Dover Corporation 2019 Form 10-K Summary
Business context and reporting period
Dover Corporation is a diversified global manufacturer and solutions provider operating through five segments: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment. The filing covers the fiscal year ended December 31, 2019, with comparative results for 2018 and 2017. Effective October 1, 2019, Dover reorganized from three operating segments to five. Approximately 47% of 2019 revenue was generated outside the United States, and the company employed approximately 24,000 people.
The 2019 results reflect continuing operations following the May 2018 spin-off of Apergy Corporation. Apergy results are presented as discontinued operations for prior periods; Dover reported no discontinued operations in 2019.
Financial performance, cash flow, margins, debt and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $7.136 billion | $6.992 billion | 2.1% increase |
| Gross profit | $2.621 billion | $2.560 billion | 2.4% increase |
| Gross margin | 36.7% | 36.6% | 10 basis-point increase |
| Operating earnings | $974.9 million | $843.1 million | 15.6% increase |
| Earnings from continuing operations | $677.9 million | $591.1 million | 14.7% increase |
| Diluted EPS from continuing operations | $4.61 | $3.89 | 18.5% increase |
| Net cash from operating activities | $945.3 million | $789.2 million | 19.8% increase |
| Free cash flow | $758.5 million | $618.2 million | 22.7% increase |
| Free cash flow as a percentage of revenue | 10.6% | 8.8% | 180 basis-point increase |
| Capital expenditures | $186.8 million | $171.0 million | 9.2% increase |
Operating improvement was driven by organic volume growth, pricing, productivity actions and lower restructuring costs. These benefits more than offset higher material costs, including the effects of U.S. steel and aluminum tariffs, a $46.9 million loss on the sale of Finder Pompe, and a $23.5 million loss on early debt extinguishment. The effective tax rate increased to 19.6% from 18.5%.
- Organic revenue growth was 3.8%, with 0.8% acquisition-related growth, partially offset by a 2.0% unfavorable currency effect and a 0.5% disposition effect. Pricing contributed approximately 1.0% to revenue.
- Bookings declined 0.4% to $7.3 billion, while book-to-bill improved to 1.02. Year-end backlog increased to $1.5 billion from $1.4 billion.
- Cash and cash equivalents were $397.3 million at year-end, including approximately $273.1 million held outside the United States.
- Total debt was $3.070 billion, including $84.7 million of commercial paper and $2.986 billion of long-term debt. Net debt was $2.673 billion, and net debt to net capitalization improved to 46.8% from 50.0%.
- Dover paid $282.2 million in dividends and repurchased 1.34 million shares for $143.3 million. The annual dividend increased to $1.94 per share, marking the 64th consecutive annual increase.
- Dover maintained a $1.0 billion unsecured revolving credit facility expiring in 2024, had not drawn on it, and reported compliance with its debt covenants. The interest coverage ratio was 10.6 to 1 versus a 3.0 to 1 minimum.
Segment results and material changes
| Segment | 2019 revenue | Revenue change | 2019 EBIT margin |
|---|---|---|---|
| Engineered Products | $1.698 billion | 3.9% increase | 17.2% |
| Fueling Solutions | $1.620 billion | 10.5% increase | 14.3% |
| Imaging & Identification | $1.084 billion | 2.3% decrease | 21.2% |
| Pumps & Process Solutions | $1.339 billion | 0.5% increase | 17.9% |
| Refrigeration & Food Equipment | $1.397 billion | 3.9% decrease | 8.5% |
- Fueling Solutions was the strongest growth contributor, benefiting from global retail-fueling demand, the Belanger acquisition, pricing and productivity actions. Segment earnings increased 52.3%.
- Engineered Products benefited from refuse-truck activity, digital solutions and vehicle-service demand; segment earnings increased 15.6%.
- Imaging & Identification revenue was reduced by currency translation, although productivity and pricing lifted segment earnings 15.4% and expanded margin to 21.2%.
- Pumps & Process Solutions had broad organic growth, but results included the $46.9 million Finder loss. Excluding that item, operating performance improved materially.
- Refrigeration & Food Equipment faced weaker U.S. retail refrigeration construction, lower Asian heat-exchanger demand and softer restaurant-equipment demand. Revenue declined 3.9% and segment earnings declined 12.7%.
Guidance, outlook, management commentary, risks and unusual items
Management’s long-term objectives remain organic revenue growth of approximately 3% to 5% over a business cycle, free cash flow of approximately 8% to 12% of revenue, and capital spending of approximately 2% to 4% of revenue. The filing does not provide a specific consolidated 2020 revenue or earnings guidance figure.
- Dover expected approximately $9 million of additional 2020 rightsizing charges, consisting of $8 million of restructuring charges and $1 million of other costs, with possible additional programs.
- In 2019, Dover acquired three businesses for $216.4 million, principally Belanger and All-Flo. On January 24, 2020, it acquired Systech and agreed to acquire Soft-Pak; the combined purchase price was approximately $210 million, subject to adjustments, and Soft-Pak remained subject to customary closing conditions.
- Dover issued €500 million of 0.750% notes due 2027 and $300 million of 2.950% notes due 2029, using the proceeds to redeem higher-cost notes due 2020 and 2021. The refinancing generated the $23.5 million extinguishment loss.
- Key risks include global economic weakness, cyclical customer capital spending, foreign-exchange volatility, tariffs and commodity costs, pricing pressure, supply disruptions, acquisitions and integration, cybersecurity, regulatory and tax changes, litigation, product liability and recalls, and the ability to realize restructuring savings.
- Environmental and other probable and estimable matters were reserved at $30.6 million at year-end. Management stated that no current legal proceedings were expected to have a material effect on financial position, results or cash flows.
- Goodwill was $3.783 billion. Fourth-quarter impairment testing under both the former and new reporting-unit structures resulted in no impairment; the auditor identified goodwill impairment testing as a critical audit matter because of the significant valuation judgments involved.
Most important facts for investors to verify
- Whether organic growth and backlog convert into sustained revenue growth, particularly in Fueling Solutions and the weaker Refrigeration & Food Equipment segment.
- The sustainability of 2019 margin expansion after lower restructuring costs and other non-recurring benefits.
- The impact of tariffs, commodity prices, foreign currency and potential economic or industrial-capital-spending weakness.
- Execution and returns from the 2019 acquisitions and the approximately $210 million of announced 2020 acquisitions.
- Debt maturity, refinancing and interest-rate exposure following the 2019 debt transactions, including the effect of euro-denominated debt.
- Whether free cash flow remains within management’s 8% to 12% long-term target while funding acquisitions, capital expenditures, dividends and share repurchases.
- Goodwill and intangible-asset valuation assumptions, including forecast revenue growth and discount rates of 8.0% to 9.5% used in the 2019 impairment tests.
- Potential changes in tax exposures, unrecognized tax benefits, environmental reserves, litigation and indemnification obligations.