Refer to the section below entitled "Special Notes Regarding Forward-Looking
Statements" for a discussion of factors that could cause our actual results to
differ from the forward-looking statements contained below and throughout this
quarterly report.
Throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), we refer to measures used by management to
evaluate performance as well as liquidity, including a number of financial
measures that are not defined under accounting principles generally accepted in
the United States of America ("GAAP"). We believe these measures provide
investors with important information that is useful in understanding our
business results and trends. Explanations within this MD&A provide more details
on the use and derivation of these measures.
On March 11, 2020, the World Health Organization declared the outbreak of the
novel coronavirus ("COVID-19") a pandemic. The COVID-19 outbreak and associated
counter-acting measures implemented by governments around the world, as well as
increased business uncertainty, had an adverse impact on our financial results
for the three and six months ended June 30, 2020. The outlook in many of our
markets remains uncertain and the pandemic is likely to continue negatively
impacting levels of commercial activity and our results. Based on improving
sequential revenue and bookings trends in the second quarter, we anticipate that
activity will improve in the third quarter. However, we do not expect to return
to normal levels or growth for the remainder of the year across most of our
impacted businesses.
OVERVIEW
Dover is a diversified global manufacturer and solutions provider delivering
innovative equipment and components, consumable supplies, aftermarket parts,
software and digital solutions, and support services through five operating
segments: Engineered Products, Fueling Solutions, Imaging & Identification,
Pumps & Process Solutions, and Refrigeration & Food Equipment. The Company's
entrepreneurial business model encourages, promotes and fosters deep customer
engagement and collaboration, which has led to Dover's well-established and
valued reputation for providing superior customer service and industry-leading
product innovation. Unless the context indicates otherwise, references herein to
"Dover," "the Company," and words such as "we," "us," or "our" include Dover
Corporation and its consolidated subsidiaries.
Dover's five operating segments are as follows:
•Our Engineered Products segment is a provider of a wide range of products,
software and services that have broad customer applications across a number of
markets, including aftermarket vehicle service, solid waste handling, industrial
automation, aerospace and defense, industrial winch and hoist, and fluid
dispensing.
•Our Fueling Solutions segment is focused on providing components, equipment and
software and service solutions enabling safe transport of fuels and other
hazardous fluids along the supply chain, as well as the safe and efficient
operation of retail fueling and vehicle wash establishments.
•Our Imaging & Identification segment supplies precision marking and coding,
product traceability and digital textile printing equipment, as well as related
consumables, software and services.
•Our Pumps & Process Solutions segment manufactures specialty pumps, fluid
handling components, plastics and polymer processing equipment, and highly
engineered components for rotating and reciprocating machines.
•Our Refrigeration & Food Equipment segment is a provider of innovative and
energy-efficient equipment and systems that serve the commercial refrigeration,
heating and cooling and food equipment markets.
In the second quarter of 2020, revenue was $1.5 billion, which decreased $311.5
million, or 17.2%, as compared to the second quarter of 2019. This was driven by
an organic revenue decline of 16.0%, an unfavorable impact from foreign currency
translation of 1.2% and a 0.7% impact due to dispositions. This decline was
partially offset by acquisition-related revenue growth of 0.7%.
The 16.0% organic revenue decline compared to the second quarter of 2019 was
broad-based across our segments due to the slowing demand environment in many of
our end-markets driven by the global response to the outbreak of COVID-19. The
Refrigeration & Food Equipment segment experienced organic revenue decline of
20.2% on weaker demand for commercial foodservice equipment and postponement of
store remodels and shipments in food retail, while the heat exchanger business
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showed relative resilience. The Engineered Products segment had a decline in
organic revenue of 20.1% primarily as a result of significantly weaker demand in
our vehicle service, industrial automation and fluid dispensing businesses,
while aerospace & defense and waste handling showed relative resilience. The
Fueling Solutions segment saw a decline in organic revenue of 14.8% driven by
slowing demand in retail fueling markets in Europe and Asia, as well as weaker
activity in the transportation and vehicle wash markets, partially offset by
strong Europay, Mastercard, and Visa ("EMV") activity in the North America
fueling industry. The Imaging & Identification segment experienced a decline in
organic revenue of 14.0% primarily driven by a significant slowdown in the
textile digital printing market caused by global disruption in the apparel and
fashion markets, while marking and coding showed relative resilience. The Pumps
& Process Solutions segment had a decline in organic revenue of 8.8% as a result
of slowing demand in the oil & gas and general industrial end-markets, partially
offset by strong growth in the biopharma and hygienic markets.
From a geographic perspective, in the second quarter, organic revenue for the
U.S., our largest market, declined 10%, while organic revenue in Europe and Asia
declined 19% and 14%, respectively, year over year. Organic revenue in all other
geographic markets declined 33%. Four out of our five segments experienced
declines in U.S. organic sales, while the Fueling Solutions segment grew on the
basis of continued demand for EMV-compliant above-ground retail fueling
equipment. The decline in Europe in the second quarter was broad-based across
all segments as the region faced significant operational and demand headwinds
from the COVID-19 pandemic. The decline in Asia was driven mainly by weak
activity in India where the lockdown in response to COVID-19 has been broad and
prolonged, as well as China where our Fueling Solutions segment, our second
largest business in China, faced significant headwinds due to the expiration of
the government's double-wall upgrade mandate that drove significant activity in
prior years, as well as continued weak demand from the major national oil
companies. Three out of our five segments did return to growth in China in the
second quarter.
