filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 Note 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, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America ("GAAP"). Please see "Non-GAAP Disclosures" at the end of this Item 2 for further detail on these financial measures. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
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, Clean Energy & Fueling, Imaging & Identification, Pumps & Process Solutions, and Climate & Sustainability Technologies. 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:
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Our Engineered Products segment provides a wide range of equipment, components, software, solutions and services to the vehicle aftermarket, waste handling, aerospace and defense, industrial winch and hoist, and fluid dispensing end-markets.
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Our Clean Energy & Fueling segment provides components, equipment, software, solutions and services enabling safe and reliable storage, transport and dispensing of traditional and clean fuels (including liquefied natural gas, hydrogen, and electric vehicle charging), cryogenic gases, and other hazardous substances along the supply chain, and safe and efficient operation of convenience retail, retail fueling and vehicle wash establishments.
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Our Imaging & Identification segment supplies precision marking and coding, product traceability, brand protection and digital textile printing equipment, as well as related consumables, software and services to the global packaged and consumer goods, pharmaceutical, industrial manufacturing, textile and other end-markets.
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Our Pumps & Process Solutions segment manufactures specialty pumps and flow meters, fluid transfer connectors, highly engineered precision components, instruments and digital controls for rotating and reciprocating machines, polymer processing equipment, serving single-use biopharmaceutical production, diversified industrial manufacturing applications, chemical production, plastics and polymer processing, midstream and downstream oil and gas, clean energy markets, thermal management, food and beverage, semiconductor production and medical applications and other end-markets.
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Our Climate & Sustainability Technologies segment is a provider of innovative and energy-efficient equipment, components and parts for the commercial refrigeration, heating and cooling and beverage can-making equipment end-markets.
In the first quarter of 2024, revenue was $2.1 billion, which increased $14.9 million, or 0.7%, as compared to the first quarter of 2023. This was driven by acquisition-related revenue growth of 2.0% partially offset by organic revenue decline of 1.3%. The strong performance in several key markets was largely offset by known headwinds in Climate & Sustainability Technologies.
The 1.3% organic revenue decline for the first quarter of 2024 was due to our Climate & Sustainability Technologies and Imaging & Identification segments which had a decline of 20.3% and 1.6%, respectively. The decline was partially offset by the Engineered Products, Pumps & Process Solutions and Clean Energy & Fueling segments which had growth of 9.2%, 4.5% and 1.4%, respectively. For further information, see "Segment Results of Operations" within this Item 2.
From a geographic perspective, organic revenue for the U.S., our largest market, increased 1.3% in the first quarter of 2024 compared to the prior year comparable quarter. Organic revenue decreased for Other Americas, Asia and Europe by 5.5%, 4.9% and 0.5%, respectively.
Bookings were $2.2 billion for the three months ended March 31, 2024, an increase of $101.5 million, or 4.8% compared to the prior year comparable quarter. Included in this result was organic growth of 3.0% and acquisition-related growth of 1.9%, partially offset by an unfavorable impact from foreign currency translation of 0.1%. The organic bookings growth was primarily driven by prevailing demand conditions, normalized lead times and better customer and channel partner inventory levels.
Restructuring and other costs for the three months ended March 31, 2024 were $24.7 million which included restructuring charges of $18.7 million and other costs of $6.0 million. Restructuring and other costs were primarily related to product line exit costs in the Climate & Sustainability Technologies. For further discussion related to our restructuring and other costs, see "Restructuring and Other Costs (Benefits)," within this Item 2.
