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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003 Commission File No. 1-4018
DOVER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 53-0257888
(State of Incorporation) (I.R.S. Employer Identification No.)
280 Park Avenue, New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 922-1640
Indicate by checkmark 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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Securities Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as October 23,
2003 was 202,518,447.
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE FIGURES)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 1,153,742 $ 1,062,451 $ 3,305,753 $ 3,138,861
Cost of sales 765,174 711,894 2,174,423 2,109,332
----------- ----------- ----------- -----------
Gross profit 388,568 350,557 1,131,330 1,029,529
Selling and administrative expenses 270,644 251,230 804,258 742,323
----------- ----------- ----------- -----------
Operating profit 117,924 99,327 327,072 287,206
----------- ----------- ----------- -----------
Interest expense, net 15,439 14,626 47,590 49,134
All other (income) expense, net 2,605 3,781 5,227 (117)
----------- ----------- ----------- -----------
Total 18,044 18,407 52,817 49,017
----------- ----------- ----------- -----------
Earnings from continuing operations, before
taxes on income 99,880 80,920 274,255 238,189
Federal and other taxes on income 24,590 22,429 67,125 65,970
----------- ----------- ----------- -----------
Net earnings from continuing operations 75,290 58,491 207,130 172,219
----------- ----------- ----------- -----------
Net earnings (losses) from discontinued operations 9,065 (2,049) 9,478 (15,460)
----------- ----------- ----------- -----------
Net earnings before cumulative effect of
change in accounting principle 84,355 56,442 216,608 156,759
----------- ----------- ----------- -----------
Cumulative effect of change in accounting principle,
net of tax -- -- -- (293,049)
----------- ----------- ----------- -----------
Net earnings (losses) $ 84,355 $ 56,442 $ 216,608 $ (136,290)
=========== =========== =========== ===========
Net earnings (losses) per common share:
Basic
- - Continuing operations $ 0.37 $ 0.29 $ 1.02 $ 0.85
- - Discontinued operations 0.05 (0.01) 0.05 (0.08)
----------- ----------- ----------- -----------
- - Total net earnings before cumulative effect of change
in accounting principle 0.42 0.28 1.07 0.77
- - Cumulative effect of change in accounting principle -- -- -- (1.44)
----------- ----------- ----------- -----------
- - Net earnings (losses) $ 0.42 $ 0.28 $ 1.07 $ (0.67)
=========== =========== =========== ===========
Diluted
- - Continuing operations $ 0.37 $ 0.29 $ 1.02 $ 0.85
- - Discontinued operations 0.04 (0.01) 0.05 (0.08)
----------- ----------- ----------- -----------
- - Total net earnings before cumulative effect of change
in accounting principle 0.41 0.28 1.07 0.77
- - Cumulative effect of change in accounting principle -- -- -- (1.44)
----------- ----------- ----------- -----------
- - Net earnings (losses) $ 0.41 $ 0.28 $ 1.07 $ (0.67)
=========== =========== =========== ===========
Weighted average number of com m on shares outstanding
during the period:
Basic 202,568 202,633 202,509 202,647
Diluted 204,017 203,230 203,366 203,541
See Notes to Condensed Consolidated Financial Statements.
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DOVER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets:
Current assets:
Cash and equivalents $ 404,379 $ 294,448
Receivables, net of allowance for doubtful accounts 778,096 669,885
Inventories, net 630,199 595,071
Prepaid expenses and other current assets 205,584 41,774
Deferred tax asset 63,492 56,823
---------- ----------
Total current assets 2,081,750 1,658,001
---------- ----------
Property, plant and equipment, net 700,107 704,922
Goodwill, net of amortization 1,684,366 1,654,883
Intangible assets, net of amortization 197,591 202,836
Other assets and deferred charges 263,976 216,743
---------- ----------
Total assets $4,927,790 $4,437,385
========== ==========
Liabilities:
Current liabilities:
Short-term debt and commercial paper $ 73,683 $ 23,761
Accounts payable 262,945 199,624
Accrued compensation and employee benefits 140,838 133,570
Accrued insurance 60,274 45,930
Other accrued expenses 265,502 246,904
Federal and other taxes on income 187,048 74,979
---------- ----------
Total current liabilities 990,290 724,768
---------- ----------
Long-term debt 1,006,033 1,030,299
Deferred income taxes 166,910 136,469
Other deferrals (principally compensation) 164,602 151,226
Stockholders' equity:
Total stockholders' equity 2,599,955 2,394,623
---------- ----------
Total liabilities and stockholders' equity $4,927,790 $4,437,385
========== ==========
DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED) (IN THOUSANDS)
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Treasury Stockholders' Comprehensive
Stock Capital Income (Loss) Earnings Stock Equity Income
----- ------- ------------- -------- ----- ------ ------
Balance as of December 31, 2002 $ 237,680 $ 65,493 $ (38,820) $ 3,164,596 $(1,034,326) $ 2,394,623
Net earnings (losses ) -- -- -- 216,608 -- 216,608 $ 216,608
Dividends paid -- -- -- (85,079) -- (85,079) --
Common stock issued for
options exercised 286 5,567 -- -- -- 5,853 --
Stock acquired during the year -- -- -- -- (1,792) (1,792) --
Increase from translation
of foreign financial statements -- -- 69,441 -- -- 69,441 69,441
Unrealized holding gains (losses) -- -- 301 -- -- 301 301
----------- --------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 2003 $ 237,966 $ 71,060 $ 30,922 $ 3,296,125 $(1,036,118) $ 2,599,955 $ 286,350
=========== ========= =========== =========== ============ =========== ===========
- - Preferred Stock , $100 par value per share. 100,000 shares authorized;
none issued.
- - Dividends paid per share were $0.42 and $0.41 for the nine months ended
September 30, 2003 and 2002,respectively.
See Notes to Condensed Consolidated Financial Statements.
