Dover Corporation 2019 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019. Dover operates through Engineered Systems, Fluids, and Refrigeration & Food Equipment. Prior-year results are presented on a continuing-operations basis following the May 2018 spin-off of Apergy; Apergy’s first-quarter 2018 results are shown separately as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1.725 billion | $1.638 billion | 5.3% |
| Gross profit / margin | $623.5 million / 36.2% | $602.8 million / 36.8% | Margin down 60 bps |
| Operating earnings | $168.1 million | $167.8 million | 0.2% |
| Earnings from continuing operations | $105.7 million | $109.4 million | (3.4%) |
| Diluted EPS from continuing operations | $0.72 | $0.70 | 2.9% |
| Net earnings | $105.7 million | $131.4 million | (19.6%) |
| Diluted net EPS | $0.72 | $0.84 | (14.3%) |
| Cash flow from operating activities | $24.5 million | $15.5 million | Up $9.0 million |
| Free cash flow | $(12.6) million | $(29.1) million | Improved $16.5 million |
Revenue growth consisted of 8.3% organic growth and 0.5% acquisition-related growth, offset by a 3.4% unfavorable foreign-currency impact and a 0.1% decline from previously disposed businesses. Selling, general and administrative expense decreased 6.1% to $408.5 million, and SG&A as a percentage of revenue improved to 23.7% from 26.6%.
Cash and cash equivalents were $243.0 million at March 31, 2019, down from $396.2 million at year-end 2018. Total debt was $3.287 billion, including $344.9 million of commercial paper. Net debt was $3.044 billion, and net debt to net capitalization increased to 51.8% from 50.0%.
Dover maintained a $1.0 billion unsecured revolving credit facility, had not drawn on it, and was in compliance with debt covenants. The reported interest coverage ratio was 9.7 to 1.0 versus a 3.0 to 1.0 minimum. Letters of credit, performance guarantees, and other guarantees totaled approximately $142.4 million.
Material changes versus the prior comparable period
- Fluids revenue increased 12.0% to $703.2 million, led by 15.1% organic growth. Excluding the Finder charge, Fluids segment earnings increased 47.2% and segment margin improved to 14.1% from 10.7%.
- Engineered Systems revenue increased 2.3%, while segment earnings rose 20.6% to $123.1 million and margin increased to 17.9% from 15.2%.
- Refrigeration & Food Equipment revenue decreased 1.1%; segment earnings declined 15.0% to $24.8 million and margin fell to 7.4% from 8.6%.
- Dover acquired Belanger, a car wash equipment manufacturer, for $175.1 million net of cash acquired. The acquisition added approximately $97.8 million of goodwill and $77.0 million of intangible assets on a preliminary basis.
- Dover recorded a $46.9 million loss related to the planned sale of Finder Pompe, consisting of a $21.6 million impairment and a $25.3 million reclassification of foreign-currency translation losses. The sale closed April 2, 2019.
- The effective tax rate increased to 23.6% from 18.5%, primarily because local tax rules excluded capital losses related to Finder.
- Weighted-average diluted shares declined to 146.9 million from 157.1 million, reflecting prior share repurchases and supporting the increase in continuing-operations diluted EPS.
- Adoption of the lease standard on January 1, 2019 added approximately $163 million of operating lease assets and liabilities without a material earnings or cash-flow effect.
Outlook, commentary, risks, and unusual items
The filing does not provide a specific full-year revenue or earnings guidance range. Management expects capital expenditures and acquisitions during the remainder of 2019 to be funded through cash, internally generated funds, commercial paper, available credit lines, or debt or equity markets as necessary.
Dover expects approximately $20 million of additional rightsizing and related charges during 2019 and 2020, including approximately $11 million during the remainder of 2019 and approximately $5 million in 2020. The filing notes that additional restructuring programs may be implemented.
Management cited material costs, U.S. Sections 232 and 301 tariffs, product and regional mix, foreign-currency movements, customer demand, economic conditions, competitive pressures, acquisition integration, interest rates, cybersecurity, legal compliance, litigation, and the ability to realize restructuring benefits as key risks.
Environmental and other matter reserves totaled $31.6 million. Management stated that it was not aware of legal proceedings that would have a material effect on financial position, results of operations, or cash flows. Tax audits are ongoing; uncertain tax positions resolved during the next twelve months could reduce unrecognized tax benefits by approximately zero to $12.2 million.
Important facts for investors to verify
- Whether the strong organic growth in Fluids and Engineered Systems continues and offsets weakness in Refrigeration & Food Equipment.
- The recurring operating impact of tariffs, material costs, unfavorable mix, and foreign-currency movements on gross and segment margins.
- Belanger’s contribution, integration progress, and the final purchase-price allocation.
- The final proceeds and working-capital adjustment from the Finder sale, which management said were not expected to be significant.
- Working-capital requirements, particularly the $137.1 million increase in adjusted working capital during the quarter, and the conversion of earnings into operating cash flow.
- Commercial paper levels, leverage, covenant compliance, and continued access to the $1.0 billion revolving credit facility.
- The amount and timing of remaining rightsizing and footprint-consolidation charges and the related cost savings.
- Future tax-audit outcomes, environmental obligations, warranty claims, and other contingencies.