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DOVER CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Refer to the section below entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of factors that could cause actual results to differ from the forward-looking statements contained below and throughout this quarterly report. OVERVIEW AND OUTLOOK Dover Corporation ("Dover" or the "Company") is a global manufacturer of innovative components and equipment, specialty systems and support services for a variety of applications in the industrial products, engineered systems, fluid management and electronic technologies markets. Dover discusses its operations at the platform level within the Industrial Products, Engineered Systems and Fluid Management segments, which contain two platforms each. Electronic Technologies' results are discussed at the segment level. The Company continued to experience positive results during the second quarter of 2011 with all segments achieving double-digit revenue and earnings growth, driven by strong bookings from the first quarter. As a result, the Company generated revenue of $2.2 billion during the second quarter of 2011, an increase of 21% compared to the prior year. Gross profit grew $127.2 million or 18% on the strength of increased volume. Bookings remained solid in the second quarter, driven by continuing strong dynamics in the energy markets, consumer electronics, and global industrial production. The Company continues to anticipate strength in the majority of its end-markets through the remainder of the year. However, the strong trends experienced in the first half of the year are expected to be somewhat tempered by a cautious macro-economic environment. In particular, refrigeration case sales are expected to soften in the second half of the year as well as solar equipment sales. The Company continues to focus on the execution of its strategies around product innovation, global expansion, leveraging its scale and disciplined capital allocation. Given its strong performance in the first six months of 2011 and the addition of Knowles Sound Solutions (as described in Note 17 to the Unaudited Condensed Consolidated Financial Statements), the Company estimates that its 2011 full year organic revenue growth will be in the range of 12% to 14% (assuming a negligible impact from foreign currency) and acquisition related growth will be approximately 6%. Based on these revenue assumptions, as well as the impact of tax benefits received in the first half of the year, a slightly lower effective tax rate, and the net impact of Knowles Sound Solutions (which is expected to reduce 2011 diluted earnings per share by $0.03 to $0.05, subject to finalization of the purchase price allocation), the Company has projected that its continuing diluted earnings per share for 2011 will be in the range of $4.50 to $4.60. If the global or domestic economic conditions accelerate or deteriorate, Dover's operating results for 2011 could be materially different than currently projected. Furthermore, in connection with the Company's strategic planning process, it is currently evaluating the potential sale of certain operating companies within the Material Handling platform of its Industrial Products segment. The decision regarding these entities is expected to be concluded before the end of the year. RESULTS OF OPERATIONS Three Months Ended June 30, % / Point Six Months Ended June 30, % / Point (dollars in thousands, except per share figures) 2011 2010 Change 2011 2010 Change Revenue $ 2,156,871 $ 1,786,696 21 % $ 4,115,892 $ 3,369,966 22 % Cost of goods and services 1,341,014 1,097,998 22 % 2,551,210 2,069,111 23 % Gross profit 815,857 688,698 18 % 1,564,682 1,300,855 20 % Selling and administrative expenses 474,130 423,809 12 % 952,649 832,978 14 % Interest expense, net 28,134 26,942 4 % 56,420 54,111 4 % Other expense (income), net 1,374 (4,708 ) - 2,594 (5,949 ) - Earnings from continuing operations 249,094 171,893 45 % 432,400 293,378 47 % Net earnings 249,769 169,870 47 % 444,674 277,997 60 % Net earnings per common share - diluted $ 1.32 $ 0.90 46 % $ 2.34 $ 1.47 59 % Gross profit margin 37.8 % 38.5 % (0.7 ) 38.0 % 38.6 % (0.6 ) Selling and administrative expenses as a percentage of revenue 22.0 % 23.7 % (1.7 ) 23.1 % 24.7 % (1.6 ) Effective tax rate 20.2 % 29.2 % (9.0 ) 21.8 % 30.1 % (8.3 ) 17-------------------------------------------------------------------------------- Table of Contents Revenue for the second quarter of 2011 increased $370.2 million or 21% from the comparable 2010 quarter reflecting organic revenue growth of 14%, growth of 4% related to acquisitions, and a 3% favorable impact from foreign exchange. The organic growth reflects volume increases across all of the Company's segments, driven by continued higher demand in the majority of the Company's end-markets, with particular