits from productivity and cost containment initiatives. EPS decreased in 2015 as a result of lower earnings, partially offset by lower weighted average shares outstanding relative to 2014 due to approximately eight million shares repurchased during the year.

Discontinued Operations

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. These businesses were previously included in the results of the Engineered Systems segment and were reclassified to discontinued operations in 2014.

For the year ended December 31, 2014, loss from discontinued operations of $2.9 million primarily includes a loss on the sale of DEK of $6.9 million and a gain of $3.2 million in connection with a working capital adjustment for ECT, which was sold in 2013. Also reflected within the net loss from discontinued operations is $32.3 million of after-tax earnings for those businesses classified as discontinued operations, including Datamax O'Neil and Sargent Aerospace, $27.1 million of spin-off costs and a pension settlement charge of $4.4 million, net of tax, attributable to lump sum payments made to Knowles participants in Dover's qualified defined benefit pension plan.

Refer to Note 3 — 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

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 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.

•	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 Printing & Identification 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.

We anticipate that much of the benefit of these 2016 programs will be realized in 2017 and into 2018. We expect the programs currently underway to be substantially completed in the next 12 to 18 months. In light of the economic uncertainty in certain of our end markets and our continued focus on improving our operating efficiency, it is possible that additional programs may be implemented throughout 2017. As such, we expect to incur restructuring charges of approximately $20.0 million to $25.0 million during 2017.

2015 Restructuring Activities

The Company incurred $55.2 million of restructuring charges for the year ended December 31, 2015, including the programs described below.

•	The Energy segment incurred restructuring charges of $30.8 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.

•	The Engineered Systems segment recorded $13.3 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 the Industrials platform.

•	The Fluids segment recorded $4.9 million of restructuring charges principally related to reduction in workforce for those businesses serving the Pumps markets. Additional restructuring was completed in the pumps businesses for facility consolidation.

•	The Refrigeration & Food Equipment segment recorded restructuring charges of $5.8 million, primarily related to asset impairments due to exit plans at targeted facilities and headcount reductions.

Restructuring initiatives in 2014 included targeted facility consolidations at certain businesses, headcount reductions and actions taken to optimize the Company's cost structure. We incurred restructuring charges of $44.8 million for the year ended December 31, 2014 relating to such activities. See Note 8 — 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 (Energy, Engineered Systems, Fluids and Refrigeration & Food Equipment). Each of these segments is comprised of various product and service offerings that serve multiple end markets. See Note 16 — 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.

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)		2016				2015				2014				2016 vs. 2015			2015 vs. 2014
Revenue:
Drilling & Production		$	719,229			$	1,009,416			$	1,459,514			(28.7	)%		(30.8	)%
Bearings & Compression		276,807				306,387				347,470				(9.7	)%		(11.8	)%
Automation		112,402				167,877				210,255				(33.0	)%		(20.2	)%
Total		$	1,108,438			$	1,483,680			$	2,017,239			(25.3	)%		(26.4	)%
Segment earnings		$	55,336			$	173,190			$	461,815			(68.0	)%		(62.5	)%
Segment margin		5.0		%		11.7		%		22.9		%
Segment EBITDA		$	186,756			$	314,969			$	573,771			(40.7	)%		(45.1	)%
Segment EBITDA margin		16.8		%		21.2		%		28.4		%
Other measures:
Depreciation and amortization		$	131,420			$	141,779			$	111,956			(7.3	)%		26.6	%
Bookings		1,089,922				1,429,260				2,016,411				(23.7	)%		(29.1	)%
Backlog		134,181				155,586				233,347				(13.8	)%		(33.3	)%
Components of revenue growth (decline):
Organic decline														(24.4	)%		(34.3	)%
Acquisitions														—	%		9.3	%
Foreign currency translation														(0.9	)%		(1.4	)%
Total revenue decline														(25.3	)%		(26.4	)%

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 revenue 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 end market revenue (representing 64.9% of 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 end market revenue (representing 25.0% of 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 end market revenue (representing approximately 10.1% of 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.

Although revenue decreased for the year ended December 31, 2016 compared to the prior year, on a quarterly sequential basis in 2016, revenue in the segment increased 6% in the third quarter over the second quarter, and 7% in the fourth quarter over the third quarter. These increases were principally driven by sequential increases in the U.S. rig count and sequentially improving oil prices. These improving fundamentals drove sequential increases in our drilling and artificial lift businesses which provide products for early cycle oil and gas production.