During the three months ended March 31, 2024, the Company acquired three businesses in separate transactions for total consideration of $174.3 million, net of cash acquired and inclusive of contingent consideration of $29.4 million (a non-cash investing activity). See Note 3 — Acquisitions in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
On March 31, 2024, the Company completed the sale of the De-Sta-Co business for total consideration, net of cash transferred, of $674.7 million. This sale resulted in a preliminary pre-tax gain on disposition of $529.9 million included within the condensed consolidated statements of earnings for the three months ended March 31, 2024. See Note 4 — Dispositions in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
On February 29, 2024, the Company entered into a $500 million accelerated share repurchase agreement (the "ASR Agreement") with Citibank, N.A. ("Citibank") to repurchase its shares in an accelerated share repurchase program (the "ASR Program"). The Company funded the ASR Program with proceeds from commercial paper. Under the terms of the ASR Agreement, the Company paid Citibank $500 million on March 1, 2024 and on that date received initial delivery of 2,569,839 shares, representing a substantial majority of the shares expected to be retired over the course of the ASR Agreement. See Note 17 — Stockholders' Equity in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
CONSOLIDATED RESULTS OF OPERATIONS
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share figures) | 2024 | 2023 | % / Point Change | ||||||||||||||||||||||||||||||||
| Revenue | $ | 2,093,941 | $ | 2,079,023 | 0.7 | % | |||||||||||||||||||||||||||||
| Cost of goods and services | 1,336,686 | 1,332,004 | 0.4 | % | |||||||||||||||||||||||||||||||
| Gross profit | 757,255 | 747,019 | 1.4 | % | |||||||||||||||||||||||||||||||
| Gross profit margin | 36.2 | % | 35.9 | % | 0.3 | ||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 463,124 | 432,414 | 7.1 | % | |||||||||||||||||||||||||||||||
| Selling, general and administrative expenses as a percent of revenue | 22.1 | % | 20.8 | % | 1.3 | ||||||||||||||||||||||||||||||
| Operating earnings | 294,131 | 314,605 | (6.5) | % | |||||||||||||||||||||||||||||||
| Interest expense | 36,365 | 34,214 | 6.3 | % | |||||||||||||||||||||||||||||||
| Interest income | (4,757) | (2,091) | 127.5 | % | |||||||||||||||||||||||||||||||
| Gain on disposition | (529,943) | — | nm* | ||||||||||||||||||||||||||||||||
| Other income, net | (6,416) | (3,808) | nm* | ||||||||||||||||||||||||||||||||
| Earnings before provision for income taxes | 798,882 | 286,290 | 179.0 | % | |||||||||||||||||||||||||||||||
| Provision for income taxes | 166,661 | 57,716 | 188.8 | % | |||||||||||||||||||||||||||||||
| Effective tax rate | 20.9 | % | 20.2 | % | 0.7 | ||||||||||||||||||||||||||||||
| Net earnings | $ | 632,221 | $ | 228,574 | 176.6 | % | |||||||||||||||||||||||||||||
| Net earnings per common share - diluted | $ | 4.52 | $ | 1.63 | 177.3 | % |
- nm - not meaningful
Revenue
Revenue for the three months ended March 31, 2024 increased $14.9 million, or 0.7%, from the prior year comparable quarter. The increase in revenue was driven by acquisition-related revenue growth of 2.0% partially offset by organic revenue which declined 1.3%, primarily due to lower revenue in our Climate & Sustainability Technologies segment. Customer pricing favorably impacted revenue by approximately 1.6% in the first quarter of 2024 and by 5.1% in the prior year comparable quarter.
Gross Profit
Gross profit for the three months ended March 31, 2024 increased $10.2 million, or 1.4%, and gross profit margin increased 30 basis points to 36.2%, versus the prior year comparable quarter. Gross profit margin increased driven by benefits from pricing and productivity actions, partially offset by lower volumes across some of the Company's businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2024 increased $30.7 million, or 7.1%, from the prior year comparable quarter, primarily driven by increased employee compensation and benefits, amortization costs and insurance costs. As a percentage of revenue, selling, general and administrative expenses increased 130 basis points as compared to the prior year comparable quarter to 22.1%.
Research and development costs, including qualifying engineering costs, are expensed when incurred and amounted to $40.1 million and $38.0 million for the three months ended March 31, 2024 and 2023, respectively. These costs as a percentage of revenue were 1.9% and 1.8% for the three months ended March 31, 2024 and 2023, respectively.
Gain on Disposition
Gain on disposition of $529.9 million was due to the sale of the De-Sta-Co business on March 31, 2024. See Note 4 — Dispositions in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
Other Income, net
Other income, net includes non-service pension benefit, deferred compensation plan investments gain or loss, earnings or charges from equity method investments, foreign exchange gain or loss, and various other items. Other income, net for the three months ended March 31, 2024 increased $2.6 million from the prior year comparable quarter driven by various immaterial items.
Income Taxes
The effective tax rates for the three months ended March 31, 2024 and 2023 were 20.9% and 20.2%, respectively. The increase in the effective tax rate for the three months ended March 31, 2024 relative to the prior year comparable quarter was primarily driven by the gain on the sale of De-Sta-Co.
The Company is monitoring the changes in tax laws resulting from the Organization for Economic Cooperation and Development’s multi-jurisdictional plan of action to address base erosion and profit shifting. We do not expect this to have a material impact on our effective tax rate.
See Note 12 — Income Taxes in the condensed consolidated financial statements in Item 1 of this Form 10-Q for additional details.
Net earnings
Net earnings for the three months ended March 31, 2024 increased 176.6% to $632.2 million, or $4.52 diluted earnings per share, from $228.6 million, or $1.63 diluted earnings per share, in the prior year comparable quarter. The increase in net earnings is driven by the after-tax gain on the sale of De-Sta-Co of $415.0 million.
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, Clean Energy & Fueling, Imaging & Identification, Pumps & Process Solutions, and Climate & Sustainability Technologies). Each of these segments is comprised of various product and service offerings that serve multiple markets. We evaluate our operating segment performance based on segment earnings as defined in Note 16 — Segment Information in the condensed consolidated financial statements in Item 1 of this Form 10-Q.
We report organic revenue growth, which excludes the impact of foreign currency exchange rates and the impact of acquisitions and divestitures. 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:
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Bookings represent total orders received from customers in the current reporting period and exclude de-bookings related to orders received in prior periods, if any. This metric is an important measure of performance and an indicator of order trends.
