Dover Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The unaudited statements are prepared under U.S. GAAP. Dover operates through four segments: Engineered Systems, Fluids, Refrigeration & Food Equipment, and Energy.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Change | Six months 2017 | Six months 2016 |
|---|---|---|---|---|---|
| Revenue | $1.993 billion | $1.686 billion | +18.2% | $3.807 billion | $3.309 billion |
| Gross profit | $749.4 million | $631.2 million | +18.7% | $1.411 billion | $1.220 billion |
| Gross margin | 37.6% | 37.4% | +20 bps | 37.1% | 36.9% |
| Operating earnings | $265.4 million | $193.8 million | +36.9% | $441.3 million | $339.6 million |
| Net earnings | $164.1 million | $118.3 million | +38.7% | $336.3 million | $217.6 million |
| Diluted EPS | $1.04 | $0.76 | +36.8% | $2.14 | $1.39 |
Q2 operating margin was approximately 13.3%, compared with 11.5% in the prior-year quarter. Six-month operating margin was approximately 11.6%, compared with 10.3%. SG&A declined to 24.3% of revenue in Q2 from 25.9% and to 25.5% for the six months from 26.6%. Interest expense increased 9.3% in both comparison periods, primarily because of euro-denominated notes issued in late 2016 and higher commercial-paper rates. Effective tax rates were 28.9% for Q2 and 27.3% for the six months, versus 28.1% and 25.5%, respectively.
Segment trends
- Engineered Systems: Q2 revenue increased 10.6% to $655.4 million; segment earnings increased 2.7% to $106.8 million, while margin declined to 16.3% from 17.6%, reflecting acquisitions, material inflation and strategic investments.
- Fluids: Q2 revenue increased 36.3% to $553.3 million and segment earnings increased 36.1% to $73.6 million. Growth was led by acquisitions in Fueling & Transport and improved industrial and oil-and-gas activity.
- Refrigeration & Food Equipment: Q2 revenue declined 0.7% to $426.3 million because of dispositions, partially offset by 5.1% organic growth. Segment earnings increased 4.1% to $65.8 million and margin improved to 15.4%.
- Energy: Q2 revenue increased 38.7% to $359.2 million and segment earnings rose to $53.4 million from a loss of $0.1 million. Results benefited from higher U.S. rig counts, well-completion activity and strong Bearings & Compression demand.
Cash flow, liquidity and debt
- Six-month operating cash flow was $233.9 million, down from $341.3 million, primarily because of increased receivables and inventory, higher working-capital investment and $43.0 million of taxes related to dispositions.
- Capital expenditures were $90.6 million, compared with $72.7 million. Free cash flow was $186.3 million, or 4.9% of revenue, versus $269.1 million, or 8.1%, in the prior-year period. Management targeted approximately 11% of full-year 2017 revenue for free cash flow.
- Cash and equivalents were $301.6 million at June 30, 2017, including $248.6 million held outside the United States. Cash declined $47.6 million during the first six months.
- Total debt was $3.532 billion, compared with $3.621 billion at December 31, 2016. Net debt to net capitalization improved to 44.2% from 46.3%. Current debt included $350.0 million of notes maturing March 15, 2018.
- Dover had a $1.0 billion undrawn unsecured revolving credit facility expiring November 10, 2020, was in compliance with covenants, and reported a 10.4-to-1.0 interest coverage ratio. Letters of credit and guarantees totaled approximately $136.1 million.
- Dividends paid were $137.2 million, or $0.88 per share. No shares were repurchased during the period; 6,771,458 shares remained available under the authorization.
Material changes and unusual items
- Revenue growth comprised Q2 organic growth of 10.0% and acquisition-related growth of 11.7%, partly offset by a 2.8% decline from dispositions and a 0.7% unfavorable currency effect. Six-month organic growth was 7.0%.
- Dover acquired Caldera Graphics for $32.7 million, adding goodwill of $24.6 million and intangible assets of $8.2 million within Engineered Systems.
- The sale of Performance Motorsports International generated $118.7 million of cash proceeds and an $88.4 million pretax gain, or $61.7 million after tax. The gain contributed approximately $0.39 to six-month diluted EPS.
- Restructuring charges were $1.8 million in Q2 and $7.9 million for the six months, down from $9.2 million and $23.6 million, respectively. Programs were expected to be substantially completed within 12 to 18 months.
- A product recall in the Fluids segment resulted in a warranty accrual of $16.2 million at June 30, 2017, down from $23.2 million initially recorded at December 31, 2016.
- Environmental and other reserves totaled $29.8 million. Management stated that no current legal proceedings were expected to have a material effect, although routine litigation and environmental matters remain ongoing.
Guidance, outlook and risks
Following strong Q2 results, bookings and backlog, management increased its 2017 outlook to revenue growth of approximately 12% to 14%, including organic growth of 5% to 7%, and diluted EPS of $4.23 to $4.33. Full-year capital expenditures were expected to approximate 2.4% of revenue.
Key risks identified include oil-and-gas and industrial demand, commodity costs and pricing pressure, foreign exchange and interest rates, customer concentration, acquisitions and integration, product recalls and warranty claims, litigation and environmental obligations, cybersecurity, intellectual property, labor disruptions, credit ratings, and potential goodwill or intangible-asset impairment. The filing reported no material change in previously disclosed risk factors.
The company was evaluating upcoming revenue-recognition and lease accounting standards. It expected to adopt the new revenue standard on January 1, 2018 using the modified retrospective method, with a potential cumulative-effect adjustment; the financial impact was not yet clear.
Investor verification points
- Separate recurring operating performance from the $88.4 million PMI disposal gain and its after-tax EPS benefit.
- Assess the sustainability of Energy growth and the effect of oil-and-gas activity, rig counts and well completions.
- Monitor working-capital absorption, free cash flow conversion and the targeted full-year cash-flow rate.
- Evaluate refinancing or repayment plans for the $350.0 million debt maturity in March 2018.
- Track integration, margins and leverage effects from the 2016 acquisitions and the Caldera acquisition.
- Monitor the product recall accrual, warranty payments, environmental reserves and other contingent liabilities.
- Review the effect of the planned revenue-recognition adoption and other accounting changes on reported results.