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DOVER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED) (IN THOUSANDS)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (losses) $ 216,608 $(136,290)
--------- ---------
Adjustments to reconcile net earnings to net cash from
operating activities:
Cumulative effective of change in accounting
principle, net of taxes -- 293,049
Net (earnings) losses from discontinued operations (9,478) 15,460
Depreciation and amortization 113,528 119,035
Changes in current assets and liabilities (excluding
acquisitions and dispositions):
Decrease (increase) in accounts receivable (52,489) (32,820)
Decrease (increase) in inventories 11,938 47,321
Decrease (increase) in prepaid expenses & other assets (116,113) 40,505
Increase (decrease) in accounts payable 33,717 (19,537)
Increase (decrease) in accrued expenses 18,937 2,007
Increase (decrease) in current taxes on income 112,063 (48,008)
Net change (increase) decrease in current
assets and liabilities 8,053 (10,532)
Contributions to defined benefit pension plan (45,780) (44,000)
Net change (increase) decrease in non-current assets &
liabilities and other (52,563) (52,747)
--------- ---------
Total adjustments 13,760 320,265
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 230,368 183,975
--------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Additions to property, plant and equipment (70,576) (69,073)
Acquisitions (net of cash and cash equivalents acquired) (31,240) (50,827)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (101,816) (119,900)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Increase (decrease) in debt 25,657 (2,530)
Proceeds from interest rate swap terminations -- 8,434
Purchase of treasury stock (1,792) (15,139)
Proceeds from exercise of stock options 2,950 6,215
Cash dividends to stockholders (85,079) (82,112)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (58,264) (85,132)
--------- ---------
Effect of exchange rate changes on cash 24,957 16,791
--------- ---------
Cash from (used in) discontinued operations 14,686 2,904
--------- ---------
NET INCREASE (DECREASE ) IN CASH & CASH EQUIVALENTS 109,931 (1,362)
Cash & cash equivalents at beginning of period 294,448 175,331
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 404,379 $ 173,969
========= =========
See Notes to Condensed Consolidated Financial Statements.
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DOVER CORPORATION
MARKET SEGMENT RESULTS
(UNAUDITED) (IN THOUSANDS)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
SALES 2003 2002 2003 2002
---- ---- ---- ----
Diversified $ 306,559 $ 299,402 $ 914,856 $ 896,865
Industries 271,128 270,962 782,710 801,140
Resources 248,791 224,718 718,796 674,770
Technologies 329,313 269,357 895,562 770,884
Intramarket eliminations (2,049) (1,988) (6,171) (4,798)
----------- ----------- ----------- -----------
Net sales $ 1,153,742 $ 1,062,451 $ 3,305,753 $ 3,138,861
=========== =========== =========== ===========
EARNINGS
Diversified $ 29,911 $ 36,348 99,379 105,791
Industries 31,508 31,705 87,763 108,053
Resources 36,954 32,919 102,772 95,757
Technologies 29,794 1,252 61,022 (2,651)
----------- ----------- ----------- -----------
Subtotal continuing operations 128,167 102,224 350,936 306,950
Corporate expense (12,848) (6,678) (29,091) (19,627)
Net interest expense (15,439) (14,626) (47,590) (49,134)
----------- ----------- ----------- -----------
Earnings from continuing operations,
before taxes on income 99,880 80,920 274,255 238,189
Federal and other taxes on income 24,590 22,429 67,125 65,970
----------- ----------- ----------- -----------
Net earnings from continuing operations $ 75,290 $ 58,491 $ 207,130 $ 172,219
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
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DOVER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and changes in financial position in
conformity with accounting principles generally accepted in the United States of
America. It is the opinion of the Company's management that all adjustments
necessary for a fair statement of the interim results presented have been
reflected therein. All such adjustments were of a normal recurring nature. The
results of operations of any interim period are not necessarily indicative of
the results of operations for the fiscal year. Certain amounts in prior years
have been reclassified to conform to the current quarter's presentation.
For a more adequate understanding of the Company's financial position, operating
results, business properties and other matters, reference is made to the
Company's Annual Report on Form 10-K which was filed with the Securities and
Exchange Commission on March 11, 2003.
NOTE B - Earnings Per Share
Net earnings as reported was used in computing both basic EPS and diluted EPS
without further adjustment. The Company does not have a complex capital
structure. Accordingly, the entire difference between basic weighted average
shares and diluted weighted average shares results from assumed stock option
exercises. The shares used in the computation of the Company's three and nine
month basic and diluted earnings per common share are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(in thousands ) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Weighted average number of common shares
outstanding during the period 202,568 202,633 202,509 202,647
Dilutive effect of employee stock options 1,449 597 857 894
------- ------- ------- -------
Weighted average number of common shares
outstanding during the period, assuming
dilution 204,017 203,230 203,366 203,541
The diluted EPS computations were made using the treasury stock method. The
diluted weighted average shares exclude the dilutive effect of options with
exercise prices in excess of the average market price of the Company's common
stock. Approximately 4.4 and 6.6 million shares were excluded from the third
quarter dilutive effect for 2003 and 2002, respectively, and approximately 6.3
and 4.4 million shares were excluded from the first nine months ended dilutive
effect for 2003 and 2002, respectively. Dover did not repurchase shares of its
common stock on the open market during the first nine months of 2003.
NOTE C - Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation," allows companies to
measure compensation cost in connection with employee share option plans using a
fair value based method or to continue to use an intrinsic value based method as
defined by APB No. 25 "Accounting for Stock Issued to Employees," which
generally does not result in a compensation cost at time of grant. The Company
accounts for stock-based compensation under APB 25, and does not recognize
stock-based compensation expense upon the grant of its stock options because the
option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date.
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The following table illustrates the effect on net earnings and basic diluted
earnings per share if the Company had recognized compensation expense upon grant
of the options, based on the Black-Scholes option pricing model:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands , except per share figures) 2003 2002 2003 2002
- ----------------------------------------- ---- ---- ---- ----
Net earnings (losses ), as reported $ 84,355 $ 56,442 $ 216,608 $ (136,290)
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards , net of
related tax effects (4,560) (3,849) (13,444) (11,296)
---------- ---------- ----------- -----------
Pro forma net earnings (losses) $ 79,795 $ 52,593 $ 203,164 $ (147,586)
========== ========== =========== ===========
Earnings (losses) per share:
Basic-as reported $ 0.42 $ 0.28 $ 1.07 $ (0.67)
---------- ---------- ----------- -----------
Basic-pro forma 0.39 0.26 1.00 (0.73)
---------- ---------- ----------- -----------
Diluted-as reported $ 0.41 $ 0.28 $ 1.07 $ (0.67)
---------- ---------- ----------- -----------
Diluted-pro forma 0.39 0.26 1.00 (0.73)
NOTE D - Acquisitions
The financial statements of the acquired companies listed below reflect the fair
market values assigned to assets and liabilities and have been included in the
consolidated financial statements from their respective dates of acquisition.
Unless otherwise noted, all acquisitions are wholly owned.