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Organic bookings represent bookings 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.
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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 provides a wide range of equipment, components, software, solutions and services to the vehicle aftermarket, waste handling, aerospace and defense, industrial winch and hoist, and fluid dispensing end-markets.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 543,140 | $ | 497,549 | 9.2 | % | ||||||||||||||||||||||||||||||||
| Segment earnings | $ | 103,969 | $ | 84,275 | 23.4 | % | ||||||||||||||||||||||||||||||||
| Segment margin | 19.1 % | 16.9 % | ||||||||||||||||||||||||||||||||||||
| Operational metrics: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 541,982 | $ | 536,472 | 1.0 | % | ||||||||||||||||||||||||||||||||
| Components of revenue growth: | ||||||||||||||||||||||||||||||||||||||
| Organic growth | 9.2 | % | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | % | ||||||||||||||||||||||||||||||||||||
| Total revenue growth | 9.2 | % |
First Quarter 2024 Compared to the First Quarter 2023
Engineered Products revenue for the first quarter of 2024 increased $45.6 million, or 9.2%, as compared to the first quarter of 2023, driven by organic growth of 9.2%. Customer pricing favorably impacted revenue in the first quarter of 2024 by approximately 1.6% and by 4.1% in the prior year comparable quarter.
The organic revenue growth was primarily driven by continued robust demand in our waste handling business as national and regional waste haulers and municipal governments invest to upgrade their refuse collection vehicle fleets and implement our leading digital technologies to drive efficiencies in waste collection. Our aerospace and defense business also saw continued solid demand in the quarter. We expect positive organic growth trends to continue through 2024 on the back of robust customer demand in waste handling, growth in aerospace and defense, and improving demand conditions and easier comparable periods in our vehicle service business.
Engineered Products segment earnings increased $19.7 million, or 23.4%, compared to the first quarter of 2023. The increase was primarily driven by organic volume increases, favorable price versus cost dynamics, and productivity initiatives. As a result, segment margin increased to 19.1% from 16.9% as compared to the prior year comparable quarter.
Bookings increased 1.0% for the segment, driven by organic growth of 1.0%. The organic bookings growth was broad-based, but most notable in our waste handling and vehicle service businesses. Segment book-to-bill was 1.00.
Clean Energy & Fueling
Our Clean Energy & Fueling segment provides components, equipment, software, solutions and services enabling safe and reliable storage, transport and dispensing of traditional and clean fuels (including liquefied natural gas, hydrogen, and electric vehicle charging), cryogenic gases, and other hazardous substances along the supply chain, and safe and efficient operation of convenience retail, retail fueling and vehicle wash establishments.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 445,053 | $ | 430,729 | 3.3 | % | ||||||||||||||||||||||||||||||||
| Segment earnings | $ | 69,675 | $ | 73,605 | (5.3) | % | ||||||||||||||||||||||||||||||||
| Segment margin | 15.7 % | 17.1 % | ||||||||||||||||||||||||||||||||||||
| Operational metrics: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 471,610 | $ | 454,526 | 3.8 | % | ||||||||||||||||||||||||||||||||
| Components of revenue growth: | ||||||||||||||||||||||||||||||||||||||
| Organic growth | 1.4 | % | ||||||||||||||||||||||||||||||||||||
| Acquisitions | 1.9 | % | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | % | ||||||||||||||||||||||||||||||||||||
| Total revenue growth | 3.3 | % |
First Quarter 2024 Compared to the First Quarter 2023
Clean Energy & Fueling revenue for the first quarter of 2024 increased $14.3 million, or 3.3%, as compared to the first quarter of 2023, driven by acquisition growth of 1.9% and organic growth of 1.4%. Customer pricing favorably impacted revenue in the first quarter of 2024 by approximately 2.8% and by 4.5% in the prior year comparable quarter.
The organic revenue growth was primarily driven by increased year-over-year pricing and demand in dispensers, especially in Europe and Latin America, growth in cryogenic gases, and the recovery in below ground retail fueling equipment, partially offset by lower shipments in liquefied petroleum gas components and higher cost of capital headwinds in vehicle wash solutions. We expect the organic growth rate to continue into the second quarter and remain positive in the second half of the year.
Clean Energy & Fueling segment earnings decreased $3.9 million, or 5.3%, over the prior year comparable quarter. The decrease was primarily due to lower volumes and unfavorable product mix. Segment margin decreased to 15.7% from 17.1% in the prior year comparable quarter.
Overall bookings increased 3.8% as compared to the prior year comparable quarter, driven by acquisition growth of 2.1%, organic growth of 1.6% and a favorable impact from foreign currency translation of 0.1%. The organic bookings growth was primarily driven by increased year over year orders in clean energy components, vehicle wash solutions, and fluid transfer systems equipment. Segment book-to-bill was 1.06.