Bookings were $1.4 billion for the three months ended June 30, 2020, a decrease
of $402.6 million compared to the prior year period. Included in this result was
organic decline of 20.6%, an unfavorable impact from foreign currency
translation of 1.7% and a 0.6% impact due to dispositions, partially offset by
acquisition-related bookings growth of 0.7%. The decline in organic bookings was
broad-based across our segments primarily as a result of the global impact on
customer demand from the COVID-19 pandemic. Bookings have improved sequentially
in June 2020, which may indicate recovering demand, but remained subdued on a
year-over-year basis across most of our businesses. Backlog as of June 30, 2020
was $1.5 billion, an increase from $1.4 billion from the prior year. See
definition of bookings and backlog within "Segment Results of Operations".
During the three months ended June 30, 2020, we acquired Em-tec GmbH ("Em-tec")
for a purchase price of $30.4 million, net of cash acquired. Em-tec is a leading
designer and manufacturer of flow measurement devices that serve a wide array of
medical and biopharmaceutical applications and will strengthen the portfolio of
our Pumps & Process Solutions segment, particularly in the biopharma end-market.
Rightsizing charges included restructuring costs of $12.3 million and other
costs of $4.6 million for the three months ended June 30, 2020. Restructuring
expense was comprised primarily of new actions taken in response to lower demand
driven by COVID-19 and continuing broad-based selling, general and
administrative expense reduction initiatives and broad-based operational
efficiency initiatives focusing on footprint consolidation, and operational
optimization and IT centralization. These restructuring charges were broad-based
across all segments as well as corporate. Other costs were comprised primarily
of charges related to the restructuring actions and a $3.6 million write-off of
assets in our Refrigeration & Food Equipment segment.
COVID-19 Update
Over the past few months, the COVID-19 pandemic has disrupted the global economy
and adversely impacted our business, including demand for our products across
multiple end-markets as well as our supply chain and operations. We expect the
unfavorable impact will continue in the second half of 2020 as general business
and economic uncertainty persists and puts pressure on the level of global
business investment. Travel and other restrictions put in place globally in
response to the pandemic have impacted operations of our customers and
suppliers, as well as the ability of our staff to deliver certain services to
our customers. While travel restrictions and lockdown measures around the world
are being reduced, the levels of activity in our markets remain subdued relative
to average historical levels and we expect continued impact in the second half
of 2020, albeit continuing a gradual improving trajectory that began at the end
of the second quarter.
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Our foremost focus has been on the health and safety of our employees, business
partners and customers. Beginning late in the first quarter and continuing into
the second quarter, we have operated in accordance with established health and
safety protocols across our facilities and have instituted an enhanced health
and safety compliance program. More specifically, we modified practices at our
manufacturing locations and offices to adhere to guidance from the U.S. Centers
for Disease Control and Prevention and local health and governmental authorities
in our global network with respect to social distancing, physical separation and
personal protective equipment and sanitization, and have restricted the number
of employees permitted in common areas at any given time. Further, we enhanced
our operational excellence model with robust processes and practices to promote
a clean and sanitary working environment, socially distanced operations where
possible and a culture of care and responsibility. These practices and processes
include procedures for dealing with confirmed COVID-19 cases, compliance
auditing, use of personal protective equipment, access control and other
protective measures, and manufacturing line and operational interface re-design.
We consider our companies to be essential suppliers to our customers and
business partners as we provide products and services on which our customers and
broader society rely upon daily to support crucial functions. Therefore most of
our U.S. and global facilities have remained substantially operational during
the outbreak with enhanced safety protocols to protect the well-being of our
employees. Over the course of the second quarter, approximately 85% of our major
global facilities (by count) remained fully operational throughout the entire
quarter. Certain facilities were either partially or fully closed due to
government mandates or in response to pandemic-related reduced demand in certain
end-markets such as the commercial refrigeration, vehicle service and apparel
and textile printing markets. We have experienced the most prolonged operational
restrictions in India, Malaysia, Brazil and Italy, all countries where we have a
relatively immaterial manufacturing footprint (except Italy, where we have
significant presence in our Imaging & Identification, Engineered Products and
Pumps & Process Solutions segments). As of June 30, 2020, approximately 97% of
our major global facilities were fully operational.
In order to help mitigate the negative financial impact caused by the pandemic,
we have executed and will continue to execute a number of temporary cost savings
measures across the portfolio and at our corporate center including employee
furloughs, adjustments to variable compensation to reflect current conditions,
utilization of governmental job retention subsidies, elimination of
non-essential travel and reduction of discretionary spend. We have also
significantly reduced our capital spending plan for the year, without deferring
strategic ongoing initiatives. In addition, we initiated restructuring actions
to drive longer-term cost savings and are proactively managing our working
capital.
Beginning in early-to-mid-March 2020, the commercial paper market began to
experience very high levels of volatility as a result of COVID 19-related
uncertainties. As a result, on March 16, 2020, we borrowed $500 million under
our $1 billion revolving credit facility. We subsequently paid off the $500
million using proceeds from commercial paper in the second quarter as volatility
in the commercial paper market stabilized and we have resumed borrowing
commercial paper. In the spirit of prudent liquidity management, even though we
have no long-term debt maturities until 2025, on May 6, 2020 we also entered
into a $450.0 million 364-day revolving credit facility which expires on May 5,
2021. We have not drawn down any amounts under this facility. See "Financial
Condition - Capitalization" for further discussion.
The extent of the impact of the COVID-19 outbreak on our operational and
financial performance will depend on certain developments, including the
duration and spread of the outbreak, its impact on our customers and suppliers
and the range of governmental and community reactions to the pandemic, which are
uncertain and cannot be fully predicted at this time. We will continue to
proactively respond to the situation and may take further actions that alter our
business operations as may be required by governmental authorities, or that we
determine are in the best interests of our employees and customers.
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