Dover Corporation 2013 Form 10-K Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer operating through Energy, Engineered Systems, Printing & Identification, and Communication Technologies. The filing covers the fiscal year ended December 31, 2013, with comparisons to 2012 and 2011. Dover employed approximately 37,000 people in continuing operations and generated 48% of revenue outside the United States.
2013 results include the businesses later transferred to Knowles within continuing operations. The planned Knowles spin-off was expected to occur on February 28, 2014, after which those businesses would be reported as discontinued operations.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $8.730 billion | $8.104 billion | +7.7% |
| Gross profit | $3.340 billion | $3.107 billion | +7.5% |
| Gross margin | 38.3% | 38.3% | Flat |
| Operating earnings | $1.354 billion | $1.265 billion | +7.0% |
| Earnings from continuing operations | $965.8 million | $833.1 million | +15.9% |
| Diluted EPS from continuing operations | $5.57 | $4.53 | +23.0% |
| Net earnings | $1.003 billion | $811.1 million | +23.7% |
| Operating cash flow from continuing operations | $1.179 billion | $1.261 billion | -6.5% |
| Free cash flow | $941.9 million | $964.1 million | -2.3% |
| Free cash flow as a percentage of revenue | 10.8% | 11.9% | Down 1.1 points |
| Total debt | $2.828 billion | $2.800 billion | +$28.4 million |
| Cash and cash equivalents | $803.9 million | $800.1 million | +$3.8 million |
| Net debt to net capitalization | 27.4% | 28.9% | Down 1.5 points |
Net earnings benefited from $37.3 million of earnings from discontinued operations, compared with a $22.0 million loss in 2012. The 2013 effective tax rate on continuing operations was 21.9%, versus 26.8% in 2012; excluding discrete tax items, management reported an adjusted rate of 28.2% in both years.
Segment performance
- Energy: Revenue was $2.296 billion, up 5.7%; segment earnings were $552.8 million, up 2.6%; operating margin declined to 24.1% from 24.8% because of product mix and acquisition-related depreciation and amortization.
- Engineered Systems: Revenue was $3.797 billion, up 11.0%; segment earnings were $575.9 million, up 14.7%; operating margin improved to 15.2% from 14.7%. Refrigeration and food equipment and recent acquisitions were key contributors.
- Printing & Identification: Revenue was $1.022 billion, up 2.5%; segment earnings rose 12.9% to $152.6 million; operating margin improved to 14.9% from 13.6%, supported by volume leverage and productivity actions.
- Communication Technologies: Revenue was $1.616 billion, up 6.6%; segment earnings rose 8.6% to $237.7 million; operating margin improved to 14.7% from 14.4%. MEMS microphone demand and smartphone product launches offset weakness at two OEM customers and normal pricing concessions.
Material changes versus the prior comparable period
- Revenue growth consisted of 2.9% organic growth and 4.8% acquisition-related growth; foreign currency translation was negligible.
- Bookings increased 8.2% to $8.7 billion, and continuing-operations backlog increased 4.6% to $1.6 billion.
- Operating cash flow and free cash flow declined because of higher working-capital investment, higher incentive compensation payments, and increased tax payments.
- Dover acquired ten businesses for approximately $322.8 million, including Finder Pompe for approximately $142.2 million.
- Capital expenditures declined to $236.8 million from $297.0 million, while depreciation and amortization increased to $421.6 million from $357.6 million, primarily reflecting acquisition-related assets and prior investments.
- Dover issued €300 million of 2.125% notes due 2020 and used proceeds primarily to repay approximately $381 million of commercial paper.
- Dover repurchased approximately 6.0 million shares for $457.3 million and paid $247.8 million of dividends. The annual dividend increased to $1.45 per share from $1.33.
Guidance, outlook, risks, contingencies, and unusual items
Management expected 2014 free cash flow of approximately 11.0% of revenue and capital expenditures of approximately 2.5% of revenue. Near-term expectations included continued Energy performance, strong Fluid Solutions results, solid refrigeration and food equipment markets, and normal seasonality in fast-moving consumer goods markets. The filing does not provide a clear consolidated 2014 revenue or EPS guidance figure.
- Knowles separation costs were expected to total $60 million to $70 million; $30.1 million had been incurred through December 31, 2013. Completion, timing, tax treatment, and expected benefits remained subject to execution risk.
- Restructuring charges were $25.9 million in 2013, and management expected approximately $5 million to $15 million in additional 2014 charges.
- ECT was sold for $92.7 million and generated an after-tax loss on sale of $2.8 million. DEK was impaired by $14.0 million and was expected to be sold in the first half of 2014.
- Environmental reserves were $30.3 million; legal reserves were $0.9 million. Management stated that no current legal proceedings were expected to be material.
- Dover maintained an undrawn $1.0 billion revolving credit facility through November 2016. Its interest-coverage ratio was 13.2 to 1 versus a 3.0 to 1 covenant requirement.
- Key risks include global economic and energy-market volatility, international operations and currency movements, commodity costs, competition and pricing pressure, acquisition integration, technology changes, cybersecurity, litigation, tax audits, credit ratings, and the Knowles separation.
Most important facts for an investor to verify
- Reconcile continuing-operations results after the Knowles spin-off and confirm the subsequent discontinued-operations presentation.
- Assess the sustainability of the 2013 tax-rate benefit, including $77.0 million of favorable discrete tax items and the Malaysian tax holiday.
- Monitor working-capital conversion, free cash flow, acquisition spending, share repurchases, and debt levels.
- Verify completion and financial effects of the DEK sale and the treatment of ECT-related tax and value-added-tax matters.
- Evaluate exposure to smartphone customer concentration, Energy-market conditions, commodity prices, foreign exchange, and restructuring execution.
- Review pension obligations, environmental reserves, uncertain tax positions, letters of credit, and other contractual commitments.