Imaging & Identification
Our Imaging & Identification segment supplies precision marking and coding, product traceability, brand protection and digital textile printing equipment, as well as related consumables, software and services to the global packaged and consumer goods, pharmaceutical, industrial manufacturing, textile and other end-markets.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 276,806 | $ | 283,091 | (2.2) | % | ||||||||||||||||||||||||||||||||
| Segment earnings | $ | 69,959 | $ | 68,315 | 2.4 | % | ||||||||||||||||||||||||||||||||
| Segment margin | 25.3 % | 24.1 % | ||||||||||||||||||||||||||||||||||||
| Operational metrics: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 278,433 | $ | 290,712 | (4.2) | % | ||||||||||||||||||||||||||||||||
| Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
| Organic decline | (1.6) | % | ||||||||||||||||||||||||||||||||||||
| Acquisitions | 0.3 | % | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (0.9) | % | ||||||||||||||||||||||||||||||||||||
| Total revenue decline | (2.2) | % |
First Quarter 2024 Compared to the First Quarter 2023
Imaging & Identification revenue for the first quarter of 2024 decreased $6.3 million, or 2.2%, as compared to the first quarter of 2023, comprised of an organic decline of 1.6% and an unfavorable impact from foreign currency translation of 0.9%, partially offset by acquisition-related growth of 0.3%. Customer pricing favorably impacted revenue in the first quarter of 2024 by approximately 3.6% and by 6.7% in the prior year comparable quarter.
The organic revenue decline was primarily due to lower marking and coding printer shipments in the United States and Europe, partially offset by strong consumables and aftermarket sales. We expect the organic growth outlook to improve as we move through the year in 2024, driven by customer pricing, increased demand for marking and coding equipment and consumables, and serialization software.
Imaging & Identification segment earnings increased $1.6 million, or 2.4%, over the prior year comparable quarter. This increase was primarily driven by pricing initiatives, cost controls, and higher mix of consumables and aftermarket shipments, which more than offset the negative impact of reduced organic volumes and an unfavorable impact from foreign currency translation. Segment margin increased to 25.3% from 24.1% in the prior year comparable quarter.
Overall bookings decreased 4.2% as compared to the prior year comparable quarter, reflecting an organic decline of 3.4% and an unfavorable impact from foreign currency translation of 1.0%, offset by acquisition growth 0.2%. The organic bookings decline was primarily due to reduced order intake and timing in our marking and coding and digital textile printing businesses. Segment book-to-bill was 1.01.
Pumps & Process Solutions
Our Pumps & Process Solutions segment manufactures specialty pumps and flow meters, fluid transfer connectors, highly engineered precision components, instruments and digital controls for rotating and reciprocating machines, polymer processing equipment, serving single-use biopharmaceutical production, diversified industrial manufacturing applications, chemical production, plastics and polymer processing, midstream and downstream oil and gas, clean energy markets, thermal management, food and beverage, semiconductor production and medical applications and other end-markets.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 465,729 | $ | 413,881 | 12.5 | % | ||||||||||||||||||||||||||||||||
| Segment earnings | $ | 118,737 | $ | 115,244 | 3.0 | % | ||||||||||||||||||||||||||||||||
| Segment margin | 25.5 % | 27.8 % | ||||||||||||||||||||||||||||||||||||
| Operational metrics: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 473,632 | $ | 464,297 | 2.0 | % | ||||||||||||||||||||||||||||||||
| Components of revenue growth: | ||||||||||||||||||||||||||||||||||||||
| Organic growth | 4.5 | % | ||||||||||||||||||||||||||||||||||||
| Acquisitions | 7.5 | % | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | 0.5 | % | ||||||||||||||||||||||||||||||||||||
| Total revenue growth | 12.5 | % |
First Quarter 2024 Compared to the First Quarter 2023
Pumps & Process Solutions revenue for the first quarter of 2024 increased $51.8 million, or 12.5%, as compared to the first quarter of 2023, driven by acquisition-related growth of 7.5%, organic growth of 4.5%, and a favorable impact from foreign currency translation of 0.5%. Acquisition-related growth was driven by the acquisition of FW Murphy Production Controls business ("FW Murphy") in the fourth quarter of 2023. Customer pricing favorably impacted revenue in the first quarter of 2024 by approximately 1.4% and by 4.9% in the prior year comparable quarter.
The organic revenue growth was primarily driven by increased revenues in our precision components and plastics and polymer processing solutions businesses, as well as increased shipments for single-use components used in biopharmaceutical manufacturing as our channel partners and end customers have largely completed multi-year inventory reduction initiatives. Overall, we expect positive demand trends for the remainder of the year in connectors, supported by improving customer sentiment in bioprocessing along with recent specification wins in liquid cooling for high performance computing and data center applications, as well as continued solid demand in precision components. We expect this to be partially offset by slower expected demand in our polymer processing equipment business.
