Dover Corporation — Form 10-Q Summary
Business context and reporting period
Dover Corporation is a global manufacturer of components, equipment, specialty systems and support services serving industrial products, engineered systems, fluid management and electronic technologies markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $2,203.4 million | $1,802.2 million | $6,122.3 million | $5,023.8 million |
| Gross profit | $822.1 million | $690.8 million | $2,335.8 million | $1,958.1 million |
| Gross margin | 37.3% | 38.3% | 38.2% | 39.0% |
| Operating earnings | $337.7 million | $292.9 million | $934.6 million | $759.5 million |
| Operating margin | 15.3% | 16.3% | 15.3% | 15.1% |
| Earnings from continuing operations | $228.6 million | $219.3 million | $650.0 million | $512.4 million |
| Diluted EPS from continuing operations | $1.21 | $1.16 | $3.43 | $2.71 |
| Net earnings | $172.3 million | $223.8 million | $617.0 million | $501.8 million |
| Diluted net EPS | $0.91 | $1.19 | $3.26 | $2.66 |
- Revenue increased 22% in both the quarter and nine-month period. Third-quarter growth comprised 10% organic growth, 9% acquisition-related growth and a 3% favorable foreign-exchange impact.
- Gross profit increased 19%, but gross margin declined 100 basis points in the quarter and 80 basis points year to date because higher raw-material costs had not yet been fully recovered through pricing and product mix was unfavorable.
- Continuing-operations earnings increased 4% in the quarter and 27% year to date. Selling and administrative expense was 22.0% of revenue in the quarter and 22.9% year to date.
- Third-quarter net earnings declined 23% because the sale of Paladin Brands and Crenlo generated a $56.3 million loss from discontinued operations, including a $65.4 million after-tax loss on sale and goodwill impairment.
- Nine-month cash flow from continuing operations was $713.3 million, versus $478.8 million in 2010. Free cash flow was $522.6 million, or 8.5% of revenue, versus $353.5 million, or 7.0%.
- Capital expenditures were $190.7 million, compared with $125.2 million in the prior-year period. Management expects full-year capital expenditures of approximately 3.2% to 3.4% of revenue.
- At September 30, 2011, cash and cash equivalents were $917.0 million, with no short-term investments and no commercial paper outstanding.
- Total debt was $2,187.0 million, compared with $1,807.5 million at December 31, 2010. Net debt to net capitalization increased to 20.7% from 9.9%, principally because acquisitions were funded with cash and debt.
- Dover had a $1.0 billion undrawn unsecured revolving credit facility expiring November 9, 2012 and was in compliance with its debt covenants. The reported EBITDA-to-net-interest coverage ratio was 13.6 to 1, versus a 3.5 to 1 minimum requirement.
Material changes versus the prior comparable period
- All four segments grew revenue in the third quarter. Fluid Management was the strongest contributor, with revenue up 40% and segment earnings up 42%; Energy revenue increased 67%.
- Industrial Products revenue increased 19% and segment earnings increased 18%, although operating margin declined 20 basis points.
- Engineered Systems revenue increased 8%, segment earnings increased 12% and operating margin improved to 15.3% from 14.7%.
- Electronic Technologies revenue increased 29%, primarily from the Sound Solutions acquisition, but segment earnings declined 14% and operating margin fell to 12.2% from 18.3%, largely because of approximately $14 million of one-time Sound Solutions acquisition expenses.
- Dover acquired seven businesses for approximately $1.4 billion, including Sound Solutions for $855 million and Harbison-Fischer for approximately $401 million. The acquisitions added $235.0 million of revenue during the first nine months.
- The company issued approximately $800 million of long-term notes in February 2011, used partly to repay commercial paper and $400 million of notes that matured in February.
- Shares repurchased totaled 2.08 million during the first nine months at an average price of $62.33 per share, including 550,000 shares repurchased in the third quarter.
Guidance, outlook, risks and unusual items
- Management maintained its full-year 2011 revenue-growth forecast of approximately 20%, consisting of approximately 13% organic growth and 7% acquisition-related growth, assuming a negligible foreign-exchange impact.
- After reflecting the anticipated $0.14 diluted EPS impact of the Paladin and Crenlo disposition, management projected full-year diluted EPS from continuing operations of $4.45 to $4.50.
- Management expected most businesses to perform well through year-end, supported by solid bookings and increased backlog, but noted uncertainty in the macroeconomic environment.
- Electronic assembly and test equipment bookings and backlog declined in the third quarter and were expected to remain weak in the fourth quarter, particularly in semiconductor and solar-related products.
- Key risks include global economic and sovereign-credit conditions, raw-material inflation, pricing pressure, acquisition integration and synergy execution, customer demand, currency movements, interest rates, supply-chain disruptions, litigation, regulatory and tax changes, and cyclical or housing-related weakness.
- Restructuring charges were $6.6 million for the first nine months, and management did not expect significant additional restructuring charges during the remainder of 2011.
- Legal and environmental proceedings were described as unlikely to have a material adverse effect, although outcomes cannot be predicted with certainty. Letters of credit outstanding totaled approximately $74.1 million.
- Disclosure controls and procedures were deemed effective as of September 30, 2011. Management excluded recently acquired companies from its internal-control assessment while evaluating their control environments.
Important facts for investors to verify
- Confirm the final purchase-price and working-capital adjustments for Sound Solutions, including the approximately $33 million receivable from NXP expected to settle in the fourth quarter.
- Assess whether raw-material inflation and product mix continue to pressure gross margins and whether pricing actions offset those costs.
- Monitor acquisition integration costs, expected synergies and the effect of the $1.4 billion acquisition program on leverage and cash generation.
- Evaluate the sustainability of the 20% revenue-growth and $4.45–$4.50 EPS guidance in light of weaker semiconductor and solar-related demand and broader macroeconomic risks.
- Review the financial and operating effects of the Paladin and Crenlo divestitures, including the $76.1 million goodwill impairment component of the loss on sale.
- Track refinancing or replacement of the $1.0 billion revolving credit facility before its November 2012 maturity.
- Reconcile non-GAAP measures such as free cash flow, organic revenue growth and net debt to their GAAP counterparts when comparing Dover with peers.