DOV 10-Q
DOVER Corp (DOV)
10-Q
2020-10-20
For: 2020-09-30
View Original
Added on
April 11, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2020
or
OF 1934
For the transition period from to
Commission File Number: 1-4018
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12-b-2 of the Exchange Act.
| ☑ | Accelerated Filer | ☐ | Emerging Growth Company | ||||||||||||||
Non-Accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the Registrant’s common stock as of October 13, 2020 was 144,103,299 .
Dover Corporation
Form 10-Q
Table of Contents
| Page | ||||||||
Item 3. | ||||||||
Item 1. Financial Statements
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods and services | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Loss on assets held for sale | |||||||||||||||||||||||
| Operating earnings | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Loss (gain) on sale of a business | ( | ||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Earnings before provision for income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
1
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive earnings (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||||
| Foreign currency translation gains (losses) | ( | ( | ( | ||||||||||||||||||||
| Reclassification of foreign currency translation losses to earnings | |||||||||||||||||||||||
| Total foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Pension and other post-retirement benefit plans: | |||||||||||||||||||||||
| Amortization of actuarial losses included in net periodic pension cost | |||||||||||||||||||||||
| Amortization of prior service costs included in net periodic pension cost | |||||||||||||||||||||||
| Total pension and other post-retirement benefit plans | |||||||||||||||||||||||
| Changes in fair value of cash flow hedges: | |||||||||||||||||||||||
| Unrealized net (losses) gains arising during period | ( | ( | ( | ||||||||||||||||||||
| Net (gains) losses reclassified into earnings | ( | ( | |||||||||||||||||||||
| Total cash flow hedges | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive earnings (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive earnings | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
2
DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net of allowances of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets and deferred charges | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and employee benefits | |||||||||||
| Accrued insurance | |||||||||||
| Other accrued expenses | |||||||||||
| Federal and other income taxes | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Noncurrent income tax payable | |||||||||||
| Other liabilities | |||||||||||
| Stockholders' equity: | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
3
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
| Common stock $1 par value | Additional paid-in capital | Treasury stock | Retained earnings | Accumulated other comprehensive (loss) earnings | Total stockholders' equity | ||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Dividends paid ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Common stock issued for the exercise of share-based awards | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Other comprehensive earnings, net of tax | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Common stock $1 par value | Additional paid-in capital | Treasury stock | Retained earnings | Accumulated other comprehensive loss | Total stockholders' equity | ||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Dividends paid ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Common stock issued for the exercise of share-based awards | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Common stock acquired | (23,280) | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
| Common stock $1 par value | Additional paid-in capital | Treasury stock | Retained earnings | Accumulated other comprehensive loss | Total stockholders' equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
Adoption of ASU 2016-13 | ( | ( | |||||||||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Dividends paid ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Common stock issued for the exercise of share-based awards | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Common stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||
| Other, net | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Common stock $1 par value | Additional paid-in capital | Treasury stock | Retained earnings | Accumulated other comprehensive loss | Total stockholders' equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Dividends paid ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Common stock issued for the exercise of share-based awards | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Common stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||
| Other, net | ( | ( | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating Activities: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to cash from operating activities: | |||||||||||
| Loss on assets held for sale | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Gain on sale of a business | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Cash effect of changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued compensation and employee benefits | ( | ( | |||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Accrued and deferred taxes, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Additions to property, plant and equipment | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Proceeds from sale of businesses | |||||||||||
| Other | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
Repurchase of common stock | ( | ( | |||||||||
| Change in notes payable | ( | ||||||||||
| Dividends paid to stockholders | ( | ( | |||||||||
| Payments to settle employee tax obligations on exercise of share-based awards | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
6
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
1. Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim periods and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. These unaudited interim Condensed Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes for Dover Corporation ("Dover" or the "Company") for the year ended December 31, 2019, included in the Company's Annual Report on Form 10-K filed with the SEC on February 14, 2020. The year end Condensed Consolidated Balance Sheet was derived from audited financial statements. Certain amounts in the prior periods have been reclassified to conform to the current year presentation.
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Condensed Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.
2. Revenue
A majority of the Company’s revenue is short cycle in nature with shipments within one year from order. A small portion of the Company’s revenue derives from contracts extending over one year. The Company's payment terms generally range between 30 to 90 days and vary by the location of businesses, the type of products manufactured to be sold and the volume of products sold, among other factors.
Over 95 % of the Company’s performance obligations are recognized at a point in time that relate to the manufacture and sale of a broad range of products and components. Revenue is recognized when control transfers to the customer upon shipment or completion of installation, testing, certification, or other substantive acceptance provisions required under the contract. Less than 5 % of the Company’s revenue is recognized over time and generally relates to the sale of services or engineered to order equipment that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin.
Revenue from contracts with customers is disaggregated by segments and geographic location, as it best depicts the nature and amount of the Company’s revenue. See Note 17 — Segment Information for revenue by segment and geographic locations.
At September 30, 2020, we estimated that $269 million in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. We expect to recognize approximately 66 % of our unsatisfied (or partially unsatisfied) performance obligations as revenue through 2021, with the remaining balance to be recognized in 2022 and thereafter.
The following table provides information about contract assets and contract liabilities from contracts with customers:
| September 30, 2020 | December 31, 2019 | January 1, 2019 | |||||||||||||||
| Contract assets | $ | $ | $ | ||||||||||||||
| Contract liabilities - current | |||||||||||||||||
| Contract liabilities - non-current | |||||||||||||||||
The revenue recognized during the nine months ended September 30, 2020 and 2019 that was included in contract liabilities at the beginning of the period amounted to $31,561 and $25,977 , respectively.
7
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
3. Acquisitions
2020 Acquisitions
During the nine months ended September 30, 2020, the Company acquired five businesses in separate transactions for total consideration of $258,674 , net of cash acquired. These businesses were acquired to complement and expand upon existing operations within the Imaging & Identification, Engineered Products, and Pumps & Process Solutions segments. The goodwill recorded as a result of these acquisitions represents the economic benefits expected to be derived from product line expansions and operational synergies. Goodwill in the amount of $33,183 is deductible for income tax purposes and goodwill in the amount of $124,691 is non-deductible for income tax purposes for these acquisitions.
On August 20, 2020, the Company acquired 100% of the voting stock of Solaris Laser S.A. ("Solaris"), a global manufacturer of product identification and traceability solutions for $18,605 , net of cash acquired. The Solaris acquisition enhances the Imaging & Identification segment's growing laser technology product line and further strengthens its position as a leading provider of marking and coding equipment and solutions. In connection with this acquisition, the Company recorded goodwill of $11,693 and intangible assets of $3,280 , primarily related to unpatented technology.
On April 30, 2020, the Company acquired 100% of the voting stock of Em-tec GmbH ("Em-tec"), a leading designer and manufacturer of flow measurement devices that serve a wide array of medical and biopharmaceutical applications for $30,396 , net of cash acquired. The Em-tec acquisition further expands the Company's reach into biopharma and other hygienic applications and enhances its portfolio of flow control technologies within the Pumps & Process Solutions segment. In connection with this acquisition, the Company recorded goodwill of $19,572 and intangible assets of $8,344 , primarily related to customer intangibles.
On February 18, 2020, the Company acquired 100% of the voting stock of So. Cal. Soft-Pak, Incorporated ("Soft-Pak") Software Solutions, a leading specialized provider of integrated back office, route management and customer relationship management software solutions to the waste and recycling fleet industry for $45,500 , net of cash acquired. The Soft-Pak acquisition strengthens the digital offerings within the Engineered Products segment. In connection with this acquisition, the Company recorded goodwill of $33,183 and intangible assets of $12,800 , primarily related to customer intangibles.
On January 24, 2020, the Company acquired 100% of the voting stock of Sys-Tech Solutions, Inc. ("Systech"), a leading provider of product traceability, regulatory compliance and brand-protection software and solutions to pharmaceutical and consumer products manufacturers, for $161,830 , net of cash acquired. The Systech acquisition strengthens the portfolio of solutions offered by the Imaging & Identification segment. In connection with this acquisition, the Company recorded goodwill of $91,493 and intangible assets of $76,100 , primarily related to customer intangibles.
One other immaterial acquisition was completed during the nine months ended September 30, 2020, within the Pumps & Process Solutions segment.
The following presents the preliminary allocation of purchase price to the assets acquired and liabilities assumed, based on their estimated fair values at their acquisition dates:
| Total | ||||||||
| Current assets, net of cash acquired | $ | |||||||
| Property, plant and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Current liabilities | ( | |||||||
| Other liabilities | ( | |||||||
| Net assets acquired | $ | |||||||
8
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The amounts assigned to goodwill and major intangible asset classifications were as follows:
| Amount allocated | Useful life (in years) | ||||||||||||||||
| Goodwill - tax deductible | $ | na | |||||||||||||||
| Goodwill - non deductible | na | ||||||||||||||||
| Customer intangibles | - | ||||||||||||||||
| Unpatented technology | - | ||||||||||||||||
| Trademarks | |||||||||||||||||
| $ | |||||||||||||||||
2019 Acquisitions
During the nine months ended September 30, 2019, the Company acquired three businesses in separate transactions for total consideration of $216,398 , net of cash acquired and including contingent consideration. These businesses were acquired to complement and expand upon existing operations within the Fueling Solutions and Pumps & Process Solutions segment. The goodwill recorded as a result of these acquisitions represents the economic benefits expected to be derived from product line expansions and operational synergies. The goodwill is deductible for U.S. income tax purposes for these acquisitions.
On May 7, 2019, the Company acquired the assets of the All-Flo Pump Company, Limited business ("All-Flo"), a growing manufacturer of specialty pumps for $39,954 . The All-Flo acquisition strengthens Dover's position in the growing market for air-operated double-diaphragm pumps within the Pumps & Process Solutions segment. The Company recorded goodwill of $20,567 and intangible assets of $14,980 . The intangible assets are being amortized over 13 to 15 years.
On January 25, 2019, the Company acquired the assets of Belanger, Inc. ("Belanger"), a leading full-line car wash equipment manufacturer for $175,350 , net of cash acquired. The Belanger acquisition strengthens Dover's position in the vehicle wash business within the Fueling Solutions segment. In connection with this acquisition, the Company recorded goodwill of $98,084 and intangible assets of $77,000 , primarily related to customer intangibles. The intangible assets are being amortized over 9 to 15 years.
One other immaterial acquisition was completed during the nine months ended September 30, 2019, which included contingent consideration, within the Pumps & Process Solutions segment.
Pro Forma Information
The following unaudited pro forma information illustrates the impact of 2020 and 2019 acquisitions on the Company’s revenue and earnings from operations for the three and nine months ended September 30, 2020 and 2019, respectively.
The unaudited pro forma information assumes that the 2020 and 2019 acquisitions had taken place at the beginning of the prior year, 2019 and 2018, respectively. Unaudited pro forma earnings are adjusted to reflect the comparable impact of additional depreciation and amortization expense, net of tax, resulting from the fair value measurement of intangible and tangible assets relating to the year of acquisition.
The unaudited pro forma effects for the three and nine months ended September 30, 2020 and 2019 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| As reported | $ | $ | $ | $ | |||||||||||||||||||
| Pro forma | |||||||||||||||||||||||
| Net earnings: | |||||||||||||||||||||||
| As reported | $ | $ | $ | $ | |||||||||||||||||||
| Pro forma | |||||||||||||||||||||||
9
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
4. Disposed Operations
Management evaluates Dover's businesses periodically for their strategic fit within its operations and may from time to time sell or discontinue certain operations for various reasons.
2020
On March 6, 2020, the Company completed the sale of the Chino, California branch of The AMS Group ("AMS Chino"), a wholly owned subsidiary of the Company. The Company recognized total consideration of $15,400 , which included a working capital adjustment. This sale resulted in a pre-tax gain on sale of $5,213 included within the Condensed Consolidated Statements of Earnings and within the Refrigeration & Food Equipment Segment for the nine months ended September 30, 2020. The sale does not represent a strategic shift that will have a major effect on operations and financial results and, therefore, did not qualify for presentation as a discontinued operation.
2019
On March 29, 2019, the Company entered into a definitive agreement to sell Finder Pompe S.r.l ("Finder"), a wholly owned subsidiary, to Gruppo Aturia S.p.A (“Aturia”). As of March 31, 2019, Finder met the criteria to be classified as held for sale. The Company classified Finder's assets and liabilities separately on the consolidated balance sheet as of March 31, 2019.
Based on the total consideration from the sale, net of selling costs, the Company recorded a loss on the assets held for sale of $46,946 in the Condensed Consolidated Statements of Earnings during the three months ended March 31, 2019. The loss was comprised of an impairment on assets held for sale of $21,607 and $25,339 of foreign currency translation losses reclassified out of accumulated other comprehensive losses.
On April 2, 2019, Dover completed the sale of Finder to Aturia, which generated total cash proceeds of $24,218 . The Finder business was included in the results of the Pumps & Process Solutions segment. The sale does not represent a strategic shift that will have a major effect on operations and financial results and, therefore, did not qualify for presentation as a discontinued operation.