2003 Acquisitions
Date Type Acquired Companies Location (Near) Segment Operating Company
- ---- ---- ------------------ --------------- ------- -----------------
20-Mar Asset Standard Aerospace Montreal,Canada Diversified Sargent
Manufactures aircraft engine rotating parts and airframe structural components .
27-May Stock/Asset Blitz GmbH Braunlingen,Germany Industries Rotary Lift
Manufactures heavy duty inground lifts , vehicle component removal devices , air compressors , and tire filling products
1-Aug Asset Temex ,S .A .W. Neuchatel,Switzerland Technologies Vectron
Manufactures high frequency surface acoustical wave filters .
The aggregate purchase price of the 2003 acquisitions was approximately $31.2
million.
NOTE E - Inventory
Inventories, by components, are summarized as follows :
September 30, December 31,
(in thousands) 2003 2002
- -------------- ---- ----
Raw materials $ 298,940 $ 288,426
Work in progress 181,492 178,631
Finished goods 182,290 159,495
--------- ---------
Total 662,722 626,552
Less LIFO reserve (32,523) (31,481)
--------- ---------
Net amount per balance sheet $ 630,199 $ 595,071
NOTE F - Property, Plant and Equipment
September 30, December 31,
(in thousands) 2003 2002
- -------------- ---- ----
Land $ 52,063 $ 49,204
Buildings 447,085 426,747
Machinery and equipment 1,379,151 1,299,374
Less accumulated depreciation (1,178,192) (1,070,403)
----------- -----------
Net amount per balance sheet $ 700,107 $ 704,922
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NOTE G - Goodwill
The following table provides the changes in carrying value of goodwill by market
segment through the nine months ended September 30, 2003:
(in thousands) Diversified Industries Resources Technologies Total
- -------------- ----------- ---------- --------- ------------ -----
Balance as of December 31, 2002 $ 401,743 $ 401,738 $ 313,570 $ 537,832 $1,654,883
Goodwill from acquisitions -- 3,025 -- 526 3,551
Other (primarily currency translation) 6,975 2,231 3,990 12,736 25,932
---------- ---------- ---------- ---------- ----------
Balance as of September 30,2003 $ 408,718 $ 406,994 $ 317,560 $ 551,094 $1,684,366
NOTE H - Restructuring and Inventory Charges
During 2002 and 2001, the Company's segments and operating companies initiated a
variety of restructuring programs. These restructuring programs focused on
reducing the overall cost structure primarily through reductions in headcount
and through the disposition or closure of certain non-strategic or redundant
product lines and manufacturing facilities. Restructuring charges are comprised
of only employee separation and facility exit costs. The remaining exit costs
primarily relate to leases and other contracts that expire in future periods. A
reconciliation of restructuring provisions from December 31, 2002, through
September 30, 2003 is as follows:
(in thousands) Severance Exit Total
- -------------- --------- ---- -----
Balance as of December 31, 2002 $ 6,219 $ 9,142 $ 15,361
Benefits and exit costs paid/write downs (3,561) (5,406) (8,967)
-------- -------- --------
Balance as of September 30, 2003 $ 2,658 $ 3,736 $ 6,394
Due to significant declines in the demand for certain products, special
inventory reserves were recorded in the Technologies segment during 2002 and
2001. The following table details the utilization of these inventory reserves
recorded at December 31, 2002 through September 30, 2003:
(in thousands) Technologies
- -------------- ------------
Balance as of December 31, 2002 $ 15,612
Disposed of through September 30, 2003 (14,540)
--------
Balance as of September 30, 2003 $ 1,072
NOTE I - Discontinued Operations
During the first nine months of 2003 Dover disposed of Duncan Parking Systems
from the Resources segment, Wittemann from the Resources segment, two small
product line businesses at OK International and Vectron International, both from
the Technologies segment and DT Magnetics, also from the Technologies segment,
which were all previously classified as discontinued operations in 2002. Cash
received related to the sale of these entities was $9.5 million. These
dispositions did not have a material impact on Dover's financial results during
the period ended September 30, 2003.
Earnings from discontinued operations in the third quarter of 2003 were
primarily attributable to the favorable resolution of certain outstanding tax
matters of $10.6 million, net of tax, and tax benefits of $5.0 million, net of
tax, related to losses on sales of businesses. These items were partially offset
by charges of $5.7 million, net of tax, related to liabilities from the entities
sold. During the first nine months of 2002 Dover disposed of Vectron GmbH from
the Technologies segment, which was previously classified as a discontinued
operation. This disposition resulted in a $7.3 million, net of tax, loss on the
sale.
All five of the operations held for sale as of December 31, 2002 have been sold.
NOTE J - Debt
Dover's long-term notes with a book value of $1,006.0 million at September 30,
2003, had a fair value of approximately $1,111.0 million at September 30, 2003.
The estimated fair value of the Company's long-term notes is based on quoted
market prices for similar issues.
During the third quarter 2003, the Company entered into three interest rate swap
agreements terminating on June 1, 2008 with a total notational amount of $150.0
million to exchange fixed rate interest for variable rate interest. All three
swaps are designated as fair value hedges of the 6.25% Notes, due June 1, 2008,
and the net interest payments or receipts from these agreements are recorded as
adjustments to interest expense. There is no hedge ineffectiveness as of
September 30, 2003 and the fair value of the interest
8 of 24
rate swaps of $4.3 million was determined through market quotations and is
reported in other assets and long-term debt.
NOTE K - Commitments and Contingent Liabilities
A few of the Company's subsidiaries are involved in legal proceedings relating
to the cleanup of waste disposal sites identified under Federal and State
statutes which 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, a few of the Company's subsidiaries
are involved in ongoing remedial activities at certain plant sites, in
cooperation with regulatory agencies, and appropriate reserves have been
established.
The Company and certain of its subsidiaries are also parties to a number of
other legal proceedings incidental to their businesses. Management and legal
counsel periodically review the probable outcome of such proceedings, the costs
and expenses reasonably expected to be incurred, the availability and extent of
insurance coverage and established reserves. While it is not possible at this
time to predict the outcome of these legal actions, in the opinion of
management, based on these reviews, it is remote that the disposition of the
lawsuits and the other matters mentioned above will have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Warranty program claims are provided for at the time of sale. Amounts provided
for are based on historical costs and adjusted new claims. A reconciliation of
the warranty provision through September 30, 2003 is as follows:
(in thousands)
- --------------
Balance at December 31, 2002 $ 35,994
Provision for warranties 18,106
Settlements made (15,967)
Other adjustments (primarily currency translation) 1,103
--------
Balance at September 30, 2003 $ 39,236
NOTE L - Subsequent Events
Subsequent to the third quarter, Dover acquired Warn Industries Inc. for
approximately $325 million in cash. Warn, located in Portland, Oregon, is the
industry leader in the design, manufacture and marketing of high-performance
winches. The Warn acquisition was funded by existing cash of $150 million, and
commercial paper borrowings of $175 million. Warn will be a stand alone
operating company within the Resources segment.