strength in the energy market and end-markets served by material handling industrial products. Revenue for the first six months of 2011 increased 22% to $4,115.9 million from the comparable 2010 period, with increases at all of the Company's segments. The Company's revenue increase was attributed to organic revenue growth of 16%, revenue growth of 4% related to acquisitions, and a 2% favorable impact from foreign exchange. Gross profit increased $127.2 million or 18% compared to the 2010 second quarter reflecting the increased sales volumes and benefits from pricing actions and productivity initiatives, which more than offset increased material costs and unfavorable product mix at certain businesses. Gross profit margin decreased 70 basis points to 37.8% in the second quarter of 2011 as a result of higher raw material costs that have yet to be recovered by selling price increases and product mix. For the six month period, gross profit increased 20% to $1,564.7 million from the prior year period while gross profit margin decreased 60 basis points to 38.0%, due to the same drivers as noted in the quarter. Selling and administrative expenses increased $50.3 million or 12% compared to the second quarter of 2010 primarily due to general increases across the segments in support of higher volumes and growth initiatives. As a percentage of revenue, selling and administrative expenses declined to 22.0% compared to 23.7% in the prior year quarter. This 170 basis point improvement reflects leverage from the higher revenue levels. Selling and administrative expenses of $952.6 million for the first six months of 2011 increased by 14% or $119.7 million over the comparable 2010 period. As a percentage of revenue, these costs declined to 23.1% from 24.7% in the comparable 2010 period, reflecting leverage from the higher revenue levels. Net interest expense for the second quarter of 2011 increased by $1.2 million or 4% compared to the same quarter last year, while net interest expense for the first six months of 2011 increased by $2.3 million or 4% compared to the respective prior year period. The increase in both the three and six month periods was primarily due to higher average outstanding debt balances in the 2011 period compared to the prior year. As discussed in Note 7 to the Unaudited Condensed Consolidated Financial Statements, the Company's total debt increased approximately $400 million during the year, as the Company issued $800 million in new notes, approximately half of which repaid outstanding commercial paper balances. Other expense (income), net for the quarter and year to date periods ending June 30, 2011 primarily reflects the impact of net losses from foreign exchange fluctuations on assets and liabilities denominated in currencies other than the functional currency, coupled with other miscellaneous non-operating gains and losses, none of which were individually, or in the aggregate, significant. The effective tax rates for continuing operations for the three and six months ended June 30, 2011 were 20.2% and 21.8% compared to the prior period rates of 29.2% and 30.1%, respectively. The effective tax rates for the three and six month periods of 2011 were favorably impacted by net discrete items totaling $30.3 million, including $22.3 million arising in the second quarter principally from U.S. federal tax settlements and $8.0 million arising in the first quarter principally from settlements with state taxing authorities. Excluding discrete items, the effective tax rates for the three and six months ended June 30, 2011 were 27.4% and 27.3%, respectively, which are lower than the effective rates in the comparable 2010 periods primarily due to a more favorable mix of non-U.S. earnings in 2011. While the Company believes additional uncertain tax positions will be settled within the next 12 months, an estimate cannot be made due to the uncertainties associated with the resolution of these matters. Earnings from continuing operations for the second quarter of 2011 increased 45% to $249.1 million, or $1.31 diluted earnings per share ("EPS"), compared to $171.9 million, or $0.91 diluted EPS, in the prior year second quarter. Net earnings for the second quarter were $249.8 million or $1.32 diluted EPS, compared to net earnings of $169.9 million or $0.90 diluted EPS for the 2010 second quarter, including a loss from discontinued operations of $2.0 million or $0.01 EPS. These increases were primarily a result of end-market improvements across all of the Company's segments driving increased sales volume, coupled with the second quarter tax benefit noted above. 