Dover Corporation 2011 Form 10-K Summary
Business context and reporting period
Dover Corporation is a diversified multinational manufacturer of specialized products, components, services and consumables, with approximately 34,000 employees. This Form 10-K covers the fiscal year ended December 31, 2011, including fourth-quarter results. Effective October 1, 2011, Dover reorganized into four reportable segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. Prior periods were recast to conform to the new structure.
2011 revenue mix was approximately 39% Engineered Systems, 24% Energy, 20% Printing & Identification and 17% Communication Technologies. Approximately 49% of revenue was generated outside the United States.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $7.950 billion | $6.640 billion | +20% |
| Gross profit | $3.051 billion | $2.617 billion | +17% |
| Gross margin | 38.4% | 39.4% | Down 100 bps |
| Earnings from continuing operations | $846.4 million | $690.8 million | +23% |
| Net earnings | $895.2 million | $700.1 million | +28% |
| Diluted EPS from continuing operations | $4.48 | $3.65 | +23% |
| Diluted net EPS | $4.74 | $3.70 | +28% |
| Operating margin from continuing operations | 13.8% | 13.5% | Up 30 bps |
| Effective tax rate | 22.7% | 23.2% | Down 50 bps |
Revenue growth consisted of 11% organic growth, 7% acquisition-related growth and a 2% favorable currency impact. Bookings increased 17% to $8.1 billion, while consolidated backlog rose to $1.447 billion from $1.263 billion.
- Communication Technologies: Revenue increased 26% to $1.360 billion; segment earnings increased 10% to $226.4 million; margin declined to 16.6% from 19.1%, principally because of Sound Solutions acquisition costs, higher depreciation and amortization, raw-material inflation and integration effects.
- Energy: Revenue increased 46% to $1.901 billion; segment earnings increased 43% to $450.6 million; margin declined modestly to 23.7%. Results benefited from drilling, production and downstream demand and acquisitions.
- Engineered Systems: Revenue increased 11% to $3.101 billion; segment earnings increased 16% to $445.2 million; margin improved to 14.4% from 13.7%, supported by volume, pricing and productivity.
- Printing & Identification: Revenue increased 8% to $1.593 billion; segment earnings declined 5% to $226.5 million; margin declined to 14.2% from 16.1% as alternative-energy and semiconductor demand weakened in the second half, particularly in Europe.
Cash flow, liquidity, debt and capital allocation
| Metric | 2011 | 2010 |
|---|---|---|
| Cash flow from operating activities | $1.058 billion | $901.9 million |
| Capital expenditures | $271.8 million | $174.8 million |
| Free cash flow | $786.4 million | $727.0 million |
| Free cash flow as a percentage of revenue | 9.9% | 10.9% |
| Total debt | $2.187 billion | $1.807 billion |
| Cash and cash equivalents | $1.207 billion | $1.189 billion |
| Net debt to net capitalization | 16.6% | 9.9% |
Dover spent $1.382 billion on acquisitions, including Harbison-Fischer and Sound Solutions, and received $516.9 million from business dispositions. It issued $800 million of notes in February 2011, generating approximately $789 million of net proceeds. No commercial paper was outstanding at year-end. Dover had an undrawn $1 billion revolving credit facility maturing November 10, 2016 and remained in compliance with its debt covenants, including a reported EBITDA-to-net-interest coverage ratio of 14.3 to 1.
The company repurchased approximately 4.0 million shares in the open market for $242.5 million and paid $219.2 million in dividends. Annual dividends increased 10% to $1.18 per share, marking the 56th consecutive year of increases.
Material changes versus the prior comparable period
- Revenue and earnings reached records, driven by broad-based volume growth, favorable acquisitions, pricing and currency translation.
- Gross margin declined 100 basis points because product and customer mix and acquisition-related depreciation more than offset operating leverage.
- Free cash flow increased in dollars but declined as a percentage of revenue because of higher capital spending, tax payments and continued growth investment.
- Total debt increased $380 million, primarily to fund acquisitions and refinance maturing debt; net leverage increased materially following the $1.4 billion acquisition program.
- Goodwill increased to $3.787 billion and intangible assets increased to $1.207 billion, primarily from acquisitions. No impairment was indicated in the fourth-quarter goodwill testing for the 17 reporting units.
- Three businesses were sold and reported as discontinued operations. Discontinued operations contributed $48.9 million of net earnings, including a $76.1 million after-tax goodwill impairment related to Paladin Brands.
- Restructuring charges remained limited at $5.7 million, compared with $6.2 million in 2010 and $67.3 million in 2009.
- Fourth-quarter revenue was $2.004 billion, continuing-operations earnings were $208.9 million and diluted EPS from continuing operations was $1.12. Fourth-quarter net earnings were $278.3 million, or $1.49 diluted EPS, including discontinued operations.
Guidance, outlook, commentary and risks
Management expects 2012 organic growth of 4% to 7%, acquisition-related growth of approximately 3%, and diluted EPS from continuing operations of $4.70 to $5.00. Management expects earnings to follow the typical seasonal pattern, with stronger second and third quarters, and expects free cash flow of approximately 10% of revenue. Capital expenditures are expected to increase slightly as a percentage of revenue to support Energy and handset capacity expansion.
Dover’s longer-term objectives for 2012–2014 include 7% to 9% annual organic sales growth, 3% to 5% acquisition growth, segment margins of approximately 19% by 2014, and free cash flow exceeding 10% of sales. Management noted a strong financial position but identified continued weakness in alternative energy, semiconductor and telecom infrastructure markets and softness in Europe as risks entering 2012.
- Exposure to economic weakness, European sovereign and credit-market uncertainty, energy-price volatility and cyclical end markets.
- Raw-material inflation, supply availability, pricing pressure and potential loss of a single-source manufacturing facility.
- Foreign exchange volatility and international political, regulatory, trade and compliance risks.
- Execution risk from acquisitions, integration, expected synergies and the ability to identify suitable acquisition targets.
- Competition, technology changes, short product life cycles and customer-demand volatility, particularly in Communication Technologies and Printing & Identification.
- Potential effects from litigation, environmental obligations, tax audits, uncertain tax positions, conflict-minerals requirements and other regulatory changes.
- Pension and post-retirement obligations, including qualified-plan underfunding of approximately $75 million and expected 2012 qualified-plan contributions of $20 million to $40 million.
Management and PricewaterhouseCoopers LLP concluded that internal control over financial reporting was effective as of December 31, 2011. The assessment excluded Harbison-Fischer, Sound Solutions and Oil Lift, which represented approximately 4.7% of 2011 revenue and 3.7% of year-end assets.
Important facts for investors to verify
- Confirm the sustainability of 2011’s organic growth and whether 2012 guidance appropriately reflects the expected slowdown in electronics, alternative energy and European markets.
- Evaluate integration progress, synergy realization and margin recovery for Sound Solutions, Harbison-Fischer and the other 2011 acquisitions.
- Monitor gross-margin and segment-margin trends, especially in Communication Technologies and Printing & Identification.
- Reconcile free cash flow after higher capital expenditures, tax payments, acquisitions, dividends and share repurchases.
- Assess leverage, debt maturities, fixed-rate debt fair value and available liquidity under the $1 billion revolving facility.
- Review goodwill, acquired intangible assets and impairment sensitivity following the substantial 2011 acquisition activity.
- Track pension funding requirements, uncertain tax positions of $193.2 million, letters of credit of approximately $59.9 million and outstanding legal, environmental and indemnification matters.