Dover Corporation 2009 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Dover is a global portfolio of manufacturing companies operating in Industrial Products, Engineered Systems, Fluid Management, and Electronic Technologies. This unaudited Form 10-Q covers the three and six months ended June 30, 2009, compared with the corresponding 2008 periods.
Financial Results and Key Metrics
| Metric | Q2 2009 | Q2 2008 | Six Months 2009 | Six Months 2008 |
|---|---|---|---|---|
| Revenue | $1,390.3 million | $2,011.0 million | $2,769.4 million | $3,876.5 million |
| Gross profit | $493.3 million | $739.6 million | $975.5 million | $1,419.2 million |
| Gross margin | 35.5% | 36.8% | 35.2% | 36.6% |
| Operating earnings | $128.3 million | $293.1 million | $243.1 million | $528.9 million |
| Earnings from continuing operations | $100.9 million | $186.9 million | $162.0 million | $334.8 million |
| Diluted continuing EPS | $0.54 | $0.98 | $0.87 | $1.74 |
| Net earnings | $97.1 million | $135.3 million | $150.5 million | $282.5 million |
- Q2 operating margin was approximately 9.2%, versus 14.6% in the prior-year quarter; six-month operating margin was approximately 8.8%, versus 13.6%.
- Net earnings included losses from discontinued operations of $3.8 million in Q2 and $11.5 million for the first six months. The comparable 2008 losses were $51.6 million and $52.4 million, respectively.
- Cash flow from continuing operations was $307.3 million for the first six months, compared with $386.0 million in 2008. Free cash flow was $248.9 million, versus $300.9 million.
- Capital expenditures declined to $58.5 million from $85.1 million, while acquisition spending declined to $34.3 million from $99.8 million.
- At June 30, 2009, cash and equivalents were $693.6 million and short-term investments were $142.5 million, for total liquidity of $836.1 million. Approximately $804.6 million was held outside the United States.
- Total debt was $1,978.8 million, net debt was $1,142.7 million, and net debt to total capitalization was 22.6%, compared with 24.9% at December 31, 2008.
- Stockholders’ equity increased to $3,903.9 million from $3,792.9 million at year-end 2008. Dividends paid were $0.25 per share in Q2 and $0.50 per share for the first six months.
Material Changes Versus the Prior Comparable Period
- Q2 revenue fell 31%, reflecting a 28.7% decline in core businesses and a 3.2% adverse foreign-exchange impact, partly offset by a 1.0% acquisition contribution. Six-month revenue declined 29%.
- All four segments reported lower Q2 revenue and earnings. Industrial Products revenue declined 41% and segment earnings declined 71%; Engineered Systems revenue declined 13% and earnings 28%; Fluid Management revenue declined 34% and earnings 43%; Electronic Technologies revenue declined 35% and earnings 65%.
- Electronic Technologies’ six-month segment earnings fell 93% to $5.9 million, with a six-month operating margin of 1.3%, primarily because of weak telecom component and assembly and test equipment demand.
- Selling and administrative expenses declined 18.3% in Q2 and 17.7% for the first six months, but increased as a percentage of revenue to 26.3% and 26.4%, respectively, because of lower volume and restructuring charges.
- The effective tax rate was 1.1% in Q2 and 17.4% for the first six months, versus 29.3% and 29.4% in the comparable periods. The 2009 rates benefited from $28.4 million of net tax benefits related to effectively settled tax positions.
- Working capital improved in absolute terms: adjusted working capital declined 12.6% from year-end to $1,115.4 million, although adjusted working capital as a percentage of revenue increased to 19.9% from 18.3%.
- Dover acquired Tyler Refrigeration through Hill PHOENIX in May 2009 for an aggregate cost of $34.3 million, net of cash acquired. The purchase-price allocation remained subject to finalization.
Guidance, Outlook, Risks, and Unusual Items
- Management projected that 2009 revenue would decline approximately 25% from 2008 and forecast continuing diluted EPS of $1.75 to $2.00. Management did not expect a meaningful demand recovery in the second half of 2009.
- Dover closed 16 facilities and reduced headcount by approximately 5,150 employees, or 15.8% of December 31, 2008 headcount, during the first six months. It expected approximately $20 million of additional restructuring costs and approximately 2,500 further headcount reductions in the remainder of 2009, with expected 2009 savings of approximately $125 million.
- Restructuring charges were $18.5 million in Q2 and $53.7 million for the first six months. The restructuring reserve was $48.9 million at June 30, 2009.
- Management cited weak global economic conditions, reduced bookings and backlog, housing and energy-market weakness, customer demand, pricing pressure, raw-material costs, foreign-exchange movements, credit-market conditions, competition, litigation, environmental matters, and potential credit-rating downgrades as key risks.
- Management stated that existing liquidity was adequate for anticipated funding needs and that additional 2009 acquisitions could be funded through cash, internally generated funds, commercial paper, credit lines, or public debt markets.
- Discontinued operations primarily related to one remaining unsold business. Assets and liabilities of discontinued operations were $55.0 million and $59.0 million, respectively, at June 30, 2009.
- Legal and environmental proceedings were described as unlikely to have a material adverse effect, although outcomes and any need for additional reserves could not be predicted with certainty.
- Disclosure controls were deemed effective as of June 30, 2009. No material changes in internal control were reported, although recently acquired companies were excluded from management’s assessment while their control environments were being evaluated.
Important Facts for Investors to Verify
- Whether revenue, bookings, backlog, and margins stabilized after the broad Q2 declines, particularly in Industrial Products and Electronic Technologies.
- Whether restructuring actions achieve the projected approximately $125 million of 2009 savings and whether further restructuring costs remain necessary.
- Whether the $1.75 to $2.00 continuing EPS outlook remains achievable given management’s expectation of limited second-half recovery.
- The sustainability of cash generation and liquidity, including the concentration of approximately $804.6 million of cash and investments outside the United States.
- The effect of the $28.4 million tax benefit on reported earnings and the normalized effective tax rate going forward.
- The final purchase-price allocation and operating contribution of the Tyler Refrigeration acquisition.
- Potential exposure from discontinued operations, environmental remediation, product warranties, litigation, currency movements, and the $50.0 million notional currency-interest-rate swap.