5. Inventories
| September 30, 2020 | December 31, 2019 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| Subtotal | |||||||||||
| Less reserves | ( | ( | |||||||||
| Total | $ | $ | |||||||||
6. Property, Plant and Equipment, net
| September 30, 2020 | December 31, 2019 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery, equipment and other | |||||||||||
| Property, plant and equipment, gross | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
10
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
7. Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments prospectively. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. Upon adoption, the Company recorded a noncash cumulative effect adjustment to retained earnings of $2.1 million, net of $0.6 million of income taxes, on the opening consolidated balance sheet as of January 1, 2020.
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and determined that the estimate of credit losses was not significantly impacted.
Estimates are used to determine the allowance. It is based on assessment of anticipated payment and all other historical, current and forward-looking information that is reasonably available.
The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.
| 2020 | |||||
| Beginning Balance, January 1, | $ | ||||
| Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings | |||||
| Provision for expected credit losses | |||||
| Amounts written off charged against the allowance | ( | ||||
| Other, including dispositions and foreign currency translation | |||||
| Ending balance, September 30 | $ | ||||
8. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill by reportable operating segments were as follows:
| Engineered Products | Fueling Solutions | Imaging & Identification | Pumps & Process Solutions | Refrigeration & Food Equipment | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Acquisitions | |||||||||||||||||||||||||||||||||||
| Disposition of business | ( | ( | |||||||||||||||||||||||||||||||||
| Foreign currency translation | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
During the nine months ended September 30, 2020, the Company recorded additions of $157,874 to goodwill as a result of the acquisitions within the Engineered Products, Imaging & Identification, and Pumps & Process Solutions segments discussed in Note 3 — Acquisitions. During the nine months ended September 30, 2020, the Company disposed of $2,597 of the Refrigeration & Food Equipment segment goodwill as a result of the sale of a business as discussed in Note 4 — Disposed Operations.
Dover performs its annual goodwill impairment testing in the fourth quarter of each year. During the 2019 impairment testing, all fifteen reporting units had fair values substantially in excess of their carrying values. In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim
11
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company assessed the current market capitalization, forecasts and the amount of headroom in the 2019 impairment test. The Company determined that a triggering event has not occurred which would require an interim impairment test to be performed. Refer to "Segment Results of Operations" for further details on the COVID-19 impact to the Company's operations.
The Company’s definite-lived and indefinite-lived intangible assets by major asset class were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer intangibles | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Trademarks | |||||||||||||||||||||||||||||||||||
| Patents | |||||||||||||||||||||||||||||||||||
| Unpatented technologies | |||||||||||||||||||||||||||||||||||
| Distributor relationships | |||||||||||||||||||||||||||||||||||
| Drawings & manuals | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||
| Unamortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Trademarks | |||||||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
9. Restructuring Activities
The Company's restructuring charges by segment were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Engineered Products | $ | $ | $ | $ | |||||||||||||||||||
| Fueling Solutions | |||||||||||||||||||||||
| Imaging & Identification | ( | ||||||||||||||||||||||
| Pumps & Process Solutions | |||||||||||||||||||||||
| Refrigeration & Food Equipment | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| These amounts are classified in the Condensed Consolidated Statements of Earnings as follows: | |||||||||||||||||||||||
| Cost of goods and services | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The restructuring expenses of $6,740 and $26,365 incurred during the three and nine months ended September 30, 2020, respectively, were a result of restructuring programs initiated primarily in 2020. Restructuring expense was comprised primarily of new actions executed in response to lower demand driven by COVID-19 as well as continuing broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint
12
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
consolidation, and operational optimization and IT centralization. Additional programs, beyond the scope of the announced programs, may be implemented during 2020 with related restructuring charges.
The $6,740 of restructuring charges incurred during the third quarter of 2020 primarily included the following items:
•The Engineered Products segment recorded $2,342 of restructuring charges principally related to headcount reductions.
•The Fueling Solutions segment recorded $1,572 of restructuring charges primarily due to headcount reductions.
•The Imaging & Identification segment recorded a restructuring charges of $99 principally related to facility restructuring costs.
•The Pumps & Process Solutions segment recorded $1,719 of restructuring expense primarily due to headcount reductions.
•The Refrigeration & Food Equipment segment recorded $534 of restructuring expense primarily due to headcount reductions and facility restructuring costs.
•Corporate recorded $474 of restructuring charges primarily related to exit costs associated with IT centralization initiatives.
The Company’s severance and exit accrual activities were as follows:
| Severance | Exit | Total | |||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ||||||||||||||
| Restructuring charges | |||||||||||||||||
| Payments | ( | ( | ( | ||||||||||||||
| Other, including foreign currency translation | ( | (1) | ( | ||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ||||||||||||||
(1) Other activity in exit reserves primarily represents the non-cash write-off of certain long-lived assets in connection with certain facility closures.
10. Borrowings
Borrowings consisted of the following:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Short-term | |||||||||||
| Commercial paper | $ | $ | |||||||||
| Notes payable | $ | $ | |||||||||
Carrying amount (1) | |||||||||||||||||
| Principal | September 30, 2020 | December 31, 2019 | |||||||||||||||
| Long-term | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
| € | |||||||||||||||||
| € | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||
(1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discounts were
$17.8 million and $18.9 million as of September 30, 2020 and December 31, 2019, respectively. Total deferred debt issuance costs were $14.8 million and $16.2 million as of September 30, 2020 and December 31, 2019, respectively.
13
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
As of September 30, 2020, the Company maintained a $1.0 billion five-year unsecured revolving credit facility (the "Credit Agreement") with a syndicate of banks which expires on October 4, 2024. The Company uses the Credit Agreement principally as liquidity back-up for its commercial paper program. On March 16, 2020, the Company borrowed $500 million under the Credit Agreement, which was subsequently repaid in full during the second quarter with proceeds from resumed commercial paper borrowings. Proceeds from the Credit Agreement borrowing were used to repay all of the Company's outstanding commercial paper and for general corporate purposes.
On May 6, 2020, the Company entered into a $450.0 million 364-day revolving credit facility (the "Short-term Credit Agreement") with a syndicate of banks which expires on May 5, 2021. The Short-term Credit Agreement is intended to be used primarily for working capital and general corporate purposes. The Company may elect to have loans under the Short-term Credit Agreement which bear interest at a base rate plus a specified applicable margin. The Short-term Credit Agreement requires the Company to pay a facility fee and imposes various restrictions on the Company such as, among other things, a requirement to maintain a minimum interest coverage ratio of EBITDA to consolidated net interest expense of not less than 3.0 to 1. The Company has not undertaken any borrowings under this facility.
As of September 30, 2020, the Company had approximately $157.6 million outstanding in letters of credit, surety bonds, and performance and other guarantees which expire on various dates through 2029. These letters of credit and bonds are primarily issued as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations.
11. Financial Instruments
Derivatives
The Company is exposed to market risk for changes in foreign currency exchange rates due to the global nature of its operations and certain commodity risks. In order to manage these risks, the Company has hedged portions of its forecasted sales and purchases to occur within the next twelve months that are denominated in non-functional currencies, with currency forward contracts designated as cash flow hedges. At September 30, 2020 and December 31, 2019, the Company had contracts with total notional amounts of $167,123 and $179,580 , respectively, to exchange currencies, principally Euro, Pound Sterling, Swedish Krona, Chinese Yuan, Canadian Dollar, and Swiss Franc. The Company believes it is probable that all forecasted cash flow transactions will occur.
In addition, the Company had outstanding contracts with a total notional amount of $85,613 and $79,707 as of September 30, 2020 and December 31, 2019, respectively, that are not designated as hedging instruments. These instruments are used to reduce the Company's exposure for operating receivables and payables that are denominated in non-functional currencies. Gains and losses on these contracts are recorded in other income, net in the Condensed Consolidated Statements of Earnings.
The following table sets forth the fair values of derivative instruments held by the Company as of September 30, 2020 and December 31, 2019 and the balance sheet lines in which they are recorded:
| Fair Value Asset (Liability) | |||||||||||||||||
| September 30, 2020 | December 31, 2019 | Balance Sheet Caption | |||||||||||||||
| Foreign currency forward | $ | $ | Prepaid and other current assets | ||||||||||||||
| Foreign currency forward | ( | ( | Other accrued expenses | ||||||||||||||
14
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
For a cash flow hedge, the change in estimated fair value of a hedging instrument is recorded in accumulated other comprehensive (loss) earnings as a separate component of the Condensed Consolidated Statements of Stockholders' Equity and is reclassified into revenues and cost of goods and services in the Condensed Consolidated Statements of Earnings during the period in which the hedged transaction is recognized. The amount of gains or losses from hedging activity recorded in earnings is not significant, and the amount of unrealized gains and losses from cash flow hedges that are expected to be reclassified to earnings in the next twelve months is not significant; therefore, additional tabular disclosures are not presented. There are no amounts excluded from the assessment of hedge effectiveness and the Company's derivative instruments that are subject to credit risk contingent features were not significant.
The Company is exposed to credit loss in the event of nonperformance by counterparties to the financial instrument contracts held by the Company; however, nonperformance by these counterparties is considered unlikely as the Company’s policy is to contract with highly-rated, diversified counterparties.
The Company has designated the €600,000 and €500,000 of euro-denominated notes issued November 9, 2016 and November 4, 2019, respectively, as hedges of a portion of its net investment in euro-denominated operations. Changes in the value of the euro-denominated debt are recognized in foreign currency translation adjustments within other comprehensive earnings of the Condensed Consolidated Statements of Comprehensive Earnings to offset changes in the value of the net investment in euro-denominated operations.
Amounts recognized in other comprehensive earnings for the gains (losses) on net investment hedges were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Loss) gain on euro-denominated debt | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Net (loss) gain on net investment hedges, net of tax | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Level 2 | Level 2 | ||||||||||
| Assets: | |||||||||||
| Foreign currency cash flow hedges | $ | $ | |||||||||
| Liabilities: | |||||||||||
| Foreign currency cash flow hedges | |||||||||||
In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments.
15
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The estimated fair value of long-term debt, net at September 30, 2020 and December 31, 2019, was $3,546,940 and $3,322,033 , respectively. The estimated fair value of long-term debt is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the fair value hierarchy.
The carrying values of cash and cash equivalents, trade receivables, accounts payable and notes payable are reasonable estimates of their fair values as of September 30, 2020 and December 31, 2019 due to the short-term nature of these instruments.
12. Income Taxes
The effective tax rates for the three months ended September 30, 2020 and 2019 were 20.2 % and 20.1 %, respectively. The increase in the effective tax rate for the three months ended September 30, 2020 relative to the prior comparable period was primarily driven by discrete items.
The effective tax rates for the nine months ended September 30, 2020 and 2019 were 19.3 % and 21.1 %, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2020 relative to the prior year comparable period was primarily driven by the exclusion of capital losses on the sale of Finder under local law in the prior year, partially offset by the impact of other discrete tax items.
Dover and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other foreign jurisdictions. We believe adequate provision has been made for all income tax uncertainties. The Company is routinely audited by taxing authorities in its filing jurisdictions, and a number of these audits are currently underway. The Company believes that within the next twelve months uncertain tax positions may be resolved and statutes of limitations will expire, which could result in a decrease in the gross amount of unrecognized tax benefits of approximately zero to $9.8 million.
13. Equity Incentive Program
The Company typically grants equity awards annually at its regularly scheduled first quarter meeting of the Compensation Committee of the Board of Directors. During the nine months ended September 30, 2020, the Company issued stock-settled appreciation rights ("SARs") covering 390,780 shares, performance share awards of 49,056 and restricted stock units ("RSUs") of 83,512 .
The Company uses the Black-Scholes option pricing model to determine the fair value of each SAR on the date of grant. Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.
The assumptions used in determining the fair value of the SARs awarded during the respective periods were as follows:
| SARs | |||||||||||
| 2020 | 2019 | ||||||||||
| Risk-free interest rate | % | % | |||||||||
| Dividend yield | % | % | |||||||||
| Expected life (years) | |||||||||||
| Volatility | % | % | |||||||||
Grant price | $ | $ | |||||||||
Fair value per share at date of grant | $ | $ | |||||||||
The performance share awards granted in 2020 are market condition awards as attainment is based on Dover's performance relative to its peer group (companies listed under the S&P 500 Industrials sector) for the relevant performance period. The performance period and vesting period for these awards is approximately three years. These awards were valued on the date of grant using the Monte Carlo simulation model (a binomial lattice-based valuation model), and are generally recognized ratably
16
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
over the vesting period, and the fair value is not subject to change based on future market conditions. The assumptions used in determining the fair value of the performance shares granted in 2020 were as follows:
| Performance Shares | |||||
| 2020 | |||||
| Risk-free interest rate | % | ||||
| Dividend yield | % | ||||
| Expected life (years) | |||||
| Volatility | % | ||||
| Grant price | $ | ||||
| Fair value per share at date of grant | $ | ||||
The performance share awards granted in 2019 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings in the period of change.
