Dover Beats on Earnings, Revenues - Analyst Blog

Dover Corp. (DOV) reported fourth-quarter 2010 adjusted earnings per share (EPS) of 94 cents, beating the Zacks Consensus Estimate of 82 cents. Results recorded a 71% increase over the prior-year quarter's EPS of 55 cents driven by solid performance across all of its segments.

EPS in the reported quarter however, excluded a tax benefit of 7 cents related to the favorable resolution of domestic tax position. Including this benefit, EPS in the quarter was reported at $1.01, up 84% compared with 55 cents in the year-ago quarter.

Revenues posted an improvement of 24% year–over-year to $1.87 billion, topping the Zacks Consensus Estimate of $1.76 billion. An organic growth of 23% and a 2% increase from acquisitions, which was partially offset by a 1% unfavorable impact from currency translation, were instrumental in revenue growth in the quarter. Revenue increased across all of its segments, particularly led by Electronic Technologies and closely followed by Fluid Management.

Cost of goods and services increased 23% to $1.15 billion in the quarter while expressed as percentage of revenues, it dipped 90 basis points to 61.6%. Gross profit surged 27% to $720.1 million and gross margin expanded 90 basis points year-over-year to 38.4%.

Selling and administrative expenses were $450.7 million, a 13% climb over $400.6 million in the prior-year quarter. Operating income upped 63% to $269.4 million and operating margin expanded 350 basis points year-over-year to 14.4% in the quarter.

Segment Update

Industrial Products: Revenue increased 19% year over year to $485.4 million in the quarter, led by revenue growth at Material Handling driven by infrastructure and energy activity. Segment income increased 30% year over year to $54.2 million driven by volume increases and leverage on productivity initiatives.

Engineered System: Revenue increased 16% year over year to $547.9 million in the quarter, driven by Hill Phoenix, Product ID and Belvac. Segment income increased 47% year over year to $71 million.

Fluid Management: Revenue increased 31% year over year to $438.9 million in the quarter driven by North American rig count growth, gains in oil prices, horizontal drilling activity and strong international pump sales. Segment income surged 53% year over year to $103.6 million on volume gains and favorable mix.

Electronic Technologies: Revenue increased 39% year over year to $405.7 million driven by strong demand for electronic assembly equipment, MicroElectrical-Mechanical System microphones, and solar equipment. The segment's operating income increased a whopping 92% to reach $76.3 million in the quarter resulting from strong leverage on higher volume and improved cost base.

Bookings and Backlog

Bookings during the quarter under review increased 23% year over year to $1.9 billion, driven by booking increases across all segments, Electronic Technologies in particular.

Backlog at the end of fourth quarter 2010 was $1.41 billion compared with $1.08 billion at the end of the fourth quarter 2009, largely due to a massive backlog increase at Electronic Technologies.

Fiscal 2010 Performance

Fiscal 2010 revenue of $7.1 billion outperformed the Zacks Consensus Estimate of $7 billion. The year over year increase in revenues of 24% was driven by organic revenue growth of 20% and growth from acquisitions of 4%. The revenue growth reported was above the company's guidance of revenue growth in the range of 20%-21%, organic revenue growth of 16.5%-17.5% and growth of 3.5% from acquisitions.

Fiscal 2010 adjusted EPS was $3.47 compared with $1.84 in the prior year. EPS reported during the year outperformed the Zacks Consensus Estimate of $3.36 and also whizzed past the company's guided range of $3.30-$3.35.

Adjusted EPS excluded the impact of tax benefits of 27 cents in fiscal 2010 and 15 cents in 2009. Including this, EPS in fiscal 2010 was $3.74 compared with $1.99 in 2009.

Cash Flow

Cash from operating activities in fiscal 2010 was $950 million, higher than $802 million in the prior year. Free cash flow during the year was $767.3 million compared with $682 million in the prior year.

Net debt to capitalization ratio improved to 9.9% as of December 31, 2010 compared with 18.4% as of December 31, 2009.

For fiscal 2011, Dover expects capital expenditure to range between 2.8% and 3% of revenues. Free cash flow is expected to be between 10% and 11% of revenues.

Fiscal 2011 Guidance

Management expects revenue to grow in the range of 9%-11%, fueled by an organic revenue growth of 6%-8% and growth of 3% from acquisitions. Management also projects EPS in the range of $4.05 - $4.25, suggesting a year over year growth in the range of 17% to 22% over adjusted fiscal 2010 EPS of $3.47.

Management expects corporate expense to be approximately $135 million and interest expense to be around $106 million. Full-year tax rate is slated to be in the range of 28% to 29%.

Our Take

Solid performance and bookings across all segments coupled with the ability to generate strong cash flow, continued focus on margin improvement and shareholder value position Dover for posting better results going forward.  It also continues to pursue strategic acquisitions to improve its product offering and complement its organic growth strategy.

It recently announced two major acquisitions totaling $1.26 billion. However, we remain concerned with the slowdown in growth for the semiconductor sector in 2011 given Dover's significant exposure to the volatile semiconductor and electronics end-markets. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

Dover Corporation is an industrial conglomerate producing a wide range of specialized industrial products and manufacturing equipment. It operates primarily in the U.S. and has subsidiaries and affiliates in Canada, France, Germany, the Netherlands, Sweden, China, and the United Kingdom.

Dover caters to a diverse clientele primarily spread over the Americas, Europe, and Asia. Dover competes with Cooper Industries plc (CBE), Ingersoll-Rand Plc (IR) and Weatherford International Ltd. (WFT).

 
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