Dover Corporation 2018 Q1 Form 10-Q Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer operating through Engineered Systems, Fluids, Refrigeration & Food Equipment, and Energy segments. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.922 billion | $1.813 billion | 6.0% |
| Gross profit | $708.9 million | $661.2 million | 7.2% |
| Gross margin | 36.9% | 36.5% | +40 bps |
| Operating earnings | $194.8 million | $174.9 million | 11.4% |
| Operating margin | 10.1% | 9.6% | Improved |
| Net earnings | $131.4 million | $172.2 million | (23.7%) |
| Diluted EPS | $0.84 | $1.09 | (22.9%) |
| Operating cash flow | $35.2 million | $78.9 million | Down $43.7 million |
| Adjusted free cash flow | $(2.6) million | $35.8 million | Down $38.4 million |
Revenue growth comprised 4.3% organic growth, 0.6% acquisition-related growth and 3.8% favorable foreign currency translation, partly offset by a 2.7% decline from disposed businesses. Customer pricing contributed approximately 0.8% to consolidated revenue growth.
Net earnings benefited from a lower effective tax rate of 18.2%, compared with 25.7% in the prior year, principally due to U.S. tax reform. However, Q1 2017 included a $90.1 million gain on sale of businesses, primarily the PMI divestiture, while Q1 2018 included $11.7 million of Apergy separation costs. Excluding these items, management stated that net earnings increased $30.0 million, or 27.1%.
Segment performance
| Segment | Q1 2018 revenue | Revenue change | Q1 2018 earnings | Key trend |
|---|---|---|---|---|
| Engineered Systems | $646.8 million | 6.4% | $97.9 million | Strong organic growth; reported earnings affected by prior-year PMI gain |
| Fluids | $553.3 million | 5.4% | $54.5 million | Stable organic revenue; growth in pumps and hygienic/pharma |
| Refrigeration & Food Equipment | $338.2 million | (5.2%) | $29.2 million | Weak retail refrigeration demand and lower bookings |
| Energy | $383.7 million | 18.4% | $54.6 million | Strong U.S. rig count, capital spending and well-completion activity |
Segment bookings were strongest in Fluids and Energy. Refrigeration & Food Equipment bookings declined 15.0% and backlog declined 17.1% year over year, reflecting weakness and order timing in retail refrigeration and can-shaping markets.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $367.2 million at March 31, 2018, down from $754.0 million at December 31, 2017. Approximately $226.0 million was held outside the United States.
- Total debt was $3.458 billion, consisting of $426.3 million of current notes payable and commercial paper and $3.032 billion of long-term debt. Net debt was $3.091 billion.
- Net debt to net capitalization increased to 41.0% from 39.1% at year-end 2017.
- The $350.0 million 5.45% notes matured on March 15, 2018 and were funded through commercial paper and reduced cash balances.
- Dover maintained a $1.0 billion unsecured revolving credit facility expiring November 10, 2020. No borrowings were outstanding under the facility, and the company was in compliance with covenants, including a 10.9-to-1.0 interest coverage ratio.
- Capital expenditures were $58.4 million; acquisitions totaled $68.4 million; dividends paid were $72.7 million; and share repurchases totaled $45.0 million for 440,608 shares.
Material changes, outlook and unusual items
- Dover approved the spin-off of Apergy, comprising the upstream energy businesses, with distribution expected on May 9, 2018 to shareholders of record on April 30, 2018 at a ratio of one Apergy share for every two Dover shares. Apergy is expected to become an independent public company, and Dover will retain no ownership interest.
- Apergy expected to issue $300.0 million of 6.375% senior notes due 2026 and enter into a $415.0 million senior secured term loan. Proceeds were intended to fund an approximately $700 million payment to Dover and related transaction expenses. Dover expected to use the proceeds primarily to support $1 billion of share repurchases.
- Dover incurred $11.7 million of Apergy separation costs in Q1 2018, including $7.4 million paid in cash during the quarter. Historical Apergy results will be presented as discontinued operations after the spin-off.
- Dover adopted ASC 606 using the modified retrospective method. The cumulative catch-up adjustment to retained earnings was $0.2 million, and the company stated that the adoption had no material effect on Q1 consolidated financial statements.
- Restructuring charges were $4.7 million, primarily for rightsizing, facility consolidation, headcount reductions and product-line exits. Programs underway were expected to be substantially completed within 12 months.
- The company provided no specific consolidated earnings or revenue guidance in the filing. Management stated that operating cash flow and capital-market access were expected to fund capital expenditures, acquisitions and other obligations.
Risks, contingencies and other disclosures
- Key risks include market demand and capital-spending volatility, pricing pressure, material costs, foreign currency and interest-rate movements, acquisition integration, execution of the Apergy spin-off, tax and trade-policy changes, restructuring execution, litigation, product quality, cybersecurity and intellectual-property risks.
- Environmental and other reserves totaled $35.0 million at March 31, 2018. Management stated that no legal proceeding was expected to have a material effect on financial position, results or cash flows.
- Potential future pension settlement charges may arise after Apergy participants leave the Dover U.S. pension plan; the amount was not determinable at filing.
- Tax accounting under SAB 118 remained provisional, with additional Tax Cuts and Jobs Act adjustments expected to be completed by the fourth quarter of 2018.
- A non-U.S. subsidiary reported approximately €73,000 of Q1 revenue and €36,100 of net profit from Iran-related transactions conducted under OFAC General License H. Expected total revenue from the contracts was approximately €1.9 million.
Investor verification checklist
- Verify completion mechanics and financial effects of the May 2018 Apergy spin-off, including discontinued-operations presentation and the cash payment to Dover.
- Assess whether strong Energy and Engineered Systems growth offsets continued weakness in retail refrigeration.
- Monitor working-capital investment, cash conversion and leverage following debt repayment, acquisitions and planned share repurchases.
- Reconcile reported earnings with the prior-year PMI gain and current-year Apergy separation and restructuring costs.
- Review subsequent filings for final Tax Cuts and Jobs Act accounting, potential pension settlement charges and any changes to capital-allocation plans.