The fair value and average attainment used in determining stock-based compensation cost for the performance shares issued in 2019 is as follows for the nine months ended September 30, 2020:
| Performance Shares | |||||
| 2019 | |||||
Fair value per share at date of grant | $ | ||||
| Average attainment rate reflected in expense | |||||
The Company also has granted RSUs, and the fair value of these awards was determined using Dover's closing stock price on the date of grant.
Stock-based compensation is reported within selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Pre-tax stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Total stock-based compensation expense, net of tax | $ | $ | $ | $ | |||||||||||||||||||
14. Commitments and Contingent Liabilities
Litigation
Certain of the Company’s subsidiaries are involved in legal proceedings relating to the cleanup of waste disposal sites identified under federal and state statutes that provide for the allocation of such costs among "potentially responsible parties." In each instance, the extent of the Company’s liability appears to be very small in relation to the total projected expenditures and the number of other "potentially responsible parties" involved and is anticipated to be immaterial to the Company. In addition, certain of the Company’s subsidiaries are involved in ongoing remedial activities at certain current and former plant sites, in cooperation with regulatory agencies, and appropriate estimated liabilities have been established. At September 30, 2020 and December 31, 2019, the Company had estimated liabilities totaling $31,308 and $30,608 , respectively, for environmental and other matters, including private party claims for exposure to hazardous substances that are probable and estimable.
17
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The Company and certain of its subsidiaries are also parties to a number of other legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of the Company’s products, patent infringement, employment matters, and commercial disputes. Management and legal counsel, at least quarterly, review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and currently accrued to-date, and the availability and extent of insurance coverage. The Company has estimated liabilities for legal matters that are probable and estimable, and at September 30, 2020 and December 31, 2019, these estimated liabilities were not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.
Warranty Accruals
Estimated warranty program claims are provided for at the time of sale of the Company's products. Amounts provided for are based on historical costs and adjusted for new claims and are included within other accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet. The changes in the carrying amount of product warranties through September 30, 2020 and 2019, were as follows:
| 2020 | 2019 | ||||||||||
| Beginning Balance, December 31 of the Prior Year | $ | $ | |||||||||
| Provision for warranties | |||||||||||
| Settlements made | ( | ( | |||||||||
| Other adjustments, including acquisitions and currency translation | ( | ||||||||||
| Ending balance, September 30 | $ | $ | |||||||||
15. Employee Benefit Plans
Retirement Plans
The Company sponsors qualified defined benefit pension plans covering certain employees of the Company and its subsidiaries, although the U.S. qualified and non-qualified defined benefit plans are closed to new entrants. The plans’ benefits are generally based on years of service and employee compensation. The Company also provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law.
The tables below set forth the components of the Company’s net periodic (income) expense relating to retirement benefit plans. The service cost component is recognized within selling, general and administrative expenses and cost of goods and services, depending on the functional area of the underlying employees included in the plans, and the non-operating components of pension costs are included within other income, net in the Condensed Consolidated Statements of Earnings.
Qualified Defined Benefits
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Plan | Non-U.S. Plans | U.S. Plan | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization: | |||||||||||||||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Recognized actuarial loss | |||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic (income) expense | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
18
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
Non-Qualified Supplemental Benefits
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization: | |||||||||||||||||||||||
| Prior service cost | |||||||||||||||||||||||
| Recognized actuarial gain | ( | ( | ( | ( | |||||||||||||||||||
| Net periodic expense | $ | $ | $ | $ | |||||||||||||||||||
Post-Retirement Benefit Plans
The Company also maintains post-retirement benefit plans, although these plans are closed to new entrants. The post-retirement benefit plans are supported by the general assets of the Company. The following table sets forth the components of the Company’s net periodic expense relating to its post-retirement benefit plans:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization: | |||||||||||||||||||||||
| Prior service cost | |||||||||||||||||||||||
| Recognized actuarial gain | ( | ( | ( | ( | |||||||||||||||||||
| Net periodic expense | $ | $ | $ | $ | |||||||||||||||||||
The total amount amortized out of accumulated other comprehensive earnings into net periodic pension and post-retirement expense totaled $2,552 and $856 for the three months ended September 30, 2020 and 2019, respectively, and $7,587 and $2,574 for the nine months ended September 30, 2020 and 2019, respectively.
Defined Contribution Retirement Plans
16. Other Comprehensive Earnings
The amounts recognized in other comprehensive (loss) earnings were as follows:
| Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Pre-tax | Tax | Net of tax | Pre-tax | Tax | Net of tax | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Pension and other post-retirement benefit plans | ( | ( | |||||||||||||||||||||||||||||||||
| Changes in fair value of cash flow hedges | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total other comprehensive earnings (loss) | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
19
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
| Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Pre-tax | Tax | Net of tax | Pre-tax | Tax | Net of tax | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Pension and other post-retirement benefit plans | ( | ( | |||||||||||||||||||||||||||||||||
| Changes in fair value of cash flow hedges | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total other comprehensive (loss) earnings | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
Total comprehensive earnings were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive earnings (loss) | ( | ( | ( | ||||||||||||||||||||
| Comprehensive earnings | $ | $ | $ | $ | |||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to earnings during the three and nine months ended September 30, 2020 and 2019 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||
| Reclassification of foreign currency translation losses to earnings for assets held for sale | $ | $ | $ | $ | |||||||||||||||||||
| Tax benefit | |||||||||||||||||||||||
| Net of tax | $ | $ | $ | $ | |||||||||||||||||||
| Pension and other postretirement benefit plans: | |||||||||||||||||||||||
| Amortization of actuarial losses | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of prior service costs | |||||||||||||||||||||||
| Total before tax | |||||||||||||||||||||||
| Tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Net of tax | $ | $ | $ | $ | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Net (gains) losses reclassified into earnings | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Tax provision (benefit) | ( | ( | |||||||||||||||||||||
| Net of tax | $ | ( | $ | $ | $ | ( | |||||||||||||||||
The reclassification of foreign currency translation losses to earnings during the nine months ended September 30, 2019 relates to the sale of Finder. See Note 4 — Disposed Operations for further details.
The Company recognizes the amortization of net actuarial gains and losses and prior service costs in other income, net within the Condensed Consolidated Statements of Earnings.
20
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
17. Segment Information
The Company categorizes its operating companies into five reportable segments as follows:
•Engineered Products segment is a provider of a wide range of products, software and services that have broad customer applications across a number of markets, including aftermarket vehicle service, solid waste handling, industrial automation, aerospace and defense, industrial winch and hoist, and fluid dispensing.
•Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
•Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
•Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
•Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
Segment financial information and a reconciliation of segment results to consolidated results was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Engineered Products | $ | $ | $ | $ | |||||||||||||||||||
| Fueling Solutions | |||||||||||||||||||||||
| Imaging & Identification | |||||||||||||||||||||||
| Pumps & Process Solutions | |||||||||||||||||||||||
| Refrigeration & Food Equipment | |||||||||||||||||||||||
| Intra-segment eliminations | ( | ( | ( | ||||||||||||||||||||
| Total consolidated revenue | $ | $ | $ | $ | |||||||||||||||||||
| Net earnings: | |||||||||||||||||||||||
Segment earnings (EBIT): (1) | |||||||||||||||||||||||
| Engineered Products | $ | $ | $ | $ | |||||||||||||||||||
| Fueling Solutions | |||||||||||||||||||||||
| Imaging & Identification | |||||||||||||||||||||||
Pumps & Process Solutions (2) | |||||||||||||||||||||||
Refrigeration & Food Equipment(3) | |||||||||||||||||||||||
| Total segment earnings (EBIT) | |||||||||||||||||||||||
Corporate expense / other (4) | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Earnings before provision for income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
(1) Segment earnings (EBIT) includes non-operating income and expense directly attributable to the segments. Non-operating income and expense includes gain on sale of a business and other income, net.
(2) The nine months ended September 30, 2019 includes a $46,946 loss on assets held for sale for Finder.
(3) The three and nine months ended September 30, 2020 include a $557 expense and a $5,213 net gain on the sale of AMS Chino, respectively. The nine months ended September 30, 2020 also include a $3,640 write-off of assets.
(4) Certain expenses are maintained at the corporate level and not allocated to the segments. These expenses include executive and functional compensation costs, non-service pension costs, non-operating insurance expenses, shared business services overhead costs, deal related expenses and various administrative expenses relating to the corporate headquarters.
21
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
The following table presents revenue disaggregated by geography based on the location of the Company's customer:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Revenue by geography | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Other Americas | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
18. Share Repurchases
In February 2018, the Company's Board of Directors approved a standing share repurchase authorization, whereby the Company may repurchase up to 20 million shares of its common stock through December 31, 2020. This share repurchase authorization replaced the January 2015 share repurchase authorization.
In the first quarter of 2020, the Company repurchased 548,659 shares of common stock at a total cost of $52,916 , or $96.45 per share. The Company suspended share repurchases in the second quarter due to business uncertainty related to COVID-19. This temporary suspension in share repurchases was lifted during the beginning of the third quarter. There were no repurchases during the three months ended September 30, 2020. During the three and nine months ended September 30, 2019, the Company repurchased 261,807 shares of common stock at a total cost of $23,280 , or $88.92 .
As of September 30, 2020, 7,811,385 shares remain authorized for repurchase under the February 2018 share repurchase authorization.
19. Earnings per Share
The following table sets forth a reconciliation of the information used in computing basic and diluted earnings per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
The following table is a reconciliation of the share amounts used in computing earnings per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Weighted average shares outstanding - Basic | |||||||||||||||||||||||
| Dilutive effect of assumed exercise of SARs and vesting of performance shares and RSUs | |||||||||||||||||||||||
| Weighted average shares outstanding - Diluted | |||||||||||||||||||||||
Diluted earnings per share amounts are computed using the weighted average number of common shares outstanding and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of SARs and vesting of performance shares and RSUs, as determined using the treasury stock method.
22
DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated) (Unaudited)
20. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This resulted in the earlier recognition of allowances for losses. In addition, the FASB issued ASU 2019-04, Codification Improvements to Topic 326 which provides clarity on certain aspects of the amendments in ASU 2016-13. The Company adopted this guidance prospectively on January 1, 2020. Upon adoption, the Company recorded a noncash cumulative effect adjustment to retained earnings of $2.1 million, net of $0.6 million of income taxes, on the opening consolidated balance sheet as of January 1, 2020. See Note 7 — Credit Losses for further details.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to the section below entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of factors that could cause our actual results to differ from the forward-looking statements contained below and throughout this quarterly report.
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we refer to measures used by management to evaluate performance as well as liquidity, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). We believe these measures provide investors with important information that is useful in understanding our business results and trends. Explanations within this MD&A provide more details on the use and derivation of these measures.
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. The COVID-19 outbreak and associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty, had an adverse impact on our financial results for the three and nine months ended September 30, 2020. Activity in many of the end-markets we serve has been improving since the second quarter of 2020 and we expect that improvement trend to continue for most of our businesses in the fourth quarter. We are cautiously optimistic about the remainder of the year, however, the demand in most markets remains uncertain.
OVERVIEW
Dover is a diversified global manufacturer and solutions provider delivering innovative equipment and components, consumable supplies, aftermarket parts, software and digital solutions, and support services through five operating segments: Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment. The Company's entrepreneurial business model encourages, promotes and fosters deep customer engagement and collaboration, which has led to Dover's well-established and valued reputation for providing superior customer service and industry-leading product innovation. Unless the context indicates otherwise, references herein to "Dover," "the Company," and words such as "we," "us," or "our" include Dover Corporation and its consolidated subsidiaries.
Dover's five operating segments are as follows:
•Our Engineered Products segment is a provider of a wide range of products, software and services that have broad customer applications across a number of markets, including aftermarket vehicle service, solid waste handling, industrial automation, aerospace and defense, industrial winch and hoist, and fluid dispensing.
•Our Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
•Our Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
•Our Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
•Our Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
In the third quarter of 2020, revenue was $1.7 billion, which decreased $77.1 million, or 4.2%, as compared to the third quarter of 2019. This was driven by an organic revenue decline of 5.1% and a 0.8% impact due to dispositions. This decline was partially offset by acquisition-related revenue growth of 1.0% and a favorable impact from foreign currency translation of 0.7%.
