Dover Corporation 2012 Form 10-K Summary
Business Context and Reporting Period
Dover Corporation is a diversified global manufacturer of equipment, components, specialty systems, and support services. Its four operating segments are Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The filing covers the fiscal year ended December 31, 2012, with comparative information for 2011 and 2010.
Approximately 35,000 employees supported continuing operations at year-end. Customers outside the United States generated 46% of 2012 revenue. No individual customer represented more than 10% of consolidated revenue.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $8.104 billion | $7.369 billion | +10.0% |
| Gross profit | $3.107 billion | $2.845 billion | +9.2% |
| Gross margin | 38.3% | 38.6% | -0.3 points |
| Operating earnings | $1.265 billion | $1.124 billion | +12.6% |
| Earnings from continuing operations | $833.1 million | $773.2 million | +7.8% |
| Diluted EPS from continuing operations | $4.53 | $4.09 | +10.8% |
| Net earnings | $811.1 million | $895.2 million | -9.4% |
| Cash flow from operating activities | $1.261 billion | $948.9 million | +32.9% |
| Free cash flow | $964.1 million | $686.2 million | +40.5% |
| Free cash flow as a percentage of revenue | 11.9% | 9.3% | +2.6 points |
| Total debt | $2.800 billion | $2.187 billion | +$612.9 million |
| Net debt to net capitalization | 28.9% | 16.6% | +12.3 points |
Operating margin from continuing operations was 14.0%, compared with 13.7% in 2011. The effective tax rate increased to 26.8% from 23.5%, while the rate excluding discrete items was 28.2% versus 27.5%.
Cash and cash equivalents totaled $800.1 million, including approximately $700 million held outside the United States. Dover maintained an undrawn $1 billion revolving credit facility expiring in November 2016 and had an interest coverage ratio of 13.9-to-1, versus a 3.0-to-1 covenant requirement.
Capital expenditures were $297.0 million. Dover paid $241.0 million in dividends, or $1.33 per share, representing the 57th consecutive annual dividend increase. The company repurchased 12.3 million shares in the open market for approximately $749.0 million.
Segment Performance
- Communication Technologies: Revenue increased 11.5% to $1.517 billion, but segment earnings declined 3.3% to $219.0 million and operating margin fell to 14.4% from 16.6%. Handset and MEMS microphone demand was strong, while Sound Solutions experienced operational and product-rollout challenges; telecom demand remained weak.
- Energy: Revenue increased 14.3% to $2.173 billion and segment earnings increased 19.5% to $538.7 million. Operating margin improved to 24.8% from 23.7%, driven by production and downstream markets, pricing, productivity, and acquisitions.
- Engineered Systems: Revenue increased 10.3% to $3.420 billion and segment earnings increased 12.8% to $502.0 million. Operating margin improved to 14.7% from 14.4%, supported by acquisitions, refrigeration and food equipment demand, and productivity gains.
- Printing & Identification: Revenue declined 1.2% to $996.5 million and segment earnings declined 4.5% to $135.2 million. FMCG growth was offset by weaker industrial markets, particularly in Europe and Asia. Operating margin declined to 13.6% from 14.0%.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected 5% organic growth, 6% acquisition-related growth, and a 1% unfavorable currency impact.
- Dover invested approximately $1.2 billion in seven acquisitions, including Maag Pump Systems, Production Control Services, and Anthony International, acquired for approximately $603 million.
- Higher acquisition-related depreciation and amortization, Sound Solutions integration issues, and restructuring charges constrained gross and segment margins.
- 2012 restructuring charges increased to $19.4 million from $5.6 million in 2011. Management expected an additional $20 million to $30 million of restructuring charges in 2013.
- Debt increased primarily because Dover issued $607.5 million of commercial paper to help fund acquisitions, particularly Anthony International.
- In the fourth quarter, Dover classified DEK International and Everett Charles Technologies, including Multitest, as discontinued operations and planned to divest them in 2013.
Guidance, Outlook, Risks, and Unusual Items
For 2013, management targeted organic revenue growth of 3% to 5%, acquisition-related growth of approximately 4%, and diluted EPS from continuing operations of $5.05 to $5.35. Management expected free cash flow of approximately 10% of revenue and capital expenditures of approximately 3.5% of revenue.
Management expected Energy to remain solid but moderate from 2012 levels, with possible improvement in the North American rig count during the second half of 2013. It expected improvement at Sound Solutions, continued growth in refrigeration, food equipment, and fluids, and benefits from Printing & Identification productivity and restructuring programs.
Discontinued operations produced a net after-tax loss of $22.0 million in 2012, including a $63.8 million goodwill impairment charge related to ECT. Continuing operations benefited from $16.1 million of favorable tax settlements and discrete items.
Principal risks include global economic weakness, European and Asian market softness, energy-price and rig-count volatility, foreign exchange movements, raw-material inflation, pricing pressure, technology changes, customer concentration in certain Communication Technologies markets, acquisition integration, restructuring execution, litigation and environmental contingencies, pension funding, cybersecurity, and potential credit-rating deterioration. Environmental reserves totaled $28.9 million and legal reserves totaled $1.2 million at year-end.
The company disclosed 2012 exports to Iranian entities by a German affiliate acquired with Maag Pump Systems. Management directed non-U.S. affiliates not to engage in further trade transactions with Iran.
Management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective as of December 31, 2012. The assessment and audit excluded Maag Pump Systems, Production Control Services, and Anthony International, representing approximately 2.8% of revenue and 3.2% of assets.
Important Facts for Investors to Verify
- Whether Sound Solutions achieved the expected operational, volume, and margin recovery.
- Whether the 2013 organic growth and diluted EPS guidance of 3% to 5% and $5.05 to $5.35, respectively, was achieved.
- Progress on integrating the 2012 acquisitions and realizing expected synergies, particularly Anthony, Maag, and PCS.
- The replacement of $607.5 million of commercial paper with longer-term fixed-rate debt and the resulting leverage trajectory.
- The timing, proceeds, and potential additional impairment associated with the planned divestitures of ECT and DEK.
- Execution of the $20 million to $30 million 2013 restructuring program and related margin benefits.
- Changes in pension underfunding, tax contingencies, environmental reserves, and the approximately $700 million of cash held outside the United States.