Date: Wed, 17 Dec 1997 22:40:40 GMT Server: Apache/1.2.4 FrontPage/3.0.3 Last-Modified: Fri, 14 Mar 1997 04:58:54 GMT ETag: "1b838-589f-3328db0e" Content-Length: 22687 Accept-Ranges: bytes Connection: close Content-Type: text/html X-Pad: avoid browser bug CEO Letter: 1996 Annual Report

 

 

TO OUR STOCKHOLDERS

EARNINGS SET A NEW RECORD - UP OVER 20% FOR FOURTH CONSECUTIVE YEAR.

 

Dover Corporation’s 1996 net income increased to a record $390 million, or $3.45 a share, including a one-time gain of $.44 per share from the sale of two companies – Dieterich Standard and Measurement Systems, Inc. Sales exceeded $4 billion for the first time, rising 9% from 1995.

 

Excluding the one-time gain, Dover’s earnings grew from $2.45 per share in 1995 to $3.01, a 23% increase, marking the fourth consecutive year of per-share earnings gains of more than 20%. At $3.01 per share, Dover’s earnings per share (EPS) have grown at a compound annual rate of more than 16% thus far in the ‘90s. This compares favorably with the 11% annual growth rate that Dover achieved during the decade of the 1980s. Our "tilt toward growth" continues.

On the previous page are charts showing EPS growth and total Return to Investors for past 10-year periods. In each 10-year period, Dover’s EPS growth exceeded that of the S&P 500 and in most of them, the total Return to Investors did the same. For the 10-year period ending in 1996, long-term Dover stockholders who reinvested their dividends enjoyed a compound average annual pretax return of 18.5%, exceeding the S&P 500 return by more than 300 basis points per year. Individual investors would have been hard pressed to find a mutual fund with as good a record. Most equity mutual funds fail to match the pretax return of the S&P 500. Most funds also generate significant tax payment requirements (as a result of portfolio turnover) while almost all of the return to Dover stockholders has been in the form of tax-deferred capital gains.

 

During the most recent five years, 1991-1996, Dover’s earnings per share have grown by 23% per year. While we are proud of this accomplishment, Dover stockholders should not expect 20% earnings growth to continue indefinitely. Our goal is consistent, above-average, high quality earnings growth. We would be pleased to maintain our 1990-96 growth rate of 16% for the balance of the decade, recognizing that this will be difficult to achieve in the low-growth, low inflation environment that most economists are predicting.

 

Highlights of 1996

• Profit improvement at Dover Elevator International. DEI’s reported profits were up 179% from 1995, a year which was burdened by write-offs. On an operating basis, profits gained 39%.

 

• Imaje’s record results. Imaje, acquired in 1995, had a superb year – improving sales, achieving pretax margins in excess of 30%, and earning more than $50 million.

 

• Belvac earnings growth. Belvac achieved another earnings record with profits more than triple the level achieved in 1993. Belvac has responded extremely well to the surge in demand for its beverage can necking machines.

 

• A-C Compressor turnaround. A renewed focus on its strengths in selected niches in the huge, worldwide compressor market stimulated significant profit improvement, with the possibility of more to come in 1997.

 

• Universal GSM-2. The successful design and launch of this new product allowed Universal to remain "best in class" in the market for flexible, fine pitch electronic component placement. This helped Universal achieve its second best earnings level within an overall market that was sharply down from 1995.

 

• Sale of companies. We regretfully sold Dieterich Standard and Measurement Systems. While it is not our normal practice to sell businesses that are performing well, in this case we responded to our perception, born of experience, that these businesses had limited growth potential as Dover companies, as well as to very attractive terms offered by synergistic buyers. Most of the net proceeds were used to repurchase Dover common stock.

 

• Investments for Growth. We invested $282 million in making acquisitions, repurchased $63 million of our own stock, and spent $125 million on capital expenditures for a combined record investment of $470 million.

 

Acquisitions in 1996

In November, Dover Technologies completed the second largest acquisition in Dover’s history – Everett Charles Technologies, of Pomona, California. This company has established a leadership position in each of three niches within the electronic test market. It is the leading producer of machines for the testing of circuitry on printed circuit boards before these boards are populated with components – that is, bare board testing. It is also the leader in design and manufacture of test fixtures for populated boards, operating seven facilities around the world. And it is the largest producer of spring-loaded test probes, which are used in both bare-board and populated-board testing. As printed circuit board design becomes increasingly complex, the need for sophisticated testing will increase. We view Everett Charles as a platform for further growth, both internally and through acquisitions.

 

Also in the fourth quarter, Dover Resources completed our other stand-alone acquisition, Tulsa Winch, a long-established producer of winches and speed reducers. Tulsa serves many industrial markets and has achieved a solid record of growth and profitability.