The 5.1% organic revenue decline compared to the third quarter of 2019 was broad-based across our segments, with the exception of our Refrigeration & Food Equipment segment. The organic revenue decline was due to continued demand softness in many of our end-markets driven by the global response to the outbreak of COVID-19. The Refrigeration & Food Equipment segment posted organic revenue growth of 2.6% primarily driven by improved activity in food retail and notable growth in demand for can making machinery, however demand for commercial foodservice equipment remained weak. The Engineered Products segment had an organic revenue decline of 10.4% primarily as a result of weaker demand in our waste handling
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business compared to recognizing all-time highest revenue in the third quarter last year, as well as continued softness in our industrial winch and hoist and industrial automation businesses, while our aerospace & defense business showed continued resilience and our vehicle service business revenues returned to levels slightly below those in the third quarter of last year. The Imaging & Identification segment experienced a decline in organic revenue of 7.6% primarily driven by continued softness in the textile digital printing market caused by the continued global disruption in the apparel and fashion markets related to COVID-19, while our marking and coding business was approximately in line with the prior year. The Fueling Solutions segment had an organic revenue decline of 7.9% driven by slowing demand in retail fueling markets in Asia and Europe as well as weaker activity in the transportation and vehicle wash markets, partially offset by strong activity in North America driven by Europay, Mastercard, and Visa ("EMV") compliance. The Pumps & Process Solutions segment had an organic revenue decline of 0.9% as a result of continued softness in compression components and aftermarket, and industrial pump end-markets, almost fully offset by strong performance in the biopharma and hygienic markets as well as strong shipments in our plastics and polymer processing business.
From a geographic perspective, in the third quarter, organic revenue for the U.S., our largest market, declined 4%, while organic revenue in Europe and Asia declined 4% and 10%, respectively, year over year. Organic revenue in all other geographic markets declined 5%. Three out of our five segments experienced declines in U.S. organic sales, while organic sales in the Refrigeration & Food Equipment grew 8% and the Imaging & Identification segment remained flat. Operational and demand headwinds from the COVID-19 pandemic led to a decline in Europe for four of our five segments, while the Pumps & Process Solutions segment grew on robust activity across all businesses. The decline in Asia was driven mainly by a reduction in China where our Fueling Solutions segment, our second largest business in China, faced significant headwinds due to the expiration of the government's double-wall upgrade mandate that drove significant activity in prior years, as well as continued weak demand from the national oil companies.
Bookings were $1.8 billion for the three months ended September 30, 2020, a decrease of $10.0 million, or 0.5% compared to the prior year comparable period. Included in this result was organic decline of 1.1% and a 0.6% impact due to dispositions, partially offset by acquisition-related bookings growth of 0.8% and a favorable impact from foreign currency translation of 0.4%. Bookings declined organically in four segments primarily as a result of the global impact on customer demand from the COVID-19 pandemic, and increased in our Refrigeration & Food Equipment on the back of positive trends, most significantly in can shaping, as well as food retail and heat exchanger markets. Backlog as of September 30, 2020 was $1.6 billion, an increase from $1.4 billion from the prior year. See definition of bookings and backlog within "Segment Results of Operations".
During the three months ended September 30, 2020, we acquired Solaris Laser S.A. ("Solaris") for a purchase price of $18.6 million, net of cash acquired. The Solaris acquisition enhances our Imaging & Identification segment's growing laser technology product line and further strengthens its position as a leading provider of marking and coding equipment and solutions.
Rightsizing charges of $5.8 million included restructuring costs of $6.7 million less other benefits of $0.9 million for the three months ended September 30, 2020. Restructuring expense was comprised primarily of new actions taken in response to lower demand driven by COVID-19 and continuing broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation, and operational optimization and IT centralization. These restructuring charges were broad-based across all segments as well as corporate. Other benefits were comprised primarily of a $1.7 million gain on sale of assets in our Refrigeration & Food Equipment segment as a result of restructuring actions and partially offset by charges related to the restructuring actions.
COVID-19 Update
The COVID-19 pandemic has disrupted the global economy and adversely impacted our business, including demand for our products across multiple end-markets as well as our supply chain and operations. We have experienced sequentially improving activity in most markets and geographies, however demand remains subdued compared to historical averages across multiple markets and we expect such softness to continue into the fourth quarter. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain and may lead to sudden changes in trajectory and outlook.
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During the third quarter, we have continued to operate in accordance with established health and safety protocols across our facilities while maintaining an enhanced health and safety compliance program. More specifically, we have modified practices at our manufacturing locations and offices to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local health and governmental authorities in our global network with respect to social distancing, physical separation, personal protective equipment and sanitization, and have restricted the number of employees permitted in common areas at any given time. These processes have been institutionalized as a formal part of our operational excellence model, including audits to sustain our practices. We are pleased to report that as of September 30, 2020 all of our major global facilities are operational.
In order to help mitigate the negative financial impact caused by the pandemic, we have executed and will continue to execute a number of temporary cost savings measures across the portfolio and at our corporate center including short-term labor actions, adjustments to variable compensation to reflect current conditions, utilization of governmental job retention subsidies, elimination of non-essential travel and reduction of discretionary spend. We have also significantly reduced our capital spending plan for the year, without deferring strategic ongoing initiatives. In addition, we initiated restructuring actions to drive longer-term cost savings and are proactively managing our working capital.
The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration of the outbreak, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which continue to be uncertain and cannot be fully predicted at this time. We will continue to proactively respond to the situation and may take further actions that alter our business operations as may be required by governmental authorities, or that we determine are in the best interests of our employees and customers.
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CONSOLIDATED RESULTS OF OPERATIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||
| Revenue | $ | 1,748,256 | $ | 1,825,345 | (4.2) | % | $ | 4,903,370 | $ | 5,360,808 | (8.5) | % | |||||||||||||||||||||||
| Cost of goods and services | 1,089,527 | 1,151,857 | (5.4) | % | 3,080,800 | 3,391,185 | (9.2) | % | |||||||||||||||||||||||||||
| Gross profit | 658,729 | 673,488 | (2.2) | % | 1,822,570 | 1,969,623 | (7.5) | % | |||||||||||||||||||||||||||
| Gross profit margin | 37.7 | % | 36.9 | % | 0.8 | 37.2 | % | 36.7 | % | 0.5 | |||||||||||||||||||||||||
| Selling, general and administrative expenses | 381,831 | 390,775 | (2.3) | % | 1,135,512 | 1,195,875 | (5.0) | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses as a percent of revenue | 21.8 | % | 21.4 | % | 0.4 | 23.2 | % | 22.3 | % | 0.9 | |||||||||||||||||||||||||
| Loss on assets held for sale | — | — | nm* | — | 46,946 | nm* | |||||||||||||||||||||||||||||
| Operating earnings | 276,898 | 282,713 | 687,058 | 726,802 | |||||||||||||||||||||||||||||||
| Interest expense | 27,724 | 31,410 | (11.7) | % | 83,703 | 94,972 | (11.9) | % | |||||||||||||||||||||||||||
| Interest income | (960) | (1,263) | (24.0) | % | (2,871) | (3,098) | (7.3) | % | |||||||||||||||||||||||||||
| Loss (gain) on sale of a business | 557 | — | nm* | (5,213) | — | nm* | |||||||||||||||||||||||||||||
| Other income, net | (1,420) | (5,364) | nm* | (9,887) | (11,059) | nm* | |||||||||||||||||||||||||||||
| Earnings before provision for income taxes | 250,997 | 257,930 | (2.7) | % | 621,326 | 645,987 | (3.8) | % | |||||||||||||||||||||||||||
| Provision for income taxes | 50,697 | 51,924 | (2.4) | % | 119,981 | 136,191 | (11.9) | % | |||||||||||||||||||||||||||
| Effective tax rate | 20.2 | % | 20.1 | % | 0.1 | 19.3 | % | 21.1 | % | (1.8) | |||||||||||||||||||||||||
| Net earnings | 200,300 | 206,006 | (2.8) | % | 501,345 | 509,796 | (1.7) | % | |||||||||||||||||||||||||||
| Net earnings per common share - diluted | $ | 1.38 | $ | 1.40 | (1.4) | % | $ | 3.45 | $ | 3.47 | (0.6) | % | |||||||||||||||||||||||
* nm - not meaningful
Revenue
Revenue for the three months ended September 30, 2020 decreased $77.1 million, or 4.2%, from the prior year comparable quarter. Results included an organic revenue decline of 5.1% primarily due to lower sales volumes due to pandemic-related slowness in our markets. Acquisition-related revenue growth of 1.0%, led by our Imaging & Identification and Pumps & Process Solutions segments, along with a favorable impact from foreign currency translation of 0.7% was partially offset by a 0.8% impact from a disposition within the Refrigeration & Food Equipment segment. Customer pricing favorably impacted revenue by approximately 0.5% in the third quarter of 2020.
Revenue for the nine months ended September 30, 2020 decreased $457.4 million, or 8.5%, from the prior year comparable period. The decrease primarily reflects an organic revenue decline of 8.0% across all our segments due to the adverse impact of COVID-19. Acquisition-related growth was 0.8% led by our Imaging & Identification and Pumps & Process Solutions segments. This growth was more than offset by an unfavorable impact from foreign currency translation of 0.6% and a 0.7% impact from dispositions within the Refrigeration & Food Equipment and Pumps & Process Solutions segments. Customer pricing favorably impacted revenue by approximately 0.6% for the nine months ended September 30, 2020.
Gross Profit
Gross profit for the three months ended September 30, 2020 decreased $14.8 million, or 2.2% from the prior year comparable quarter, primarily due to organic revenue declines, increased material and inflation costs and higher restructuring costs, partially offset by favorable business mix, pricing initiatives, benefits from productivity initiatives, restructuring and cost containment actions, including adjustments to direct and indirect manufacturing costs to current demand levels and short-term actions to reduce labor costs. Gross profit margin increased 80 basis points to 37.7%, due to benefits from productivity initiatives and restructuring and cost containment actions.
Gross profit for the nine months ended September 30, 2020 decreased $147.1 million, or 7.5%, from the prior year comparable period, primarily due to an organic revenue declines, increased material and inflation costs and higher restructuring costs,
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partially offset by productivity initiatives and restructuring and cost containment actions. Gross profit margin increased by 50 basis points to 37.2% for the nine months ended September 30, 2020 from the comparable period primarily due to benefits from productivity initiatives and restructuring and cost containment actions. We are managing production at our operating plants aggressively to match demand.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2020 decreased $8.9 million, or 2.3%, from the prior year comparable quarter, primarily due to continued cost reduction actions to offset revenue declines, including a reduction in discretionary spend and adjustments to variable compensation to reflect current conditions, and benefits from rightsizing actions. As a percentage of revenue, selling, general and administrative expenses increased 40 basis points to 21.8% due to the decline in revenue base. As we continue to respond to the impact of COVID-19, we expect sustained reductions in discretionary spend and headcount to match demand.
Selling, general and administrative expenses for the nine months ended September 30, 2020 decreased $60.4 million, or 5.0%, from the prior year comparable period, primarily due to a reduction in discretionary spend and benefits from rightsizing actions, partially offset by higher restructuring charges and a write-off of assets. Selling, general and administrative expenses as a percentage of revenue increased 90 basis points as compared to the prior year comparable period reflecting the decrease in revenue base.
Research and development costs, including qualifying engineering costs, are expensed when incurred and amounted to $36.4 million and $32.1 million for the three months ended September 30, 2020 and 2019, respectively, and $106.7 million and $102.0 million, for the nine months ended September 30, 2020 and 2019, respectively. These costs as a percent of revenue were 2.1% and 1.8% for the three months ended September 30, 2020 and 2019, respectively, and 2.2% and 1.9% for the nine months ended September 30, 2020 and 2019, respectively.
Loss on assets held for sale
On March 29, 2019, we entered into a definitive agreement to sell Finder Pompe S.r.l. ("Finder") for total consideration of approximately $23.6 million net of estimated selling costs. As of March 31, 2019, Finder met the criteria to be classified as held for sale and based on the total consideration from the sale, net of selling costs, we recorded a loss on the assets held for sale of $46.9 million. The loss was comprised of an impairment on assets held for sale of $21.6 million and foreign currency translation losses reclassified from accumulated other comprehensive losses to current earnings of $25.3 million. We subsequently sold Finder on April 2, 2019, which generated total cash proceeds of $24.2 million.
Gain on sale of a business
On March 6, 2020, we sold the Chino, California branch of The AMS Group ("AMS Chino") within the Refrigeration & Food Equipment segment for total consideration of $15.4 million which included a working capital adjustment. A gain of $5.2 million was recognized on this sale. The disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.
Other income, net
Other income, net for the three months and nine months ended September 30, 2020 decreased $3.9 million and $1.2 million respectively from prior year comparable periods primarily due to foreign exchange losses from the remeasurement of foreign currency denominated balances.
Income Taxes
The effective tax rates for the three months ended September 30, 2020 and 2019 were 20.2% and 20.1%, respectively. The increase in the effective tax rate for the three months ended September 30, 2020 relative to the prior year comparable quarter was primarily driven by discrete items.
The effective tax rates for the nine months ended September 30, 2020 and 2019 were 19.3% and 21.1%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2020 relative to the prior year comparable period was
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primarily driven by the exclusion of capital losses on the sale of Finder under local law in the prior year, partially offset by the impact of other discrete tax items.
Dover and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other foreign jurisdictions. We believe adequate provision has been made for all income tax uncertainties. The Company is routinely audited by taxing authorities in its filing jurisdictions, and a number of these audits are currently underway. The Company believes that within the next twelve months uncertain tax positions may be resolved and statutes of limitations will expire, which could result in a decrease in the gross amount of unrecognized tax benefits of approximately zero to $9.8 million.