The Company received federal tax refunds of approximately $144 million
subsequent to the third quarter related to the filing of the 2002 tax return.
The proceeds from the tax refunds have been used to pay down commercial paper
borrowings.
In October 2003, the Company's $300 million 364-day facility bearing interest at
LIBOR plus .23% expired and was replaced with another $300 million 364-day
facility bearing interest at LIBOR plus .23% expiring October 2004.
NOTE M - New Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which is effective for exit and disposal
activities initiated after December 31, 2002. The standard replaces EITF Issue
94-3 and requires companies to recognize costs associated with exit or disposal
activities when they are incurred, as defined in SFAS No. 146, rather than at
the date of a commitment to an exit or disposal plan. The provisions of SFAS 146
are to be applied prospectively. The effect of the adoption of SFAS No. 146 was
immaterial to the Company's consolidated results of operations and financial
position.
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In November of 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of FASB Statement No. 5., "Accounting for
Contingencies", relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The disclosure requirements of FIN
45 are effective for financial statements of interim or annual periods that end
after December 15, 2002 and have been incorporated into the footnotes. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of the guarantor's year-end. FIN 45 requires that upon
issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The effect of the
adoption of FIN 45 was immaterial to the Company's consolidated results of
operations and financial position. The Company has also adopted the disclosure
requirements of FIN 45.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS 123" which is
effective for fiscal years ending after December 15, 2002 regarding certain
disclosure requirements which have been incorporated into the footnotes. This
Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those effects in
interim financial information. The effect of the adoption of SFAS No. 148 had no
impact to the Company's consolidated results of operations and financial
position.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. FIN 46 requires certain variable
interest entities ("VIE's") to be consolidated by the primary beneficiary if the
entity does not effectively disperse risks among the parties involved. The
provisions of FIN 46 are effective immediately for those variable interest
entities created after January 31, 2003. The provisions are effective for the
first interim period ending after December 15, 2003 for those variable interests
held prior to February 1, 2003. The effect of the adoption of FIN 46 was
immaterial to the Company's consolidated results of operations and financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the
accounting for derivatives, amending the previously issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a financing
component in order to increase the comparability of accounting practices under
SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have material impact
on the Company's consolidated results of operations or financial position.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies
have historically presented within their financial statements either as equity
or between the liabilities section and the equity section, rather than as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The effect of the adoption
of SFAS No. 150 was immaterial to the Company's consolidated results of
operations and financial position.
10 of 24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(1) MATERIAL CHANGES IN CONSOLIDATED FINANCIAL CONDITION:
Management assesses the Company's liquidity in terms of its ability to generate
cash to fund its operating, investing and financing activities. Significant
factors affecting liquidity are: cash flows generated from operating activities,
capital expenditures, acquisitions, dispositions, dividends, adequacy of
available bank lines of credit and the ability to attract long-term capital with
satisfactory terms.
The Company's cash and cash equivalents increased 37.3% during the first nine
months of 2003 to $404.4 million at September 30, 2003 compared to $294.4
million at December 31, 2002. Cash flow provided from continuing operating
activities for the first nine months of 2003 was $230.4 million compared to
$184.0 million in the first nine months of 2002. Increases in cash flows from
continuing operations were primarily driven by increased net earnings and
increases in other deferred payments. The Company made a discretionary
contribution of $27.0 million to its defined benefit pension plan in the third
quarter of 2003 bringing the year-to-date contribution to $45.8 million as
compared to $44.0 million in the comparable prior year period. The Company does
not anticipate making any material additional discretionary contributions for
the remainder of 2003. The level of cash used in continuing investing activities
for the first nine months of 2003 was $101.8 million compared to $119.9 million
for the comparable period last year, reflecting reduced acquisition activity
from the comparable prior year period. The acquisition expenditures for the
first nine months of 2003 were $31.2 million compared to $50.8 million in the
comparable 2002 period, while capital expenditures made in the first nine months
of 2003 were relatively flat at $70.6 million, compared to $69.1 million in the
comparable 2002 period. Acquisitions and capital expenditures during the first
nine months of 2003 were funded by internal cash flow. Cash used in continuing
financing activities through September 30, 2003 was $58.3 million compared to
cash used of $85.1 million in the comparable 2002 period. Net cash used from
financing activities during the first nine months of 2003 primarily reflected a
net $25.6 million increase of debt and dividend payments of $85.1 million,
compared with prior year net decreases in debt of $2.5 million and dividend
payments of $82.1 million.
Working capital increased from December 31, 2002 by $81.1 million or 7.4% to
$1,177.9 million, primarily driven by increases in receivables of $108.2 million
and increases in inventory of $36.2 million, offset by increases in payables of
$63.3 million. Excluding the impact of acquisitions of $20.5 million and changes
in foreign currency of $52.7 million, working capital only increased $7.9
million or 0.7% from December 31, 2002. Prepaid and other current assets
increased $163.8 million from December 31, 2002, primarily due to a federal tax
receivable of $159.0 million and additional prepaid pension assets of $45.8
million which reflects current year-to-date contributions. Federal and other
taxes on income increased $112.1 million due to current taxes payable on
improved earnings and other pending tax settlements.
Subsequent to the third quarter, Dover acquired Warn Industries Inc. for
approximately $325 million in cash. The Warn acquisition was funded by existing
cash of $150 million, and commercial paper borrowings of $175 million. Of the
$175 million commercial paper borrowed, $50 million was borrowed prior to
September 30th of 2003. Also subsequent to the third quarter, the Company
received federal tax refunds of approximately $144 million related to the filing
of the 2002 tax return and anticipates receiving additional refunds during the
fourth quarter of $7.4 million. The proceeds from the tax refunds have been used
to pay down commercial paper borrowings.
