Dover Corporation Form 10-K Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer operating through Engineered Systems, Fluids, and Refrigeration & Food Equipment. The filing covers the fiscal year ended December 31, 2018; quarterly data identifies fourth-quarter revenue of $1.809 billion and earnings from continuing operations of $158.0 million.
Dover completed the tax-free spin-off of its upstream energy businesses into Apergy Corporation on May 9, 2018. Apergy’s historical results are presented as discontinued operations, and Dover now reports three operating segments. The company employed approximately 24,000 people and generated 48% of revenue outside the United States.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $6.992 billion | $6.821 billion | +2.5% |
| Gross profit | $2.560 billion | $2.529 billion | +1.2% |
| Gross margin | 36.6% | 37.1% | Down 50 bps |
| Operating earnings | $843.1 million | $806.9 million | +4.5% |
| Earnings from continuing operations | $591.1 million | $746.7 million | -20.8% |
| Diluted EPS from continuing operations | $3.89 | $4.73 | -17.8% |
| Net earnings | $570.3 million | $811.7 million | -29.8% |
| Diluted net EPS | $3.75 | $5.15 | -27.2% |
| Operating cash flow from continuing operations | $789.2 million | $739.4 million | +6.7% |
| Free cash flow | $618.2 million | $569.3 million | +8.6% |
| Free cash flow as a percentage of revenue | 8.8% | 8.3% | Up 50 bps |
- Organic revenue growth was 3.7%, supplemented by 0.8% foreign-currency benefit and 0.5% acquisition-related growth, partially offset by a 2.5% disposition impact. Pricing contributed approximately 1.0% to revenue.
- Engineered Systems revenue increased 2.8% to $2.743 billion; reported segment margin fell to 16.5%, primarily because 2017 included significant disposition gains. Excluding unusual items, management reported improved operating margins.
- Fluids revenue increased 9.5% to $2.797 billion, while segment margin declined to 13.9% because of footprint-consolidation inefficiencies, supply-chain disruption, restructuring, tariffs, and other costs.
- Refrigeration & Food Equipment revenue declined 9.1% to $1.453 billion, and segment margin decreased to 9.4%, driven by weak retail refrigeration demand, lower food-equipment activity, unfavorable mix, product redesign and SKU-rationalization costs, and higher steel costs.
- Bookings increased 5.1% to $7.3 billion, with a 1.04 book-to-bill ratio. Year-end backlog increased to $1.4 billion from $1.2 billion.
- Capital expenditures were $171.0 million. The company paid $283.6 million in dividends, increased the annual dividend per share 4% to $1.90, and repurchased approximately $895.0 million of common stock during 2018.
Liquidity, debt, and capital structure
- Cash and cash equivalents were $396.2 million at December 31, 2018, compared with $754.0 million at year-end 2017. Approximately $247.5 million was held outside the United States.
- Total debt was $3.164 billion, including $220.3 million of commercial paper; long-term debt was $2.944 billion. Dover repaid $350.0 million of 5.45% notes that matured in March 2018.
- Net debt was $2.768 billion, and net debt to net capitalization increased to 50.0% from 39.1%, primarily because of the Apergy distribution, share repurchases, dividends, and lower equity.
- Dover had an undrawn $1.0 billion revolving credit facility expiring November 10, 2020. The interest-coverage ratio was 9.6-to-1 versus a 3.0-to-1 covenant requirement. Management stated that liquidity was adequate and debt covenants were satisfied.
- Credit ratings at year-end were Moody’s Baa1/P-2 and Standard & Poor’s BBB+/A-2, both with stable outlooks.
Material changes versus the prior comparable period
- The Apergy spin-off materially changed Dover’s portfolio, balance sheet, segment structure, and comparability of continuing operations. Apergy produced a 2018 discontinued-operations loss of $20.9 million, compared with 2017 discontinued-operations earnings of $65.0 million, including separation costs.
- 2017 included $203.1 million of gains on business sales; no comparable significant disposition gains were recorded in 2018. This was the principal reason reported continuing-operations earnings declined despite higher operating earnings and revenue.
- Rightsizing and other related costs increased to $72.8 million in 2018, including $58.5 million of restructuring charges. The company paid $52.0 million of restructuring costs during the year.
- The effective tax rate increased to 18.5% from 14.7%. Dover recorded a $4.2 million net tax benefit in 2018 to finalize provisional Tax Cuts and Jobs Act accounting.
- The company adopted ASC 606 using the modified retrospective method; the cumulative retained-earnings adjustment was $0.2 million and the overall 2018 impact was not material.
- Two acquisitions were completed for $68.6 million: Ettlinger in Fluids and Rosario in Refrigeration & Food Equipment. Dover subsequently acquired Belanger for approximately $180 million on January 25, 2019.
Guidance, outlook, management commentary, and risks
Dover’s long-term objectives are organic revenue growth of 3% to 5% on average through a business cycle, free cash flow of approximately 8% to 12% of revenue, capital spending of approximately 2% to 4% of revenue, disciplined bolt-on acquisitions, and continued dividend growth. The filing does not provide specific 2019 revenue or earnings guidance.
- Management expects approximately $20 million of additional charges to complete selling, general and administrative reductions and footprint-consolidation initiatives, with approximately $15 million expected in 2019 and $5 million in 2020. Broader footprint benefits are expected to begin in 2019 and extend into 2021.
- Management identified growth opportunities in digital technologies, industrial automation, energy efficiency, sustainability, international retail fueling, industrial pumps, biopharma and medical markets, and process solutions.
- Key operating risks include economic weakness, customer capital-spending reductions, competition and pricing pressure, tariffs and commodity-cost inflation, foreign-exchange movements, supply-chain disruption, and weak retail refrigeration markets.
- Other material risks include acquisition integration and synergy execution, restructuring execution, cybersecurity and data privacy, product liability and recalls, environmental and legal contingencies, tax audits, labor disputes, intellectual-property protection, and the possibility that the Apergy separation could fail to receive intended tax treatment.
- Environmental and other legal reserves totaled $31.8 million at year-end. Management stated that existing legal proceedings were not expected to have a material effect on financial position, results, or cash flows.
- Dover disclosed approximately €9.2 million of fourth-quarter 2018 revenue and €4.6 million of net profit from Iran-related transactions conducted by a non-U.S. Fluids subsidiary under applicable wind-down authorizations; the activities were completed by November 4, 2018.
Important facts for investors to verify
- Reconcile reported earnings declines with the absence of 2017 disposition gains, higher restructuring costs, discontinued Apergy results, and tax-rate changes.
- Assess whether Fluids margin recovery and Refrigeration & Food Equipment stabilization offset tariff, material-cost, supply-chain, and demand pressures.
- Monitor execution and cash costs of the margin-expansion, SG&A reduction, and footprint-consolidation programs.
- Evaluate leverage and liquidity after the Apergy-related balance-sheet reduction, $1 billion share-repurchase program, dividends, and subsequent Belanger acquisition.
- Review the comparability of 2018 and 2017 results after the Apergy separation and changes in segment presentation.
- Confirm the impact of ASC 606, the Tax Cuts and Jobs Act, and the expected 2019 adoption of the lease standard, which management estimated would increase assets and liabilities by approximately $150 million to $200 million.
- Track exposure to tariffs, commodity prices, foreign currency, cybersecurity incidents, litigation, product recalls, environmental matters, and uncertain tax positions.