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 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.

Bookings for the year ended December 31, 2016 decreased 23.7% compared to the prior year, reflecting ongoing market weakness. Backlog at December 31, 2016 decreased 13.8% compared to the prior year due to decreased demand in all three end markets primarily due to lower oil prices. Segment book-to-bill was 0.98.

2015 Versus 2014

Energy segment revenue for the year ended December 31, 2015 decreased $533.6 million, or 26.4%, compared to the prior year, including an organic decline of 34.3%, an unfavorable impact from foreign currency translation of 1.4%, offset by acquisition-related growth of 9.3%. This decline in revenue was the result of significantly lower demand from our customers as a result of the dramatic decrease in the price of oil during 2015 and a decline of approximately 47% in the year over year average number of active drilling rigs in the U.S. The impact of customer price reductions on revenue was approximately 1.7% in 2015.

•

Drilling & Production end market revenue (representing 68.0% of 2015 segment revenue) decreased $450.1 million, or 30.8%, compared to the prior year, due to significantly reduced demand and customer inventory reductions in our North American markets caused by the decrease in the price of oil and reduced number of active drilling rigs. The decrease in revenue for Drilling & Production was partially offset by acquisition-related growth, mainly due to our acquisition of Accelerated Companies LLC in the fourth quarter of 2014.

•	Bearings & Compression end market revenue (representing 20.7% of 2015 segment revenue) decreased $41.1 million, or 11.8%, compared to the prior year, due to ongoing declines in our Bearings end market, as slower OEM build rates continued, especially with oil and gas customers.

•	Automation end market revenue (representing 11.3% of 2015 segment revenue) decreased $42.4 million, or 20.2%, compared to the prior year. The favorable impact of recent acquisitions was more than offset by customer project delays, as low oil prices and uncertainties resulted in reduced capital spending by service and exploration and production companies.

Energy segment earnings for the year ended December 31, 2015 decreased $288.6 million, or 62.5%, compared to the prior year, primarily driven by lower volume for our businesses serving the Drilling & Production end market as well as higher acquisition-related depreciation and amortization of approximately $10.1 million over the prior year. In addition, restructuring charges increased $23.3 million over the prior year, as the segment continued targeted workforce reductions and field service consolidations.

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 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)		2016				2015				2014				2016 vs. 2015			2015 vs. 2014
Revenue:
Printing & Identification		$	1,022,502			$	943,670			$	988,884			8.4	%		(4.6	)%
Industrials		1,343,781				1,399,243				1,397,081				(4.0	)%		0.2	%
		$	2,366,283			$	2,342,913			$	2,385,965			1.0	%		(1.8	)%
Segment earnings		$	391,829			$	376,961			$	386,998			3.9	%		(2.6	)%
Segment margin		16.6		%		16.1		%		16.2		%
Segment EBITDA		$	465,776			$	436,875			$	448,944			6.6	%		(2.7	)%
Segment EBITDA margin		19.7		%		18.6		%		18.8		%
Other measures:
Depreciation and amortization		$	73,947			$	59,914			$	61,946			23.4	%		(3.3	)%
Bookings
Printing & Identification		$	1,026,453			$	937,215			$	993,204			9.5	%		(5.6	)%
Industrials		1,339,810				1,369,438				1,451,847				(2.2	)%		(5.7	)%
		$	2,366,263			$	2,306,653			$	2,445,051			2.6	%		(5.7	)%
Backlog
Printing & Identification		$	98,924			$	98,288			$	110,359			0.6	%		(10.9	)%
Industrials		252,780				250,725				282,598				0.8	%		(11.3	)%
		$	351,704			$	349,013			$	392,957			0.8	%		(11.2	)%
Components of revenue growth (decline):
Organic growth														1.7	%		3.2	%
Acquisitions														4.4	%		0.9	%
Dispositions														(3.9	)%		—	%
Foreign currency translation														(1.2	)%		(5.9	)%
Total revenue growth (decline)														1.0	%		(1.8	)%

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 acquisitions of JK Group in the fourth quarter 2015 and RAV in the fourth quarter 2016, partially offset by a 3.9% impact from a disposition and an unfavorable impact from foreign currency translation of 1.2%. Customer pricing favorably impacted revenue by approximately 0.3% in 2016.