18-------------------------------------------------------------------------------- Table of Contents Earnings from continuing operations for the first six months of 2011 increased 47% to $432.4 million, or $2.28 diluted EPS, compared to $293.4 million, or $1.55 diluted EPS. Net earnings for the first six months of 2011 increased 60% to $444.7 million, or $2.34 diluted EPS including a gain from discontinued operations of $12.3 million or $0.06 EPS, compared to net earnings of $278.0 million, or $1.47 diluted EPS including a loss from discontinued operations of $15.4 million, or $0.08 EPS. The increases in earnings from continuing operations and net earnings for the six month period were driven by the same factors as noted previously for the quarter, while net earnings also reflects the impact of discontinued operations as noted below. The gain from discontinued operations, net of tax for the second quarter of 2011 reflects a tax benefit resulting primarily from discrete tax items settled during the period. For the second quarter of 2010, the loss from discontinued operations, net of tax related primarily to a working capital adjustment and other tax adjustments on previously sold businesses. The gain from discontinued operations, net of tax of $12.3 million, or $0.06 EPS, for the six months ended June 30, 2011 reflects a tax benefit resulting primarily from discrete tax items settled during the first quarter. For the six months ended June 30, 2010, the loss from discontinued operations, net of $15.4 million, or $0.08 EPS, related primarily to the loss generated by the sale of a business that had been previously reflected as discontinued operations. Severance and Other Restructuring Reserves The Company does not have any significant restructuring activities underway, but in both 2011 and 2010 initiated a few targeted facility consolidations at its operating companies. As a result, the Company incurred restructuring charges totaling $3.6 million and $2.2 million for the six months ended June 30, 2011 and 2010, respectively. The Company does not expect to incur significant restructuring charges over the remainder of 2011, but will continue to monitor business activity across its end markets served and adjust capacity as necessary depending on the economic climate. 19-------------------------------------------------------------------------------- Table of Contents SEGMENT RESULTS OF OPERATIONS Starting with the first quarter of 2011, the Company changed its segment presentation of depreciation and amortization expense to show total depreciation and amortization expense relating to each respective segment's operations. Prior to 2011, the Company had presented only the depreciation and amortization of acquisition-related accounting write-ups to reflect the fair value of inventory, property, plant and equipment, and intangible assets. The amounts of depreciation and amortization expense presented for 2010 herein have been conformed to the current year presentation. Industrial Products The Industrial Products segment provides material handling products and services that improve its customers' productivity, as well as products used in various mobile equipment applications, primarily in the transportation equipment, vehicle service and solid waste management markets. The primary products and services provided by each of the segment's two platforms are as follows: Material Handling - Industrial and recreational winches, utility, construction and demolition machinery attachments, hydraulic parts, industrial automation tools, four-wheel-drive and all-wheel drive powertrain systems, accessories for off-road vehicles and operator cabs and rollover structures. Mobile Equipment - Primarily refuse truck bodies, tank trailers, compactors, balers, vehicle service lifts and collision equipment, car wash systems, internal engine components, fluid control assemblies and various aerospace components. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2011 2010 % Change 2011 2010 % Change Revenue Material Handling $ 276,828 $ 214,295 29 % $ 529,594 $ 403,347 31 % Mobile Equipment 290,668 248,523 17 % 557,343 488,662 14 % Eliminations (721 ) (432 ) (1,400 ) (825 ) $ 566,775 $ 462,386 23 % $ 1,085,537 $ 891,184 22 % Segment earnings $ 73,316 $ 61,635 19 % $ 137,729 $ 112,674 22 % Operating margin 12.9 % 13.3 % 12.7 % 12.6 % Segment depreciation and amortization $ 16,589 $ 17,118 -3 % $ 32,990 $ 34,488 -4 % Bookings Material Handling $ 293,000 $ 223,787 31 % $ 581,714 $ 427,885 36 % Mobile Equipment 336,212 288,887 16 % 673,485 520,015 30 % Eliminations (734 ) (303 ) (1,233 ) (710 ) $ 628,478 $ 512,371 23 % $ 1,253,966 $ 947,190 32 % Backlog Material Handling $ 217,518 $ 140,452 55 % Mobile Equipment 485,276 359,727 35 % Eliminations (654 ) (257 ) $ 702,140 $ 499,922 40 % Industrial Products revenue and earnings for the second quarter of 2011 increased by 23% and 19%, respectively, from the second quarter of the prior year primarily due to broad-based volume growth in most of the segment's businesses. The revenue increase was attributed to growth in core business revenue of 20%, coupled with growth of 2% from Gear Products, a 2010 acquisition made by the Tulsa Winch business in its Material Handling platform, and a 1% favorable impact from foreign currency. Earnings in the second quarter of 2011 were favorably impacted by increased volume, particularly in infrastructure and energy markets. Operating margin decreased 40 basis points from the prior year quarter, as benefits from volume increases were offset in part by higher material costs, product mix, and additional selling and administrative investments necessary to support the segment's product and business development activities. 