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 six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $2.157 billion | $1.787 billion | $4.116 billion | $3.370 billion |
| Gross profit | $815.9 million | $688.7 million | $1.565 billion | $1.301 billion |
| Operating earnings | $341.7 million | $264.9 million | $612.0 million | $467.9 million |
| Earnings from continuing operations | $249.1 million | $171.9 million | $432.4 million | $293.4 million |
| Net earnings | $249.8 million | $169.9 million | $444.7 million | $278.0 million |
| Diluted EPS | $1.32 | $0.90 | $2.34 | $1.47 |
- Revenue increased 21% in the quarter and 22% year to date. Q2 growth comprised 14% organic growth, 4% acquisition-related growth and a 3% favorable foreign-exchange effect. Six-month growth comprised 16% organic growth, 4% acquisition-related growth and a 2% favorable foreign-exchange effect.
- Gross margin was 37.8% in Q2 and 38.0% year to date, down 70 and 60 basis points, respectively, primarily because higher raw-material costs were not yet fully recovered through pricing and because of product mix.
- Selling and administrative expense declined as a percentage of revenue to 22.0% in Q2 from 23.7%, and to 23.1% year to date from 24.7%, reflecting operating leverage.
- Effective tax rates were 20.2% for Q2 and 21.8% year to date, compared with 29.2% and 30.1%. The 2011 rates benefited from $30.3 million of discrete tax items, principally federal and state tax settlements. Excluding discrete items, the rates were 27.4% and 27.3%.
- All four segments reported double-digit Q2 revenue growth. Fluid Management was the strongest contributor, with revenue up 32% and segment earnings up 37%. Electronic Technologies revenue rose 19% and earnings 29%; Industrial Products revenue rose 23% and earnings 19%; Engineered Systems revenue rose 12% and earnings 11%.
Cash flow, balance sheet, debt and liquidity
- Six-month cash flow from continuing operations was $341.9 million, compared with $318.3 million in 2010. Capital expenditures were $126.4 million versus $86.3 million, producing free cash flow of $215.5 million versus $232.0 million.
- Cash and cash equivalents were $1.397 billion at June 30, 2011, compared with $1.187 billion at December 31, 2010. Substantially all cash and cash equivalents were held outside the United States.
- Total debt was $2.234 billion, up from $1.808 billion at year-end. Net debt was $836.6 million, and net debt to net capitalization increased to 14.6% from 9.9%.
- Dover issued $800 million of notes in February 2011: $450 million of 4.30% notes due 2021 and $350 million of 5.375% notes due 2041. Net proceeds of $789.0 million were used primarily to repay commercial paper and fund general corporate purposes, including acquisitions.
- The company had a $1 billion undrawn unsecured revolving credit facility expiring November 9, 2012, primarily serving as liquidity support for its commercial paper program. Dover was in compliance with its debt covenants and reported an EBITDA-to-net-interest coverage ratio of 13.4 to 1, versus a required minimum of 3.5 to 1.
- Six-month investing cash use was $435.0 million, including $424.6 million for four Fluid Management acquisitions. Financing activities provided $252.8 million, after debt issuance, debt repayment, share repurchases and dividends.
Material changes, acquisitions and unusual items
- Dover acquired Harbison-Fischer, Dosmatic, TAGC Limited and the EnviroGear product line for an aggregate $424.6 million. These acquisitions added $46.1 million of Q2 revenue and $89.6 million of six-month revenue and generated $236.1 million of goodwill.
- On July 4, 2011, after the reporting date, Dover acquired NXP Semiconductors’ Sound Solutions business for $855 million in cash. The business will be integrated into Knowles within Electronic Technologies and is expected to add approximately $200 million of second-half 2011 revenue. Management expects the acquisition to reduce 2011 diluted EPS by $0.03 to $0.05 and anticipates approximately $11 million of additional third-quarter closing costs.
- Discontinued operations produced a $0.7 million Q2 gain and a $12.3 million six-month gain, compared with a $2.0 million Q2 loss and a $15.4 million six-month loss in 2010. The 2011 gain primarily reflected tax benefits from discrete settlements.
- Restructuring charges were $2.1 million in Q2 and $3.6 million year to date. Management did not expect significant additional restructuring charges during the remainder of 2011.
- Dover repurchased 1.0 million shares in the quarter under its authorization and acquired an additional 79,708 shares from employees exercising options, for total Q2 repurchases of 1.0797 million shares at an average price of $64.06.
Guidance, outlook and risks
- Management projected 2011 organic revenue growth of 12% to 14%, assuming negligible foreign-exchange impact, plus approximately 6% acquisition-related growth.
- Continuing diluted EPS guidance for 2011 was $4.50 to $4.60, incorporating first-half tax benefits, a slightly lower effective tax rate and the expected dilution from Sound Solutions.
- Management expected strength in most end markets but cautioned that the macroeconomic environment remained uncertain. Refrigeration case and solar equipment sales were expected to soften in the second half, and solar bookings had already declined significantly because of concerns regarding government subsidies.
- Key disclosed risks include raw-material inflation, pricing pressure, cyclical demand, economic and credit-market conditions, foreign-exchange and interest-rate volatility, supply-chain disruptions, acquisitions and integration execution, litigation, environmental matters, intellectual-property claims, tax matters and changes in government policy.
- Legal proceedings and environmental remediation matters were not expected by management to have a material adverse effect, although outcomes cannot be predicted. Letters of credit outstanding totaled approximately $77.6 million.
Important facts for investors to verify
- Whether organic growth and bookings remain strong after the anticipated moderation in refrigeration and solar markets.
- The final purchase-price allocation, integration costs and earnings contribution of the $855 million Sound Solutions acquisition.
- Whether gross margins recover from raw-material inflation and unfavorable product mix.
- The sustainability of the unusually favorable 2011 tax rate, including the distinction between recurring tax rates and discrete settlement benefits.
- Post-acquisition cash levels, debt balances and leverage, particularly because the company used $855 million of cash after quarter-end.
- Conversion of earnings into free cash flow as capital expenditures, working capital and acquisition spending remain elevated.
- Potential outcomes of tax uncertainties, environmental and product-related litigation, and the evaluation of a possible sale of certain Industrial Products operating companies.