•

Revenue derived from our Printing & Identification platform (representing 43.2% of 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.

•

Revenue of our Industrials platform (representing 56.8% of segment revenue), decreased $55.5 million, or 4.0%, compared to the prior year. The decrease was primarily due to the disposition in the first quarter of 2016 of Texas Hydraulics 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% due to 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.

Bookings for our Industrials platform for the year ended December 31, 2016 decreased 2.2%, compared to the prior year, due primarily to reduced activity in our environmental solutions business. Our Printing & Identification bookings for the year ended December 31, 2016 increased 9.5%, compared to the prior year, due to solid activity in our global marking and coding and digital printing businesses. Segment book-to-bill was 1.00.

2015 Versus 2014

Engineered Systems segment revenue for the year ended December 31, 2015 decreased $43.1 million, or 1.8%, compared to the prior year, primarily driven by an unfavorable impact from foreign currency translation of 5.9%, partially offset by organic growth of 3.2% and acquisition-related growth of 0.9%. Customer pricing did not have a significant impact on Engineered Systems revenue in 2015 as compared to 2014.

•	Revenue within our Printing & Identification platform (representing 40.3% of 2015 segment revenue) decreased $45.2 million, or 4.6%, compared to the prior year. The growth in organic revenue of 4.6% and acquisition-related growth of 2.2% was more than offset by the negative impact of foreign currency translation of 11.4%, as the Euro and several other currencies weakened against the U.S. dollar.

•

Revenue derived from our Industrials platform (representing 59.7% of 2015 segment revenue) increased $2.2 million, or 0.2%, compared to the prior year. Organic growth of 2.3% was driven by continued strong results in our waste handling and auto-related businesses, partially offset by softness in other Industrials businesses. This increase was partially offset by a 2.1% unfavorable foreign currency translation impact.

Engineered Systems segment earnings for the year ended December 31, 2015 decreased $10.0 million, or 2.6%, compared to the prior year. Increased volume as a result of organic growth was more than offset by the significant, unfavorable impact from foreign currency translation and higher restructuring charges of $6.7 million. Segment margin remained relatively flat with the prior year, reflecting productivity gains and the benefits from completed restructuring initiatives.

Fluids

Our Fluids segment, serving the Fluid Transfer and Pumps end markets, is focused on the safe handling of critical fluids across the retail fueling, chemical, hygienic, oil and gas and industrial end markets.

		Years Ended December 31,												% Change
(dollars in thousands)		2016				2015				2014				2016 vs. 2015			2015 vs. 2014
Revenue:
Fluid Transfer		$	1,055,909			$	792,971			$	778,979			33.2	%		1.8	%
Pumps		644,665				606,302				651,587				6.3	%		(6.9	)%
Total		$	1,700,574			$	1,399,273			$	1,430,566			21.5	%		(2.2	)%
Segment earnings		$	200,921			$	262,117			$	251,639			(23.3	)%		4.2	%
Segment margin		11.8		%		18.7		%		17.6		%
Segment EBITDA		$	286,145			$	318,195			$	312,542			(10.1	)%		1.8	%
Segment EBITDA margin		16.8		%		22.7		%		21.8		%
Other measures:
Depreciation and amortization		$	85,224			$	56,078			$	60,903			52.0	%		(7.9	)%
Bookings		1,702,930				1,351,191				1,434,358				26.0	%		(5.8	)%
Backlog		331,238				243,459				277,834				36.1	%		(12.4	)%
Components of revenue growth (decline):
Organic (decline) growth														(5.1	)%		0.8	%
Acquisitions														27.8	%		2.4	%
Dispositions														(0.3	)%		—	%
Foreign currency translation														(0.9	)%		(5.4	)%
Total revenue growth (decline)														21.5	%		(2.2	)%

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 primarily of acquisition-related growth of 27.8% primarily due to Tokheim and Wayne, partially offset by an organic decline of 5.1% and an unfavorable foreign currency translation impact of 0.9%. The decline in organic revenue impacted both the Fluids Transfer and Pumps 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.

