Dover Corporation 2016 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, 2016, compared with the corresponding 2015 periods.
Financial Performance and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $1.686 billion | $1.759 billion | $3.309 billion | $3.474 billion |
| Gross profit | $631.2 million | $654.6 million | $1.220 billion | $1.282 billion |
| Gross margin | 37.4% | 37.2% | 36.9% | 36.9% |
| Operating earnings | $193.8 million | $251.9 million | $339.6 million | $444.4 million |
| Earnings from continuing operations | $118.3 million | $155.6 million | $217.6 million | $272.8 million |
| Diluted EPS from continuing operations | $0.76 | $0.97 | $1.39 | $1.69 |
| Net earnings | $118.3 million | $332.4 million | $217.6 million | $541.9 million |
| Operating cash flow | Not separately provided | Not separately provided | $341.3 million | $350.2 million |
| Free cash flow | Not separately provided | Not separately provided | $268.6 million | $278.5 million |
Q2 operating margin was approximately 11.5%, compared with 14.3% in the prior-year quarter. Six-month operating margin was approximately 10.3%, compared with 12.8%. Selling and administrative expenses increased 8.6% in Q2 and 5.2% year to date, reaching 25.9% and 26.6% of revenue, respectively.
- Segment revenue: Energy declined 29.2% in Q2; Engineered Systems was essentially flat; Fluids increased 15.5%, primarily from acquisitions; and Refrigeration & Food Equipment declined 4.2%.
- Segment earnings: Energy reported a Q2 loss of $0.1 million versus $40.9 million of earnings in 2015. Engineered Systems earnings increased 7.6%, Fluids earnings declined 23.0%, and Refrigeration & Food Equipment earnings declined 3.8%.
- Liquidity: Cash and equivalents were $255.1 million at June 30, 2016, down from $362.2 million at December 31, 2015. Approximately $229.6 million was held outside the United States.
- Debt: Total debt was $2.951 billion, including $337.0 million of commercial paper. Net debt was $2.696 billion, and net debt to net capitalization increased to 42.1% from 39.6% at year-end 2015.
- Credit capacity: Dover maintained a $1.0 billion unsecured revolving credit facility expiring November 10, 2020, had not drawn on it, and was in compliance with debt covenants. The reported coverage ratio was 9.7 to 1.0.
- Capital allocation: The company paid $131.3 million in dividends during the first six months and made no share repurchases. Dividends paid per share increased to $0.84 from $0.80.
Material Changes Versus the Prior Comparable Period
- Q2 revenue decreased 4.1%; the decline consisted of a 6.5% organic decline, a 3.1% reduction from dispositions, and a 0.4% unfavorable currency impact, partially offset by 5.9% acquisition-related growth.
- Six-month revenue decreased 4.8%, reflecting a 7.0% organic decline, 5.7% acquisition growth, a 2.5% disposition impact, and a 1.0% unfavorable currency impact.
- Continuing-operations earnings declined 24.0% in Q2 and 20.2% for the six-month period. The principal driver was weakness in Energy and oil- and gas-exposed Fluids businesses.
- Net earnings comparisons were distorted by 2015 discontinued operations, including gains on the sales of Datamax O’Neil and Sargent Aerospace totaling $265.6 million for the first six months of 2015.
- Dover acquired Tokheim, Fairbanks Environmental, and ProGauge in the Fluids segment for aggregate net cash consideration of $475.2 million. The acquisitions added $301.6 million of goodwill and $192.1 million of intangible assets based on preliminary purchase accounting.
- Dover agreed to acquire Wayne Fueling Systems for $780 million in cash, with closing expected in the second half of 2016.
- Restructuring charges were $9.2 million in Q2 and $23.6 million year to date, primarily in Energy and Fluids. The company expects approximately $40.0 million of restructuring expense for full-year 2016.
- Other comprehensive loss was $39.9 million in Q2 and $27.0 million for the six months, largely reflecting unfavorable foreign-currency translation.
Guidance, Outlook, Risks, and Unusual Items
Management reduced full-year 2016 expectations. Revenue is expected to decline approximately 3% to 5%, including an organic decline of 6% to 8%. Full-year diluted EPS guidance was reduced to $3.35 to $3.45. Foreign-currency and acquisition growth assumptions, net of dispositions, were unchanged.
Management expects approximately $95 million to $105 million of cost savings in 2016 from restructuring, productivity, and other cost-reduction programs. Full-year capital expenditures are expected to approximate 2.3% of revenue, and management is targeting free cash flow of approximately 11% of revenue.
- Principal operating risk is continued weakness in oil and gas markets, including lower rig counts, customer capital spending, and demand in Energy and portions of Fluids.
- Management expects certain large can-shaping equipment orders and shipments in Refrigeration & Food Equipment to be deferred to 2017.
- Energy incurred approximately $4.5 million of facility-idling costs and approximately $2.2 million of insurance and legal settlement costs in Q2.
- Acquisition-related depreciation, amortization, and deal costs pressured Fluids earnings and margins.
- Goodwill impairment testing was not triggered at June 30, 2016, despite exposure to deteriorating oil and gas markets.
- Environmental and other probable, estimable matters were reserved at $31.8 million. Management stated that no current legal proceedings are expected to have a material effect, although outcomes of legal matters cannot be predicted with certainty.
- Unrecognized tax benefits could decrease by approximately zero to $18.3 million within the next twelve months as audits and statutes of limitation are resolved.
Important Facts for Investors to Verify
- Whether oil and gas market weakness persists and further affects Energy and Fluids revenue, bookings, margins, and backlog.
- The closing, financing, integration costs, and earnings contribution of the planned $780 million Wayne acquisition.
- Progress against the $95 million to $105 million cost-savings target and approximately $40 million restructuring-cost estimate.
- Whether the reduced revenue and EPS guidance remains achievable amid order deferrals, currency movements, and customer spending trends.
- Changes in commercial paper balances, cash generation, net leverage, and debt covenant capacity following acquisitions.
- Preliminary purchase-price allocations and any subsequent measurement-period adjustments for the 2016 acquisitions.