Pumps & Process Solutions segment earnings increased $3.5 million, or 3.0%, over the prior year comparable quarter. The increase was driven by the favorable impact from the FW Murphy acquisition, along with the positive impact of increased volumes, pricing initiatives and productivity actions, partially offset by a negative impact from product mix. Segment margin decreased to 25.5% from 27.8% from the prior year comparable quarter due to project mix within polymer processing solutions and growth investments in thermal connectors.
Overall bookings increased 2.0% as compared to the prior year comparable quarter, with an acquisition-related growth of 6.3% and a favorable impact from foreign currency translation of 0.3%, partially offset by an organic decline of 4.6%. The organic bookings decline was primarily due to reduced orders in our polymer processing equipment business, partially offset by positive demand trends in connectors, supported by improving customer sentiment in bioprocessing along with recent specification wins in high performance computing applications. Segment book-to-bill was 1.02.
Climate & Sustainability Technologies
Our Climate & Sustainability Technologies segment is a provider of innovative and energy-efficient equipment, components and parts for the commercial refrigeration, heating and cooling and beverage can-making equipment end-markets.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 364,292 | $ | 455,325 | (20.0) | % | ||||||||||||||||||||||||||||||||
| Segment earnings | $ | 50,759 | $ | 73,778 | (31.2) | % | ||||||||||||||||||||||||||||||||
| Segment margin | 13.9 % | 16.2 % | ||||||||||||||||||||||||||||||||||||
| Operational metrics: | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 453,086 | $ | 371,643 | 21.9 | % | ||||||||||||||||||||||||||||||||
| Components of revenue decline: | ||||||||||||||||||||||||||||||||||||||
| Organic decline | (20.3) | % | ||||||||||||||||||||||||||||||||||||
| Acquisitions | 0.6 | % | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (0.3) | % | ||||||||||||||||||||||||||||||||||||
| Total revenue decline | (20.0) | % |
First Quarter 2024 Compared to the First Quarter 2023
Climate & Sustainability Technologies revenue decreased $91.0 million, or 20.0%, as compared to the first quarter of 2023, reflecting organic revenue decline of 20.3% and an unfavorable impact from foreign currency translation of 0.3%, partially offset by acquisition-related growth of 0.6%. Customer pricing unfavorably impacted revenue in the first quarter of 2024 by approximately 0.6% and favorably impacted by 5.9% in the prior year comparable quarter.
The organic revenue decline was due primarily to near-term, transient slowing in heat exchanger demand in Europe due to HVAC OEMs efforts to reduce component inventories, as well as continued headwinds in new beverage can-making equipment sales as customers pivot from new equipment investment to scaling production and expanding utilization of recent capacity additions. We expect organic revenue declines to continue into the second quarter, with improvement expected in the second half of 2024 on continued strong retail refrigeration demand, driven by growing demand for low-GWP (global warming potential) CO2 refrigerant systems, as well as improved demand for heat exchangers in Europe.
Climate & Sustainability Technologies segment earnings decreased $23.0 million, or 31.2%, as compared to the first quarter of 2023. The segment earnings decrease was primarily due to lower volumes in heat exchangers and beverage can-making equipment, partially offset by productivity initiatives and cost reduction actions. Segment margin decreased to 13.9% from 16.2% in the prior year comparable quarter.
Bookings in the first quarter of 2024 increased 21.9% from the prior year comparable quarter, reflecting organic growth of 22.3% partially offset by an unfavorable impact from foreign currency translation of 0.4%. The organic bookings growth was principally driven by favorable demand trends across retail refrigeration, including continued strong demand for low-GWP (global warming potential) CO2 refrigerant systems which resulted in the booking of several large customer orders in the first quarter. This was partially offset by temporary reductions in heat exchanger demand in Europe. Segment book-to-bill for the first quarter of 2024 was 1.24.
Reconciliation of Segment Earnings to Net Earnings
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | |||||||||||||||||||||
| Net earnings: | |||||||||||||||||||||||
| Segment earnings: | |||||||||||||||||||||||
| Engineered Products | $ | 103,969 | $ | 84,275 | |||||||||||||||||||
| Clean Energy & Fueling | 69,675 | 73,605 | |||||||||||||||||||||
| Imaging & Identification | 69,959 | 68,315 | |||||||||||||||||||||
| Pumps & Process Solutions | 118,737 | 115,244 | |||||||||||||||||||||
| Climate & Sustainability Technologies | 50,759 | 73,778 | |||||||||||||||||||||
| Total segment earnings | 413,099 | 415,217 | |||||||||||||||||||||
| Purchase accounting expenses (1) | 45,551 | 42,679 | |||||||||||||||||||||
| Restructuring and other costs (2) | 24,684 | 14,053 | |||||||||||||||||||||
| Gain on disposition (3) | (529,943) | — | |||||||||||||||||||||
| Corporate expense / other (4) | 42,317 | 40,072 | |||||||||||||||||||||
| Interest expense | 36,365 | 34,214 | |||||||||||||||||||||
| Interest income | (4,757) | (2,091) | |||||||||||||||||||||
| Earnings before provision for income taxes | 798,882 | 286,290 | |||||||||||||||||||||
| Provision for income taxes | 166,661 | 57,716 | |||||||||||||||||||||
| Net earnings | $ | 632,221 | $ | 228,574 |
(1) Purchase accounting expenses are primarily comprised of amortization of acquired intangible assets.
