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| DOV > SEC Filings for DOV > Form 10-K on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Annual Report
Special Note Regarding Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes which appear elsewhere in the Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. "Risk Factors" and in "SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS" inside the front cover of this Annual Report on Form 10-K.
(1) FINANCIAL CONDITION
Liquidity and Capital Resources
Management assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchases of outstanding shares, adequacy of available commercial paper and 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, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on a short and long-term basis.
The following table is derived from the Consolidated Statements of Cash Flows:
Years Ended December 31,
Cash Flows from Continuing Operations 2008 2007
(In thousands)
Net Cash Flows Provided By (Used In):
Operating activities $ 1,010,416 $ 927,693
Investing activities (452,994 ) (332,102 )
Financing activities (560,904 ) (345,673 )
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Cash flows provided by operating activities during 2008 increased $82.7 million over the prior year primarily reflecting higher earnings from continuing operations before depreciation and amortization, lower tax payments in 2008 and lower receivables, partially offset by higher pension contributions.
Cash used in investing activities during 2008 increased $120.9 million compared to 2007, largely due to the purchase of short-term investments, partially offset by lower spending on acquisitions in 2008. Acquisition expenditures in 2008 were $103.8 million compared to $273.6 million in 2007, while proceeds from the disposition of businesses were essentially flat at $92.8 million, up $1.8 million from $91.0 million in 2007. Capital expenditures of $175.8 million were generally consistent with the prior year level of $173.7 million. The Company currently anticipates that any acquisitions made during 2009 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, established lines of credit or public debt markets. Capital expenditures for 2009 are expected to be approximately 30% to 40% below 2008 levels.
Cash used in financing activities during 2008 increased $215.2 million compared to 2007 reflecting higher repayments of commercial paper and long-term debt, partially offset by $594.1 million in proceeds received from the issuance of long-term debt and lower cash spent on share repurchases in the 2008 period.
Share Repurchases
During the twelve months ended December 31, 2008, the Company repurchased 10,000,000 shares of its common stock in the open market at an average price of $46.15 per share. As of December 31, 2008, the Company had completed the purchases of all shares authorized under its $500 million share repurchase program, which was approved by the Board of Directors in the fourth quarter of 2007.
During the third and fourth quarters of 2007, the Board of Directors approved two separate share repurchase programs authorizing repurchases of approximately 20,000,000 common shares through the end of 2008. The Company entered into an accelerated share repurchase agreement on August 2, 2007 ("ASR") under which it purchased 6,000,000 shares of its common stock at an initial purchase price of $51.64 per share. Upon final settlement of this ASR in the fourth quarter of 2007, the final economic purchase price was $48.36 per share, representing an average of the volume weighted average price of the Company's common stock during the outstanding period less a negotiated discount amount. In addition, during 2007, the Company made other open market purchases of its common stock totaling 6.4 million shares at an average price of $46.78 per share.
Adjusted Working Capital
Adjusted Working Capital (a non-GAAP measure calculated as accounts receivable, plus inventory, less accounts payable) decreased from the prior year end by $86.0 million, or 6%, to $1,275.9 million which reflected a decrease in receivables of $91.0 million, a decrease in inventory of $37.8 million and a decrease in accounts payable of $42.8 million. Excluding acquisitions of $18.4 million, dispositions of ($9.6) million and the effects of foreign exchange translation of ($38.5) million, Adjusted Working Capital would have decreased by $56.3 million, or 4%. "Average Annual Adjusted Working Capital" as a percentage of revenue (a non-GAAP measure calculated as the five-quarter average balance of accounts receivable, plus inventory, less accounts payable divided by the trailing twelve months of revenue) decreased to 18.3% at December 31, 2008 from 18.9% at December 31, 2007 and inventory turns were 7.1 at December 31, 2008 compared to 6.7 at December 31, 2007.
In addition to measuring its cash flow generation and usage based upon the operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, the Company also measures free cash flow (a non-GAAP measure). Management believes that free cash flow is an important measure of operating performance because it provides both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase Dover's common stock. For further information, see Non-GAAP Disclosures at the end of this Item 7.
Free cash flow for the year ended December 31, 2008 was $834.6 million or 11.0% of revenue compared to $754.0 million or 10.3% of revenue in the prior year. The 2008 increase in free cash flow reflected higher earnings from continuing operations before depreciation and amortization and lower tax payments in 2008 and lower receivables and inventory, partially offset by higher pension contributions.
