Dover Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Dover 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 six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results were materially affected by the COVID-19 pandemic, which reduced customer demand, disrupted supply chains and operations, and increased business uncertainty across most end markets.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Change | Six months 2020 | Six months 2019 |
|---|---|---|---|---|---|
| Revenue | $1.499 billion | $1.811 billion | (17.2%) | $3.155 billion | $3.535 billion |
| Gross profit | $551.6 million | $672.6 million | (18.0%) | $1.164 billion | $1.296 billion |
| Gross margin | 36.8% | 37.1% | (30 bps) | 36.9% | 36.7% |
| Operating earnings | $184.9 million | $276.0 million | (33.0%) | $410.2 million | $444.1 million |
| Operating margin | 12.3% | 15.2% | (290 bps) | 13.0% | 12.6% |
| Net earnings | $124.8 million | $198.1 million | (37.0%) | $301.0 million | $303.8 million |
| Diluted EPS | $0.86 | $1.35 | (36.3%) | $2.07 | $2.07 |
| Cash flow from operations | Not separately provided | Not separately provided | — | $347.7 million | $233.2 million |
| Free cash flow | Not separately provided | Not separately provided | — | $268.5 million | $142.1 million |
Q2 selling, general and administrative expense declined 7.5% to $366.7 million, but increased to 24.5% of revenue from 21.9% because of the lower revenue base. The effective tax rate was 20.4% in Q2 and 18.7% for the six-month period, compared with 20.7% and 21.7%, respectively, in the prior-year periods.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $649.0 million at June 30, 2020, up from $397.3 million at December 31, 2019.
- Total debt was $3.506 billion, consisting of $505.0 million of commercial paper and $3.001 billion of long-term debt, compared with $3.070 billion at year-end 2019.
- Net debt to net capitalization increased to 48.0% from 46.8% at December 31, 2019.
- Dover maintained a $1.0 billion revolving credit facility expiring in October 2024 and entered into an additional $450.0 million 364-day facility expiring May 5, 2021. The latter facility was undrawn at quarter-end.
- The company reported compliance with its debt covenants and an interest coverage ratio of 10.7 times versus a required minimum of 3.0 times.
- Six-month dividends paid were $141.6 million, or $0.98 per share, compared with $139.7 million, or $0.96 per share, in 2019.
- Dover repurchased 548,659 shares for $52.9 million in the first quarter, suspended repurchases in Q2 because of COVID-19 uncertainty, and stated that repurchases would resume in the second half of 2020.
Material changes versus the prior comparable period
- Q2 organic revenue declined 16.0%, with an unfavorable 1.2% foreign-currency impact and a 0.7% disposition impact, partly offset by 0.7% acquisition-related growth and approximately 0.8% favorable pricing.
- All five segments reported lower Q2 revenue. The largest declines were in Refrigeration & Food Equipment, down 23.9%; Engineered Products, down 20.4%; and Fueling Solutions, down 16.4%.
- Q2 segment earnings declined across all segments. Refrigeration & Food Equipment margin fell to 3.9% from 11.5%, while Engineered Products margin fell to 13.9% from 17.9%.
- Six-month net earnings declined only 0.9%, partly because the 2019 period included a $46.9 million loss related to the sale of Finder Pompe.
- Q2 restructuring expense increased to $12.3 million from $5.7 million. Six-month restructuring expense was $19.6 million versus $8.7 million, primarily from COVID-19-related demand reductions, headcount actions, footprint consolidation, operational optimization, and IT centralization.
- Six-month operating cash flow increased $114.4 million, primarily from working-capital improvements and approximately $50 million of deferred tax and payroll-tax payments. Inventory increased $79.8 million from year-end, while accounts receivable declined $74.6 million.
- Dover acquired Systech, Soft-Pak, and Em-tec for aggregate consideration of $238.8 million, net of cash acquired, and sold AMS Chino for net consideration of approximately $15.4 million, recognizing a $5.8 million gain.
Guidance, outlook, commentary and risks
The filing does not provide formal full-year earnings or revenue guidance. Management expects business activity to improve sequentially in the third quarter as bookings and revenue trends improved late in Q2, but does not expect most impacted businesses to return to normal levels or growth for the remainder of 2020.
- Approximately 85% of major global facilities remained fully operational throughout Q2; approximately 97% were fully operational at June 30, 2020.
- Q2 bookings were approximately $1.4 billion, down 20.6% organically year over year, while backlog was approximately $1.5 billion versus $1.4 billion in the prior year.
- Management expects continued COVID-19 pressure in the second half of 2020, particularly in commercial foodservice, retail fueling outside North America, oil and gas, vehicle service, apparel and textile printing, and other capital-intensive markets.
- Cost containment measures include furloughs, reduced variable compensation, lower discretionary spending, reduced travel, governmental job-retention subsidies, lower capital spending, working-capital management, and additional restructuring actions.
- Key risks include the duration and severity of COVID-19, customer demand and capital spending, supply-chain disruptions, commodity and material costs, foreign-exchange movements, acquisitions and integration, restructuring execution, litigation, cybersecurity, tariffs and other regulatory developments.
- Environmental liabilities were estimated at $31.9 million at June 30, 2020. Management stated that current legal proceedings were not expected to have a material effect, although outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether the anticipated sequential recovery in Q3 materialized and whether bookings converted into revenue, particularly given Q2 book-to-bill ratios below 1.0 in most segments.
- The sustainability of improved cash flow, including the effects of inventory levels, accounts payable, and deferred tax payments.
- Commercial paper market access, refinancing requirements, and the increase in net leverage to 48.0% of net capitalization.
- The duration and financial impact of COVID-19 on the most exposed end markets, especially commercial foodservice, retail refrigeration, oil and gas, vehicle service, and textile printing.
- Whether restructuring and other rightsizing actions generate the expected savings without impairing long-term operating capacity.
- The integration, performance, and valuation of the 2020 acquisitions, including the resulting goodwill and intangible assets.
- Future share repurchases, dividend policy, and capital allocation priorities following the Q2 repurchase suspension.