20-------------------------------------------------------------------------------- Table of Contents Material Handling revenue increased 29%, when compared to the prior year second quarter, while earnings increased 22%. Higher sales volumes drove organic revenue growth of 25%, coupled with 3% growth due to the acquisition of Gear Products noted above and a 1% favorable impact from foreign currency. Revenue improvements resulted from increased activity across most end-markets, including infrastructure and energy. Earnings improved due to increased sales volume, offset in part by additional selling and administrative investments necessary to support the platform's growth initiatives. The platform's second quarter operating margin declined 90 basis points compared to the prior year, reflecting the additional selling and administrative spending and the impact of a benefit in the second quarter of 2010 from a $3.4 million one-time gain on the sale of a property. Mobile Equipment revenue increased 17% while earnings increased 15% compared to the prior year second quarter. The revenue growth was attributed to higher demand for crude oil and dry bulk commercial trailers and vehicle service offerings. Earnings increased as a result of the higher volumes, but operating margin decreased 30 basis points, primarily reflecting changes in product mix since a significant portion of the revenue growth was generated by lower margin commercial trailer business. For the six months ended June 30, 2011, Industrial Products revenue and earnings increased 22%, as compared to the six months ended June 30, 2010. Revenue and earnings were favorably impacted by increased sales volume, offset in part by additional selling and administrative investments necessary to support the segment's product and business development activities. 21-------------------------------------------------------------------------------- Table of Contents Engineered Systems The Engineered Systems segment provides products and services for the refrigeration, storage, packaging and preparation of food products, as well as industrial marking and coding systems for various markets. The primary products and services provided by each of the segment's two platforms are as follows: Engineered Products - Refrigeration systems, refrigeration display cases, walk-in coolers, foodservice equipment, commercial kitchen air and ventilation systems, heat transfer equipment, and food and beverage packaging machines. Product Identification - Industrial marking and coding systems used to code information (i.e. dates and serial numbers) on consumer products, printing products for cartons used in warehouse logistics operations, bar code printers and portable printers. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2011 2010 % Change 2011 2010 % Change Revenue Engineered Products $ 406,620 $ 357,570 14 % $ 740,935 $ 629,343 18 % Product Identification 239,035 219,551 9 % 465,365 432,051 8 % $ 645,655 $ 577,121 12 % $ 1,206,300 $ 1,061,394 14 % Segment earnings $ 94,116 $ 84,655 11 % $ 161,429 $ 139,498 16 % Operating margin 14.6 % 14.7 % 13.4 % 13.1 % Segment depreciation and amortization $ 16,350 $ 15,273 7 % $ 32,176 $ 31,023 4 % Bookings Engineered Products $ 400,604 $ 379,048 6 % $ 800,361 $ 747,182 7 % Product Identification 239,234 223,203 7 % 472,168 443,613 6 % $ 639,838 $ 602,251 6 % $ 1,272,529 $ 1,190,795 7 % Backlog Engineered Products $ 346,335 $ 334,971 3 % Product Identification 97,236 80,550 21 % $ 443,571 $ 415,521 7 % Engineered Systems revenue and earnings for the second quarter of 2011 increased by 12% and 11%, respectively, from the second quarter of the prior year. The increase in revenue was supported by organic revenue growth of 7%, a 4% favorable foreign currency impact and a negligible increase from acquisitions. The revenue and earnings increase was substantially driven by volume growth in product ID, refrigeration and heat transfer systems and food and beverage packaging machines, coupled with the benefits from pricing actions, that more than offset material cost escalation and higher selling and administrative costs during the period. Engineered Products second quarter revenue increased 14% while earnings increased by 24%. Core business revenue increased 11% driven by