•	Fluid Transfer end market revenue (representing 62.1% of segment revenue) increased $262.9 million, or 33.2%, compared to the prior year. This revenue increase was primarily driven by our acquisitions of Tokheim and Wayne partially offset by the impact of reduced capital spending by longer cycle midstream customers and certain integrated energy customers.

•	Pumps end market revenue (representing 37.9% of segment revenue) increased $38.4 million, or 6.3%, 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.

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.

Bookings for the year ended December 31, 2016 increased 26.0% compared to the prior year, and backlog levels at December 31, 2016 increased 36.1% compared to the prior year, primarily reflecting the positive impact of acquisitions. Book to bill was 1.00.

2015 Versus 2014

Fluids segment revenue for the year ended December 31, 2015 decreased $31.3 million, or 2.2%, compared to the prior year, comprised of an unfavorable foreign currency translation impact of 5.4%, offset by organic revenue growth of 0.8% and acquisition-related growth of 2.4%. Fluids segment revenue experienced some favorability in 2015 as a result of customer pricing offset by pricing pressure in polymer pumps and pressures within the oil and gas markets.

•	Fluid Transfer end market revenue (representing 56.7% of 2015 segment revenue) increased $14.0 million, or 1.8%, compared to the prior year. The Fluid Transfer businesses grew organically and continue to benefit from acquisition-related growth, which partially offset the unfavorable impact of foreign currency translation.

•	Pumps end market revenue (representing 43.3% of 2015 segment revenue) decreased $45.3 million, or 6.9%, compared to the prior year, as solid results for our plastic and polymer pump business were offset by the impacts of foreign currency translation and slower activity in oil and gas-related pump end markets.

Fluids segment earnings for the year ended December 31, 2015 increased $10.5 million, or 4.2%, compared to the prior year, driven by the benefits of completed restructuring and productivity actions. Segment margin expanded 110 basis points, in spite of an increase in depreciation and amortization expense related to recent acquisitions, higher restructuring charges as compared to the prior year period, deal related expenses and the unfavorable impact of foreign currency translation.

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)		2016				2015				2014				2016 vs. 2015			2015 vs. 2014
Revenue:
Refrigeration		$	1,261,633			$	1,336,829			$	1,483,157			(5.6	)%		(9.9	)%
Food Equipment		358,706				394,601				438,032				(9.1	)%		(9.9	)%
Total		$	1,620,339			$	1,731,430			$	1,921,189			(6.4	)%		(9.9	)%
Segment earnings		$	283,628			$	221,299			$	238,734			28.2	%		(7.3	)%
Segment margin		17.5		%		12.8		%		12.4		%
Segment EBITDA		$	348,645			$	287,373			$	307,435			21.3	%		(6.5	)%
Segment EBITDA margin		21.5		%		16.6		%		16.0		%
Other measures:
Depreciation and amortization		$	65,017			$	66,074			$	68,701			(1.6	)%		(3.8	)%
Bookings		1,645,807				1,717,100				1,863,207				(4.2	)%		(7.8	)%
Backlog		258,329				247,352				282,507				4.4	%		(12.4	)%
Components of revenue growth (decline):
Organic growth (decline)														0.2	%		(7.8	)%
Acquisitions														—	%		0.7	%
Dispositions														(6.4	)%		(0.4	)%
Foreign currency translation														(0.2	)%		(2.4	)%
Total revenue decline														(6.4	)%		(9.9	)%

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 end market revenue (representing 77.9% of 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 end market revenue (representing 22.1% of 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 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.

Bookings for the year ended December 31, 2016 decreased 4.2% compared to the prior year, due to the dispositions of the walk-in cooler business of Hillphoenix and Tipper Tie. Backlog levels increased 4.4% at December 31, 2016 compared to the prior

year. When adjusting for the disposition of Tipper Tie, backlog levels increased 7.8% compared to the prior year. Book to bill was 1.02.

2015 Versus 2014

Refrigeration & Food Equipment segment revenue for the year ended December 31, 2015 decreased $189.8 million, or 9.9%, compared to the prior year, comprised of an organic revenue decline of 7.8%, an unfavorable impact from foreign currency translation of 2.4% and a 0.4% decline due to dispositions. The decline was slightly offset by acquisition-related growth of 0.7%. Customer pricing did not have a significant impact on the segment's revenue in 2015.