Net earnings
Net earnings for the three months ended September 30, 2020 decreased 2.8% to $200.3 million, or $1.38 diluted earnings per share, from $206.0 million, or $1.40 diluted earnings per share, from the prior year comparable quarter. The decrease in net earnings was mainly attributable to reduced volume due to the impact of COVID-19, increased material and inflation costs and higher restructuring costs. The reduction was partially offset by broad-based cost containment actions and benefits from productivity and restructuring actions.
Net earnings for the nine months ended September 30, 2020 decreased 1.7% to $501.3 million, or $3.45 diluted earnings per share, from $509.8 million, or $3.47 diluted earnings per share, from the prior year comparable period. The decrease in net earnings was primarily due to the impact of COVID-19, increased material and inflation costs, and higher restructuring costs. The decrease in net earnings was partially offset by broad-based cost containment actions, benefits from productivity and restructuring actions, and a loss on assets held for sale of $46.9 million in the prior period.
Rightsizing Activities, which includes Restructuring and Other Costs
During the three and nine months ended September 30, 2020, rightsizing activities included restructuring charges of $6.7 million and $26.4 million, respectively, and other benefits of $0.9 million and costs of $4.2 million, respectively. Restructuring expense was comprised primarily of new actions taken in response to lower demand driven by COVID-19 as well as continuing broad-based selling, general and administrative expense reduction initiatives and broad-based operational efficiency initiatives focusing on footprint consolidation and operational optimization and IT centralization. Other costs and benefits comprised primarily of charges related to the restructuring actions offset by a $1.7 million gain on sale of assets in our Refrigeration & Food Equipment segment as a result of restructuring actions. These rightsizing charges were recorded in cost of goods and services and selling, general and administrative expenses in the Condensed Consolidated Statement of Earnings. Additional programs beyond the scope of the announced programs may be implemented during 2020 with related restructuring charges.
We recorded the following rightsizing costs for the three and nine months ended September 30, 2020:
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Engineered Products | Fueling Solutions | Imaging & Identification | Pumps & Process Solutions | Refrigeration & Food Equipment | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring (GAAP) | $ | 2,342 | $ | 1,572 | $ | 99 | $ | 1,719 | $ | 534 | $ | 474 | $ | 6,740 | |||||||||||||||||||||||||||
| Other costs (benefits), net | 33 | 43 | — | 52 | (1,505) | 485 | (892) | ||||||||||||||||||||||||||||||||||
| Rightsizing (Non-GAAP) | $ | 2,375 | $ | 1,615 | $ | 99 | $ | 1,771 | $ | (971) | $ | 959 | $ | 5,848 | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Engineered Products | Fueling Solutions | Imaging & Identification | Pumps & Process Solutions | Refrigeration & Food Equipment | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring (GAAP) | $ | 6,860 | $ | 3,958 | $ | (167) | $ | 10,271 | $ | 3,307 | $ | 2,136 | $ | 26,365 | |||||||||||||||||||||||||||
| Other costs, net | 45 | 18 | 3 | 37 | 2,442 | 1,637 | 4,182 | ||||||||||||||||||||||||||||||||||
| Rightsizing (Non-GAAP) | $ | 6,905 | $ | 3,976 | $ | (164) | $ | 10,308 | $ | 5,749 | $ | 3,773 | $ | 30,547 | |||||||||||||||||||||||||||
During the three and nine months ended September 30, 2019, rightsizing activities included restructuring charges of $3.3 million and $12.0 million, respectively, and other costs of $0.5 million and $2.2 million, respectively. Restructuring expense
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was related to two significant rightsizing restructuring programs initiated in 2018, comprised primarily of broad-based selling, general and administrative expense reduction and footprint consolidation initiatives. Other costs were comprised primarily of other charges related to the restructuring actions. These rightsizing charges were recorded in cost of goods and services and selling, general and administrative expenses in the Condensed Consolidated Statement of Earnings.
We recorded the following rightsizing costs for the three and nine months ended September 30, 2019:
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Engineered Products | Fueling Solutions | Imaging & Identification | Pumps & Process Solutions | Refrigeration & Food Equipment | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring (GAAP) | $ | 556 | $ | 825 | $ | 296 | $ | 907 | $ | 495 | $ | 257 | $ | 3,336 | |||||||||||||||||||||||||||
| Other costs (benefits), net | 34 | (14) | 5 | 36 | 345 | 65 | 471 | ||||||||||||||||||||||||||||||||||
| Rightsizing (Non-GAAP) | $ | 590 | $ | 811 | $ | 301 | $ | 943 | $ | 840 | $ | 322 | $ | 3,807 | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Engineered Products | Fueling Solutions | Imaging & Identification | Pumps & Process Solutions | Refrigeration & Food Equipment | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring (GAAP) | $ | 1,757 | $ | 3,339 | $ | 1,973 | $ | 1,789 | $ | 2,134 | $ | 1,018 | $ | 12,010 | |||||||||||||||||||||||||||
| Other costs (benefits), net | 38 | (8) | (15) | 471 | 1,666 | 65 | 2,217 | ||||||||||||||||||||||||||||||||||
| Rightsizing (Non-GAAP) | $ | 1,795 | $ | 3,331 | $ | 1,958 | $ | 2,260 | $ | 3,800 | $ | 1,083 | $ | 14,227 | |||||||||||||||||||||||||||
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SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our five reportable operating segments (Engineered Products, Fueling Solutions, Imaging & Identification, Pumps & Process Solutions, and Refrigeration & Food Equipment). Each of these segments is comprised of various product and service offerings that serve multiple markets. See Note 17 — Segment Information in the Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for a reconciliation of segment revenue and earnings to our consolidated revenue and net earnings. For further information, see "Non-GAAP Disclosures" at the end of this Item 2.
Additionally, we use the following operational metrics in monitoring the performance of the business. We believe the operational metrics are useful to investors and other users of our financial information in assessing the performance of our segments:
•Bookings represent total orders received from customers in the current reporting period. This metric is an important measure of performance and an indicator of revenue order trends.
•Organic bookings represent total orders received from customers in the current reporting period excluding the impact of foreign currency exchange rates and the impact of acquisitions and dispositions. This metric is an important measure of performance and an indicator of revenue order trends.
•Backlog represents an estimate of the total remaining bookings at a point in time for which performance obligations have not yet been satisfied. This metric is useful as it represents the aggregate amount we expect to recognize as revenue in the future.
•Book-to-bill is a ratio of the amount of bookings received from customers during a period divided by the amount of revenue recorded during that same period. This metric is a useful indicator of demand.
Engineered Products
Our Engineered Products segment is a provider of a wide range of products, software and services that have broad customer applications across a number of markets, including aftermarket vehicle service, solid waste handling, industrial automation, aerospace and defense, industrial winch and hoist, and fluid dispensing.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 386,562 | $ | 426,689 | (9.4) | % | $ | 1,137,102 | $ | 1,275,468 | (10.8) | % | ||||||||||||||||||||||||||
| Segment earnings (EBIT) | $ | 64,890 | $ | 74,367 | (12.7) | % | $ | 181,686 | $ | 218,615 | (16.9) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 10,717 | 10,095 | 6.2 | % | 30,561 | 30,906 | (1.1) | % | ||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 75,607 | $ | 84,462 | (10.5) | % | $ | 212,247 | $ | 249,521 | (14.9) | % | ||||||||||||||||||||||||||
| Segment margin | 16.8 | % | 17.4 | % | 16.0 | % | 17.1 | % | ||||||||||||||||||||||||||||||
| Segment EBITDA margin | 19.6 | % | 19.8 | % | 18.7 | % | 19.6 | % | ||||||||||||||||||||||||||||||
| Other measures: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 381,139 | $ | 426,059 | (10.5) | % | $ | 1,074,484 | $ | 1,251,176 | (14.1) | % | ||||||||||||||||||||||||||
| Backlog | $ | 373,458 | $ | 416,025 | (10.2) | % | ||||||||||||||||||||||||||||||||
Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
Organic decline | (10.4) | % | (10.9) | % | ||||||||||||||||||||||||||||||||||
| Acquisitions | 0.3 | % | 0.2 | % | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | 0.7 | % | (0.1) | % | ||||||||||||||||||||||||||||||||||
| (9.4) | % | (10.8) | % | |||||||||||||||||||||||||||||||||||
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Third Quarter 2020 Compared to the Third Quarter 2019
Engineered Products segment revenue for the third quarter of 2020 decreased $40.1 million, or 9.4%, as compared to the third quarter of 2019, comprised of organic decline of 10.4%, partially offset by a favorable impact from foreign currency translation of 0.7% and acquisition-related growth of 0.3%. Acquisition-related growth was driven by the acquisition of So. Cal. Soft-Pak ("Soft-Pak"). Customer pricing favorably impacted revenue by approximately 0.5% in the third quarter of 2020.
The organic revenue decline was primarily driven by the global economic downturn precipitated by the COVID-19 pandemic. The impact continued to be broad-based, with the most significant impacts in the third quarter experienced in our waste handling, industrial winch and hoist, industrial automation and fluid dispensing businesses. In waste handling we continued to experience headwinds on new order activity in the quarter as waste haulers and municipalities reduced current year capital budgets to preserve cash flow, and orders for compaction and recycling solutions remained below prior year levels; the comparison is further challenged since our waste handling business recorded all-time highest revenue in the third quarter of 2019. Although headwinds from the COVID-19 pandemic remain across the majority of our businesses, sequential activity improved from the second quarter to the third quarter in a number of businesses, most notably in our vehicle service and industrial automation businesses. Our vehicle service business revenues in particular returned to a level that was only slightly below those experienced in the third quarter of last year. Our aerospace & defense business also demonstrated continued resilience, posting strong year over year revenue growth in the quarter on the back of a strong backlog of orders from defense customers.
While we experienced improvements in the third quarter in several businesses, we expect the global COVID-19 pandemic to continue to impact demand for capital equipment and segment results for the remainder of the year as demand headwinds across our businesses persist, and as a result, we continue to focus on initiatives that align the cost structures of our businesses with near-term demand levels. Despite those near-term demand headwinds, we expect that demand for our products will continue its long term favorable growth trend, and believe the fundamental long term demand drivers across our end-markets remain constructive.
Engineered Products segment earnings decreased $9.5 million, or 12.7%, compared to the third quarter of 2019. The decrease was primarily driven by the continued impact of the COVID-19 pandemic on customer spending. This was partially offset by cost containment initiatives we executed in the second quarter. These initiatives include actions to adjust direct and indirect manufacturing costs to current demand levels, the execution of short-term actions to reduce labor costs, the elimination of non-essential travel, third party and other expenses, the recognition of adjustments to variable compensation to reflect current conditions, the execution of selective structural cost actions aimed at streamlining our businesses, and a detailed review and re-prioritization of all planned investments and hiring plans. These actions will remain in place until sustained improvements in near-term demand are realized. Segment operating margin decreased 60 basis points to 16.8% from 17.4% as compared to the prior year quarter.
Bookings decreased 10.5% for the segment, comprised of an organic decline of 11.6%, partially offset by a favorable impact from foreign currency of 0.7% and acquisition-related growth of 0.4%. The organic bookings decline was broad-based and primarily driven by the global impact on customer demand of the COVID-19 pandemic. Segment book-to-bill was 0.99. Backlog decreased 10.2% compared to the prior year quarter.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Engineered Products revenue for the nine months ended September 30, 2020 decreased $138.4 million, or 10.8%, compared to the prior year comparable period. This was comprised of organic revenue decline of 10.9% and an unfavorable impact from foreign currency translation of 0.1%, partially offset by acquisition-related growth of 0.2%. The organic revenue decline was primarily driven by the broad-based impact to customer spending of the global economic downturn precipitated by the COVID-19 pandemic. The impact began in the first quarter with government mandated shutdowns in China and Italy impacting our vehicle service business as well as a voluntary shutdown in the U.S. of a facility serving the automotive original equipment manufacturer ("OEM") market. The impact then became more broad-based in the early part of the second quarter, before experiencing sequential improvements toward the end of the second quarter and through the third quarter. Despite improving conditions, demand headwinds persisted in the third quarter. Customer pricing favorably impacted revenue by approximately 0.3% for the nine months ended September 30, 2020.
Segment earnings for the nine months ended September 30, 2020 decreased $36.9 million, or 16.9%, as compared to the 2019 comparable period. This decrease was primarily driven by the earnings impact from lower revenues due to the global COVID-19 pandemic, partially offset by significant cost reduction initiatives. Segment margin decreased from 17.1% to 16.0% as compared to the prior year comparable period.