(2) Restructuring and other costs relate to actions taken for headcount reductions, facility consolidations and site closures, product line exits, and other asset charges.
(3) Gain on disposition due to the sale of De-Sta-Co in the Engineered Products segment.
(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 and digital overhead costs, deal-related expenses and various administrative expenses relating to the corporate headquarters.
Restructuring and Other Costs (Benefits)
Restructuring and other costs are not presented in our segment earnings because these costs are excluded from the segment operating performance measure reviewed by management. During the three months ended March 31, 2024, we incurred restructuring charges of $18.7 million and other costs, net of $6.0 million. Restructuring charges for the three months ended March 31, 2024 primarily related to product line exit costs and headcount reductions in the Climate & Sustainability Technologies, Clean Energy & Fueling and Pumps & Process Solutions segments. These restructuring programs were initiated in 2023 and 2024 and the Company will continue to make proactive adjustments to its cost structure to align with current demand trends. Other costs, net of $6.0 million for the three months ended March 31, 2024, were primarily due to a non-cash asset impairment charge in our Climate & Sustainability Technologies segment. These restructuring and other 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 2024 with related restructuring charges.
We recorded the following restructuring and other costs for the three months ended March 31, 2024:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Engineered Products | Clean Energy & Fueling | Imaging & Identification | Pumps & Process Solutions | Climate & Sustainability Technologies | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring | $ | 492 | $ | 4,965 | $ | 760 | $ | 1,351 | $ | 11,070 | $ | 17 | $ | 18,655 | |||||||||||||||||||||||||||
| Other costs, net | 685 | 659 | 469 | 57 | 3,450 | 709 | 6,029 | ||||||||||||||||||||||||||||||||||
| Restructuring and other costs | $ | 1,177 | $ | 5,624 | $ | 1,229 | $ | 1,408 | $ | 14,520 | $ | 726 | $ | 24,684 |
During the three months ended March 31, 2023 restructuring and other activities include restructuring charges of $12.5 million and other costs (benefits) of $1.6 million. Restructuring expenses for the three months ended March 31, 2023 were primarily related to headcount reductions and exit costs in the Clean Energy & Fueling segment. These programs were initiated in 2022 and 2023 and were undertaken in light of current market conditions. Other costs (benefits), net for the three months ended March 31, 2023 was comprised primarily of $1.1 million for product line rationalization in the Clean Energy & Fueling segment. These restructuring and other 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 restructuring and other costs for the three months ended March 31, 2023:
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Engineered Products | Clean Energy & Fueling | Imaging & Identification | Pumps & Process Solutions | Climate & Sustainability Technologies | Corporate | Total | ||||||||||||||||||||||||||||||||||
| Restructuring | $ | 539 | $ | 10,144 | $ | 339 | $ | 1,326 | $ | 242 | $ | (114) | $ | 12,476 | |||||||||||||||||||||||||||
| Other costs (benefits), net | 25 | 1,068 | 353 | (47) | 172 | 6 | 1,577 | ||||||||||||||||||||||||||||||||||
| Restructuring and other costs (benefits) | $ | 564 | $ | 11,212 | $ | 692 | $ | 1,279 | $ | 414 | $ | (108) | $ | 14,053 |
Purchase Accounting Expenses
Purchase accounting expenses primarily relate to amortization of acquired intangible assets. These expenses are not presented in our segment earnings because they are excluded from the segment operating performance measure reviewed by management. These expenses reconcile to segment earnings as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | |||||||||||||||||||||
| Purchase Accounting Expenses | |||||||||||||||||||||||
| Engineered Products | $ | 3,994 | $ | 5,804 | |||||||||||||||||||
| Clean Energy & Fueling | 20,957 | 19,567 | |||||||||||||||||||||
| Imaging & Identification | 5,741 | 5,606 | |||||||||||||||||||||
| Pumps & Process Solutions | 9,811 | 6,877 | |||||||||||||||||||||
| Climate & Sustainability Technologies | 5,048 | 4,825 | |||||||||||||||||||||
| Total | $ | 45,551 | $ | 42,679 | |||||||||||||||||||
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, repurchase 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 for reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
The following table is derived from our condensed consolidated statements of cash flows:
| Three Months Ended March 31, | |||||||||||
| Cash Flows from Operations (in thousands) | 2024 | 2023 | |||||||||
| Net cash flows provided by (used in): | |||||||||||
| Operating activities | $ | 166,593 | $ | 241,284 | |||||||
| Investing activities | 429,851 | (43,556) | |||||||||
| Financing activities | (80,782) | (306,565) |
Operating Activities
Cash flow from operating activities for the three months ended March 31, 2024 decreased by $74.7 million compared to March 31, 2023, primarily due to the timing of receivables collections and investments in inventory ahead of higher expected shipment volumes in the next several quarters.
