Dover Corporation 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Dover Corporation is a diversified global manufacturer operating through Engineered Systems, Fluids, and Refrigeration & Food Equipment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the same periods in 2018. Historical Apergy results have been presented as discontinued operations in the 2018 comparative periods.
Effective October 1, 2019, Dover reorganized its reporting structure into five segments: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $1.825 billion | $1.747 billion | $5.361 billion | $5.183 billion |
| Gross profit | $673.5 million | $646.5 million | $1.970 billion | $1.915 billion |
| Gross margin | 36.9% | 37.0% | 36.7% | 36.9% |
| Operating earnings | $282.7 million | $220.1 million | $726.8 million | $624.3 million |
| Earnings from continuing operations | $206.0 million | $157.3 million | $509.8 million | $433.2 million |
| Diluted EPS from continuing operations | $1.40 | $1.05 | $3.47 | $2.82 |
| Net earnings | $206.0 million | $157.3 million | $509.8 million | $428.7 million |
| Cash flow from operations | Not separately provided | Not separately provided | $584.1 million | $418.7 million |
| Free cash flow | Not separately provided | Not separately provided | $446.8 million | $284.1 million |
Q3 operating margin was approximately 15.5%, compared with 12.6% in the prior-year quarter. Nine-month operating margin was approximately 13.6%, compared with 12.0% in 2018. Selling, general and administrative expense declined 8.4% in the quarter and 7.3% year to date, reflecting rightsizing actions.
At September 30, 2019, cash and cash equivalents were $340.5 million, compared with $396.2 million at December 31, 2018. Total debt was $3.091 billion, consisting of $182.7 million of commercial paper and $2.909 billion of long-term debt. Net debt to net capitalization improved to 47.7% from 50.0% at year-end 2018. The company had a $1.0 billion undrawn revolving credit facility and an interest coverage ratio of 10.5 to 1.0.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 4.5%; nine-month revenue increased 3.4%. Q3 growth included 5.6% organic growth, 1.0% acquisition growth, a 1.6% foreign-currency headwind, and a 0.5% disposition impact.
- Fluids was the strongest segment: Q3 revenue increased 9.1% and segment earnings increased 43.8%, with margin expanding to 19.3% from 14.7%. Nine-month revenue increased 8.6%.
- Engineered Systems Q3 revenue increased 4.5% and segment earnings increased 25.1%; segment margin rose to 19.4% from 16.2%.
- Refrigeration & Food Equipment Q3 revenue declined 4.1% and segment earnings declined 17.0%; margin fell to 9.5% from 11.0%, primarily because of lower volumes and facility restructuring costs.
- Q3 earnings from continuing operations increased 31.0%, while nine-month earnings increased 17.7%. Nine-month results included a $46.9 million loss related to the sale of Finder Pompe; excluding that item, earnings from continuing operations increased 28.5%.
- Share count declined, with nine-month basic weighted-average shares of 145.3 million versus 151.2 million in 2018. Dover repurchased 261,807 shares for $23.3 million during Q3 and had 9.44 million shares remaining under its authorization.
- Dover completed three Fluids acquisitions for total consideration of $216.4 million, including Belanger and All-Flo, compared with $68.6 million of acquisitions in the first nine months of 2018.
Cash Flow, Liquidity, Guidance, and Risks
Operating cash flow increased $165.4 million year over year to $584.1 million. Capital expenditures were $137.3 million and acquisition spending was $215.7 million. Dividends paid were $211.1 million, or $1.45 per share. Management stated that available cash, internally generated funds, commercial paper, credit facilities, and debt or equity markets, as necessary, are expected to fund capital expenditures and acquisitions.
Management expects approximately $24 million of rightsizing and related charges during 2019 and 2020. Approximately $14 million had been incurred through September 30, 2019; expected remaining charges were approximately $6 million in the remainder of 2019 and $4 million in 2020. Additional programs beyond the announced initiatives may be implemented.
On October 4, 2019, Dover entered into a new $1.0 billion five-year unsecured revolving credit facility expiring October 4, 2024, replacing the prior facility. The company was in compliance with its debt covenants at September 30, 2019.
Principal risks include economic and end-market conditions, customer demand and capital spending, pricing pressure, tariffs and material costs, foreign exchange and interest-rate fluctuations, acquisition integration, restructuring execution, litigation and product liability, cybersecurity, intellectual property, and changes in tax or trade policy. The filing states that there were no material changes to previously disclosed risk factors and no legal proceedings expected to have a material effect. Environmental and other matter reserves totaled $30.9 million.
The filing does not provide formal full-year revenue or earnings guidance. Management commentary indicates continued focus on organic growth, productivity, pricing, acquisitions, rightsizing, and capital allocation.
Important Facts for Investors to Verify
- Confirm the effect of the October 2019 five-segment reorganization on future reported segment trends and historical recast information.
- Assess sustainability of Fluids growth and margins, particularly following the Belanger and All-Flo acquisitions.
- Monitor weakness in commercial refrigeration, heat exchangers, retail refrigeration, and foodservice equipment.
- Evaluate the impact of tariffs, material inflation, unfavorable mix, foreign exchange, and customer pricing on margins.
- Track completion, cash costs, and realized savings from rightsizing and footprint-consolidation programs.
- Review acquisition spending, share repurchases, dividends, and potential debt-funded capital allocation.
- Consider the $46.9 million Finder loss and the differing Apergy discontinued-operations presentation when comparing 2018 and 2019 results.
- Verify liquidity, commercial-paper availability, covenant compliance, guarantees of approximately $145.5 million, and the maturity profile of long-term debt.