The following table is derived from the Condensed Consolidated Statements of
Cash Flows:
Cash flows from Continuing Operations Nine Months Ended September 30,
(in thousands, unaudited) 2003 2002
- ------------------------- ---- ----
Cash flows provided by operating activities $ 230,368 $ 183,975
Cash flows (used in) investing activities (101,816) (119,900)
Cash flows (used in) financing activities (58,264) (85,132)
Dover's free cash flow for the nine months ended September 30, 2003 increased
significantly as cash generated from operations improved $46.4 million from the
comparable 2002 period. The following table is a reconciliation of free cash
flow with cash flows from operating activities.
11 of 24
Nine Months Ended September 30,
Free Cash Flow (in thousands, unaudited) 2003 2002
- ---------------------------------------- ---- ----
Cash flow provided by operating activities $ 230,368 $ 183,975
Less: Capital expenditures (70,576) (69,073)
Dividends to stockholders (85,079) (82,112)
---------- ---------
Free cash flow $ 74,713 $ 32,790
The total debt level of $1,079.7 million as of September 30, 2003 increased from
December 31, 2002 as a result of drawing down approximately $50.2 million of
short-term commercial paper, partially offset by repayment of approximately
$28.0 million of long-term debt during the second quarter of 2003. As of
September 30, 2003, net debt of $674.5 million represented 20.6% of total
capital, a decrease of 3.5 percentage points from December 31, 2002. During the
third quarter of 2003, Dover entered into three interest rate swap agreements
terminating on June 1, 2008 with notional amounts of $50.0 million each to
exchange 6.25% fixed interest rate Notes, due June 1, 2008 to variable interest.
In October 2003, the Company's $300 million 364-day facility bearing interest at
LIBOR plus .23% expired and was replaced with another $300 million 364-day
facility bearing interest at LIBOR plus .23% expiring October 2004.
The following table provides a reconciliation of net debt to total
capitalization with the GAAP information:
September 30, December 31,
Net Debt to Total Capitalization Ratio (in thousands ) 2003 2002
- ------------------------------------------------------ ---- ----
Short-term debt and commercial paper $ 73,683 $ 23,761
Long-term debt 1,006,033 1,030,299
Less: Cash, equivalents and marketable securities 405,250 294,959
---------- ----------
Net debt 674,466 759,101
Add: Stockholders' equity 2,599,955 2,394,623
---------- ----------
Total capitalization $3,274,421 $3,153,724
Net debt to total capitalization 20.6% 24.1%
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS:
Three Months Ended September 30, 2003 Compared with Three Months Ended September
30, 2002
Sales in the third quarter of 2003 of $1,153.7 million were up 8.6% from the
comparable 2002 period. Sales would have increased 5.1% to $1,116.3 million if
2002 foreign currency translation rates were applied to 2003 results.
Acquisitions completed during 2003 contributed $7.4 million to consolidated
sales during the quarter ended September 30, 2003. Gross profit of $388.6
million in the third quarter of 2003 represented a 10.8% improvement compared to
$350.6 million in the comparable 2002 period. Gross profit margins of 33.7% in
the third quarter of 2003 compared to 33.0% in the third quarter of 2002.
Selling and administrative expenses for the third quarter of 2003 were $270.6
million or 23.5% of net sales, compared to $251.2 million or 23.6% of net sales
in the comparable 2002 period. Operating profit of $117.9 million in the third
quarter increased $18.6 million compared to the prior year due primarily to
benefits from the company's restructuring programs undertaken during 2002 and
2001 and slightly improved global economic conditions. Operating profit margins
in the third quarter of 2003 were 10.2% compared to 9.3% in the third quarter of
2002.
Net interest expense increased 5.6% to $15.4 million during the third quarter of
2003, comparable to $14.6 million in the third quarter of 2002.
Other net expenses for the third quarter of 2003 were $2.6 million, which
primarily related to a legal settlement at the Industries segment, compared to
other net expenses of $3.8 million in the comparable 2002 period, which
primarily related to foreign exchange losses.
Dover's effective tax rate for continuing operations for the third quarter of
2003 was 24.6% compared to last year's third quarter rate of 27.7%. The low
effective tax rate for both periods is largely due to the continuing benefit
from tax credit programs such as those for R&D and foreign taxes combined with
the benefit from U.S. export programs, a lower foreign tax rate and the
recognition of certain capital loss benefits.
12 of 24
Net earnings from continuing operations for the third quarter of 2003 were $75.3
million or $.37 per diluted share compared to $58.5 million or $.29 per diluted
share from continuing operations in the comparable 2002 period. For the third
quarter of 2003, net earnings were $84.4 million or $.41 per diluted share,
including $9.1 million or $.04 per diluted share in earnings from discontinued
operations, compared to $56.4 million or $.28 per diluted share in the third
quarter of 2002, which included $2.0 million or $.01 per diluted share in losses
from discontinued operations. Earnings from discontinued operations in the third
quarter of 2003 were primarily attributable to the favorable resolution of
certain outstanding tax matters of $10.6 million, net of tax, and tax benefits
of $5.0 million, net of tax, related to losses on sales of businesses. These
items were partially offset by charges of $5.7 million, net of tax, related to
liabilities from the entities sold.
Nine Months Ended September 30, 2003 Compared with Nine Months Ended September
30, 2002
Sales for the nine months ended September 30, 2003 of $3,305.8 million were up
5.3% from the comparable 2002 period. Sales would have increased 1.1% to
$3,172.5 million if 2002 foreign currency translation rates were applied to 2003
results. Acquisitions made during 2003 contributed $12.8 million to consolidated
sales during the nine months ended September 30, 2003. Gross profit of $1,131.3
million during the first nine months of 2003 represented a 9.9% improvement
compared to $1,029.5 million in the comparable 2002 period. Gross profit margins
of 34.2% in the first nine months of 2003 compared to 32.8% in the first nine
months of 2002.
Selling and administrative expenses for the first nine months of 2003 were
$804.3 million or 24.3% of net sales, compared to $742.3 million or 23.6% of net
sales in the comparable 2002 period. Operating profit of $327.1 million for the
nine month period ended September 30, 2003, increased $39.9 million compared to
the prior year due primarily to benefits from the company's restructuring
programs undertaken during 2002 and 2001 and slightly improved global economic
conditions. Operating profit margins for the first nine months of 2003 were 9.9%
compared to 9.2% for the first nine months of 2002.
Net interest expense decreased 3.1% to $47.6 million during the first nine
months of 2003, compared to $49.1 million during the first nine months of 2002.
Other net expenses for the nine months ended September 30, 2003 were $5.2
million, which primarily related to legal settlements at the Industries and
Resources segments and foreign exchange losses. Other net income for the nine
months ended September 30, 2002 was $.1 million, which included a gain on the
sale of a product line offset by foreign exchange losses.