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Fueling Solutions
Our Fueling Solutions segment is focused on providing components, equipment and software and service solutions enabling safe transport of fuels and other hazardous fluids along the supply chain, as well as the safe and efficient operation of retail fueling and vehicle wash establishments.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 380,511 | $ | 411,769 | (7.6) | % | $ | 1,066,988 | $ | 1,175,405 | (9.2) | % | ||||||||||||||||||||||||||
| Segment earnings | $ | 66,601 | $ | 68,069 | (2.2) | % | $ | 167,313 | $ | 157,936 | 5.9 | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 18,014 | 18,744 | (3.9) | % | 54,321 | 55,568 | (2.2) | % | ||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 84,615 | $ | 86,813 | (2.5) | % | $ | 221,634 | $ | 213,504 | 3.8 | % | ||||||||||||||||||||||||||
| Segment margin | 17.5 | % | 16.5 | % | 15.7 | % | 13.4 | % | ||||||||||||||||||||||||||||||
| Segment EBITDA margin | 22.2 | % | 21.1 | % | 20.8 | % | 18.2 | % | ||||||||||||||||||||||||||||||
| Other measures: | ||||||||||||||||||||||||||||||||||||||
Bookings | $ | 383,902 | $ | 450,727 | (14.8) | % | $ | 1,068,470 | $ | 1,188,066 | (10.1) | % | ||||||||||||||||||||||||||
Backlog | $ | 204,574 | $ | 223,081 | (8.3) | % | ||||||||||||||||||||||||||||||||
Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
Organic decline | (7.9) | % | (8.5) | % | ||||||||||||||||||||||||||||||||||
| Acquisitions | — | % | 0.3 | % | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | 0.3 | % | (1.0) | % | ||||||||||||||||||||||||||||||||||
| (7.6) | % | (9.2) | % | |||||||||||||||||||||||||||||||||||
Third Quarter 2020 Compared to the Third Quarter 2019
Fueling Solutions segment revenue for the third quarter of 2020 decreased $31.3 million, or 7.6%, as compared to the third quarter of 2019, comprised of an organic decline of 7.9%, partially offset by a favorable impact from foreign currency translation of 0.3%. Customer pricing favorably impacted revenue by approximately 0.7% in the third quarter of 2020.
The organic revenue decline was principally due to the continued adverse effects of COVID-19 and the tapering of government-mandated underground infrastructure upgrades in China. Demand was also impacted by reductions in capital budgets of vertically-integrated oil companies, which operate a significant share of fuel retail infrastructure outside the North American market. Additionally, our businesses serving the transportation and vehicle wash markets faced reduced capital spending by their customers due to COVID-19 operational disruptions and economic uncertainty. Demand for retail fueling solutions in North America was supported by strong demand and robust orders for EMV-compliant equipment which provided a partial offset to the decline in global sales. We expect activity in the retail fueling market to remain subdued through the end of the year, particularly outside of North America.
Fueling Solutions segment earnings decreased $1.5 million, or 2.2%, over the prior year comparable quarter. The decrease was predominantly driven by the global impact of COVID-19 which depressed volume and demand. This decline was partially offset by favorable geographic and product mix, productivity actions including realized restructuring benefits and selling, general and administrative cost reductions, and pricing initiatives. Segment margin increased to 17.5% from 16.5% in the prior year quarter.
Overall bookings decreased 14.8% as compared to the prior year comparable quarter, driven by organic decline of 14.2% and an unfavorable impact from foreign currency translation of 0.6%. Organic bookings decline was primarily driven by the global impact on customer demand caused by the COVID-19 pandemic, slower demand from vertically-integrated oil companies and prior year bookings reflected increased orders of underground equipment in China due to government-mandated site infrastructure upgrade activity. This was partially offset by high order trends for EMV equipment in North America. Segment book to bill was 1.01. Backlog decreased 8.3% as compared to the prior year comparable quarter primarily as a result of lower second and third quarter bookings.
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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Fueling Solutions segment revenue decreased $108.4 million, or 9.2%, as compared to the nine months ended September 30, 2019, attributable to organic decline of 8.5% and an unfavorable impact from foreign currency translation of 1.0%, partially offset by acquisition-related growth of 0.3%. Organic revenue decline was due to slowing in the retail fueling market in China and other parts of the world outside of North America, as well as slowing in global fluid transfer and tunnel vehicle wash businesses, partially offset by strong EMV activity in the North America fueling industry. The decline was primarily driven by the global adverse impacts triggered by COVID-19 beginning in the middle of the first quarter and continuing through the third quarter. Government-mandated shutdowns in China, India and Italy affected production and demand early in the year. Shutdowns continued into May in certain regions. We expect activity in the retail fueling market to remain subdued through the end of the year, particularly outside of North America. Customer pricing favorably impacted revenue by approximately 1.1% for the nine months ended September 30, 2020.
Fueling Solutions segment earnings increased $9.4 million, or 5.9%, for the nine months ended September 30, 2020. The increase was driven by favorable geographic mix, pricing and productivity initiatives, selling, general and administrative cost containment, and favorable impact from foreign currency translation. These benefits were partially offset by weakened organic volume due to COVID-19. Segment margin increased 230 basis points to 15.7% from 13.4% in the prior year comparable period.
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Imaging & Identification
Our Imaging & Identification segment supplies precision marking and coding, product traceability and digital textile printing equipment, as well as related consumables, software and services.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 265,690 | $ | 275,109 | (3.4) | % | $ | 750,432 | $ | 810,051 | (7.4) | % | ||||||||||||||||||||||||||
| Segment earnings | $ | 51,928 | $ | 61,655 | (15.8) | % | $ | 141,456 | $ | 172,251 | (17.9) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 9,809 | 7,360 | 33.3 | % | 27,802 | 22,208 | 25.2 | % | ||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 61,737 | $ | 69,015 | (10.5) | % | $ | 169,258 | $ | 194,459 | (13.0) | % | ||||||||||||||||||||||||||
| Segment margin | 19.5 | % | 22.4 | % | 18.8 | % | 21.3 | % | ||||||||||||||||||||||||||||||
| Segment EBITDA margin | 23.2 | % | 25.1 | % | 22.6 | % | 24.0 | % | ||||||||||||||||||||||||||||||
| Other measures: | ||||||||||||||||||||||||||||||||||||||
Bookings | $ | 266,423 | $ | 284,527 | (6.4) | % | $ | 760,342 | $ | 816,464 | (6.9) | % | ||||||||||||||||||||||||||
Backlog | $ | 171,158 | $ | 121,877 | 40.4 | % | ||||||||||||||||||||||||||||||||
Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
Organic decline | (7.6) | % | (8.6) | % | ||||||||||||||||||||||||||||||||||
| Acquisitions | 4.3 | % | 3.4 | % | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | (0.1) | % | (2.2) | % | ||||||||||||||||||||||||||||||||||
| (3.4) | % | (7.4) | % | |||||||||||||||||||||||||||||||||||
Third Quarter 2020 Compared to the Third Quarter 2019
Imaging & Identification segment revenue for the third quarter of 2020 decreased $9.4 million, or 3.4%, as compared to the third quarter of 2019, comprised of an organic decline of 7.6% and an unfavorable impact from foreign currency translation of 0.1%, partially offset by acquisition-related growth of 4.3%. Acquisition-related growth was driven by the acquisition of Sys-Tech Solutions, Inc. ("Systech") in the first quarter and Solaris, which closed in the third quarter. Customer pricing favorably impacted revenue by approximately 0.3% in the third quarter of 2020.
The organic revenue decline was primarily driven by the global economic downturn precipitated by the COVID-19 pandemic. We continued to experience significant unfavorable impact in our digital textile printing business. Digital textile printing activity has improved throughout the third quarter, driven by demand for home decor and sportswear apparel products, however activity in fashion and general apparel printing remains slower compared to prior year. This dynamic resulted in improving demand for our inks and consumables that are closely tied to current levels of activity and continued dampening of customers' need and appetite for investments in new machinery. Our marking and coding business posted approximately flat revenue driven by continued solid demand for consumables, particularly inks for food and beverage, cleaning supplies, pharmaceuticals and medical supplies, and delayed conversion of a strong pipeline for equipment sales as customers remain cautious towards capital expenditures and operational disruption amidst high utilization rates.
We expect the resiliency of our marking and coding business to continue in the fourth quarter, and continue to anticipate a favorable long-term growth trend thereafter, supported by constructive secular trends in demand for product traceability, identification, differentiation, and brand protection solutions. We expect continued slowness in new orders in the fourth quarter for the digital printing business driven by uncertainty and disruption in the apparel markets, although we expect the trajectory to improve sequentially based on most recent trends. We believe we also remain favorably positioned to exploit a longer-term transition from analog to digital printing by our customers.
Imaging & Identification segment earnings decreased $9.7 million, or 15.8%, over the prior year comparable quarter. This decrease was primarily driven by the impact of continued reduced consumer spending on clothing, sports apparel, and other textile products that impact our digital printing customers. Partially offsetting this decrease were continued cost containment initiatives in the third quarter. These initiatives included actions to adjust direct and indirect manufacturing cost to current
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demand levels, the execution of short-term actions to reduce labor costs, the elimination of non-essential travel, third party and other expenses, the recognition of adjustments to variable compensation to reflect current conditions, the execution of selective structural cost actions aimed at streamlining our business, and a detailed review and re-prioritization of all planned investments and hiring plans. These actions have been taken deliberately and strategically, and have allowed us to rationalize current spending to levels appropriate given near-term market conditions, while preserving our ability to capitalize on long-term secular growth trends. Segment margin decreased to 19.5% from 22.4% in the prior year comparable quarter.
Overall bookings decreased 6.4% as compared to the prior year comparable quarter, reflecting an organic decline of 9.9% and an unfavorable impact from foreign currency translation of 0.2%, partially offset by acquisition-related growth of 3.7%. The organic reduction was the result of a year over year reduction in new orders for equipment and consumables in our digital printing business. Segment book to bill was 1.00. Backlog increased 40.4% as compared to the prior year quarter driven by the inclusion of backlog from the Systech and Solaris acquisitions, and sustained bookings for consumables in marking and coding.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Imaging & Identification segment revenue decreased $59.6 million, or 7.4%, as compared to the nine months ended September 30, 2019, attributable to organic decline of 8.6% and an unfavorable impact from foreign currency translation of 2.2%, partially offset by acquisition-related growth of 3.4%. The organic revenue decline was primarily driven by the impact to consumer spending of the aforementioned global economic downturn precipitated by the COVID-19 pandemic. This impact began in the first quarter and although activity levels started to recover through the second and third quarter, we continue experience reduced activity on a year over year basis, most notably in our digital printing business. Customer pricing favorably impacted revenue by approximately 0.6% for the nine months ended September 30, 2020.
Imaging & Identification segment earnings decreased $30.8 million, or 17.9%, for the nine months ended September 30, 2020 over the prior year comparable period. The decrease was primarily driven by the earnings impact from lower revenues due to the global COVID-19 pandemic, partially offset by the significant cost reduction initiatives. Segment margin decreased to 18.8% from 21.3% in the prior year comparable quarter.
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Pumps & Process Solutions
Our Pumps & Process Solutions segment manufactures specialty pumps, fluid handling components, plastics and polymer processing equipment, and highly engineered components for rotating and reciprocating machines.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 347,875 | $ | 341,337 | 1.9 | % | $ | 976,506 | $ | 1,010,480 | (3.4) | % | ||||||||||||||||||||||||||
Segment earnings (1) | $ | 89,786 | $ | 77,433 | 16.0 | % | $ | 223,567 | $ | 168,702 | 32.5 | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 17,206 | 16,018 | 7.4 | % | 53,114 | 49,767 | 6.7 | % | ||||||||||||||||||||||||||||||
Segment EBITDA (1) | $ | 106,992 | $ | 93,451 | 14.5 | % | $ | 276,681 | $ | 218,469 | 26.6 | % | ||||||||||||||||||||||||||
Segment margin (1) | 25.8 | % | 22.7 | % | 22.9 | % | 16.7 | % | ||||||||||||||||||||||||||||||
Segment EBITDA margin (1) | 30.8 | % | 27.4 | % | 28.3 | % | 21.6 | % | ||||||||||||||||||||||||||||||
| Other measures: | ||||||||||||||||||||||||||||||||||||||
Bookings | $ | 323,801 | $ | 329,642 | (1.8) | % | $ | 969,076 | $ | 1,075,348 | (9.9) | % | ||||||||||||||||||||||||||
Backlog | $ | 361,631 | $ | 361,478 | — | % | ||||||||||||||||||||||||||||||||
Components of revenue growth (decline): | ||||||||||||||||||||||||||||||||||||||
Organic decline | (0.9) | % | (3.6) | % | ||||||||||||||||||||||||||||||||||
| Acquisitions | 1.3 | % | 1.1 | % | ||||||||||||||||||||||||||||||||||
| Dispositions | — | % | (0.6) | % | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | 1.5 | % | (0.3) | % | ||||||||||||||||||||||||||||||||||
| 1.9 | % | (3.4) | % | |||||||||||||||||||||||||||||||||||
(1) Segment earnings (EBIT) and segment EBITDA for the nine months ended September 30, 2019 include a $46,946 loss on assets held for sale for Finder.
