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Dover Beats EPS, Misses Sales

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Dover Corporation (DOV - Free Report) reported its second-quarter 2012 earnings of $1.15 per share, beating the Zacks Consensus Estimate of $1.14. Results inched up 1% from the prior-year quarter’s earnings of $1.14 per share.  

On the reported basis, earnings were $1.15 per share compared with the prior-year quarter earnings of $1.26. The prior-year quarter earnings included the benefits of tax gains of 12 cents per share.

Operational Update

Total revenues were $2.157 billion, improving 8% year over year, missing the Zacks Consensus Estimate of $2.186 billion. The revenue increase included an organic growth of 3% and increase from acquisitions by 7%, partially offset by negative impacts of 2% from foreign currency.

Cost of sales soared 10% to $1.339 billion versus $1.219 billion in the year-ago quarter. Gross profit of the company went up 5.4% year over year to $817.6 million. However, gross margin contracted 100 basis points (bps) to 37.9% in the quarter.

Selling and administrative expenses also increased 10% to $494.1 million in the quarter. Operating profit dropped 1.3% to $323.5 million. Operating margin was 15%, a 140 bps contraction over the prior-year quarter.

Segmental Performance

Revenues in the Communication Technologies segment escalated 25% to $361.7 million. The segment’s income, however, dipped 8.4% to $50.3 million, and operating margin dropped 500 bps year over year to 13.9%.

Energy reported total revenues of $538.8 million in the quarter under review compared with $454.3 million in the year-ago quarter. The segment’s operating income shot up 21.3% to $133.9 million from $110.4 million in the year-earlier quarter. The segment’s margin expanded 60 bps year over year to 24.9% in the reported quarter.

Net sales in the Engineered Systems segment increased 7.6% to $886.1 million in the quarter from $823.2 million in the year-ago quarter. The segment’s income surged 4.1% to $133.8 million from $128.6 million in the year-earlier quarter. Operating margin of the segment contracted 50 bps year over year to 15.1%.

Total revenues of Printing & Identification segment fell 16% to $370.2 million from $429.5 million in the prior-year quarter. The segment reported operating income of $41.7 million, down 63% from $68 million in the last-year’s quarter, contracting the operating margin by 450 bps year over year to 11.3%.

Bookings and Backlog

The company ended the second quarter with $2.14 billion worth of bookings versus $1.96 at the end of the second quarter 2011. Backlog of the company increased to $1.66 billion at end of the reported quarter from $1.48 billion at second quarter 2011.

Free Cash Flow & Acquisition

Dover generated free cash flow of $177.8 million in the reported quarter compared with $132.9 million in the year-ago quarter. Recently, Dover completed the acquisition of a leading provider of artificial lift products and services for the oil and gas industry, Production Control Services, Inc. The transaction value of the deal was nearly $220 million.

Outlook for 2012

Dover expects revenue growth in the range of 8%-10%, down from the previous guidance of 10%-14%. Organic revenue growth will contribute 3%-5% while acquisitions will add 5% to the revenue growth. It expects earnings to lie in the band of $4.70-$4.85.

Our view

Dover’s expansion has been mainly driven by acquisitions and its acquisition pipeline is ever active. Production Control Services, Inc. will complement the Norris Production Solutions, an operating unit within Dover's Energy segment. The acquisition will help Dover to pursue its strategy to become the market leader in the field of artificial lift. Further, it will be able to foray into the artificial lift market with a wider and diversified range of products.

Dover has access to the volatile semiconductor and electronics end-markets through its Printing and Identification segment. Lower volumes reduced operating leverage in the semiconductor business during the first-quarter 2012. As regards development, we do not expect anything noteworthy in the semiconductor sector in 2012 and thus remain cautious regarding the outlook for Printing and Identification.

Dover competes with companies like Cooper Industries plc and Weatherford International Ltd. (WFT - Free Report) . Dover retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

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