Dover's effective tax rate for continuing operations for the nine months ended
September 30, 2003 was 24.5% compared to the 2002 nine month rate of 27.7% and
the 2002 full year rate of 21.7%. The low effective tax rate is largely due to
the continuing benefit from tax credit programs such as those for R&D and
foreign taxes combined with the benefit from U.S. export programs, a lower
foreign tax rate and the recognition of certain capital loss benefits.
Net earnings from continuing operations for the first nine months of 2003 were
$207.1 million or $1.02 per diluted share compared to $172.2 million or $.85 per
diluted share from continuing operations in the comparable 2002 period. For the
nine months ended September 30, 2003, net earnings before cumulative effect of
accounting changes were $216.6 million or $1.07 per diluted share, including
$9.5 million or $.05 per diluted share in earnings from discontinued operations,
compared to the first nine months of 2002 net earnings before cumulative effect
of accounting changes of $156.8 million or $.77 per diluted share, which
included $15.5 million or $.08 per diluted share in losses from discontinued
operations. Earnings from discontinued operations in the first nine months of
2003 were primarily attributable to the favorable resolution of certain
outstanding tax matters of $10.6 million, net of tax, and tax benefits of $5.0
million, net of tax, related to losses on sales of businesses. These items were
partially offset by charges of $5.7 million, net of tax, related to liabilities
from the entities sold. Losses from discontinued operations in the first nine
months of 2002 primarily related to a loss on the sale of Vectron GmbH of $7.3
million, net of tax.
For the nine months ended September 30, 2002, the impact of the adoption of the
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", resulted in a net loss of $136.3 million. The adoption
resulted in a goodwill impairment charge of $345.1 million ($293.0 million, net
of tax, or $1.44 diluted earnings per share). The adoption of the standard also
discontinued the amortization of goodwill effective January 1, 2002.
13 of 24
DOVER DIVERSIFIED
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, unaudited) ------------------------------------------ -----------------------------------------
2003 2002 % Change 2003 2002 % Change
-------- -------- -------- -------- -------- --------
Net sales $306,559 $299,402 2.4% $914,856 $896,865 2.0%
Earnings 29,911 36,348 -17.7% 99,379 105,791 -6.1%
Operating margins 9.8% 12.1% 10.9% 11.8%
Diversified's third quarter results reflect a strong performance from Hill
Phoenix which was offset by flat to down results at other businesses. Hill
Phoenix achieved record earnings and significantly improved margins for a second
consecutive quarter, as increased volume and production efficiency improvements
drove the performance. Sargent reported slightly improved earnings, with
increases from their defense business and a strategic add-on acquisition, offset
by continued weakness in the commercial aerospace market. PMI earnings were
flat, as they continue to deal with production issues and softness in some of
their market segments. SWEP and Tranter PHE both reported slightly improved
sales and earnings over last year, mainly due to large projects and improving
markets. Although earnings and margins were down compared to the prior year
period, Belvac's strong backlog and consistent bookings should keep them on
track for a solid sales and earnings year. Crenlo reported lower earnings, as
sales volume was the lowest of the year, although bookings for the quarter were
up 25% over last year. Waukesha reported lower earnings due to manufacturing
facility closure costs and continued market softness. Mark Andy, SWF and Van Dam
continue to struggle with adverse conditions in the printing/packaging markets
served. Graphics Microsystems earnings were flat compared to last year on
slightly improved sales. However, bookings and backlog indicate a positive trend
as they have focused on market share growth with a number of large customers.
For the nine months ended September 30, 2003, sales increases from the
comparable 2002 period were primarily driven by Belvac, SWEP and Performance
Motorsports, offset by decreases at Waukesha, Crenlo and L&E. Earnings for the
nine months ended September 30, 2003 also increased from 2002, driven primarily
by Belvac and Hill Phoenix, with offsetting decreases at Waukesha and
Performance Motorsports.
Bookings in the third quarter of 2003 were $308.4 million, an increase of 7.6%
from the comparable 2002 period, and the quarter book-to-bill ratio was 1.01.
Bookings for the nine months of 2003 were $919.7 million, an increase of 4.8%
from the comparable 2002 period, and the nine months book-to-bill ratio was
1.01. Backlog at the end of the quarter was $377.3 million, 4.8% higher than at
the beginning of the year.
DOVER INDUSTRIES
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ------------------------------------
(in thousands, unaudited) 2003 2002 % Change 2003 2002 % Change
-------- -------- -------- -------- -------- --------
Net sales $271,128 $270,962 0.1% $782,710 $801,140 -2.3%
Earnings 31,508 31,705 -0.6% 87,763 108,053 -18.8%
Operating margins 11.6% 11.7% 11.2% 13.5%
Industries' third quarter results approximated prior year, but compared
positively to last quarter as sales and earnings grew 3% and 8%, respectively.
Strong earnings and margin gains at Tipper Tie and positive comparisons at Heil
Environmental, PDQ, Chief Automotive and Dovatech compared to the same period
last year were the key contributors. Sales improved at Rotary driven by strong
overseas performance, although start-up costs negatively impacted earnings.
Tipper Tie benefited from strong overseas results as Alpina (a Swiss acquisition
purchased in 2000) grew at double-digit rates. Triton's sales were flat compared
to the prior year but up over 10% compared to last quarter led by a strong new
product focus. Products introduced since January of 2002 now account for over
70% of Triton's unit sales. PDQ's earnings improvement was primarily the result
of new product introductions. Heil Environmental sales exceeded 2002 levels for
the first time this year driven by share gains domestically along with a strong
European performance. Dovatech's results surpassed last year for the third
consecutive quarter driven by strength in its chiller businesses. Heil Trailer,
Marathon and DI Foodservice continued to be impacted by weak markets, although
all are strategically realigning their businesses, which should improve future
performance. Although Kurz-Kasch's results declined this quarter due to the
impact of new product introductions, sales and earnings continue to show
double-digit increases for the year.
For the nine months ended September 30, 2003, sales decreases from the
comparable 2002 period were primarily driven by Heil Environmental, Heil Trailer
and Chief Automotive, offset by increases at Tipper Tie, Dovatech, Kurz-Kasch.
Earnings for the nine months ended September 30, 2003 also decreased from
14 of 24
2002, driven primarily by Heil Environmental, Heil Trailer and DI Food Service,
with offsetting increases at Dovatech.
