DOV

DOVER Corp. 10-Q Summary: Period Ended September 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine months ended on that date. Dover Corporation is a diversified industrial company operating through four market segments: Diversified Industries, Industries, Resources, and Technologies. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis.

Key Financial Metrics

*2002 nine-month results include a $293.0M net-of-tax cumulative effect of change in accounting principle (SFAS 142 goodwill impairment).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8.6% in Q3 and 5.3% for the nine months ended September 30, 2003, compared to the prior year. Organic growth was partially offset by foreign currency translation impacts.
• Profitability: Operating profit margins improved to 10.2% in Q3 2003 from 9.3% in Q3 2002. Gross margins also expanded to 33.7% in Q3 from 33.0%.
• Segment Performance:
  • Technologies: Showed a significant turnaround, with earnings rising from $1.3M in Q3 2002 to $29.8M in Q3 2003, driven by Circuit Board Assembly and Test (CBAT) and Specialized Electronic Components (SEC) businesses.
  • Resources: Remained the most profitable segment, with earnings up 12.3% in Q3, driven by higher energy prices and new product introductions.
  • Diversified: Earnings declined 17.7% in Q3 despite flat sales, though Hill Phoenix reported record earnings.
  • Industries: Earnings were flat in Q3 but down 18.8% for the nine-month period due to weak markets in certain sub-segments.
• Liquidity: Cash and equivalents increased 37.3% year-over-year to $404.4M. Net debt to total capitalization decreased to 20.6% from 24.1%.

Guidance, Outlook, and Risks

• Outlook: Management notes encouraging signs in most markets, with the Technologies segment achieving its most profitable quarter since Q1 2001. The global manufacturing economy remains unclear, but Dover is positioned for an upturn through strategic realignment and cost management.
• Subsequent Events:
  • Acquired Warn Industries Inc. for approximately $325 million in cash (funded by existing cash and commercial paper) subsequent to the quarter.
  • Received federal tax refunds of approximately $144 million related to the 2002 tax return, used to pay down commercial paper.
• Risks and Contingencies:
  • Legal Proceedings: Subsidiaries are involved in environmental cleanup proceedings and other litigation; management believes the impact will be immaterial.
  • Market Risks: Exposure to foreign currency fluctuations, interest rate changes, and cyclical nature of industrial markets.
  • Restructuring: Ongoing restructuring programs from 2001-2002 continue to impact results, with remaining provisions of $6.4M as of September 30, 2003.

Key Facts for Investor Verification

• Discontinued Operations Impact: Q3 2003 earnings included $9.1M from discontinued operations, primarily due to favorable tax resolutions ($10.6M) and tax benefits ($5.0M) related to prior business sales.
• Accounting Changes: The 2002 comparative period was significantly distorted by a one-time goodwill impairment charge of $293.0M (net of tax) due to the adoption of SFAS 142.
• Acquisition Activity: 2003 acquisitions totaled $31.2M, significantly lower than the $50.8M in the prior year period, though a major $325M acquisition (Warn Industries) occurred immediately after the quarter.
• Stock-Based Compensation: The company uses the intrinsic value method (APB 25) rather than fair value (SFAS 123); pro forma net earnings would be lower if fair value accounting were applied.
• Debt Structure: The company entered into $150M in interest rate swaps in Q3 2003 to hedge fixed-rate notes, converting them to variable rates.