Dover Corporation Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2018. Dover is a diversified global manufacturer operating through three segments: Engineered Systems, Fluids, and Refrigeration & Food Equipment.
On May 9, 2018, Dover completed the pro rata spin-off of Apergy. Apergy’s historical results are presented as discontinued operations, and prior-period information has been revised to reflect continuing operations where applicable.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $1.747 billion | $1.748 billion | $5.183 billion | $5.068 billion |
| Gross profit | $646.5 million | $649.2 million | $1.915 billion | $1.879 billion |
| Gross margin | 37.0% | 37.1% | 36.9% | 37.1% |
| Operating earnings | $220.1 million | $239.2 million | $624.3 million | $622.1 million |
| Earnings from continuing operations | $157.3 million | $159.5 million | $433.2 million | $457.0 million |
| Diluted EPS from continuing operations | $1.05 | $1.01 | $2.82 | $2.90 |
| Net earnings | $157.3 million | $178.9 million | $428.7 million | $515.2 million |
Q3 revenue was essentially flat year over year. Organic growth of 3.1% and acquisition-related growth of 0.3% were offset by a 2.8% decline from disposed businesses and a 0.6% unfavorable foreign-currency impact. Nine-month revenue increased 2.3%, including 2.8% organic growth, 0.4% acquisition growth, and 1.9% favorable currency translation, partly offset by a 2.8% disposition impact.
Q3 earnings from continuing operations declined 1.3%, while diluted continuing-operations EPS increased 4.0% because of share repurchases. Nine-month continuing-operations earnings declined 5.2%, primarily reflecting the $90.1 million 2017 gain on business sales, including the PMI sale, and higher restructuring costs.
| Segment | Q3 revenue | Q3 revenue change | Q3 earnings | Q3 margin |
|---|---|---|---|---|
| Engineered Systems | $671.5 million | 0.1% | $108.7 million | 16.2% |
| Fluids | $690.1 million | 8.1% | $101.2 million | 14.7% |
| Refrigeration & Food Equipment | $386.2 million | (12.0%) | $42.4 million | 11.0% |
Fluids was led by international retail fueling, pumps, and industrial markets. Engineered Systems benefited from broad-based organic growth and productivity actions. Refrigeration & Food Equipment was adversely affected by weak U.S. retail refrigeration demand, lower bookings, unfavorable mix, and higher steel costs.
Cash flow, debt, and liquidity
- Nine-month cash flow from operating activities was $418.7 million, compared with $454.0 million in 2017.
- Capital expenditures were $134.6 million, producing free cash flow of $284.1 million, or 5.5% of revenue, versus $323.6 million and 6.4% in the prior-year period.
- Cash used in investing activities was $210.1 million, including $68.6 million for two acquisitions and $134.6 million of capital expenditures.
- Cash used in financing activities was $749.3 million, including $892.8 million of share repurchases and $213.1 million of dividends, partly offset by $689.6 million received from Apergy.
- Cash and cash equivalents were $209.3 million at September 30, 2018, down from $754.0 million at December 31, 2017. Approximately $177.9 million was held outside the United States.
- Total debt was $3.281 billion, including $298.6 million of commercial paper. Long-term debt was $2.982 billion.
- Net debt to net capitalization increased to 52.8% from 39.1% at year-end 2017, primarily due to the Apergy distribution, share repurchases, dividends, and lower cash.
- Dover maintained a $1.0 billion undrawn revolving credit facility expiring November 10, 2020. The company was in compliance with debt covenants and reported an interest coverage ratio of 10.2 to 1.0.
Material changes, outlook, and unusual items
- Dover adopted ASC 606 using the modified retrospective method. The cumulative adjustment to retained earnings was $0.2 million, and the filing states that the overall impact was not material.
- The company recorded $36.4 million of restructuring charges during the first nine months, including $24.2 million in Q3. Management expects approximately $39 million of charges related to SG&A reduction initiatives, with about $18 million expected in Q4 2018 and the first half of 2019.
- Material costs increased, particularly from steel and other commodity impacts associated with U.S. Section 232 and Section 301 tariffs. Management also cited temporary site-consolidation and supply-chain disruption costs.
- Dover acquired Ettlinger for $53.2 million and Rosario for $15.3 million, net of cash acquired.
- The company substantially completed its announced $1 billion share-repurchase program. Q3 repurchases totaled 1.729 million shares for $147.8 million, and 11.2 million shares remained authorized under the February 2018 program at quarter-end.
- Management expects operating cash flow and capital-market access to fund capital expenditures, acquisitions, and other requirements. The filing does not provide a clear consolidated earnings or revenue guidance figure.
- A non-U.S. Fluids subsidiary reported approximately €869.5 thousand of Q3 revenue and €470.6 thousand of net profit from Iran-related transactions entered into before May 8, 2018. Wind-down activities were expected to be completed by November 4, 2018 in compliance with applicable sanctions.
- Environmental and other matter reserves totaled $30.9 million. Management stated that no current legal proceedings were expected to have a material effect, individually or in aggregate.
- The company expects to recognize a non-cash pension settlement charge in Q4 2018 related to lump-sum payments for certain Apergy participants; the amount was not yet finalized.
Most important facts for investors to verify
- Whether weakness in U.S. retail refrigeration persists and further pressures Refrigeration & Food Equipment revenue, bookings, backlog, and margins.
- The extent to which tariffs, material costs, supply-chain disruptions, and restructuring charges affect future margins and cash flow.
- Completion and final share count of the $700 million accelerated share-repurchase program.
- Progress against the remaining restructuring charges and whether anticipated savings are realized.
- Working-capital conversion, as adjusted working capital increased 16.4% to $1.139 billion and contributed to lower operating cash flow.
- Leverage and liquidity following the Apergy separation, continued repurchases, dividends, and potential acquisitions.
- Final tax accounting under the Tax Cuts and Jobs Act and the impact of the January 1, 2019 lease-accounting adoption.
- The final pension settlement charge and any developments involving environmental, legal, sanctions, or other contingent liabilities.