Segment bookings in the third quarter of 2003 were $277.9 million, an increase
of 5.1% from the comparable 2002 period, and the quarter book-to-bill ratio was
1.02. Segment bookings for the first nine months of 2003 were $805.6 million,
compared to $794.6 million during comparable 2002 period, and the nine months
book-to-bill ratio was 1.03. Backlog increased 23.6% from the beginning of the
current year to $151.3 million.
DOVER RESOURCES
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, unaudited) -------------------------------------- -------------------------------------
2003 2002 % Change 2003 2002 % Change
-------- -------- -------- -------- -------- --------
Net sales $248,791 $224,718 10.7% $718,796 $674,770 6.5%
Earnings 36,954 32,919 12.3% 102,772 95,757 7.3%
Operating margins 14.9% 14.6% 14.3% 14.2%
The improved results at Resources were driven by a combination of factors,
including higher energy prices, new product introductions, global sales and
sourcing initiatives, and right sizing of businesses that continue to face
sluggish markets. Compared to last year, strong earnings growth was achieved at
the Energy Products Group, OPW Fueling Components, OPW Fluid Transfer Group and
Wilden. These businesses are all strongly positioned on a global basis and also
are benefiting from key new product introductions. Blackmer continues to be
negatively impacted by the slow down in the "chemical and process" markets in
North America but has taken necessary steps to right size its North American
operations in response to this softness. Both De-Sta-Co Industries and De-Sta-Co
Manufacturing have seen continued softness in spending by North American
automotive and industrial customers. Texas Hydraulics and, to some extent Tulsa
Winch, continue to be affected by the slow down in construction equipment,
mobile cranes, and aerial lift markets. In response, Texas Hydraulics continues
to add new customers and new products, while Tulsa Winch has capitalized on its
strength in military, oil field, and marine winch applications. C. Lee Cook's
results are flat with prior year but it is beginning to experience some increase
in its compressor OEM business. Hydro Systems' sales and earnings are comparable
to prior year in total but the business has seen a shift to and growth in its
European operations. RPA Process Technologies achieved earnings growth over
prior year primarily as a result of the completion of several large projects but
the business continues to face sluggish capital spending in the paper, process,
and minerals markets.
For the nine months ended September 30, 2003, sales increases from the
comparable 2002 period were primarily driven by Energy Products Group, De-Sta-Co
Industries, and OPW Fueling Components, offset by decreases at Texas Hydraulics
and De-Sta-Co Manufacturing. Earnings for the nine months ended September 30,
2003 also increased from 2002, driven primarily by Energy Products Group, OPW
Fueling Components and De-Sta-Co Industries, with offsetting decreases at Wilden
and Texas Hydraulics.
Segment bookings in the third quarter of 2003 were $251.6 million, an increase
of 16.7% from the comparable 2002 period and the book-to-bill ratio for the
quarter was 1.01. Segment bookings for the first nine months of 2003 were $729.6
million, an increase of 7.2% from the comparable 2002 period and the
book-to-bill ratio for the nine months was 1.02. Ending backlog was $90.6
million, a 16.6% increase from the end of last year. Dover Resources' results
for all periods presented have been adjusted to include Texas Hydraulics, which
was transferred from Dover Industries at the beginning of the year.
15 of 24
DOVER TECHNOLOGIES
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, unaudited) ----------------------------------------- -------------------------------------
2003 2002 % Change 2003 2002 % Change
--------- --------- -------- --------- --------- ---------
Net sales $ 329,313 $ 269,357 22.3% $ 895,562 $ 770,884 16.2%
Earnings 29,794 1,252 -- 61,022 (2,651) --
Operating margins 9.0% 0.5% 6.8% -0.3%
The turnaround evidenced in the first half of 2003 continued into the third
quarter. Bookings, sales and earnings were up 6%, 8% and 44%, respectively, on a
sequential quarterly basis, and bookings and sales were up 29% and 22%,
respectively, over the third quarter of 2002, while earnings increased $28.5
million. All of the Technologies companies have reported profits on a
year-to-date basis, with the exception of one Specialized Electronic Components
(SEC) company.
The Circuit Board Assembly and Test (CBAT) businesses recorded earnings of $19.5
million as compared to a loss of $3.3 million for the third quarter of 2002.
Third quarter sales were $204.4 million, an increase of $41.8 million or 26%
from last year's comparable quarter. Bookings at $206.1 million were up 35% over
the prior year. Bookings increased 14% from last quarter, following a 13%
increase in the second quarter of 2003. The book-to-bill ratio for the quarter
was 1.01 and backlog was $90.6 million. The year-to-date CBAT growth,
experienced at all companies, was attributable in large part to increased demand
in the backend semiconductor products at Alphasem and ECT, and continued growth
from investments in Asia, particularly in China. In addition, the CBAT companies
reported sales in the current quarter to large North American based EMS
companies for the first time in a while.
The SEC businesses had sales in the quarter of $52.0 million, as compared to
$45.8 million in last year's third quarter, an increase of 14% and were flat
compared to last quarter. SEC reported earnings of $0.8 million as compared to a
loss of $3.4 million in 2002. Bookings in the third quarter of $55.0 million
were 15% greater than the same period last year. The book-to-bill ratio for the
quarter was 1.06 and backlog was $49.2 million. Sequential quarterly earnings
for SEC decreased $1.1 million on flat sales while bookings increased 6.0%.
Vectron, the largest company in SEC, recorded quarterly sales, earnings and
margin increases compared to both the prior quarter and last year. Through more
efficient operations and improved customer focus (quality, flexibility and
product development), Vectron reported its best margins since early 2001.
Offsetting that performance, K&L Microwave had a difficult quarter as it winds
up its restructuring in order to focus on military and selected commercial
wireless markets. The SEC companies continue to expand into the military,
space, medical and industrial markets, and have noted some signs of improved
activity at certain of the large telecom equipment companies.
In the quarter, Imaje had sales of $72.9 million, an increase of 20% over the
same period in 2002. Earnings increased from $14.5 million to $15.8 million or
9%. Bookings in the third quarter of $71.0 million were 24% greater than the
same period last year. The book-to-bill ratio for the quarter was 0.97 and
backlog was $18.3 million. Earnings for the third quarter equaled the level of
earnings for the second quarter on slightly reduced sales. This reflects
improved execution of Imaje's logistics and distribution networks coupled with
continued focus on new product development. Sales for 2003 as compared to 2002
were positively impacted by a 15% strengthening of the Euro against the dollar.
