Dover Corporation Form 10-Q 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. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $2.018 billion | $1.748 billion | $5.918 billion | $4.903 billion |
| Gross profit | $754.6 million | $658.7 million | $2.248 billion | $1.823 billion |
| Gross margin | 37.4% | 37.7% | 38.0% | 37.2% |
| Operating earnings | $342.0 million | $276.9 million | $998.7 million | $687.1 million |
| Net earnings | $263.8 million | $200.3 million | $761.0 million | $501.3 million |
| Diluted EPS | $1.81 | $1.38 | $5.24 | $3.45 |
| Operating cash flow | Not separately provided | Not separately provided | $788.6 million | $686.9 million |
| Free cash flow | Not separately provided | Not separately provided | $667.4 million | $563.4 million |
- Q3 revenue increased 15.4%, with organic growth of 13.2%, acquisition-related growth of 1.1%, and favorable foreign-currency translation of 1.1%. Customer pricing contributed approximately 3.6%.
- Q3 net earnings increased 31.7%; diluted EPS increased 31.2%. Nine-month net earnings increased 51.8% and diluted EPS increased 51.9%.
- Q3 gross margin declined 30 basis points because material, labor, and logistics costs outpaced the benefits of pricing, productivity, and cost actions. Nine-month gross margin improved 80 basis points.
- Q3 SG&A increased 8.0%, but declined to 20.4% of revenue from 21.8%. Nine-month SG&A increased 10.0%, while its revenue ratio improved to 21.1% from 23.2%.
- Cash and cash equivalents were $739.1 million at September 30, 2021, compared with $513.1 million at December 31, 2020. Long-term debt was $3.060 billion versus $3.109 billion.
- Net debt to net capitalization improved to 37.4% from 43.4%. Dover had a $1.0 billion undrawn revolving credit facility expiring October 2024 and reported a 14.9-to-1 interest coverage ratio against a 3.0-to-1 covenant minimum.
- Working capital investment increased: receivables rose $213.9 million and inventories rose $220.0 million from year-end, partially offset by a $193.9 million increase in accounts payable.
Material changes versus the prior comparable period
- Growth was broad-based across all segments. Q3 revenue increased 26.0% in Pumps & Process Solutions, 16.6% in Refrigeration & Food Equipment, 15.8% in Engineered Products, 10.1% in Imaging & Identification, and 7.9% in Fueling Solutions.
- Pumps & Process Solutions was the strongest earnings contributor, with Q3 segment earnings up 58.6% and margin expanding to 32.5% from 25.8%. Imaging & Identification earnings increased 22.1%, while Fueling Solutions earnings declined 1.5% due to inflation, labor costs, and unfavorable mix.
- Q3 bookings increased 27.2% to approximately $2.3 billion, and backlog increased to $2.8 billion from $1.6 billion a year earlier and $2.6 billion at June 30, 2021.
- Operating cash flow increased $101.7 million year over year, but higher receivables and inventory reduced cash conversion. Free cash flow increased $104.1 million, while free cash flow as a percentage of revenue declined to 11.3% from 11.5%.
- Dover acquired six businesses during the first nine months for $178.6 million of total consideration, including Espy, CDS Visual, AvaLAN, Blue Bite, Quantex, and one immaterial acquisition. The prior-year period included five acquisitions totaling $258.7 million.
- Restructuring charges declined to $4.8 million in Q3 and $20.7 million for nine months, compared with $6.7 million and $26.4 million, respectively. Q3 rightsizing activities produced a net benefit of $3.2 million, including a $9.1 million reimbursement for previously incurred restructuring costs.
Guidance, outlook, commentary, risks, and unusual items
- Management expected full-year 2021 capital expenditures of approximately $175 million to $200 million.
- Management reported continued recovery in most end markets but expected material-cost inflation, labor shortages, elevated logistics costs, and supplier component constraints to continue into Q4 2021. These issues caused shipment delays and productivity shortfalls, particularly in aerospace and defense, retail refrigeration, industrial pumps, and certain vehicle-service and waste-handling businesses.
- Foodservice equipment, textile printing, and bearings and compression components remained below pre-pandemic activity levels, although management expected continued improvement.
- On October 11, 2021, Dover agreed to sell Unified Brands, within Refrigeration & Food Equipment, to Electrolux Professional for approximately $244 million, subject to customary adjustments. The transaction was not classified as held for sale or discontinued operations at September 30.
- On October 15, 2021, Dover completed the acquisition of LIQAL B.V. for approximately €20 million plus potential contingent consideration; LIQAL will be reported in Fueling Solutions.
- Other unusual or nonrecurring items included the prior-year $5.2 million gain on the sale of AMS Chino, 2021 restructuring and product-line-exit costs, the $9.1 million restructuring reimbursement, and favorable tax audit settlements.
- Environmental and other probable, estimable liabilities totaled $29.9 million. Management stated that pending legal proceedings were not expected to have a material effect, although litigation, environmental matters, warranty claims, cybersecurity, product liability, and compliance risks remain relevant.
- Management identified COVID-19 effects, supply-chain disruption, labor availability, inflation, customer demand, pricing pressure, foreign-exchange movements, acquisitions, restructuring execution, interest rates, tariffs, and litigation as risks to forward-looking results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether pricing actions will offset continuing steel, labor, freight, and other input-cost inflation without further margin erosion.
- Whether the $2.8 billion backlog converts to revenue as expected despite supplier constraints, labor shortages, and shipment delays.
- The cash-flow impact of elevated receivables, inventory, and supplier-finance obligations; amounts due to supply-chain-finance institutions were approximately $218 million at September 30, 2021.
- Completion terms and proceeds from the Unified Brands sale, and the financial contribution and integration of LIQAL and the 2021 acquisitions.
- Capital allocation, including the $175 million–$200 million capital-expenditure outlook, $214.8 million of year-to-date dividends, and remaining authorization to repurchase 19.8 million shares.
- Potential changes in environmental, warranty, tax, litigation, and other contingent liabilities, including possible reductions of unrecognized tax benefits of up to approximately $9.7 million within the following twelve months.