Third Quarter 2020 Compared to the Third Quarter 2019
Pumps & Process Solutions segment revenue for the third quarter of 2020 increased $6.5 million, or 1.9%, as compared to the third quarter of 2019, comprised of a favorable impact from foreign currency translation of 1.5% and acquisition-related growth of 1.3%, partially offset by organic decline of 0.9%. Acquisition-related growth was driven by the acquisition of Em-tec GmbH ("Em-tec"). Customer pricing favorably impacted revenue by approximately 1.1% in the third quarter of 2020.
The organic revenue decline was principally driven by continued comparable weakness in demand for compression components and aftermarket services due to lower activity in the North American oil & gas sector, as well as continued slower demand for industrial pumps due to pandemic-related disruptions. The decline was almost completely offset by strong performance in the biopharma and hygienic markets, as well as robust demand in specialty pumps for defense applications and strong shipments against a significant backlog in the plastics & polymer processing business. We expect the segment revenue trajectory from the third quarter to directionally continue into the fourth quarter.
Pumps & Process Solutions segment earnings increased $12.4 million, or 16.0%, over the prior year comparable quarter. The increase was primarily driven by strategic pricing initiatives, productivity actions, restructuring benefits, favorable impact from foreign currency translation, and selling, general and administrative cost reductions. The cost reductions include the elimination of non-essential travel, third party and other expenses, and re-prioritization of all planned investments and hiring plans. This increase was partially offset by unfavorable changes in material and inflation costs. Segment margin increased to 25.8% from 22.7% from the prior year comparable quarter.
Overall bookings decreased 1.8% as compared to the prior year comparable quarter, reflecting organic decline of 3.7% partially offset by a favorable impact from foreign currency translation of 1.3% and acquisition-related growth of 0.6%. Organic bookings decline was primarily driven by the continued COVID-19 global impact on customer demand, as well as a high comparable benchmark from the prior year driven by large government orders, and partially offset by growth in the biopharma and hygienic markets. Segment book to bill was 0.93. Backlog remained flat compared to the prior year comparable quarter.
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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Pumps & Process Solutions segment revenue decreased $34.0 million, or 3.4%, as compared to the nine months ended September 30, 2019, attributable to organic decline of 3.6%, an unfavorable impact from foreign currency translation of 0.3% and a 0.6% impact from dispositions, partially offset by acquisition-related growth of 1.1%. The organic decline was primarily driven by continued slow demand in the oil & gas market as well as government mandated facility shutdowns during the first half of the year. We expect demand headwinds to continue into the fourth quarter in the oil and gas industry offset by volume growth in the biopharma and hygienic markets. Customer pricing favorably impacted revenue by approximately 1.0% for the nine months ended September 30, 2020.
Pumps & Process Solutions segment earnings increased $54.9 million, or 32.5%, for the nine months ended September 30, 2020 over the prior year comparable period. Segment earnings for the nine months ended September 30, 2019 included a loss on assets held for sale for Finder of $46.9 million. Excluding the loss, segment earnings increased $7.9 million, predominantly driven by pricing initiatives, productivity actions, restructuring benefits, and selling, general and administrative cost reductions. These benefits were partially offset by the global impact of COVID-19 on volume and an unfavorable impact from material and inflation costs. Segment margin increased to 22.9% from 16.7% from the prior year comparable period, which included the loss on Finder.
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Refrigeration & Food Equipment
Our Refrigeration & Food Equipment segment is a provider of innovative and energy-efficient equipment and systems that serve the commercial refrigeration, heating and cooling and food equipment markets.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 368,395 | $ | 370,335 | (0.5) | % | $ | 973,835 | $ | 1,090,452 | (10.7) | % | ||||||||||||||||||||||||||
Segment earnings(1) | $ | 40,159 | $ | 35,211 | 14.1 | % | $ | 75,147 | $ | 104,393 | (28.0) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 12,081 | 13,047 | (7.4) | % | 35,050 | 38,835 | (9.7) | % | ||||||||||||||||||||||||||||||
Segment EBITDA(1) | $ | 52,240 | $ | 48,258 | 8.3 | % | $ | 110,197 | $ | 143,228 | (23.1) | % | ||||||||||||||||||||||||||
Segment margin(1) | 10.9 | % | 9.5 | % | 7.7 | % | 9.6 | % | ||||||||||||||||||||||||||||||
Segment EBITDA margin(1) | 14.2 | % | 13.0 | % | 11.3 | % | 13.1 | % | ||||||||||||||||||||||||||||||
| Other measures: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 449,549 | $ | 323,422 | 39.0 | % | $ | 1,131,106 | $ | 1,084,785 | 4.3 | % | ||||||||||||||||||||||||||
| Backlog | $ | 472,140 | $ | 262,870 | 79.6 | % | ||||||||||||||||||||||||||||||||
| Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
Organic growth (decline) | 2.6 | % | (7.6) | % | ||||||||||||||||||||||||||||||||||
| Dispositions | (3.8) | % | (3.0) | % | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | 0.7 | % | (0.1) | % | ||||||||||||||||||||||||||||||||||
| (0.5) | % | (10.7) | % | |||||||||||||||||||||||||||||||||||
(1) Segment earnings (EBIT) and Segment EBITDA for the three and nine months ended September 30, 2020 include a $557 expense and a $5,213 net gain on the sale of AMS Chino, respectively. The nine months ended September 30, 2020 also include a $3,640 write-off of assets.
Third Quarter 2020 Compared to the Third Quarter 2019
Refrigeration & Food Equipment segment revenue decreased $1.9 million, or 0.5%, as compared to the third quarter of 2019, reflecting a 3.8% impact from the disposition of AMS Chino, partially offset by organic revenue growth of 2.6% and a favorable impact from foreign currency translation of 0.7%. Customer pricing did not have a significant impact on revenue in the third quarter of 2020.
The organic revenue growth was principally driven by recovering demand in food retail as supermarket customers resumed their remodeling programs, as well as large shipments against backlog in the aluminum can shaping business. Our heat exchanger business posted approximately flat revenue year-over-year as weakness in HVAC applications was offset by robust demand in residential and industrial applications, including semiconductor production and server and medical cooling. Commercial foodservice markets remained challenged, with improving activity in the restaurant chain end-market only partially offset by continued declines in institutional (education, sports and large event venues, et cetera) and independent restaurant markets.
We expect continued strength in the aluminum can shaping market due to secular shifts away from plastic containers in favor of aluminum, as well as a significant increase in demand for canned beverages and food due to the shift to at-home consumption. However, food retailers will likely exhibit normal seasonally slower activity in the fourth quarter due to holidays resulting in sequentially lower revenue as we finish the year.
Refrigeration & Food Equipment segment earnings increased $4.9 million, or 14.1%, as compared to the third quarter of 2019. Segment margin increased to 10.9% from 9.5% in the prior year comparable quarter. The earnings growth was driven by leverage on increased organic volumes, broad-based cost reduction and productivity initiatives, a $1.7 million gain on sale of assets, and deferral of planned selling, general, and administrative investments, partially offset by the disposition of AMS Chino and higher restructuring costs primarily associated with segment-wide reductions in force.
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Bookings in the third quarter of 2020 increased 39.0% from the prior year comparable quarter, reflecting organic growth of 41.3%,a favorable impact from foreign currency translation of 0.9%, partially offset by a 3.2% impact from the disposition of AMS Chino. The organic growth was driven principally by large project awards for aluminum can shaping equipment supported by market trends of beverage companies shifting away from plastic and glass containers in favor of aluminum. Additionally, both our retail refrigeration and heat exchanger business experienced stronger order rates, partially offset by ongoing softness in foodservice equipment. Segment book to bill for the third quarter of 2020 was 1.22. Backlog increased 79.6% over the prior year comparable quarter, principally driven by our aluminum can shaping equipment business as well as an increase in our retail refrigeration business.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Refrigeration & Food Equipment segment revenue decreased $116.6 million, or 10.7%, compared to the nine months ended September 30, 2019, reflecting an organic revenue decline of 7.6%, a 3.0% impact from the disposition of AMS Chino and an unfavorable foreign currency translation of 0.1%. The organic revenue decline for the nine months ended September 30, 2020 was driven primarily by the impact of COVID-19 on a global basis. This impact began in the first quarter with operations shut down in China and Malaysia as well as interruptions in North American facilities. Intermittent disruptions continued in the second quarter and lessened in the third quarter. We expect continued strength in the aluminum can shaping market and near-term growth in the retail refrigeration market driven by the recent wear and tear on our customers' existing assets driving equipment replacement programs. Customer pricing favorably impacted revenue by approximately 0.3% for the nine months ended September 30, 2020.
Refrigeration & Food Equipment segment earnings decreased $29.2 million, or 28.0%, for the nine months ended September 30, 2020, as compared to the prior year comparable period. Segment margin decreased to 7.7% from 9.6% in the prior year comparable period due to substantially reduced revenues and operational inefficiencies associated with COVID-19, increased restructuring expenses and a $3.6 million write-off of assets, partially offset by the gain on sale from the disposition of AMS Chino, a $1.7 million gain on sale of assets, and other broad-based cost reduction activities.
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FINANCIAL CONDITION
We assess our liquidity in terms of our ability to generate cash to fund our 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. We generate substantial cash from the operations of our businesses and remain in a strong financial position, with sufficient liquidity available to support continued operations, reinvest in existing businesses and fund strategic acquisitions, while maintaining our prudent capital structure on a short and long-term basis.
Cash Flow Summary
The following table is derived from our Condensed Consolidated Statements of Cash Flows:
| Nine Months Ended September 30, | |||||||||||
Cash Flows (dollars in thousands) | 2020 | 2019 | |||||||||
| Net Cash Flows Provided By (Used In): | |||||||||||
| Operating activities | $ | 686,919 | $ | 584,098 | |||||||
| Investing activities | (362,998) | (336,057) | |||||||||
| Financing activities | (283,336) | (302,430) | |||||||||
Operating Activities
Cash provided by operating activities for the nine months ended September 30, 2020 increased approximately $102.8 million compared to the comparable period in 2019. This increase was primarily driven by improvements in working capital of $66.1 million, permitted deferrals of tax payments and advanced payments on contracts, partially offset by lower net earnings, excluding the impact of depreciation, amortization, loss on assets held for sale and gain on sale of a business.
We participated in certain government economic stabilization programs to enhance our liquidity. We deferred approximately $40 million of U.S. and state income tax payments from the second quarter to the third quarter of 2020, which has now been paid. Additionally, under the U.S. CARES Act, we deferred a total of approximately $20 million of payroll taxes in the second and third quarters to be paid equally in the fourth quarters of 2021 and 2022.
Adjusted Working Capital: We believe adjusted working capital (a non-GAAP measure calculated as accounts receivable, plus inventory, less accounts payable) provides a meaningful measure of our operational results by showing changes caused solely by revenue.
Adjusted Working Capital (dollars in thousands) | September 30, 2020 | December 31, 2019 | |||||||||
| Accounts receivable | $ | 1,203,429 | $ | 1,217,190 | |||||||
| Inventories | 838,539 | 806,141 | |||||||||
| Less: Accounts payable | 899,814 | 983,293 | |||||||||
| Adjusted working capital | $ | 1,142,154 | $ | 1,040,038 | |||||||
Adjusted working capital increased from December 31, 2019 by $102.1 million, or 9.8%, to $1.1 billion at September 30, 2020, which reflected a decrease of $13.8 million in accounts receivable, an increase of $32.4 million in inventory, and a decrease in accounts payable of $83.5 million.
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Investing Activities
Cash provided by or used in investing activities generally results from cash outflows for capital expenditures and acquisitions, offset by proceeds from sales of businesses and property, plant and equipment. For the nine months ended September 30, 2020 and 2019, we used cash in investing activities of $363.0 million and $336.1 million, respectively, driven mainly by the following factors:
•Acquisitions: During the nine months ended September 30, 2020, we acquired Systech, Soft-Pak, Em-tec, Solaris, and an immaterial business within the Imaging & Identification, Engineered Products, and Pumps & Process Solutions segments for $258.7 million, net of cash acquired. During the nine months ended September 30, 2019, we acquired Belanger, Inc, All-Flo Pump Company, Limited and an immaterial business within the Fueling Solutions and Pumps and Process Solutions segments for $215.7 million, net of cash acquired.
•Capital spending: Our capital expenditures decreased $13.7 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease is in line with our reduced capital spending plan for the year as a result of COVID-19, without deferring strategic ongoing initiatives.
•Proceeds from sale of businesses: For the nine months ended September 30, 2020, we received proceeds of $15.4 million from the sale of AMS Chino within the Refrigeration & Food Equipment segment. For the nine months ended September 30, 2019, we received proceeds of $24.2 million from the sale of Finder in the second quarter of 2019.
We anticipate that capital expenditures and any acquisitions we make through the remainder of 2020 will be funded from available cash and internally generated funds and through the issuance of commercial paper, use of lines of credit or public or private debt or equity markets, as necessary.