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 liquidity by showing changes caused by operational results. The following table provides a calculation of adjusted working capital:
| Adjusted Working Capital (in thousands) | March 31, 2024 | December 31, 2023 | ||||||||||||||||||
| Accounts receivable | $ | 1,519,458 | $ | 1,432,040 | ||||||||||||||||
| Inventories | 1,245,661 | 1,225,452 | ||||||||||||||||||
| Less: Accounts payable | 969,763 | 958,542 | ||||||||||||||||||
| Adjusted working capital | $ | 1,795,356 | $ | 1,698,950 | ||||||||||||||||
Adjusted working capital increased by $96.4 million, or 5.7%, in the three months ended March 31, 2024, which reflected an increase of $87.4 million in accounts receivable, an increase of $20.2 million in inventory and an increase in accounts payable of $11.2 million. These amounts include the effects of acquisitions, dispositions and foreign currency translation. The change in accounts receivable and payable reflect the timing of payments and collections. The increase in inventories is driven by production planning ahead of higher expected shipment volumes in the next several quarters.
Investing Activities
Cash flow from investing activities is derived from cash inflows from proceeds from a disposition, partially offset by cash outflows for acquisitions and capital expenditures. The majority of the activity in investing activities was comprised of the following:
- Proceeds from disposition: During the three months ended March 31, 2024, we received net proceeds of $611.7 million from the sale of De-Sta-Co within the Engineered Products segment. There were no proceeds from disposition during the three months ended March 31, 2023.
*•*Acquisitions: During the three months ended March 31, 2024, we deployed approximately $144.9 million, net, to acquire Transchem Group and Bulloch Technologies, Inc. within the Climate & Sustainability Technologies segment and one other immaterial acquisition within the Imaging & Identification segment. In comparison, during the three months ended March 31, 2023, there were no acquisitions.
- Capital spending: Capital expenditures decreased $3.9 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, in line with our planned capital expenditures for the year.
We anticipate that capital expenditures and any additional acquisitions we make through the remainder of 2024 will be funded from available cash and internally generated funds and, if necessary, through the issuance of commercial paper, or by accessing the public debt or equity markets. We estimate capital expenditures in 2024 to range from $160.0 million to $170.0 million.
Financing Activities
Cash flow from financing activities generally relates to the use of cash for purchases of our common stock and payment of dividends, offset by net borrowing activity. The majority of financing activity was attributed to the following:
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Repurchase of common stock, including prepayment under accelerated share repurchase program: During the three months ended March 31, 2024, we used $500 million to repurchase 2,569,839 shares on March 1, 2024, under an accelerated share repurchase transaction. During the three months ended March 31, 2023, we repurchased no shares. See Note 17 — Stockholders' Equity in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
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Commercial paper and other short-term borrowings, net: During the three months ended March 31, 2024, we received net proceeds of $500.7 million from commercial paper borrowings, primarily used to fund our accelerated share repurchase transaction. During the three months ended March 31, 2023, we used $221.2 million to pay off commercial paper borrowings.
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Dividend payments: Total dividend payments to common shareholders were $71.4 million during the three months ended March 31, 2024, as compared to $70.8 million during the same period in 2023. Our dividends paid per common share increased 1.0% to $0.510 during the three months ended March 31, 2024 compared to $0.505 during the same period in 2023.
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 liquidity because it provides management and investors a measurement of cash generated from operations that may be 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:
| Three Months Ended March 31, | |||||||||||
| Free Cash Flow (dollars in thousands) | 2024 | 2023 | |||||||||
| Cash flow provided by operating activities | $ | 166,593 | $ | 241,284 | |||||||
| Less: Capital expenditures | (44,475) | (48,375) | |||||||||
| Free cash flow | $ | 122,118 | $ | 192,909 | |||||||
| Cash flow from operating activities as a percentage of revenue | 8.0 | % | 11.6 | % | |||||||
| Cash flow from operating activities as a percentage of net earnings | 26.4 | % | 105.6 | % | |||||||
| Free cash flow as a percentage of revenue | 5.8 | % | 9.3 | % | |||||||
| Free cash flow as a percentage of net earnings | 19.3 | % | 84.4 | % |
For the three months ended March 31, 2024, we generated free cash flow of $122.1 million, representing 5.8% of revenue and 19.3% of net earnings. Free cash flow for the three months ended March 31, 2024 decreased $70.8 million, compared to March 31, 2023, due to the timing of receivables collections and investments in inventory ahead of higher expected shipment volumes in the next several quarters. The decreases in cash flow from operating activities and free cash flow as percentages of net earnings are due primarily to the gain on sale of De-Sta-Co. The related tax liability will be paid in quarterly installments throughout 2024.