•	Refrigeration end market revenue (representing 77.2% of 2015 segment revenue) decreased $146.3 million, or 9.9%, compared to the prior year, primarily driven by the anticipated decline in organic revenue due to reduced volume from a major food retail customer, as well as an unfavorable impact from foreign currency translation, primarily the Euro.

•	Food Equipment end market revenue (representing 22.8% of 2015 segment revenue) decreased $43.4 million, or 9.9%, compared to the prior year, mainly due to market softness in our beverage can forming equipment and food packaging machinery businesses, as well as the unfavorable impact of foreign currency translation.

Refrigeration & Food Equipment segment earnings for the year ended December 31, 2015 decreased $17.4 million, or 7.3%, compared to the prior year, primarily due to volume declines, partially offset by the benefits of restructuring programs and productivity initiatives. Segment margin increased 40 basis points, reflecting the benefits of restructuring programs and reduced supply chain and manufacturing costs as well as lower restructuring charges in 2015 as compared to the prior year.

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)	2016				2015				2014
Net cash flows provided by (used in):
Operating activities	$	861,975			$	949,059			$	950,164
Investing activities	(1,503,843		)		(34,578		)		(782,557		)
Financing activities	633,608				(1,091,886		)		(255,489		)

Operating Activities

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.

Cash provided by operating activities for the year ended December 31, 2015 decreased $1.1 million compared to 2014. This slight decline was driven primarily by lower continuing earnings excluding depreciation and amortization of $162.4 million and lower compensation and expense accruals of $114.1 million, offset by higher cash inflows from working capital of $234.7 million relative to the prior year primarily driven by improvements in inventory, accounts receivable and accounts payable through active working capital management.

Pension and Other Post-Retirement Activity: Total cash used in conjunction with pension plans during 2016 was $25.7 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 2016, 2015 and 2014 and expects to make minimal contributions, if any, in the near term.

Our significant 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 2016, 2015 and 2014 totaled $8.4 million, $8.4 million and $9.5 million, respectively. In 2017, we expect to contribute approximately $6.5 million to our non-U.S. plans. Our non-qualified supplemental pension plan is funded through Company assets as benefits are paid. During 2016 a total of $16.6 million benefits were paid under this plan. See Note 14 — 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 increased from December 31, 2015 by $32.9 million, or 2.6%, to $1.3 billion at December 31, 2016, which reflected an increase in receivables of $144.7 million, an increase in net inventory of $67.6 million and an increase in accounts payable of $179.4 million. Excluding acquisitions, dispositions and the effects of foreign currency translation, adjusted working capital decreased by $53.0 million, or 4.2% due to working capital management.

Investing Activities

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

•

Acquisitions: In 2016, we deployed $1.6 billion to acquire six businesses. In comparison, we acquired four business in 2015 for an aggregate purchase price of approximately $567.8 million. Total acquisition spend in 2014 was nearly $802.3 million and was comprised of seven businesses. See Note 2 — 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 2016, we generated cash proceeds of $206.4 million, primarily from the sale of Texas Hydraulics and Tipper Tie. Cash proceeds of $689.3 million in 2015 were primarily from the sale of Datamax O'Neil and Sargent Aerospace. In 2014, we generated cash proceeds of $191.3 million primarily from the sale of DEK and $16.3 million from the collection of deferred sale proceeds on the 2013 sale of ECT.

•	Capital spending: Capital expenditures, primarily to support productivity and new product launches, were $165.2 million in 2016, $154.3 million in 2015 and $166.0 million in 2014. Our capital expenditures increased $11.0 million in the 2016 period as compared to 2015, primarily within Fluids. We expect 2017 capital expenditures to approximate 2.4% of revenue, in line with 2016 results.

We anticipate that capital expenditures and any additional acquisitions we make in 2017 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: 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. In 2014, we had cash inflow of $251.5 million from commercial paper issuances, principally to fund acquisitions during the period, including Accelerated Companies LLC in the fourth quarter of 2014.