The following table is a reconciliation of free cash flow to cash flows from operating activities:
Years Ended December 31,
Free Cash Flow 2008 2007
(In thousands)
Cash flow provided by operating activities $ 1,010,416 $ 927,693
Less: Capital expenditures 175,795 173,653
Free cash flow $ 834,621 $ 754,040
Free cash flow as a percentage of revenue 11.0 % 10.3 %
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At December 31, 2008, the Company's net property, plant, and equipment totaled $872.1 million compared to $892.2 million at the end of 2007. The decrease in net property, plant and equipment reflected depreciation and disposals, partially offset by capital expenditures of $175.8 million, acquisitions of $5.0 million and $17.0 million related to foreign currency fluctuations.
The aggregate of current and deferred income tax assets and liabilities decreased from a $241.2 million net liability at the beginning of the year to a net liability of $240.7 million at year-end 2008. This resulted primarily from a decrease in deferred tax liabilities related to intangible assets and pension assets, partially offset by a decrease in deferred tax assets related to net operating loss carryforwards and accrued expenses.
Dover's consolidated benefit obligation related to defined and supplemental retirement benefits decreased by $16.9 million in 2008. The decrease was due primarily to currency rate changes partially offset by actuarial losses. In 2008, plan assets decreased by $94.7 million primarily due to losses on plan investments and currency fluctuations during
the year, partially offset by Company and employee contributions. It is estimated that the Company's defined and supplemental retirement benefits expense will increase from $35.7 million in 2008 to approximately $36.4 million in 2009.
The Company utilizes the net debt to total capitalization calculation (a non-GAAP measure) to assess its overall financial leverage and capacity and believes the calculation is useful to investors for the same reason. The following table provides a reconciliation of net debt to total capitalization to the most directly comparable GAAP measures:
At December 31, At December 31,
Net Debt to Total Capitalization Ratio 2008 2007
(In thousands)
Current maturities of long-term debt $ 32,194 $ 33,175
Commercial paper and other short-term debt 192,750 605,474
Long-term debt 1,860,729 1,452,003
Total debt 2,085,673 2,090,652
Less: Cash, cash equivalents and short-term investments 826,869 606,105
Net debt 1,258,804 1,484,547
Add: Stockholders' equity 3,792,866 3,946,173
Total capitalization $ 5,051,670 $ 5,430,720
Net debt to total capitalization 24.9 % 27.3 %
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The total debt level of $2,085.7 million at December 31, 2008 decreased $5.0 million from December 31, 2007 due to a decrease in commercial paper borrowings partially offset by an increase in long-term debt. Net debt at December 31, 2008 decreased $225.7 million as a result of higher cash generated from operations. The percentage decrease in net debt to total capital, after $462 million of share repurchases, reflects strong free cash flow and proceeds from dispositions of $92.8 million.
Dover's long-term debt instruments had a book value of $1,892.9 million on December 31, 2008 and a fair value of approximately $2,018.5 million. On December 31, 2007, the Company's long-term debt instruments had a book value of $1,485.2 million and a fair value of approximately $1,496.0 million.
The Company believes that existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase the Company's debt. However, management anticipates that the net debt to total capitalization ratio will remain generally consistent with historical levels. Operating cash flow and access to capital markets are expected to satisfy the Company's various cash flow requirements, including acquisitions and capital expenditures.
Management is not aware of any potential impairment to the Company's liquidity. Under the Company's $1 billion 5-year unsecured revolving credit facility with a syndicate of banks, which expires in November of 2012, the Company is required to maintain an interest coverage ratio of EBITDA to consolidated net interest expense of not less than 3.5 to 1. The Company was in compliance with this covenant and its other long-term debt covenants at December 31, 2008 and had a coverage ratio of 13.5 to 1. It is anticipated that in 2009 any funding requirements above cash generated from operations will be met through the issuance of commercial paper. Given the current economic conditions, the Company fully expects to remain in compliance with all of its debt covenants.
The Company periodically enters into financial transactions specifically to hedge its exposures to various items, including, but not limited to, interest rate and foreign exchange rate risk. Through various programs, the Company hedges its cash flow exposures to foreign exchange rate risk by entering into foreign exchange forward contracts and collars. The Company does not enter into derivative financial instruments for speculative purposes and does not have a material portfolio of derivative financial instruments.
During the first quarter of 2008, Dover entered into several interest rate swaps in anticipation of the debt financing completed on March 14, 2008 which, upon settlement, resulted in a net gain of $1.2 million which was deferred and is being amortized over the lives of the related notes.
There is presently one outstanding swap agreement for a total notional amount of $50.0 million, or CHF65.1 million, which swaps the U.S. 6-month LIBOR rate and the Swiss Franc 6-month LIBOR rate. This agreement hedges a portion of the Company's net investment in non-U.S. operations and the fair value outstanding at December 31, 2008 was a loss of $12.0 million which was based on quoted market prices for similar instruments (uses Level 2 inputs under the SFAS No. 157 hierarchy). This hedge is effective.
