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Dover Corporation (DOV - Analyst Report) reported third-quarter 2013 adjusted earnings from continuing operations of $1.54 per share, beating the Zacks Consensus Estimate of $1.50 and up 23% from the prior-year quarter’s earnings of $1.25 per share. Organic growth across all segments, strength in drilling and downstream markets within Energy, refrigeration & food equipment markets, and Printing & Identification, and cost reduction activities helped the year-over-year increase.

On a reported basis, earnings from continuing operations were $1.53 per share, up 20% from $1.27 per share earned in the prior-year quarter. Earnings in the reported quarter included tax benefit of 3 cents per share, one-time gains of 2 cents and a charge of 6 cents per share related to the Knowles spin off. The year-ago quarter included gains from discrete
and other tax items of 2 cents per share.

Revenues and Margins
Total revenue rose 7% year on year to $2.25 billion in the quarter, but fell short of the Zacks Consensus Estimate of $2.3 billion. The year-over-year rise includes an organic growth of 3% and a 4% contribution from acquisitions.

Cost of sales increased 7% to $1.37 billion in the quarter from $1.29 billion in the year-ago quarter. Gross profit went up 8% year over year to $877 million. Consequently, gross margin expanded 30 basis points (bps) to 38.9% in the quarter.

Selling, general and administrative expenses increased 7% year over year to $482 million. Operating profit in the reported quarter increased 10% to $394 million. Operating margin also expanded 40 bps to 17.5% in the quarter.

Segmental Performance

Revenues in the Communication Technologies segment rose 4% year over year to $413.6 million in the reported quarter. The segment’s income increased 19% year over year to $76 million.

Energy revenues went up 3% to $577 million in the quarter. The segment’s operating income went up 5% to $145.5 million from $139 million in the prior-year quarter.

Revenues in the Engineered Systems segment increased 13% to $1,005 million in the quarter. The segment’s income also improved 19% to $172 million.

Printing & Identification segment revenues were $256 million in the quarter compared with $247 million in the prior-year quarter. The segment reported an operating income of $42.9 million, increasing 9% from $39.5 million a year ago.

Bookings and Backlog

The company ended the third quarter of 2013 with bookings worth $2.16 billion versus $1.98 billion at the end of the third quarter of 2012. Backlog increased year over year to $1.54 billion at the end of the reported quarter compared with $1.51 million in the year-ago quarter.

Cash Flows

The company generated cash flow from operating activities of $340 million in the reported quarter, up from $286 million in the prior-year quarter. Free cash flow was $283 million compared with $218 million in the prior-year quarter.

Outlook for 2013

Due to weaker-than-expected market conditions, Dover tweaked its earnings guidance to a range of $5.57-$5.64 per share from the prior earnings expectation of $5.56-$5.71 per share. Dover now expects revenue growth of 7% compared with its previous projection of  7%-9% growth. The new guidance assumes an organic revenue improvement of 3% and a 4% contribution from acquisitions.

Our View

Dover will continue to benefit from its acquisitions, growth in bookings and orders, and a positive outlook for the semiconductor market. However, volatile raw material costs will put margins under pressure and the printing & identification segment results are likely to be affected given its above-average exposure to Europe.

Dover currently retains a short-term Zacks Rank #2 (Buy). Along with Dover, Manitex International, Inc. (MNTX - Snapshot Report), Colfax Corporation (CFX - Analyst Report) and Ingersoll-Rand Plc (IR - Analyst Report) also belong to the diversified machinery industry. While Manitex carries a Zacks Rank #1 (Strong Buy), Colfax and Ingersoll retain a Zacks Rank # 2 (Buy).

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