volume growth in refrigeration and heat transfer systems and food and beverage packaging machines. Growth from the Intek acquisition completed in 2010 and favorable foreign currency positively impacted revenues by 3%. The platform's earnings were favorably impacted by the higher core sales volume and benefits from pricing actions which more than offset higher material costs, contributing to a 140 basis point improvement in operating margin. Product Identification revenue increased 9%, driven by organic growth of 3% due to strength in the product ID markets, coupled with a 6% favorable foreign currency impact. Earnings remained flat compared to the second quarter of the prior year and operating margin declined 150 basis points, primarily due to new product launch costs and increased sales activities throughout the quarter. For the six months ended June 30, 2011, Engineered Systems revenue and earnings increased 14% and 16%, respectively, as compared to the six months ended June 30, 2010. Revenue and earnings were favorably impacted by increased sales volume, offset in part by material cost escalation and higher selling and administrative costs during the period. 22-------------------------------------------------------------------------------- Table of Contents Fluid Management The Fluid Management segment provides products and services for end-to-end stewardship of its customers'critical fluids including liquids, gases, powders and other solutions that are hazardous, valuable or process-critical. Through its Fluid Solutions platform, the segment provides highly engineered, cost-saving technologies that help contain, control, move, measure and monitor these critical fluids. The Energy platform serves the oil, gas and power generation industries. Its products promote the efficient and cost-effective extraction, storage and movement of oil and gas products, or constitute critical components for power generation equipment. The primary products and services provided by each of the segment's two platforms are as follows: Energy - Market production and distribution products such as sucker rods, downhole rod pumps, drill bit inserts for oil and gas exploration, gas well production control devices, control valves, piston and seal rings, control instrumentation, remote data collection and transfer devices, and components for compressors, turbo machinery, motors and generators. Fluid Solutions - Nozzles, swivels and breakaways used to deliver various types of fuel, suction system equipment, unattended fuel management systems, integrated tank monitoring, pumps used in fluid transfer applications, quick disconnect couplings used in a wide variety of biomedical and commercial applications, and chemical proportioning and dispensing systems. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2011 2010 % Change 2011 2010 % Change Revenue Energy $ 321,076 $ 216,020 49 % $ 624,616 $ 421,347 48 % Fluid Solutions 213,599 187,759 14 % 419,162 363,264 15 % Eliminations (137 ) (105 ) (300 ) (137 ) $ 534,538 $ 403,674 32 % $ 1,043,478 $ 784,474 33 % Segment earnings $ 131,382 $ 96,168 37 % $ 245,067 $ 182,935 34 % Operating margin 24.6 % 23.8 % 23.5 % 23.3 % Segment depreciation and amortization $ 21,775 $ 15,523 40 % $ 43,372 $ 30,286 43 % Bookings Energy $ 335,748 $ 226,301 48 % $ 690,522 $ 434,970 59 % Fluid Solutions 218,868 192,035 14 % 436,655 371,072 18 % Eliminations 51 (51 ) (258 ) (136 ) $ 554,667 $ 418,285 33 % $ 1,126,919 $ 805,906 40 % Backlog Energy $ 177,129 $ 84,800 109 % Fluid Solutions 81,436 65,639 24 % Eliminations - (1 ) $ 258,565 $ 150,438 72 % Fluid Management revenue and earnings for the second quarter of 2011 increased by 32% and 37%, respectively, over the prior year second quarter. The improvement in revenue was driven by a 16% increase in core business revenue, a 14% increase from recent acquisitions, and 2% favorable foreign currency impact. The increase in revenue is primarily attributed to continued strength in the oil and gas markets served by the Energy platform as well as in the industrial markets served by the Fluid Solutions platform, along with positive price recovery and market share gains at select operating companies. The increase in segment earnings and operating margin reflects the benefit of higher sales volumes in the 2011 quarter. Energy revenue and earnings increased over the prior year quarter by 49% and 50%, respectively. Organic revenue growth of 22% was driven by higher demand in the oil and gas sector, while recent acquisitions contributed revenue growth of 25% and foreign currency had a favorable impact of 2%. The earnings improvement was driven by the significantly higher volumes and productivity improvements. Operating margin increased 40 basis points despite additional amortization expense associated with recent acquisitions. 