However, margins continue to be pressured as the majority of Imaje's product
costs are incurred in Euros. Consequently, Imaje is in process of expanding its
product delivery platforms in both China and North America.
For the nine months ended September 30, 2003, sales at the CBAT businesses were
$532.5 million, an increase of $86.4 million and earnings were $31.3 million, an
increase of $58.0 million as compared to the same 2002 period. For the nine
months ended September 30, 2003, sales at the SEC businesses were $154.4, a
decrease of $1.3 million and earnings were $5.6 million, an increase of $12.8
million as compared to the same 2002 period. For the nine months ended September
30, 2003, sales at Imaje were $208.7 million, an increase of $39.6 million and
earnings were $42.9 million, an increases of $6.4 million as compared to the
same 2002 period.
CBAT bookings for the first nine months of 2003 were $548.4 million, an increase
of 17.4% from the comparable 2002 period and the book-to-bill ratio was 1.03.
SEC bookings for the first nine months of 2003 were $160.8 million, an increase
of 4.9% and the book-to-bill ratio was 1.04. Imaje's bookings for the first nine
months of 2003 were $212.2 million, an increase of 28.5% from the comparable
2002 period and the book-to-bill ratio was 1.02.
16 of 24
OUTLOOK
Dover's third quarter results continue to reflect the positive progress seen in
the first and second quarters despite challenging economic conditions which
still impact most Dover companies. Technologies had its most profitable quarter
since the first quarter of 2001. This is a direct result of continuing operating
improvements by the CBAT and SEC companies. Segment operating margins increased
to 9% from 7% last quarter, with improved profitability and operating leverage
at Technologies. The positive bookings trend seems to indicate that the
electronic markets served are stabilizing and in some cases showing modest
growth. Resources was once again the Company's most profitable segment for the
quarter and it is expected that their newest acquisition, Warn Industries which
closed on October 1, will make a significant long-term contribution in terms of
future sales and profitability. The Diversified segment had lower earnings on
essentially flat sales, despite a strong performance at Hill Phoenix. Industries
continues to face challenges in many markets, although results were modestly
better than either the first or second quarter, and reflected meaningful
strategic realignment expenses.
Results over the past three quarters show encouraging signs for most of Dover's
markets, while the outlook for the global manufacturing economy still remains
unclear. Dover's businesses continue to make the right investments and right
size their operations to ensure the Company is well positioned for a
manufacturing upturn.
SPECIAL NOTES REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, particularly "Management's Discussion and
Analysis", contains forward-looking statements within the meaning of the
Securities Act of 1933, as amended, and the Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995. Such statements relate
to, among other things, industries in which the Company operates, the U.S. and
global economies, earnings, cash flow and operating improvements and may be
indicated by words or phrases such as "anticipates", "supports", "plans",
"projects", "expects", "should", "would", "could", "hope", "forecast", "Dover
believes", "management is of the opinion", and similar words or phrases. Such
statements may also be made by management orally. Forward-looking statements are
subject to inherent uncertainties and risks, including among others: the impact
of continued events in the Middle East on the worldwide economy; increasing
price and product/service competition by foreign and domestic competitors,
including new entrants; technological developments and changes; the ability to
continue to introduce competitive new products and services on a timely, cost
effective basis; the mix of products/services; the achievement of lower costs
and expenses; domestic and foreign governmental and public policy changes
including environmental regulations; protection and validity of patent and other
intellectual property rights; the continued success of the Company's acquisition
program; the cyclical nature of the same Company's businesses; and the outcome
of pending and future litigation and governmental proceedings. In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic and international economic conditions
including interest rate and currency exchange rate fluctuations. In light of
these risks and uncertainties, actual events and results may vary significantly
from those included in or contemplated or implied by such statements. Readers
are cautioned not to place undue reliance on such forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, 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
Internet website, http://www.dovercorporation.com. Such information will be
found in the "What's New" section of the website's home page. It will be
accessible from the home page for approximately one month after release, after
which time it will be archived on the website for a period of time. The Internet
address in this release 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 INFORMATION
In an effort to provide investors with additional information regarding the
company's results as determined by generally accepted accounting principles
(GAAP), the company also discloses non-GAAP information which management
believes provides useful information to investors. Free cash flow, net debt,
capitalization, and revenues and working capital excluding the impact of changes
in foreign currency exchange rates are not financial measures under GAAP and
should not be considered as a substitute for cash flows from operating
activities, debt or equity, sales and working capital as determined in
accordance with GAAP and may not be comparable to similarly titled measures
reported by other companies. Management believes the net debt to capitalization
ratio and free cash flow are important measures of liquidity and operating
performance because they provide both management and investors a measurement of
cash generated from operations that is available to fund acquisitions and repay
debt. Management believes that reporting revenues and working capital at
constant currency, which excludes
17 of 24
the positive or negative impact of fluctuations in foreign currency exchange
rates, provides a meaningful measure of the Company's operational changes, given
the global nature of Dover's businesses.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the Company's exposure to market risk
during the first nine months of 2003. For discussion of the Company's exposure
to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, contained in the Company's Annual Report incorporated by reference
in Form 10-K for the fiscal year ended December 31, 2002.
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 are
effective. During the third quarter of 2003, there were no changes in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certificate pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, signed and dated by Robert
G. Kuhbach.
31.2 Certificate pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, signed and dated by Thomas
L. Reece.
32 Certificate Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
signed and dated by Thomas L. Reece and Robert G. Kuhbach.
(b) Reports on Form 8-K:
The Company filed with the Securities and Exchange Commission a
report on Form 8-K, filed on October 20, 2003, covering information
reported under Item 12. Results of Operations and Financial
Condition.
The Company filed with the Securities and Exchange Commission a
report on Form 8-K, filed on July 18, 2003, covering information
reported under Item 9. Regulation FD Disclosure but furnished
pursuant to Item 12. Results of Operation and Financial Condition in
accordance with SEC Release No. 33-8216.
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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 31, 2003 /s/ Robert G. Kuhbach
---------------- ----------------------------------
Robert G. Kuhbach, Vice President,
Finance, Chief Financial Officer &
Treasurer
(Principal Financial Officer)
Date: October 31, 2003 /s/ Raymond T. McKay, Jr.
---------------- ----------------------------------
Raymond T. McKay, Jr.
Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
31.1 Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, signed and dated by Robert G. Kuhbach.
31.2 Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, signed and dated by Thomas L. Reece.
32 Certificate Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, signed and dated by Robert
G. Kuhbach and Thomas L. Reece.
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