Dover Corporation 2009 Form 10-K Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer operating through four segments: Industrial Products, Engineered Systems, Fluid Management, and Electronic Technologies. The filing covers the fiscal year ended December 31, 2009; fourth-quarter data is included in the unaudited quarterly table. Results reflect continuing operations unless otherwise stated, with prior periods recast for discontinued operations.
The company serves industrial, energy, transportation, refrigeration, foodservice, product-identification, electronics, and other specialized markets. Approximately 43% of revenue was generated outside the United States, and Dover had approximately 29,300 continuing-operations employees at year-end, down approximately 9% from the prior year.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $5.776 billion | $7.569 billion | (24%) |
| Gross profit | $2.099 billion | $2.730 billion | (23%) |
| Gross margin | 36.3% | 36.1% | +0.2 percentage points |
| Operating earnings | $588.0 million | $1.029 billion | (43%) |
| Earnings from continuing operations | $371.9 million | $694.8 million | (46%) |
| Diluted EPS from continuing operations | $1.99 | $3.67 | (46%) |
| Net earnings | $356.4 million | $590.8 million | (40%) |
| Diluted net EPS | $1.91 | $3.12 | (39%) |
| Operating cash flow from continuing operations | $802.1 million | $1.010 billion | (21%) |
| Free cash flow | $682.1 million | $834.6 million | (18%) |
| Free cash flow margin | 11.8% | 11.0% | +0.8 percentage points |
| Capital expenditures | $120.0 million | $175.8 million | (32%) |
| Total debt | $1.861 billion | $2.086 billion | (11%) |
| Net debt to total capitalization | 18.4% | 24.9% | (6.5 percentage points) |
Cash and equivalents were $714.4 million and short-term investments were $223.8 million at December 31, 2009, for total cash, cash equivalents, and short-term investments of $938.2 million. Approximately $813.8 million of that balance was held outside the United States. Total assets were $7.882 billion and stockholders’ equity was $4.084 billion.
The company paid $189.9 million of dividends during 2009, or $1.02 per common share. No shares were repurchased during 2009. Acquisition cash spending was $222.0 million, excluding $6.4 million of stock consideration, and six add-on businesses were acquired for aggregate consideration of $228.4 million.
Segment performance
| Segment | 2009 revenue | Revenue change | 2009 earnings | Operating margin |
|---|---|---|---|---|
| Industrial Products | $1.622 billion | (34%) | $139.8 million | 8.6% |
| Engineered Systems | $1.862 billion | (7%) | $227.3 million | 12.2% |
| Fluid Management | $1.271 billion | (26%) | $259.3 million | 20.4% |
| Electronic Technologies | $1.027 billion | (26%) | $83.7 million | 8.1% |
Demand weakened across most end markets because of the global economic downturn. Industrial Products was affected by infrastructure, construction, energy, transportation, and vehicle-service weakness. Fluid Management was affected by lower oil, gas, power-generation, and industrial demand. Electronic Technologies experienced weak telecom and electronic assembly and test demand. Engineered Systems was comparatively resilient, although refrigeration, HVAC, packaging, and product-identification volumes declined.
Total company backlog declined to $1.084 billion at year-end 2009 from $1.156 billion in 2008. Bookings and backlog declined materially in Industrial Products and Fluid Management, while Engineered Systems and Electronic Technologies reported year-end backlog increases versus 2008.
Material changes versus the prior comparable period
- Revenue declined 24%, with organic revenue down 23.9%; acquisitions contributed 1.9% and foreign exchange reduced revenue by 1.7%.
- Gross margin was broadly maintained despite the sharp revenue decline, but selling and administrative expenses increased to 26% of revenue from 22%, partly because of $50.2 million of restructuring charges.
- Total restructuring charges were approximately $72.1 million in 2009, compared with substantially lower charges in 2008. Management reported approximately $125 million of savings from restructuring and related initiatives during 2009.
- Cash flow benefited from active working-capital management. Adjusted working capital declined 14.4% to $1.093 billion, although average annual adjusted working capital as a percentage of revenue increased to 19.9% from 18.3%.
- Debt declined by $224.8 million, primarily because Dover repaid $192.8 million of commercial paper and reduced long-term debt by $32.0 million. No commercial paper was outstanding at year-end.
- Discontinued operations generated a $15.5 million after-tax loss in 2009, including approximately $10.3 million of after-tax impairment related to a business held for sale, compared with a $103.9 million loss in 2008.
- Research and development expense decreased to $178.3 million from $189.2 million in 2008.
Guidance, outlook, risks, and unusual items
For 2010, management projected organic revenue growth of 4% to 6%, including approximately 1% of foreign-currency benefit, plus approximately 3% acquisition-related growth from 2009 transactions. Diluted EPS from continuing operations was projected at $2.35 to $2.65. Management expected earnings to follow the traditional pattern of being higher in the second and third quarters. Capital expenditures were expected to be approximately 2.3% to 2.5% of revenue, and significant additional restructuring charges were not anticipated.
Management stated that liquidity was adequate for operations, acquisitions, capital expenditures, and other obligations. Dover had access to a $1.0 billion unsecured revolving credit facility expiring in November 2012, had not drawn on it, and was in compliance with its covenants. The EBITDA-to-net-interest coverage ratio was 9.1 to 1 versus a required minimum of 3.5 to 1. The three major rating agencies reaffirmed their reported ratings in February 2010: Moody’s A2/P-1, Standard & Poor’s A/A-1, and Fitch A/F1.
Principal risks include continued economic or credit-market weakness, cyclical demand, energy-price volatility, construction and housing weakness, competition and pricing pressure, raw-material costs and availability, foreign-exchange volatility, international operating risks, acquisition and integration execution, failure to achieve cost savings, technology changes, tax audits and uncertain tax positions, litigation, environmental matters, intellectual-property protection, pension funding, and possible credit-rating deterioration.
Unrecognized tax benefits totaled $276.6 million at year-end, of which $159.9 million represented the net amount that would affect the effective tax rate if recognized. Total future obligations disclosed in the contractual-obligations table were $3.921 billion, including debt, interest, leases, purchase obligations, benefit obligations, and other commitments; the timing of $230.2 million of uncertain tax positions could not be estimated beyond 2010.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2009. The 2009 acquisitions were excluded from the control assessment; they represented approximately 2.3% of 2009 consolidated revenue and 3.1% of year-end consolidated assets.
Most important facts for investors to verify
- Whether the projected 2010 recovery in organic revenue and diluted EPS materialized, particularly in Industrial Products, Fluid Management, and Electronic Technologies.
- Whether the reported restructuring savings and expected 2010 benefits were sustainable without requiring additional material charges.
- The quality and conversion of free cash flow, including working-capital performance and capital-expenditure discipline.
- The remaining debt maturities, especially $436.2 million due in 2011, and continued compliance with the revolving-credit-facility covenant.
- The outcome and potential cash impact of $276.6 million of unrecognized tax benefits, related audits, and uncertain tax positions.
- The carrying value and impairment risk of goodwill of $3.350 billion and intangible assets of $950.7 million amid cyclical market conditions.
- The resolution and proceeds from the remaining business held for sale and any further discontinued-operation losses.
- Demand trends reflected in bookings and backlog, particularly the year-end backlog of $1.084 billion compared with $1.156 billion in 2008.