Financing Activities
Our cash flow from financing activities generally relates to the use of cash for the repurchase of our common stock and payments of dividends, offset by net borrowing activity. For the nine months ended September 30, 2020 and 2019, cash used in financing activities was $283.3 million and $302.4 million, respectively, with the activity primarily attributable to the following:
•Repurchase of common stock: During the nine months ended September 30, 2020, we used $52.9 million to repurchase 548,659 shares, all of which were purchased in the first quarter. We suspended further share repurchases in the second quarter as a result of business uncertainty related to COVID-19. We lifted this suspension beginning in the third quarter. During the nine months ended September 30, 2019, we used $23.3 million to repurchase 261,807 shares.
•Long-term debt, commercial paper and notes payable: During the nine months ended September 30, 2020, we borrowed $500 million under the $1.0 billion five-year unsecured revolving credit facility ("Credit Agreement") in the first quarter which was subsequently repaid during the second quarter. During the nine months ended September 30, 2020, we also received net proceeds from commercial paper of $5.8 million. During the nine months ended September 30, 2019, we repaid $37.7 million of commercial paper and notes payable.
•Dividend payments: Dividends paid to shareholders during the nine months ended September 30, 2020 totaled $213.0 million as compared to $211.1 million during the same period in 2019. Our dividends paid per common share increased 1.7% to $1.475 during the nine months ended September 30, 2020 compared to $1.450 during the same period in 2019. The number of common shares outstanding decreased during the nine months ended September 30, 2020 compared to the same period in 2019 as a result of share repurchases completed in 2020 and the fourth quarter of 2019.
•Payments to settle employee tax obligations: Payments to settle tax obligations from the exercise of share-based awards declined $7.6 million compared to the prior year period. The decrease is primarily due to the decrease in the number of shares exercised partially offset by an increase in the average stock price compared to the prior year period.
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Liquidity and Capital Resources
Free Cash Flow
In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures. We believe that free cash flow is an important measure of operating performance because it provides management and investors a measurement of cash generated from operations that is available for mandatory payment obligations and investment opportunities, such as funding acquisitions, paying dividends, repaying debt and repurchasing our common stock.
The following table reconciles our free cash flow to cash flow provided by operating activities:
| Nine Months Ended September 30, | |||||||||||
Free Cash Flow (dollars in thousands) | 2020 | 2019 | |||||||||
| Cash flow provided by operating activities | $ | 686,919 | $ | 584,098 | |||||||
| Less: Capital expenditures | (123,564) | (137,276) | |||||||||
| Free cash flow | $ | 563,355 | $ | 446,822 | |||||||
| Free cash flow as a percentage of revenue | 11.5 | % | 8.3 | % | |||||||
| Free cash flow as a percentage of net earnings | 112.4 | % | 87.6 | % | |||||||
For the nine months ended September 30, 2020, we generated free cash flow of $563.4 million, representing 11.5% of revenue and 112.4% of net earnings. Free cash flow for the nine months ended September 30, 2020 increased $116.5 million compared to the prior year period, due to higher operating cash flow primarily as a result of improvements in working capital, permitted deferrals of tax payments and advanced payments on contracts, as previously noted, and lower capital expenditures.
We continued to maintain positive free cash flow through the third quarter by proactively managing our working capital and reducing our capital spend for the year, without deferring strategic ongoing initiatives. We also continued to reduce discretionary spend and other costs to align with current demand levels in order to support strong free cash flow generation. We participated in certain government economic stabilization programs to enhance our liquidity by deferring tax payments and utilizing job retention subsidies.
Capitalization
We use commercial paper borrowings for general corporate purposes, including the funding of acquisitions and the repurchase of our common stock. As of September 30, 2020, we maintained a $1 billion Credit Agreement with a syndicate of banks with an expiration date of October 4, 2024. The Credit Agreement is used as liquidity back-up for our commercial paper program.
Beginning in early-to-mid-March 2020, the commercial paper market began to experience very high levels of volatility as a result of COVID-19 related uncertainties. Volatility was most pronounced for "Tier-2" issuers, such as Dover, and impacted both market access and pricing. As a result, on March 16, 2020, the Company borrowed $500 million under the Credit Agreement. Proceeds from the borrowing were used to repay all of the Company's outstanding commercial paper and for general corporate purposes. We subsequently repaid the $500 million using proceeds from commercial paper as volatility in the commercial paper market stabilized and we resumed borrowing commercial paper.
In the spirit of prudent liquidity management, on May 6, 2020 we also entered into a $450.0 million 364-day revolving credit facility ("Short-term Credit Agreement") which expires on May 5, 2021. The Short-term Credit Agreement is intended to be used primarily for working capital and general corporate purposes. The Company may elect to have loans under the Short-term Credit Agreement which bear interest at a base rate plus a specified applicable margin. We have not undertaken any borrowings under this facility.
Under the Credit Agreement and the Short-term Credit Agreement, we are required to pay a facility fee and to maintain an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of not less than 3.0 to 1.0. We were in compliance with this covenant and our other long-term debt covenants at September 30, 2020 and had a coverage ratio of 11.0 to 1. We are not aware of any potential impairment to our liquidity and expect to remain in compliance with all of our debt covenants. Additionally, our earliest long-term debt maturity is in 2025.
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We also have a current shelf registration statement filed with the Securities and Exchange Commission that allows for the issuance of additional debt securities that may be utilized in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.
At September 30, 2020, our cash and cash equivalents totaled $427.5 million, of which $336.1 million was held outside the United States. At December 31, 2019, our cash and cash equivalents totaled $397.3 million, of which $273.1 million was held outside the United States. Cash and cash equivalents are invested in highly liquid investment-grade money market instruments and bank deposits with maturities of three months or less. We invest any cash in excess of near-term requirements in money market instruments or short-term investments, which consist of investment grade time deposits with original maturity dates at the time of purchase of no greater than three months.
We utilize the net debt to net capitalization calculation (a non-GAAP measure) to assess our overall financial leverage and capacity and believe the calculation is useful to investors for the same reason. Net debt represents total debt minus cash and cash equivalents. Net capitalization represents net debt plus stockholders' equity. The following table provides a reconciliation of net debt to net capitalization to the most directly comparable GAAP measures:
Net Debt to Net Capitalization Ratio (dollars in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Commercial paper | $ | 90,500 | $ | 84,700 | ||||||||||
| Long-term debt | 3,047,216 | 2,985,716 | ||||||||||||
| Total debt | 3,137,716 | 3,070,416 | ||||||||||||
| Less: Cash and cash equivalents | (427,501) | (397,253) | ||||||||||||
| Net debt | 2,710,215 | 2,673,163 | ||||||||||||
| Add: Stockholders' equity | 3,246,421 | 3,032,660 | ||||||||||||
| Net capitalization | $ | 5,956,636 | $ | 5,705,823 | ||||||||||
| Net debt to net capitalization | 45.5 | % | 46.8 | % | ||||||||||
Our net debt to net capitalization ratio decreased to 45.5% at September 30, 2020 compared to 46.8% at December 31, 2019. Net debt increased $37.1 million during the period primarily due to an increase in long-term debt as a result of foreign currency translation on Euro denominated notes partially offset by an increase in cash and cash equivalents. Stockholders' equity increased $213.8 million primarily as a result of earnings during the period, partially offset by dividends paid, and share repurchases.
Operating cash flow, existing capacity of our Credit Agreement and our Short-term Credit Agreement and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions, capital expenditures and share repurchases.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements and related public financial information are based on the application of GAAP which requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our public disclosures, including information regarding contingencies, risk and our financial condition. We believe our use of estimates and underlying accounting assumptions conform to GAAP and are consistently applied. We review valuations based on estimates for reasonableness on a consistent basis.
Recent Accounting Standards
See Part 1, Notes to Condensed Consolidated Financial Statements, Note 20 — Recent Accounting Pronouncements. The adoption of recent accounting standards as included in Note 20 — Recent Accounting Pronouncements in the Condensed Consolidated Financial Statements has not had, and is not expected to have, a significant impact on our revenue, earnings or liquidity.
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Special Notes Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, especially "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this document other than statements of historical fact are statements that are, or could be deemed, “forward-looking” statements. Some of these statements may be indicated by words such as “may”, “anticipate”, “expect”, believe”, “intend”, “guidance”, “estimates”, “suggest”, “will”, “plan”, “should”, “would”, “could”, “forecast” and other words and terms that use the future tense or have a similar meaning. Forward-looking statements are based on current expectations and are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond the Company’s control. Factors that could cause actual results to differ materially from current expectations include, among other things, the impacts of COVID-19, or other future pandemics, on the global economy and on our customers, suppliers, employees, business and cash flows, other general economic conditions and conditions in the particular markets in which we operate, changes in customer demand and capital spending, competitive factors and pricing pressures, our ability to develop and launch new products in a cost-effective manner, changes in law, including the effect of U.S. tax reform and developments with respect to trade policy and tariffs, our ability to identify and complete acquisitions and integrate and realize synergies from newly acquired businesses, the impact of interest rate and currency exchange rate fluctuations, capital allocation plans and changes in those plans, including with respect to dividends, share repurchases, investments in research and development, capital expenditures and acquisitions, our ability to derive expected benefits from restructuring, productivity initiatives and other cost reduction actions, changes in material costs or the supply of input materials, the impact of legal compliance risks and litigation, including with respect to product quality and safety, cybersecurity and privacy, our ability to capture and protect intellectual property rights, and various other factors that are described in our periodic reports filed with or furnished to the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2019. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
The Company may, from time to time, post financial or other information on its website, www.dovercorporation.com. The website is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this report.
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Non-GAAP Disclosures
In an effort to provide investors with additional information regarding our results as determined by GAAP, we also disclose non-GAAP information which we believe provides useful information to investors. Segment EBITDA, segment EBITDA margin, free cash flow, free cash flow as a percentage of revenue, free cash flow as a percentage of net earnings, net debt, net capitalization, net debt to net capitalization ratio, adjusted working capital, organic revenue growth and rightsizing costs are not financial measures under GAAP and should not be considered as a substitute for earnings, cash flows from operating activities, debt or equity, working capital, revenue or restructuring costs as determined in accordance with GAAP, and they may not be comparable to similarly titled measures reported by other companies.
We believe that segment EBITDA and segment EBITDA margin are useful to investors and other users of our financial information in evaluating ongoing operating profitability as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment earnings, which is the most directly comparable GAAP measure. We do not present segment net income because corporate expenses, interest and taxes are not allocated at a segment level. Segment EBITDA margin is calculated as segment EBITDA divided by segment revenue.
We believe the net debt to net capitalization ratio and free cash flow are important measures of liquidity. Net debt to net capitalization is helpful in evaluating our capital structure and the amount of leverage we employ. Free cash flow and free cash flow ratios provide both management and investors a measurement of cash generated from operations that is available to fund acquisitions, pay dividends, repay debt and repurchase our common stock. Free cash flow as a percentage of revenue equals free cash flow divided by revenue. Free cash flow as a percentage of net earnings equals free cash flow divided by net earnings. We believe that reporting adjusted working capital, which is calculated as accounts receivable, plus inventory, less accounts payable, provides a meaningful measure of our operational results by showing the changes caused solely by revenue. We believe that reporting organic revenue growth, which excludes the impact of foreign currency exchange rates and the impact of acquisitions and divestitures, provides a useful comparison of our revenue performance and trends between periods. We believe that reporting rightsizing costs, which include restructuring and other charges, is important as it enables management and investors to better understand the financial impact of our broad-based cost reduction and operational improvement initiatives.
Reconciliations of non-GAAP measures can be found above in this Item 2, Management's Discussion & Analysis.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposure to market risk during the nine months ended September 30, 2020. For a discussion of our exposure to market risk, refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Item 4. Controls and Procedures
At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.
During the third quarter of 2020, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Notes to Condensed Consolidated Financial Statements, Note 14 — Commitments and Contingent Liabilities.
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Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a.Not applicable.
b.Not applicable.
c.In February 2018, the Company's Board of Directors approved a standing share repurchase authorization, whereby the Company may repurchase up to 20 million shares of its common stock through December 31, 2020. No share repurchases were made under the February 2018 authorization during the three months ended September 30, 2020. As of September 30, 2020, the number of shares still available for repurchase under the February 2018 share repurchase authorization was 7,811,385.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| 31.1 | ||||||||||||||||||||
| 10.1 | ||||||||||||||||||||
| 31.2 | ||||||||||||||||||||
| 32 | ||||||||||||||||||||
| 101 | The following materials from Dover Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Earnings, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. | |||||||||||||||||||
| 104 | Cover Page formatted in Inline XBRL and contained in Exhibit 101. | |||||||||||||||||||
| *Executive compensation plan or arrangement. | ||||||||||||||||||||
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| DOVER CORPORATION | ||||||||
| Date: | October 20, 2020 | /s/ Brad M. Cerepak | ||||||
| Brad M. Cerepak | ||||||||
| Senior Vice President & Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: | October 20, 2020 | /s/ Ryan W. Paulson | ||||||
| Ryan W. Paulson | ||||||||
| Vice President, Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
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