Capitalization
We use commercial paper borrowings for general corporate purposes, including the funding of acquisitions and the repurchase of our common stock. As of March 31, 2024, we maintained $1.0 billion five-year and $500.0 million 364-day unsecured revolving credit facilities (together, the "Credit Agreements") with a syndicate of banks which expire April 6, 2028 and April 4,
2024, respectively. On April 4, 2024, the Company entered into a new $500.0 million 364-day unsecured revolving credit facility with a syndicate of banks which expires on April 3, 2025. The Credit Agreements are designated as a liquidity back-stop for the Company's commercial paper program and also are available for general corporate purposes.
At the Company's election, loans under the Credit Agreements will bear interest at a base rate plus an applicable margin. The Credit Agreements require the Company to pay facility fees and impose various restrictions on the Company such as, among other things, a requirement to maintain an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of not less than 3.0 to 1.0. The Company was in compliance with all covenants in the Credit Agreements and other long-term debt covenants at March 31, 2024 and had an interest coverage ratio of consolidated EBITDA to consolidated net interest expense of 19.1 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.
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 March 31, 2024, our cash and cash equivalents totaled $930.0 million, of which approximately $445.4 million was held outside the United States. At December 31, 2023, our cash and cash equivalents totaled $398.6 million, of which approximately $269.6 million was held outside the United States. Cash and cash equivalents are held primarily in bank deposits with highly rated banks. We regularly hold cash in excess of near-term requirements in bank deposits or invest the funds in government 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.
On March 31, 2024, the Company completed the sale of the De-Sta-Co business for total consideration, net of cash transferred, of $674.7 million. Of the total consideration, $63.0 million will be received upon finalization of closing activities in India, which occurred on April 1, 2024, and China, which is expected to occur in the second quarter. See Note 4 — Dispositions in the condensed consolidated financial statements in Item 1 of this Form 10-Q for further details.
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, including cash held for sale. Net capitalization represents net debt plus stockholders' equity. The following table provides a calculation of net debt to net capitalization from the most directly comparable GAAP measures:
| Net Debt to Net Capitalization Ratio (dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Commercial paper | $ | 968,300 | $ | 467,600 | |||||||||||||
| Other | 672 | 682 | |||||||||||||||
| Total short-term borrowings | 968,972 | 468,282 | |||||||||||||||
| Long-term debt | 2,973,485 | 2,991,759 | |||||||||||||||
| Total debt | 3,942,457 | 3,460,041 | |||||||||||||||
| Less: Cash and cash equivalents, including cash held for sale | (929,954) | (415,861) | |||||||||||||||
| Net debt | 3,012,503 | 3,044,180 | |||||||||||||||
| Add: Stockholders' equity | 5,152,852 | 5,106,605 | |||||||||||||||
| Net capitalization | $ | 8,165,355 | $ | 8,150,785 | |||||||||||||
| Net debt to net capitalization | 36.9 | % | 37.3 | % |
Our net debt to net capitalization ratio decreased to 36.9% at March 31, 2024 compared to 37.3% at December 31, 2023. Net debt decreased $31.7 million during the period primarily due to an increase in cash and cash equivalents resulting from the sale of De-Sta-Co and a decrease in long-term debt, partially offset by higher commercial paper borrowings used to fund the ASR program. Net proceeds from the sale of De-Sta-Co were used to reduce our commercial paper borrowings in April 2024. Stockholders' equity increased for the period as a result of current earnings of $632.2 million, partially offset by share repurchases under the ASR program.
Operating cash flow and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions, capital expenditures, purchase obligations, and lease obligations. Acquisition spending and/or share repurchases could potentially increase our debt.
We believe that existing sources of liquidity are adequate to meet anticipated funding needs at current risk-based interest rates for the foreseeable future.
Critical Accounting 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 Note 19 — Recent Accounting Pronouncements in the condensed consolidated financial statements in Item 1 of this Form 10-Q. The adoption of recent accounting standards as included in Note 19 — 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.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, especially MD&A, contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. 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", "continue", "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, and assumptions, including those described in our Annual Report on Form 10-K for the year ended December 31, 2023. Factors that could cause actual results to differ materially from current expectations include, among other things: general economic conditions and conditions in the particular markets in which we operate; supply chain constraints and labor shortages that could result in production stoppages, inflation in material input costs and freight logistics; the impacts of natural or human induced disasters, acts of war, terrorism, international conflicts, and public health crises or other future pandemics on the global economy and on our customers, suppliers, employees, business and cash flows; 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 tax laws 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 restructurings, productivity initiatives and other cost reduction actions; the impact of legal compliance risks and litigation, including with respect to product quality and safety, cybersecurity and privacy; and 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, 2023. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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.
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. 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, and organic revenue growth are not financial measures under GAAP and should not be considered as a substitute for cash flows from operating activities, debt or equity, working capital or revenue as determined in accordance with GAAP, and they may not be comparable to similarly titled measures reported by other companies. 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 provides a meaningful measure of liquidity by showing changes caused by operational results. We believe that reporting organic revenue growth provides a useful comparison of our revenue performance and trends between periods.
Reconciliations and comparisons to non-GAAP measures can be found above in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
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