•

Treasury purchases: In January 2015, our Board of Directors approved a new standing share repurchase authorization, whereby the Company may repurchase up to 15 million shares of its common stock over the following three years. This share repurchase authorization replaced all previously authorized repurchase programs. 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. During 2016, we did not purchase any shares under this program. In 2015, we used $600.2 million to repurchase 8.2 million shares under this authorization. As of December 31, 2016, the number of shares still available for repurchase under the January 2015 share repurchase authorization was 6.8 million. During 2014, we completed the repurchase of 7.5 million shares at a total cost of $601.1 million under the previously board-approved stock repurchase programs of May and November 2012.

•	Dividend payments: Total dividend payments to common shareholders were $267.7 million in 2016, $258.0 million in 2015 and $258.5 million in 2014. Our dividends paid per common share increased 5% to $1.72 per share in 2016 compared to $1.64 per share in 2015. This represents the 61st consecutive year that our dividend has increased.

•

Net Proceeds from the exercise of share-based awards: Proceeds from the exercise of share-based awards were $8.4 million, $4.0 million and $20.3 million in 2016, 2015 and 2014, 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 $15.7 million, $5.0 million and $21.2 million in 2016, 2015 and 2014, respectively. These tax payments generally increase or decrease correspondingly to the number of exercises in a particular year.

•

Cash received from Knowles, net of cash distributed: In connection with the separation of Knowles from Dover in 2014, Knowles made a cash payment of $400.0 million to Dover immediately prior to the distribution. Dover received net cash of $360.0 million upon separation, which reflects the $400.0 million cash payment due net of cash held by Knowles at the time of distribution and retained by it in connection with its separation from Dover. Dover utilized the net proceeds from Knowles to pay down commercial paper and to repurchase shares of its common stock in the first quarter of 2014.

Cash Flows from Discontinued Operations

In 2015, cash used in discontinued operations totaled $115.9 million compared to cash provided of $6.0 million in 2014. These cash flows reflect the operating results of Datamax O'Neil and Sargent Aerospace (prior to their sale in 2015), as well as the results of Knowles prior to its spin-off in the first quarter of 2014. Cash used in the 2015 period also includes $110.5 million of taxes paid relating to the gain on the sale of Sargent Aerospace. Cash used in the 2014 period includes costs incurred for the spin-off of Knowles of $27.1 million and capital expenditures of $20.6 million.

Liquidity and Capital Resources

Free Cash Flow

In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures as set forth in the Consolidated Statements of Cash Flows. We believe that free cash flow is an important measure of operating performance because it provides management and investors a measurement of cash generated from operations that 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 free cash flow to cash flow provided by operating activities:

	Years Ended December 31,
Free Cash Flow (dollars in thousands)	2016				2015				2014
Cash flow provided by operating activities	$	861,975			$	949,059			$	950,164
Less: Capital expenditures	(165,205		)		(154,251		)		(166,033		)
Free cash flow	$	696,770			$	794,808			$	784,131
Free cash flow as a percentage of revenue	10.3		%		11.4		%		10.1		%

For 2016, we generated free cash flow of $696.8 million, representing 10.3% of revenue. Free cash flow in 2015 was $794.8 million or 11.4% of revenue, and $784.1 million, or 10.1% of revenue in 2014. The full year decrease in 2016 free cash flow reflects lower earnings from continuing operations before deprecation and amortization, higher capital expenditures and timing of revenue at year end, principally in the energy related businesses. We expect to generate free cash flow in 2017 of approximately 11.0% of revenue.

The 2015 increase in free cash flow compared to 2014 reflects productivity, operating efficiencies and working capital management through the Dover Excellence Program.

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, 2016 and had a coverage ratio of 9.4 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 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.

On September 16, 2016, we entered into a $500.0 million unsecured term loan facility (the “Term Loan Agreement”) with a syndicate of banks. We did not draw down on the Term Loan Agreement and on November 14, 2016, voluntarily terminated the Term Loan Agreement.

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, 2016, our cash and cash equivalents totaled $349.1 million, of which approximately $221.1 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.

In 2014, we received a one-time cash dividend of approximately $235.0 million as a result of certain restructuring arising from the spin-off of Knowles. The U.S. tax consequences of this intercompany dividend, which were not significant, have been included in our total income tax expense. Cash held by our foreign subsidiaries is generally used to finance foreign operations and investments, including acquisitions. It is our intent to indefinitely reinvest those funds outside the U.S. It is not practicable to estimate the amount of tax payable if some or all of such funds were to be repatriated and the amount of foreign tax credits available to reduce or eliminate the resulting U.S. income tax liability. Management believes it has sufficient liquidity to satisfy its cash needs, including its cash needs in the United States.

