Dover Corporation Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The unaudited results cover Dover’s four operating segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $1.708 billion | $1.788 billion | $5.016 billion | $5.262 billion |
| Gross profit | $631.8 million | $672.6 million | $1.852 billion | $1.954 billion |
| Gross margin | 37.0% | 37.6% | 36.9% | 37.1% |
| Operating earnings | $210.7 million | $276.9 million | $550.4 million | $721.3 million |
| Earnings from continuing operations | $130.1 million | $186.5 million | $347.7 million | $459.3 million |
| Diluted EPS from continuing operations | $0.83 | $1.19 | $2.22 | $2.87 |
| Net earnings | $130.1 million | $186.1 million | $347.7 million | $728.0 million |
Q3 revenue declined 4.5% and nine-month revenue declined 4.7%. Organic revenue decreased 6.8% in Q3 and 6.9% year to date, partly offset by acquisition growth of 6.3% and 5.9%, respectively. Selling and administrative expense increased 6.4% in Q3 and 5.6% year to date, raising the expense ratio to 24.7% and 26.0%, respectively.
Segment developments
- Energy: Q3 revenue fell 24.9% and segment earnings fell 72.7%; operating margin declined to 4.9% from 13.4%. Weak U.S. oil and gas activity, lower rig counts, customer capital-spending reductions, and project delays were the principal factors.
- Engineered Systems: Q3 revenue declined 1.5% while nine-month revenue declined 0.3%. Nine-month segment earnings increased 2.5%, supported by Printing & Identification growth and productivity improvements.
- Fluids: Q3 revenue increased 17.3%, primarily from acquisitions, but organic revenue declined 8.6%. Segment earnings decreased 11.7% and operating margin fell to 16.0% from 21.3% because of lower organic volume, acquisition-related amortization, and deal costs.
- Refrigeration & Food Equipment: Q3 revenue declined 8.4% and earnings declined 16.4%. Results reflected the prior walk-in-coolers disposition, reduced can-shaping activity, production inefficiencies, and unfavorable product mix.
Cash flow, liquidity, and capital structure
- Cash flow from continuing operations was $572.9 million for the first nine months, versus $632.5 million in the prior-year period.
- Capital expenditures were $115.8 million, producing free cash flow of $457.2 million, or 9.1% of revenue, versus $521.2 million and 9.9% in the prior year.
- Cash and cash equivalents were $514.8 million at September 30, 2016, including $478.7 million held outside the United States.
- Total debt was $3.128 billion, including $507.1 million of commercial paper. Net debt was $2.613 billion, and net debt to net capitalization increased to 40.8% from 39.6% at December 31, 2015.
- Dover maintained a $1.0 billion unsecured revolving credit facility expiring in November 2020 and had not drawn on it. A separate $500 million unsecured term loan facility was established in September 2016 and had not been drawn at quarter-end.
- The company paid $199.8 million in dividends during the first nine months, or $1.28 per share, and made no share repurchases. Approximately 6.8 million shares remained available under the repurchase authorization.
Material changes, outlook, and unusual items
- Dover acquired four businesses for $501.8 million during the first nine months, primarily in Fluids, and acquired Ravaglioli for approximately $274 million on October 3, 2016. Ravaglioli became part of Engineered Systems.
- Dover agreed to acquire Wayne Fueling Systems for $780 million, expected to close in the first quarter of 2017 subject to customary conditions, including regulatory approval. Wayne is intended to join Fluids.
- Restructuring charges were $7.7 million in Q3 and $31.3 million year to date. Full-year 2016 restructuring expense was expected to be approximately $40 million to $44 million, with estimated 2016 cost savings of $95 million to $105 million. Programs were expected to be substantially completed within 12 to 18 months.
- Management reduced full-year guidance to revenue decline of approximately 4% to 5%, organic revenue decline of 7% to 8%, and diluted EPS of $3.00 to $3.05. Capital expenditures were expected to approximate 2.3% of revenue, and free cash flow was targeted at approximately 11% of revenue.
- Tipper Tie was classified as held for sale at September 30, 2016 under a definitive agreement with approximately $160 million of consideration. The transaction was not classified as a discontinued operation.
- Prior-year nine-month net earnings included $268.7 million from discontinued operations, primarily gains on the sales of Datamax O’Neil and Sargent Aerospace. This makes the year-over-year net earnings comparison not meaningful; continuing-operations results provide the more relevant comparison.
- Other income included an $11.2 million pre-tax gain on the sale of Texas Hydraulics. Environmental reserves totaled $30.5 million; management stated that no pending legal proceedings were expected to have a material effect.
Key investor verification points
- Confirm the sustainability of earnings and cash flow amid continued oil and gas weakness, industrial capital-spending softness, and refrigeration production inefficiencies.
- Evaluate acquisition integration, incremental amortization, deal costs, leverage, and funding requirements for Ravaglioli and the planned Wayne acquisition.
- Compare actual results with the reduced full-year revenue and EPS guidance and assess whether restructuring savings offset volume declines.
- Monitor commercial paper balances, debt maturities, credit ratings, covenant compliance, and the 40.8% net debt-to-net-capitalization ratio.
- Assess the outcome and proceeds of the Tipper Tie sale and any potential adjustments to acquisition purchase-price allocations.
- Consider the effects of foreign currency, oil and natural gas prices, customer concentration, pricing pressure, raw-material costs, litigation, environmental obligations, and tax audits.