Dover Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. The filing contains unaudited interim consolidated financial statements. Dover operates through Communication Technologies, Energy, Engineered Systems, and Printing & Identification. Certain non-core businesses, primarily DEK International and Everett Charles Technologies, are reported as discontinued operations.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | Change | 9M 2013 | 9M 2012 | Change |
|---|---|---|---|---|---|---|
| Revenue | $2,252.3 million | $2,097.6 million | 7.4% | $6,520.7 million | $6,090.5 million | 7.1% |
| Gross profit | $876.7 million | $810.1 million | 8.2% | $2,509.2 million | $2,333.3 million | 7.5% |
| Gross margin | 38.9% | 38.6% | +30 bps | 38.5% | 38.3% | +20 bps |
| Operating earnings | $394.4 million | $358.2 million | 10.1% | $1,036.9 million | $961.3 million | 7.9% |
| Earnings from continuing operations | $263.7 million | $233.3 million | 13.0% | $755.0 million | $624.9 million | 20.8% |
| Diluted EPS from continuing operations | $1.53 | $1.27 | 20.5% | $4.34 | $3.37 | 28.8% |
| Net earnings | $269.1 million | $241.0 million | 11.6% | $809.2 million | $651.2 million | 24.3% |
Q3 operating margin was approximately 17.5%, compared with 17.1% in the prior-year quarter. Net earnings included $5.5 million from discontinued operations in Q3 and $54.2 million for the first nine months.
Revenue and segment developments
- Communication Technologies: Q3 revenue increased 4.3% to $413.6 million and segment earnings increased 19.4% to $76.1 million. Growth was led by consumer-electronics product launches and MEMS microphone demand, partly offset by market-share losses at two handset OEM customers.
- Energy: Q3 revenue increased 2.7% to $577.4 million and segment earnings increased 4.6% to $145.5 million. Drilling and Downstream growth offset weaker Production revenue, particularly winch products. Bookings increased 13.0% and backlog increased 10.5% year over year.
- Engineered Systems: Q3 revenue increased 12.6% to $1,005.0 million and segment earnings increased 19.4% to $172.2 million. Acquisitions contributed approximately 8.8% of revenue growth, with additional support from refrigeration, food equipment, and Fluid Solutions demand.
- Printing & Identification: Q3 revenue increased 3.9% to $256.6 million and segment earnings increased 8.6% to $42.9 million. FMCG and industrial demand improved modestly, while year-to-date industrial revenue remained below the prior-year period.
Company-wide Q3 organic revenue growth was approximately 3%, acquisition-related growth was approximately 4%, and foreign-currency translation contributed approximately 0.4%. Bookings increased approximately 9% to $2.2 billion, book-to-bill was approximately 0.96, and backlog increased approximately 2% to $1.5 billion.
Cash flow, liquidity, debt, and capital allocation
- Cash provided by operating activities from continuing operations was $723.1 million for the first nine months, compared with $690.5 million in 2012.
- Capital expenditures were $157.5 million, and acquisitions used $119.0 million. Free cash flow was $565.6 million, or 8.7% of revenue, compared with $481.7 million and 7.9% in the prior-year period.
- Cash and cash equivalents were $739.8 million at September 30, 2013, including $687.7 million held outside the United States.
- Total debt was $2.862 billion, consisting primarily of $668.9 million of commercial paper and $2.193 billion of long-term debt before current installments. Net debt was $2.122 billion, and net debt to net capitalization was 28.7%, compared with 28.9% at December 31, 2012.
- Dover had a $1.0 billion unsecured revolving credit facility expiring November 10, 2016. No borrowings were outstanding under the facility, and the company reported compliance with its 3.0-to-1 interest-coverage covenant and other debt covenants.
- Dover repurchased 5.46 million shares for $407.9 million during the first nine months and paid $184.1 million in dividends. Approximately $342.6 million remained available under the November 2012 repurchase authorization at September 30, 2013.
Material changes and unusual items
- The effective tax rate for continuing operations was 20.3% for the first nine months, compared with 27.8% in 2012. The 2013 rate benefited from approximately $70.9 million of favorable discrete tax items, principally from tax-audit resolutions, tax-law interpretations, cross-border matters, and the American Tax Relief Act of 2012. Excluding discrete items, the rate was 27.8%, broadly comparable with 28.1% in 2012.
- Dover recorded $10.6 million of Knowles spin-off costs in Q3 and $14.0 million year to date. A $4.4 million one-time pension curtailment gain partially offset Q3 selling and administrative expenses.
- Restructuring charges were $4.6 million in Q3 and $23.4 million year to date. Full-year 2013 restructuring expense was expected to be approximately $27.5 million to $32.5 million, with programs substantially complete within 12 to 18 months.
- Discontinued operations included a $44.2 million after-tax goodwill impairment charge year to date related to the expected sale of DEK and ECT, partially offset by a $25.5 million deferred-tax benefit and other discrete tax benefits.
- Dover completed six acquisitions for aggregate net cash consideration of $119.0 million during the first nine months. In October 2013, it acquired Fibrelite and Kungsors Plast AB for approximately $50 million.
- U.S. qualified and non-qualified defined-benefit pension plans were closed to new participants effective January 1, 2014, with intended benefit accruals frozen effective December 31, 2023.
Guidance, outlook, and risks
Management revised full-year organic revenue growth guidance to approximately 3%, with acquisition-related growth expected to remain approximately 4%, implying total revenue growth of approximately 7%. Diluted EPS guidance was narrowed to $5.57 to $5.64, including incurred spin-off costs, discrete tax benefits, and one-time gains; prospective Knowles spin-off costs were excluded. Management expected full-year free cash flow of approximately 10% of revenue and capital expenditures of approximately 3.0% of revenue.
Dover expected to complete the tax-free distribution of 100% of Knowles in early 2014, subject to Board approval, an IRS private letter ruling, and effectiveness of Knowles’ SEC registration statement. Expected total spin-off costs were $60 million to $70 million. Key risks include failure or delay of the spin-off, taxability of the distribution, changing customer demand, loss of major customers, pricing pressure, raw-material costs, economic and geopolitical conditions, foreign-exchange movements, acquisition execution, litigation, environmental matters, and credit-rating changes.
Environmental and other probable, estimable contingencies totaled $30.2 million, and legal reserves totaled $0.8 million at September 30, 2013. Management stated that existing legal proceedings were not expected to have a material effect on financial position, results of operations, or cash flows.
Investor verification points
- Verify the completion date, tax treatment, final costs, and post-spin financial profile of the Knowles transaction.
- Assess the sustainability of earnings growth excluding the $70.9 million of favorable year-to-date discrete tax items and other one-time items.
- Monitor Communication Technologies’ exposure to handset OEM concentration and market-share losses.
- Evaluate working-capital growth, particularly the $261.8 million increase in adjusted working capital, relative to revenue growth and cash conversion.
- Track commercial-paper balances, refinancing needs, interest coverage, and the company’s continued use of share repurchases and acquisitions.
- Confirm the timing and proceeds of the planned DEK and ECT divestitures and any additional impairment or tax effects.