Dover Corporation 2015 Q2 Form 10-Q Summary
Business context and reporting period
Dover is a diversified global manufacturer operating through four segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results of Knowles and certain divested businesses are presented as discontinued operations.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.759 billion | $1.963 billion | $3.474 billion | $3.765 billion |
| Gross profit | $654.6 million | $768.1 million | $1.282 billion | $1.476 billion |
| Gross margin | 37.2% | 39.1% | 36.9% | 39.2% |
| Operating earnings | $251.9 million | $329.3 million | $444.4 million | $603.7 million |
| Earnings from continuing operations | $155.6 million | $210.6 million | $272.8 million | $380.6 million |
| Diluted EPS from continuing operations | $0.97 | $1.25 | $1.69 | $2.23 |
| Net earnings | $332.4 million | $214.0 million | $541.9 million | $374.1 million |
| Diluted net EPS | $2.07 | $1.27 | $3.35 | $2.19 |
- Q2 revenue declined 10.4%; organic revenue decreased 9.6%, foreign currency reduced revenue by 4.4%, and acquisitions contributed 3.6%.
- Six-month revenue declined 7.7%, with a 7.8% organic decline, 4.1% unfavorable currency impact, and 4.2% acquisition growth.
- Q2 continuing-operations earnings declined 26.1%; six-month earnings declined 28.3%. Selling and administrative expense fell 8.2% in Q2, but increased as a percentage of revenue to 22.9% from 22.4%.
- The Q2 effective tax rate was 29.6%, compared with 30.6% in the prior year; the six-month rate was 29.3%, compared with 30.2%.
- Operating cash flow from continuing operations was $350.2 million for the six months, compared with $213.4 million in 2014. Free cash flow was $278.5 million, or 8.0% of revenue, versus $138.1 million, or 3.7%.
- Capital expenditures were $71.8 million. Management expects full-year capital expenditures of approximately 2.0% to 3.0% of revenue.
- Cash and equivalents were $595.2 million at June 30, 2015, including $568.5 million held outside the United States.
- Total debt was $2.607 billion and net debt was $2.012 billion. Net debt to net capitalization improved to 35.9% from 38.8% at December 31, 2014.
- Dover had $2.225 billion of long-term debt, excluding current maturities, and $381.9 million of current debt and commercial paper. A $300.0 million note is due October 15, 2015.
- The company maintained an undrawn $1.0 billion revolving credit facility expiring November 10, 2016, and was in compliance with its debt covenants. Reported EBITDA-to-net-interest coverage was 14.5 to 1 versus a 3.0 to 1 covenant minimum.
Material changes versus the prior comparable period
- Energy was the principal weakness: Q2 revenue fell 23.9% and segment earnings fell 64.4%, driven by weak North American oil and gas demand, customer inventory reductions, lower capital spending, and restructuring charges. Operating margin fell to 11.2% from 23.9%.
- Refrigeration & Food Equipment revenue declined 14.2% and earnings declined 22.6%, reflecting lower retail refrigeration demand, customer share shifts, project timing, unfavorable absorption, and product mix.
- Engineered Systems revenue decreased 3.4%, primarily from currency effects, while segment earnings decreased 5.0%. Organic revenue increased 3.1%.
- Fluids revenue increased 1.5% and segment earnings increased 11.2%; operating margin improved to 20.0% from 18.2%, supported by product mix, volume leverage, and cost initiatives.
- Gross margin declined 190 basis points in Q2 and 230 basis points for the six months, due to unfavorable mix, higher labor costs, reduced fixed-cost leverage, restructuring, and higher acquisition-related depreciation and amortization.
- Restructuring expense was $3.1 million in Q2 and $27.2 million year to date, compared with $2.9 million and $6.2 million in the prior-year periods. The company had incurred approximately $64.6 million over the preceding three quarters.
- Dover repurchased 4.0 million shares for $300.1 million in Q2 and 6.7 million shares for $500.1 million year to date. Approximately 8.3 million shares remained available under the three-year, 15.0 million-share authorization.
- Dividends paid per share increased to $0.40 in Q2 and $0.80 year to date, from $0.375 and $0.75, respectively.
Guidance, outlook, risks and unusual items
- Management reduced 2015 guidance. Full-year revenue is expected to decline 8.0% to 9.0%, versus the previous forecast of a 4.0% to 6.0% decline. The revised outlook assumes a 7.0% to 8.0% organic decline, a 4.0% unfavorable currency impact, and 3.0% acquisition growth.
- Full-year diluted EPS from continuing operations is expected to be $3.75 to $3.90, down from prior guidance of $4.20 to $4.40. The filing does not provide a separate full-year net EPS outlook including discontinued operations.
- Management expects full-year restructuring expense of approximately $40 million to $45 million and 2015 cost savings of $90 million to $95 million. Programs are expected to be substantially completed within 12 to 18 months.
- Management expects full-year free cash flow of approximately 11.0% of revenue. Second-half expectations include continued Energy weakness, muted capital spending in retail refrigeration and certain industrial markets, growth in Engineered Systems, and continued strength in most Fluids markets.
- Discontinued operations included $177.8 million of net gain from the April 2015 sale of Sargent Aerospace and $87.8 million of gain from the March 2015 sale of Datamax O’Neil. These gains substantially increased reported net earnings but are not indicative of continuing operations.
- The company disclosed an Iran-related compliance matter involving a German subsidiary. A 2015 order for spare parts was not fulfilled, but the company identified a 2013 sale that generated €8,518 of revenue and €2,366 of profit involving equipment ultimately used by an Iranian entity. Dover disclosed the matter to the U.S. Treasury Office of Foreign Assets Control and is awaiting guidance regarding funds received in 2015.
- Risks include oil and gas demand and pricing, customer capital spending, foreign currency volatility, raw-material costs, customer concentration, competitive and pricing pressures, acquisition and restructuring execution, credit ratings, legal and environmental matters, and potential goodwill impairment. Management reported no goodwill impairment trigger at June 30 but will continue monitoring Energy-market conditions.
- Environmental reserves were $31.3 million at June 30, 2015. Management stated that no pending legal proceedings were expected to have a material effect, individually or in the aggregate.
Most important facts for investors to verify
- Whether North American oil and gas markets stabilize and whether Energy bookings, backlog, margins, and customer inventory reductions improve.
- Whether the revised 2015 revenue and EPS guidance is achievable amid continued currency pressure and weak retail refrigeration and industrial capital spending.
- The timing and funding of the $300.0 million debt maturity due October 15, 2015, and the company’s ongoing access to commercial paper and revolving-credit liquidity.
- Whether restructuring savings of $90 million to $95 million are realized and whether additional restructuring costs exceed the $40 million to $45 million full-year estimate.
- The sustainability of free cash flow after separating the benefit of working-capital releases and business-sale proceeds from recurring operating performance.
- The impact of the Sargent Aerospace and Datamax O’Neil divestitures on continuing revenue, earnings mix, cash generation, and future comparability.
- The resolution and potential financial or regulatory consequences of the Iran-related compliance disclosure and any related OFAC guidance.