During the third quarter of 2008, the Company entered into a foreign currency hedge which was subsequently settled within the quarter in anticipation of a potential acquisition, which did not occur. As a result of terminating the hedge, the Company recorded a gain of $2.4 million in the third quarter ended September 30, 2008.
At December 31, 2008, the Company had open foreign exchange forward purchase contracts expiring through December 2009 related to fair value hedges of foreign currency exposures. The fair values of these contracts were based on quoted market prices for identical instruments as of December 31, 2008 (uses Level 1 inputs under the SFAS No. 157 hierarchy).
The details of the open contracts as of December 31, 2008 are as follows:
US Dollars Sold
Expiration From 12/31/08
Less Than 1 Average
Forward Currencies Purchased Month 2-3 Months 4-6 Months 7-12 Months Contract Rate
(In thousands)
Great Britain Pounds $ - $ 35,107 $ - $ - 1.4867
Euros 85,558 - - - 1.3885
Singapore Dollars 566 - - - 1.5015
Chinese Yuan 2,320 5,200 9,840 21,520 6.6915
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Collar Put Call US Dollar Value
US Dollar to Euro 1.460 1.526 $ 3,000 Maturities from 3/2009 - 12/2009
The Company's credit ratings, which are independently developed by the
respective rating agencies, are as follows for the years ended December 31:
2008 2007
Short term Long term Short term Long term
Moody's P-1 A2 P-1 A2
Standard & Poor's A-1 A A-1 A
Fitch F1 A F1 A
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A summary of the Company's undiscounted long-term debt, commitments and obligations as of December 31, 2008 and the years when these obligations are expected to be due is as follows:
Payments Due by Period
Less than 1 More than
Total Year 1-3 Years 3-5 Years 5 Years Other(A)
(In thousands)
Long-term debt $ 1,892,923 $ 32,194 $ 472,281 $ 271 $ 1,388,177 $ -
Interest expense 1,504,984 105,625 188,500 159,250 1,051,609 -
Rental commitments 189,665 46,144 64,009 37,788 41,724 -
Purchase obligations 28,023 27,381 57 - 585 -
Capital leases 16,017 2,429 4,666 3,706 5,216 -
Supplemental & post-retirement benefits 127,000 34,000 21,000 20,000 52,000 -
Uncertain tax positions(A) 249,553 22,171 - - - 227,382
Other long-term obligations 1,234 165 267 218 584 -
Total obligations $ 4,009,399 $ 270,109 $ 750,780 $ 221,233 $ 2,539,895 $ 227,382
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(A) Due to the uncertainty of the potential settlement of future uncertain tax positions, management is unable to estimate the timing of the related payments, if any, that will be made subsequent to 2009. These amounts do not include the potential indirect benefits resulting from deductions or credits for payments made to other jurisdictions.
Severance and Exit Reserves
From time to time, the Company will initiate various restructuring programs at its operating companies or record severance and exit costs in connection with purchase accounting for acquisitions. During the latter half of 2008, the Company announced plans to increase the amount of restructuring efforts in response to the significant decline in global economic activity. At December 31, 2008 and 2007, the Company had reserves related to severance and exit activities of $31.0 million and $28.4 million, respectively. During 2008, the Company recorded $27.4 million in additional charges and $5.6 million in purchase accounting reserves related to acquisitions, partially offset by other non-cash write-downs of $2.3 million and payments of $28.1 million. These costs yielded a savings of approximately $35.0 million in 2008. The Company expects further restructuring plans to occur in 2009 resulting in costs of approximately $40.0 million that the Company expects will yield savings of approximately $75.0 million in 2009. Restructuring charges are recorded primarily in Selling and administrative expenses in the Consolidated Statement of Operations.
(2) RESULTS OF OPERATIONS:
2008 COMPARED TO 2007
Consolidated Results of Operations
Revenue for the year ended December 31, 2008 increased 3% over 2007, due to increases of $232.0 million at Fluid Management, $52.2 million at Industrial Products and $6.0 million at Electronic Technologies. These revenue increases were due to positive market fundamentals and acquisitions at Fluid Management, while Engineered Systems' revenue decreased $41.7 million due to weakness in markets served by the Engineered Products platform. Overall, Dover's organic revenue growth was 1%, net acquisition growth was 1% and the impact from foreign exchange was 1%. Gross profit increased 4% to $2,730.0 million from 2007 while the gross profit margin remained essentially flat at 36.1% and 35.8%, in 2008 and 2007, respectively.
