01—Abstract
Summary
Summary of the 10-K filed February 19, 2010. Cited figures are marked; the original filing is the authoritative source.
Dover Corporation's 2009 10-K shows a sharp cyclical downturn in revenue and earnings, but a balance sheet and cash generation that held up well.
Revenue fell 24% to $5.78 billiona from $7.57 billion, driven by a 34% drop at Industrial Products and a 26% drop at Fluid Management. Organic revenue declined about 24%. Gross margin was roughly flat at 36.3%, but operating earnings fell 43% to $588 million as selling and administrative expenses did not flex down as fast as sales.
Earnings from continuing operations dropped 46% to $372 millionb, and diluted EPS from continuing operations was $1.99 versus $3.67. Net EPS was $1.91 after a $0.08 loss from discontinued operations. Restructuring charges totaled about $72 million in 2009, with headcount reduced about 9% and 23 manufacturing and warehouse facilities closed.
Management guides to 2010 savings of $30c-40 million from those actions. Cash generation was the bright spot. Operating cash flow was $802 million and free cash flow was $682 million, or 11.8% of revenue, above the company's 10% target.
Working capital was actively managed, with inventory turns rising to 6.2 and adjusted working capital falling 14.4%. Total debt declined $225 million to $1.86 billiond, and net debt to total capitalization improved to 18.4% from 24.9%. Cash and short-term investments were $938 million, although $814 million of that sat outside the U.S. Dover made no share repurchases in 2009 and paid dividends of $1.02 per share, up from $0.90.
Credit ratings were reaffirmed (Moody's A2, S&P A, Fitch A). For 2010, management projects organic growth of 4% to 6% plus about 3% from 2009 acquisitions, and diluted EPS from continuing operations of $2.35 to $2.65. The company also reported a backlog of $1.08 billion at year-end, down from $1.16 billion.
Risks flagged include continued economic weakness, pricing pressure, FX exposure (about 43% of revenue is non-U.S.), and tax audits. The company remains acquisition-driven, having bought 17 businesses for $605.8 million over 2007 to 2009.
02—Key points
Key Highlights
- Revenue fell 24% to $5.78B (from $7.57B), with Industrial Products down 34% and Fluid Management down 26%; organic growth was -23.9%
- Operating earnings fell 43% to $588M and continuing-operations diluted EPS fell to $1.99 from $3.67, though gross margin held near 36.3%
- Free cash flow was $682M (11.8% of revenue), above the company's >10% target, aided by a $183M reduction in adjusted working capital
- Total debt was reduced by $225M to $1.86B; net debt to total capitalization improved to 18.4% from 24.9%; interest coverage was 9.1x vs. a 3.5x covenant
- 2010 guidance: organic growth of 4-6% plus about 3% from acquisitions, and diluted EPS from continuing operations of $2.35-$2.65
- Restructuring cut about 2,950 jobs (9%) and 23 facilities, with $72M of 2009 charges and $30-40M of expected 2010 savings; no share repurchases in 2009
- Dividend increased to $1.02/share from $0.90; backlog declined 6% to $1.08B; $814M of $938M cash and investments is held outside the U.S.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Dover Corp kept $0.07.
- Revenue$5.34B100.0%
- Cost of revenue−$3.33B62.3%
- Gross profit$2.01B37.7%
- Operating costs−$1.42B26.6%
- Operating income$591.1M11.1%
- Interest, other & tax−$234.7M4.4%
- Net income$356.4M6.7%
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 19, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $5.34B$7.57B | −29.4% |
| Cost of Revenue | $3.33B$4.84B | −31.2% |
| Gross Profit | $2.01B$2.73B | −26.3% |
| R&D Expenses | $172.07M$189.22M | −9.1% |
| SG&A Expenses | $1.42B$1.70B | −16.4% |
| Operating Income | $591.13M$1.03B | −42.6% |
| Interest Expense | $116.23M$130.15M | −10.7% |
| Net Income | $356.44M$590.83M | −39.7% |
| EPS (Basic) | $1.91$3.13 | −39.0% |
| EPS (Diluted) | $1.91$3.12 | −38.8% |
| Shares Outstanding (Basic) | 186K188.48M | −99.9% |
| Shares Outstanding (Diluted) | 187K189.27M | −99.9% |
05—Questions
Frequently Asked Questions
Why did Dover's earnings fall so sharply in 2009?
Revenue dropped 24% on weak demand across all four segments, especially Industrial Products (infrastructure, automotive, construction equipment) and Fluid Management (energy). Operating costs did not fall as fast as sales, so operating earnings declined 43%. Selling and administrative expenses rose to 26% of revenue from 22%, partly because of $50.2M of restructuring charges. Gross margin held roughly steady, which suggests the drop was driven mainly by volume and fixed-cost absorption rather than pricing.
Is Dover's dividend safe, and how strong is its balance sheet?
The dividend was raised to $1.02 per share in 2009 and paid out about $190M, and it is covered by free cash flow of $682M. Leverage improved: total debt fell to $1.86B, net debt to capitalization dropped to 18.4%, and interest coverage was 9.1x against a 3.5x covenant. Credit ratings (A2/A/A) were reaffirmed in February 2010. Liquidity is solid, with $938M of cash and short-term investments, though most of it is offshore.
What does management expect for 2010?
Management guides to organic revenue growth of 4% to 6%, including about 1 point of currency benefit, plus about 3% from acquisitions completed in 2009. Diluted EPS from continuing operations is projected at $2.35 to $2.65, weighted toward the second and third quarters. Restructuring benefits of $30-40M are expected, and the company does not anticipate a significant further workforce reduction. Management also plans to keep capital spending at 2.3% to 2.5% of revenue.
What are the main risks to the investment case?
The main risks are a prolonged economic slowdown or delayed recovery in capital goods and infrastructure markets, rising raw material costs (steel, copper, aluminum) that may not be passed through, and foreign exchange exposure, since about 43% of revenue is non-U.S. Other risks include competitive pricing pressure, the cyclical energy and electronics businesses, dependence on acquisitions for growth (about 4-5% organic growth through the cycle is the target), goodwill of $3.35B that could be impaired, and tax audit outcomes.
How much of the 2009 cash flow was driven by one-time actions?
Working capital reduction contributed meaningfully: receivables fell $134M, inventory fell $65M, and accounts receivable collections added $163M to operating cash flow. These gains are not repeatable at the same scale, so they flatter 2009 free cash flow. Operating cash flow nonetheless fell $208M year over year, and the company also made $79M of employee benefit plan contributions, up from $55M, which is a cost that will likely persist.
06—Continue