Fitch Ratings has affirmed Dover Corporation's (NYSE: DOV) long-term Issuer Default Rating (IDR) and debt ratings at 'A' and its short-term IDR and commercial paper (CP) ratings at 'F1'. A full rating list is shown below. Fitch's actions affect $3.2 billion of total debt, including the undrawn $1 billion revolving credit facility (RCF). The Rating Outlook is Stable.
The ratings and Outlook are supported by Dover's solid annual free cash flow (FCF), strong operating profile from a diversified business portfolio, and leading positions in secular growth markets.
Concerns include Dover's aggressive cash deployment for acquisitions and share repurchases, integration risks associated with increased acquisition activity across disparate businesses and geographies, and credit metrics at the weaker end for the rating.
Fitch expects annual FCF will continue exceeding $500 million, mostly from stronger profitability. The company has consistently achieved its 10% pre-dividend FCF margin target, with inventory liquidations and lower capital spending offsetting lower profitability levels in periods of negative revenue growth.
Ongoing operating efficiency initiatives, in conjunction with acquisitions and business portfolio pruning, could strengthen Dover's operating profile. The company's planned divestiture of electronics equipment businesses, on the back of selling its commercial construction business in 2011, will further reduce exposure to more volatile and capital intensive businesses.
Fitch believes Dover's flexibility for acquisitions and share repurchases meaningfully exceeding FCF is approaching its limit. Cash balances should end 2012 below $750 million and last four-year average of $1 billion. The ratings and Outlook reflect Fitch's expectations that Dover will moderate share repurchases to limit total debt to capital to 35%.
Pro forma for the recent purchase of Anthony International, Dover spent $956 million on acquisitions net of divestitures through Sept. 30, 2012, following $856 million of net acquisitions in 2011. Nonetheless, Dover funded this acquisition with borrowings under the commercial paper (CP) program, which the company will reduce with FCF.
Acquisitions since 2008 have added an estimated $1.5 billion of annual revenues and Fitch expects Dover will remain acquisitive in order to achieve its 3%-5% inorganic annual revenue growth target.
Dover has also ramped up its share repurchases, albeit from subdued levels during the 2008-2009 recession. Through the nine months ended Sept. 30, 2012, the company bought back 6.6 million common shares for $393.5 million and its board of directors recently authorized up to $1 billion of stock buybacks within the next 4-6 quarters.
Fitch estimates total leverage (total debt to operating EBITDA was 1.3x for the latest 12 months (LTM) ended Sept. 30, 2012, but likely was closer to 1.7x, pro forma for the acquisition of Anthony International. This is consistent with the aforementioned target long-term debt to capital ratio of 35%.
Negative rating actions could occur if: i) financial flexibility declines due to acquisition spending, and stock buybacks continue to meaningfully exceed annual FCF; or ii) the pace of profitability growth is insufficient to return total leverage to a long-term ratio of approximately 1.5x.
Positive rating actions are unlikely in the absence of a commitment to maintaining lower total leverage, which Fitch does not believe would provide Dover with the flexibility to achieve its growth objectives.
Dover's organic sales should increase by low- to mid-single digits over the near term, driven by solid demand in key growth areas, particularly handset and energy markets. Emerging markets remain solid, although demand in Europe (15%-20% of revenues) continues to be weak. Acquisitions should add 3%-5% of annual revenue growth over the near term.
Higher volume, the benefits of past efficiency initiatives, and the inclusion of more profitable acquisitions should drive solid operating profit. Fitch expects operating profit margin to exceed 16% for 2012, up from 15% in 2011.
Dover's liquidity profile at Sept. 30, 2012 was sufficient and included:
--$794 million of cash and cash equivalents, of which $516 million was held outside the U.S.;
--An undrawn $1 billion RCF expiring 2016, which Dover uses as a back-stop for the CP program. Fitch's expectation for FCF of more than $500 million also supports liquidity.
Total debt of approximately $2.2 billion at Sept. 30, 2012 consisted of staggered tranches of senior notes. Dover's short-term debt outstanding consisted of $3 million related to capital leases. Subsequent to Sept. 30, 2012, short-term debt also includes CP borrowings used to fund the Anthony International transaction in the current quarter.
The company has no significant debt maturities until 2015. In addition, pension contributions to qualified plans should remain manageable and are expected to be $20 million to $40 million in 2012 and assumed to be $40 million in each of the next few years.
Fitch affirms the following ratings for Dover:
--Long-term IDR at 'A';
--Senior unsecured RCF at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F1';
--CP at 'F1'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Jason Pompeii, +1-312-368-3210
70 W. Madison St.
Chicago, IL 60602
Eric Ause, +1-312-606-2309
Craig Fraser, +1-212-908-0310
Brian Bertsch, New York, +1 212-908-0549
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