23-------------------------------------------------------------------------------- Table of Contents Fluid Solutions revenue and earnings increased over the prior year quarter by 14% and 12%, respectively. Organic revenue growth of 10% was driven by broad-based growth across many end-markets, including petrochemical and energy, while recent acquisitions contributed revenue growth of 1% and foreign currency favorably impacted revenue by 3%. Earnings were favorably impacted by the increased volumes; however, operating margin decreased 40 basis points due primarily to one-time costs associated with selective integration and restructuring activities. For the six months ended June 30, 2011, Fluid Management's revenue and earnings increased over the prior year period by 33% and 34%, respectively, due to higher demand in substantially all end-markets. On a year-to-date basis, earnings benefited from the higher volumes and operating efficiencies, while operating margin increased 20 basis points compared to the prior year period, despite the impact of additional acquisition-related amortization expense and certain one-time integration and restructuring costs noted above and other one-time acquisition related costs incurred in the first quarter. Electronic Technologies The Electronic Technologies segment designs and manufactures electronic technology equipment and devices/components such as advanced micro-component products for the hearing aid, mobile phone and consumer electronics industries, high frequency capacitors, microwave electromagnetic switches, radio frequency and microwave filters, electromagnetic products, frequency control/select components and sophisticated automated assembly and testing equipment. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2011 2010 % Change 2011 2010 % Change Revenue $ 412,630 $ 345,607 19 % $ 785,960 $ 636,596 23 % Segment earnings 76,917 59,582 29 % 136,692 104,487 31 % Operating margin 18.6 % 17.2 % 17.4 % 16.4 % Segment depreciation and amortization $ 19,178 $ 17,823 8 % $ 38,457 $ 35,511 8 % Bookings $ 393,860 $ 394,441 0 % $ 814,121 $ 752,918 8 % Backlog 374,139 318,450 17 % Electronic Technologies revenue and earnings for the second quarter of 2011 increased 19% and 29%, respectively, over the prior year second quarter. The increase in revenue was supported by organic revenue growth of 17% and a 2% favorable impact from foreign currency exchange rates. The organic revenue growth was primarily driven by strong solar manufacturing equipment sales and continued strong demand for electronic assembly and test equipment and Micro Electronic Mechanical Systems ("MEMS") microphones, while demand for telecom infrastructure related products moderated. Revenue from the electronic assembly and test equipment companies increased 39% compared to the prior year period due to increased demand for solar products; however, new bookings for solar products declined significantly during the quarter resulting from concerns over governmental actions to curtail subsidies supporting solar power. The decline in solar bookings experienced in the second quarter is expected to continue in the near-term. The communication components companies' revenue increased 7% due to strong growth in MEMS microphones. Earnings for the quarter were favorably impacted by higher sales volume and productivity improvements, which more than offset negative impacts of competitive pricing actions and product mix. The acquisition of the Sound Solutions business closed in the beginning of July, as discussed in Note 17 to the Unaudited Condensed Consolidated Financial Statements. Sound Solutions is one of the world's leading manufacturers of dynamic speakers and receivers for cell phones and other consumer electronics. The business will be incorporated into the Knowles business, which will enhance the segment's product offerings serving the high growth handset market. Knowles Sound Solutions is expected to add approximately $200 million to the segment's second half revenue and be slightly dilutive to earnings for 2011, due to significant acquisition-related expenses. For the six months ended June 30, 2011, segment revenue increased 23% driven by increases in electronic assembly and communication components businesses of 49% and 8%, respectively. Earnings improved by 31% due to higher sales volume, product mix and production leverage. 24-------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION Management assesses Dover's liquidity in terms of its ability to generate cash and access capital markets to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchase of outstanding shares, adequacy of commercial paper and available bank lines of credit, and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from operations and remains in a strong financial position, maintaining enough liquidity for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on a short and long-term basis. |