Selling and administrative expenses of $1,700.7 million for the year ended December 31, 2008 increased $86.7 million over the comparable 2007 period, primarily due to increased revenue activity, increased professional fees and restructuring charges.
Interest expense, net, increased 7% to $96.0 million for 2008, compared to $89.6 million for 2007 due to higher average outstanding borrowings used to fund purchases of the Company's common stock and higher average commercial paper rates.
Other expense (income), net for 2008 and 2007 of ($12.7) million and $3.5 million, respectively, was driven primarily by foreign exchange gains and losses, partially offset by other miscellaneous income.
The 2008 and 2007 tax rate for continuing operations was 26.6% in both periods, each favorably impacted by the mix of non-U.S. earnings in low-taxed overseas jurisdictions.
Net earnings for the twelve months ended December 31, 2008 were $590.8 million or $3.12 EPS, which included a loss from discontinued operations of $103.9 million or $0.55 EPS, compared to net earnings of $661.1 million or $3.26 EPS for the same period of 2007, including a loss from discontinued operations of $8.7 million or $0.04 EPS. The losses from discontinued operations in 2008 largely reflect a loss provision for a business expected to be sold in 2009, as well as tax expenses and tax accruals related to ongoing Federal tax settlements and state tax assessments. Refer to Note 8 in the Consolidated Financial Statements for additional information on discontinued operations.
Current Economic Environment
With few exceptions, Dover experienced lower demand across all of its end markets resulting in lower bookings and backlog in the fourth quarter of 2008. Looking forward to 2009, a continuation of a weak and uncertain global business environment is expected. Though this downturn will have a significant adverse impact on revenue and earnings, Dover remains committed to maintaining margin levels as much as possible on a full year basis, although the Company expects the first quarter to be weak, in part due to significant ongoing restructuring efforts. The structural changes made over the last few years, becoming less dependent on capital goods markets and having greater recurring revenue, together with improved working capital management and strong pricing discipline is expected to mitigate the impact of the economic downturn during 2009. As discussed above in the Liquidity and Capital Resources section, the Company believes that existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates.
The Company's synergy capture programs and the restructuring initiatives launched during 2008 will continue into 2009. During 2008, Dover reduced its workforce approximately 6% and expects to reduce its workforce further in 2009 by another 5%. During 2009, the Company will monitor business activity across its markets served and adjust capacity as necessary should the economic environment worsen. The Company will also remain focused on working capital levels and expects to generate strong free cash flow during 2009.
Segment Results of Operations
Industrial Products
Twelve Months Ended December 31,
2008 2007 % Change
(In thousands)
Revenue
Material Handling $ 1,136,869 $ 1,145,253 (1 )%
Mobile Equipment 1,323,422 1,262,984 5 %
Eliminations (786 ) (977 )
$ 2,459,505 $ 2,407,260 2 %
Segment earnings $ 299,740 $ 312,486 (4 )%
Operating margin 12.2 % 13.0 %
Acquisition related depreciation and amortization
expense* $ 32,283 $ 27,830 16 %
Bookings
Material Handling $ 1,109,028 $ 1,141,955 (3 )%
Mobile Equipment 1,177,880 1,364,340 (14 )%
Eliminations (1,134 ) (1,556 )
$ 2,285,774 $ 2,504,739 (9 )%
Backlog
Material Handling $ 188,591 $ 213,653 (12 )%
Mobile Equipment 387,329 543,776 (29 )%
Eliminations (220 ) (195 )
$ 575,700 $ 757,234 (24 )%
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* Represents the pre-tax impact on earnings from the depreciation and amortization of acquisition accounting write-ups to reflect the fair value of inventory, property, plant and equipment, and intangible assets.
Industrial Products increase in revenue over the prior year was primarily due to strength in the military and solid waste management markets as well as the impact of the December 2007 acquisition of Industrial Motion Control LLC ("IMC") and the March 2008 acquisition of Lantec Winch and Gear Inc. Overall, the segment had 2% revenue growth from its core businesses and acquisition growth of 3%, which was partially offset by the sale of a line of business. Earnings declined 4% when compared to the prior year substantially due to weakness in the construction and the North American auto service markets, and restructuring costs.
Material Handling revenue decreased 1% while earnings decreased 5% when compared to the prior year. Revenue and earnings growth in the industrial winch business was more than offset by softness in the infrastructure, industrial automation and automotive markets. In addition, the platform incurred additional expenses related to its ongoing cost reduction and integration activities.
Mobile Equipment revenue and earnings increased 5% and 2%, respectively, over the prior year. The revenue increase was primarily due to core business growth as the platform continued to experience strength in the aerospace, military and solid waste management markets. Softness in the automotive service and bulk . . .
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