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, 2016				December 31, 2015				December 31, 2014
Current maturities of long-term debt		$	6,950			$	122			$	299,956
Commercial paper		407,600				151,000				478,000
Notes payable and current maturities of long-term debt		414,550				151,122				777,956
Long-term debt		3,206,637				2,603,655				2,253,041
Total debt		3,621,187				2,754,777				3,030,997
Less: Cash and cash equivalents		(349,146		)		(362,185		)		(681,581		)
Net debt		3,272,041				2,392,592				2,349,416
Add: Stockholders' equity		3,799,746				3,644,575				3,700,725
Net capitalization		$	7,071,787			$	6,037,167			$	6,050,141
Net debt to net capitalization		46.3		%		39.6		%		38.8		%

Our net debt to net capitalization ratio increased to 46.3% at December 31, 2016 compared to 39.6% at December 31, 2015. The increase in this ratio was largely driven by 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 net debt to net capitalization ratio increased to 39.6% at December 31, 2015 compared to 38.8% at December 31, 2014 primarily due to changes in net debt during the period. Net debt increased $43.2 million during the period primarily due to a reduction in cash levels as a result of debt repayments, stock repurchases, acquisitions and higher long-term debt outstanding due to the $400.0 million notes issued in the fourth quarter of 2015, offset by decreased 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, 2016:

	Short Term Rating		Long Term Rating		Outlook
Moody's	P-2		A3		Stable
Standard & Poor's	A-2		A-		Negative
Fitch	F2		A-		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, 2016, we had approximately $140.9 million outstanding in letters of credit with financial institutions, which expire at various dates in 2017 through 2021. 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, 2016 and the years when these obligations are expected to be due is as follows:

						Payments Due by Period
(in thousands)		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years				Other
Long-term debt (1)		$	3,230,073			$	6,950			$	350,357			$	763,261			$	2,109,505			$	—
Interest payments (2)		1,609,162				130,272				231,931				206,052				1,040,907				—
Rental commitments		255,071				61,638				91,187				43,464				58,782				—
Purchase obligations		72,355				70,686				1,669				—				—				—
Capital leases		13,630				3,122				3,234				2,044				5,230				—
Supplemental and post-retirement benefits (3)		114,943				22,545				20,597				26,632				45,169				—
Uncertain tax positions (4)		84,894				—				—				—				—				84,894
Total obligations		$	5,380,128			$	295,213			$	698,975			$	1,041,453			$	3,259,593			$	84,894

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(1	)	See Note 9 to the Consolidated Financial Statements. Amounts represent principal payments for all long-term debt, including current maturities.
(2	)	Amounts represent estimate of future interest payments on long-term debt using the interest rates in effect at December 31, 2016.
(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 14 to the Consolidated Financial Statements. We also expect to contribute approximately $6.5 million to our non-U.S. qualified defined benefit plans in 2017, which amount is not reflected in the above table.
(4	)	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 2016. 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, 2016 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 2016 year-end fair value of our long-term debt by approximately $784.0 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. Previously, we entered into a floating-to-floating cross currency swap agreement with a total notional amount of $50.0 million in exchange for CHF 65.1 million, which matured on October 15, 2015. This transaction hedged a portion of our net investment in non-U.S. operations. The agreement qualified as a net investment hedge and changes in the fair value were reported within the cumulative translation adjustment section of other comprehensive earnings, with any hedge ineffectiveness recognized in current earnings.

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 devaluation of the euro relative to the U.S. dollar, the U.S. dollar equivalent of this debt decreased, resulting in the recognition of a gain in other comprehensive income of $53.8 million and $35.5 million for the years ended December 31, 2016 and 2015, 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, 2016 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 sales.

Inventories - Inventories for the majority of our subsidiaries, including all international subsidiaries, are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market. 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 balance sheet 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 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 approach. Under the income approach, 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 2016 reporting unit valuations ranged from 9.0% to 10.5%.

