Dover Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer operating through Communication Technologies, Energy, Engineered Systems, and Printing & Identification. This report covers the unaudited three months ended March 31, 2013, compared with the same period in 2012.
Dover reclassified DEK International and Everett Charles Technologies as discontinued operations and expects to divest them during 2013. Prior-period results were reclassified for comparability.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $2.040 billion | $1.955 billion | 4.3% increase |
| Gross profit | $776.6 million | $746.1 million | 4.1% increase |
| Gross margin | 38.1% | 38.2% | Down 10 basis points |
| Operating earnings | $292.2 million | $292.1 million | Approximately flat |
| Earnings from continuing operations | $197.0 million | $186.4 million | 5.7% increase |
| Diluted EPS from continuing operations | $1.12 | $1.00 | 12.0% increase |
| Net earnings | $210.0 million | $196.1 million | 7.1% increase |
| Diluted net EPS | $1.20 | $1.05 | 14.3% increase |
| Operating cash flow from continuing operations | $78.3 million | $161.3 million | 51.5% decrease |
| Free cash flow | $31.2 million | $93.1 million | Decrease of $61.9 million |
Selling and administrative expenses increased 6.7% to $484.4 million, or 23.8% of revenue versus 23.2% in the prior-year quarter. Net interest expense was $30.2 million. The effective tax rate on continuing operations was 26.1%, compared with 28.4%; excluding discrete items, the comparable rate was 27.8% in both periods.
Discontinued operations contributed $13.0 million of net earnings versus $9.7 million in Q1 2012. Comprehensive earnings declined to $178.7 million from $237.3 million, primarily because of a $31.3 million after-tax other comprehensive loss, including foreign currency translation losses.
Segment performance and material changes
- Communication Technologies: Revenue increased 4.3% to $372.8 million, led by consumer electronics. Segment earnings declined 5.0% to $44.2 million and operating margin fell to 11.9% from 13.0%, reflecting restructuring, higher research and development, legal spending, depreciation, and unfavorable mix.
- Energy: Revenue and segment earnings each increased 5.6% to $561.2 million and $139.5 million, respectively. Production and downstream growth, acquisitions, productivity, and pricing offset lower drilling activity. Operating margin remained 24.9%.
- Engineered Systems: Revenue increased 5.6% to $867.9 million, primarily from acquisitions, while segment earnings declined 4.0% to $117.2 million. Operating margin decreased to 13.5% from 14.9%. Results included approximately $3.0 million of restructuring costs, a $2.9 million loss on a business disposition, and gains on land and building sales totaling approximately $7.8 million.
- Printing & Identification: Revenue declined 2.3% to $237.9 million, but segment earnings increased 14.0% to $29.8 million. Operating margin improved to 12.5% from 10.7% due to product mix, productivity, and prior restructuring actions. Bookings and backlog declined 5.0% and 6.6%, respectively.
Consolidated revenue growth consisted of approximately 6% acquisition-related growth, offset in part by a 1% decline in organic revenue. Organic performance was affected by lower shipments to a key retail refrigeration customer, reduced North American drilling activity, and weak European industrial markets. Bookings increased approximately 7% to $2.2 billion, while backlog remained approximately $1.6 billion.
Cash flow, debt, liquidity, and capital allocation
- Cash and cash equivalents were $571.4 million at March 31, 2013, down from $800.1 million at December 31, 2012. Approximately $523 million was held outside the United States.
- Total debt was $2.892 billion, including $698.4 million of commercial paper and $2.194 billion of long-term debt. Net debt was $2.321 billion.
- Net debt to net capitalization increased to 32.8% from 28.9%, primarily because of share repurchases and increased commercial paper borrowings.
- Dover repurchased 4.05 million shares for $291.9 million at an average price of $72.02. Approximately $458.5 million remained available under the $1 billion November 2012 authorization.
- The company paid $60.3 million in dividends, or $0.35 per common share.
- Capital expenditures were $47.2 million, and no acquisitions were completed in Q1 2013. Management expects full-year capital expenditures of approximately 3.0% to 3.5% of revenue.
- Dover maintained an undrawn $1.0 billion unsecured revolving credit facility expiring November 10, 2016. The company reported compliance with debt covenants and an interest coverage ratio of 14.1 times versus a 3.0-times minimum.
Guidance, outlook, risks, and unusual items
- Management projected 2013 organic revenue growth of approximately 3% to 5%, acquisition-related growth of approximately 4%, and total revenue growth of 7% to 9%.
- Full-year 2013 diluted EPS from continuing operations was estimated at $5.05 to $5.35. Management also expected full-year free cash flow of approximately 10% of revenue.
- Management expected North American drilling activity and rig count to improve in the second half of 2013, while identifying consumer electronics, Energy production and downstream markets, and Fluid Solutions distribution expansion as growth opportunities.
- Restructuring charges were $6.4 million in Q1, and full-year 2013 restructuring expenses were expected to be approximately $20 million to $30 million. Programs were expected to be substantially completed within 12 to 18 months.
- Potential risks include global economic weakness, particularly in Europe; customer concentration and demand changes; raw-material costs; pricing pressure; currency movements; acquisitions and integration; litigation; environmental matters; intellectual property; credit-market conditions; and possible credit-rating downgrades.
- Tax audits and uncertain tax positions could reduce unrecognized tax benefits by approximately $90 million to $140 million within the following twelve months, with a portion expected to relate to discontinued operations.
- Dover reported approximately $103.9 million of letters of credit and guarantees. Management considered environmental and other legal proceedings unlikely to have a material adverse effect, although outcomes cannot be predicted with certainty.
Investor verification priorities
- Verify whether projected 2013 revenue growth of 7% to 9% and diluted EPS of $5.05 to $5.35 were achieved.
- Assess whether the first-quarter working-capital increase and weak operating cash flow were temporary or continued through the year.
- Monitor leverage, commercial paper usage, and the effect of additional share repurchases on liquidity and net debt.
- Track the timing and proceeds of the planned divestitures of DEK International and Everett Charles Technologies.
- Evaluate Energy drilling exposure, European industrial weakness, the key refrigeration customer project, and Printing & Identification bookings and backlog.
- Review restructuring costs, acquisition integration, tax audit outcomes, litigation, environmental liabilities, and the potential impact of currency translation losses.