Dover Corporation: Q2 2019 Form 10-Q Summary
Business context and reporting period
Dover is a diversified global manufacturer operating through three segments: Engineered Systems, Fluids, and Refrigeration & Food Equipment. This unaudited Form 10-Q covers the three and six months ended June 30, 2019. Prior-period results have been revised to present Apergy as discontinued operations following its May 2018 spin-off.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $1.811 billion | $1.798 billion | 0.7% |
| Gross profit | $672.6 million | $665.2 million | 1.1% |
| Gross margin | 37.1% | 37.0% | +10 basis points |
| Operating earnings | $276.0 million | $236.5 million | 16.7% |
| Earnings from continuing operations | $198.1 million | $166.5 million | 19.0% |
| Diluted EPS from continuing operations | $1.35 | $1.08 | 25.0% |
| Net earnings | $198.1 million | $140.0 million | 41.5% |
For the six months ended June 30, 2019, revenue was $3.535 billion, up 2.9%; earnings from continuing operations were $303.8 million, up 10.1%; and diluted continuing-operations EPS was $2.07, up from $1.77. Six-month gross margin was 36.7%, compared with 36.9% in 2018. The effective tax rate was 20.7% in the quarter and 21.7% year to date.
- Q2 organic revenue growth was 2.9%, supplemented by 0.8% acquisition-related growth, offset by a 2.5% foreign-currency headwind and a 0.5% disposition impact.
- Segment revenue growth was led by Fluids, up 5.2%; Engineered Systems declined 0.9%; and Refrigeration & Food Equipment declined 4.1%.
- Q2 segment margins were 18.9% for Engineered Systems, 17.7% for Fluids, and 11.5% for Refrigeration & Food Equipment.
- Cash flow from operating activities was $233.2 million for the first six months, compared with $174.7 million in 2018. Free cash flow was $142.1 million, or 4.0% of revenue, versus $78.4 million, or 2.3%.
- Capital expenditures were $91.1 million and acquisition spending was $215.3 million, primarily for Belanger and All-Flo in the Fluids segment.
Liquidity, debt, and capital structure
- Cash and cash equivalents were $321.3 million at June 30, 2019, down from $396.2 million at December 31, 2018; approximately $292.2 million was held outside the United States.
- Total debt was $3.304 billion, consisting of $357.7 million of commercial paper and $2.946 billion of long-term debt.
- Net debt was $2.983 billion and the net debt-to-net-capitalization ratio was 50.2%, compared with 50.0% at year-end 2018.
- Dover maintained a $1.0 billion unsecured revolving credit facility, had not drawn on it, and reported compliance with debt covenants. The consolidated EBITDA-to-net-interest coverage ratio was 10.0 to 1.0.
- Dividends paid in the first six months were $139.7 million, or $0.96 per share. No shares were repurchased during the period; 9.7 million shares remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Profitability improved primarily from pricing, volume leverage, productivity measures, and benefits from rightsizing actions. SG&A declined 7.5% in Q2 and represented 21.9% of revenue versus 23.8% in the prior-year quarter.
- Fluids benefited from strong demand, acquisitions, pricing, and cost actions. Fueling & Transport revenue increased 7.5% in Q2, while Fluids segment earnings increased 38.6%.
- Engineered Systems earnings increased 4.0% despite lower Printing & Identification revenue; Industrial activity and cost actions supported margin expansion.
- Refrigeration & Food Equipment earnings declined 13.6%, reflecting lower heat exchanger and refrigeration volumes, unfavorable mix, volume ramp costs, and foreign exchange.
- Dover recorded a $46.9 million loss in the first quarter on the sale of Finder Pompe, including $21.6 million of impairment and $25.3 million of reclassified foreign-currency losses. Finder was sold on April 2, 2019 for $24.2 million of cash proceeds.
- Second-quarter comparisons benefited from the absence of 2018 Apergy-related discontinued-operation losses and spin-off costs. Q2 2018 included a $26.5 million discontinued-operation loss.
- Adoption of the new lease standard on January 1, 2019 increased assets and liabilities by approximately $163 million without a material earnings or cash-flow effect.
Outlook, commentary, risks, and unusual items
- Management described liquidity as sufficient to fund operations, capital expenditures, acquisitions, and other capital requirements through operating cash flow and capital-market access.
- Dover expects approximately $22 million of rightsizing and related charges during 2019 and 2020. It incurred approximately $10 million through June 30, 2019 and expected approximately $7 million during the remainder of 2019 and $5 million in 2020; additional programs may be implemented.
- Management expects capital expenditures and acquisitions during the remainder of 2019 to be funded through cash, internally generated funds, commercial paper, credit facilities, or debt or equity markets as necessary.
- Key stated risks include economic and end-market conditions, customer demand and capital spending, pricing pressure, tariffs and material costs, foreign-exchange and interest-rate volatility, acquisition integration, restructuring execution, litigation, product quality and safety, cybersecurity, privacy, and intellectual-property protection.
- Environmental and other matter reserves were $31.3 million. Outstanding letters of credit, surety bonds, and performance guarantees totaled approximately $142.1 million. Management stated that no pending legal proceedings were expected to have a material effect.
- Potential resolution of tax audits and expiration of statutes of limitation could reduce unrecognized tax benefits by approximately zero to $11.9 million within the next twelve months.
Important facts for investors to verify
- Whether Fluids growth and margin gains are sustainable after acquisition, pricing, and cost-reduction benefits.
- Whether weakness in Refrigeration & Food Equipment, digital printing, Asia, and certain industrial end markets persists.
- The timing and cash cost of remaining rightsizing and footprint-consolidation actions.
- Working-capital growth, particularly the $100.5 million increase in inventory and $56.9 million increase in receivables since year-end.
- Commercial-paper levels, refinancing requirements for debt maturities beginning in 2020, and continued covenant compliance.
- The final accounting for the 2019 acquisitions and any additional impairment, restructuring, tax, litigation, or environmental exposures.
- Reconciliations and comparability of non-GAAP measures, including organic revenue growth, segment EBITDA, adjusted working capital, free cash flow, and net debt.