We performed the annual goodwill impairment testing of our nine identified reporting units in the fourth quarter of 2016. Based on the impairment tests performed, the fair value of our reporting units exceeded their carrying value, in most cases, by more than 100%. As such, no goodwill impairment was recognized. While all of our reporting units passed the goodwill impairment test, two of our reporting units within the Energy segment had the lowest headroom compared to the other reporting units. The aggregate goodwill balance for these two reporting units were $959.0 million. While there was an overall year over year decline within the Energy segment resulting in lower estimated cash flows, impacted by lower oil prices and the resulting economic pressures within the oil and gas industry, in the second half of 2016, U.S. rig count and oil prices increased sequentially and led to improvement compared to the prior year. These two reporting units had fair values in excess of their carrying values of 49% and 33%, an improvement from the prior year. While we believe the assumptions used in the 2016 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 in 2017.

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 14 — Employee Benefit Plans to the Consolidated Financial Statements, the 2016 weighted-average discount rates used to measure our qualified defined benefit ranged from 2.06% to 4.10%, a decrease from the 2015 rates, which ranged from 2.32% to 4.40%. The lower 2016 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 $33.7 million from the amount recorded in the financial statements at December 31, 2016. 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 $1.7 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, 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.

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. 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 2016, 2015 or 2014.

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 12 — Equity and Cash Incentive Program to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Recent Accounting Standards

Recently Issued Accounting Standards

In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred until the asset is sold to a third party or recovered through use. This guidance will be effective for us on January 1, 2018. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment

costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for us on January 1, 2018. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. This guidance will be effective for us on January 1, 2017. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. This guidance will be effective for us on January 1, 2019. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 340): Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU will be effective for us on January 1, 2017. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. This guidance will be effective for us on January 1, 2018. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU 2016-20, Technical Corrections and Improvements to Topic 606, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, ASU 2016-10, Identifying Performance Obligations and Licensing and ASU 2016-08, Principal versus Agent Considerations.

We commenced our assessment of ASU 2014-09 during the second half of 2015 and developed a project plan to guide the implementation. This project plan includes analyzing the standard’s impact on our contract portfolio, comparing our historical accounting policies and practices to the requirements of the new standard and identifying potential differences from applying the requirements of the new standard to its contracts. We are also in the process of drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We expect to adopt this new standard using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial Statements.

Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting (Topic 323), which eliminates the requirement to retrospectively apply equity method accounting when an entity increases ownership or influence in a previously held investment. We early adopted this guidance at December 31, 2016, which requires prospective application of equity method accounting treatment when we obtain significant influence over an investee during the period. The adoption of this ASU did not have a material impact to our Consolidated Financial Statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. Under this guidance the cumulative impact of purchase accounting adjustments arising during the one year measurement period from the date of acquisition will be recognized, in full, in the period identified. This guidance was effective for us on January 1, 2016 and will be applied prospectively to adjustments arising after that date. The adoption of this ASU did not have a material impact to our Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct reduction from the carrying amount of the related debt, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. We adopted this guidance January 1, 2016. As a result of adoption, debt issuance costs of $13,687 were reclassified from assets to reduce long-term-debt as of December 31, 2015.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances, such as the existence of substantial doubt. We are required to evaluate going concern uncertainties at each annual and interim reporting period, considering the entity’s ability to continue as a going concern within one year after the issuance date. This guidance was effective for us on December 31, 2016. The adoption of this ASU did not have an impact to our Consolidated Financial Statements.

Non-GAAP Disclosures

In an effort to provide investors with additional information regarding our results as determined by GAAP, we also disclose non-GAAP information which we believe provides useful information to investors. Segment EBITDA, segment EBITDA margin, free cash flow, net debt, net capitalization, the net debt to net capitalization ratio, adjusted working capital, earnings adjusted for non-recurring items, effective tax rate adjusted for discrete and other items and organic revenue growth are not financial measures under GAAP and should not be considered as a substitute for cash flows from operating activities, debt or equity, earnings, revenue, or working capital 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 free cash flow are important measures of liquidity. Net debt to net capitalization is helpful in evaluating our capital structure and the amount of leverage we employ. 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 free cash flow, net debt and net capitalization can be found above in this Item 7, MD&A. We believe that reporting our effective tax rate adjusted for discrete and other items is useful to management and investors as it facilitates comparisons of our ongoing tax rate to prior and future periods and our peers. 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.