 

During the year, we made eight more add-on acquisitions, involving the investment of $91 million. These eight businesses will extend the geographic markets of existing Dover companies. Each is described elsewhere in this report.

 

The companies acquired in 1996 had a (pro-forma) full-year sales volume of approximately $175 million, only a portion of which has been included in our 1996 financial results. Because most of our acquisition investments came late in the year and the level of full first-year acquisition premium write-offs will be high, these businesses will contribute only a few cents per share to our earnings in 1997 – but significantly more in later years.

 

The past four years have presented us with the opportunity to invest almost $1.2 billion in new acquisitions. Since we typically buy solid businesses with high profitability, our purchase costs have substantially exceeded the book value of the acquired companies. These premiums are charged to earnings over a period of years. In 1996, the non-cash charge for amortization of these premiums amounted to $.35 per Dover share, versus $.36 in 1995. Even if we make no further acquisitions (an unlikely event), this charge will remain at $.35 in 1997. We will continue to report this number, so long as it remains large in relation to earnings, because of its relevance to valuation.

 

Financial Position

Despite record long-term investments, Dover maintained its net debt (total debt less cash and marketable securities) at the same level with which we began the year. A portion of our long-term commitments was funded by proceeds from divestments – about $85 million after taxes. But the bulk of the funds came from our strong free cash flow from operations of $259 million (after dividends and capital expenditures), which represented approximately 6.3% of sales. The trend of growing investment and strong free cash flow is captured in the charts on pages 34-35. Our net debt as a percentage of total capital declined from 30% at the end of 1995 to only 26% a year later. The relationship of year-end net debt to EBITA (earnings before interest, taxes and amortization) also declined from 1.07 in 1995 to .9 in 1996. This is a conservative posture that leaves us fully capable of seizing long-term growth opportunities that may present themselves in 1997.

 

The charts on page 2 illustrate our very strong earnings growth over the past five years, during which EPS has almost tripled – a compound annual growth rate of 23%. Our return on stockholders’ equity, computed on the basis of $3.01 EPS, continued at 25%. After-tax operating return on investment also improved to a record level of 36%. This statistic measures the ability of our company presidents to generate profits from the operating assets under their control, and is a key component of operating executive incentive compensation. The calculation excludes acquisition premiums and their amortization, and assumes 100% equity financing.

 

Dover Technologies

Dover Technologies’ profits improved by 10%, despite a significant decline in the electronic assembly equipment market. The three companies serving this market – Universal, DEK and Soltec – experienced a decline in sales and a $40 million drop in profits from the record levels achieved in 1995. Nevertheless, their sales and earnings were higher than in any year before 1995. The earnings decline was more than offset by gains elsewhere: Novacap, K&L Microwave, TNI and Quadrant had record profits. Imaje did also, and its results, included for only one quarter of 1995, contributed for a full year in 1996. The add-on acquisition of ATT Frequency Products by Quadrant in 1995 also added substantially to year-over-year comparisons, as relocation of its manufacturing to a new facility significantly reduced costs. Everett Charles, included only for December, 1996, made a small contribution to sales and none to profits because of acquisition premium write-offs.

 

During past cyclical market downturns at Universal (1985-86 and 1989-91), Dover Technologies’ overall profits have declined sharply. The addition of Imaje, the growth of the components businesses, and the recent addition of Everett Charles will, we believe, provide much greater earnings stability.

 

Dover Industries

Dover Industries’ sales rose 6% in 1996 but operating profits were flat (excluding the gain on the sale of Dieterich Standard). A decline in the solid waste business at Heil Environmental and at Marathon offset strong gains at Rotary Lift and DovaTech and modest increases at other companies. The divestment of Dieterich in mid-1996 and American Metal Ware in mid-1995, coupled with a non-recurring charge of more than $5 million at Groen, also affected year-to-year comparisons.

 

On a "look-through basis," considering only the operating profits of the 11 ongoing Dover Industries companies, earnings improved at approximately the same 6% rate as sales.

 

We continue to be extremely pleased with the internal growth of Rotary Lift and Texas Hydraulics. Both companies have invested heavily in manufacturing improvements, focused their marketing efforts, and passed improvements on to the customer in order to achieve higher market share. Profits at both companies have more than doubled in the past three years. Neither automotive lifts nor hydraulic cylinders are new or "high tech" products, but these companies’ vigorous growth shows how much can be accomplished, even in mature markets, by the right management with the right strategy.

 

Dover Diversified

Dover Diversified’s profits improved 15% on a 9% sales gain, setting records for the fifth consecutive year. Results in 1995 included an $11.6 million gain relating to contract settlements. On a look-through basis, excluding this gain and looking only at operating profits of ongoing companies, earnings were up 24%, with operating margins rising nearly 3 percentage points to 16.8%.

 

The three largest factors in Dover Diversified’s success, each of which added approximately $8 million to operating profits, were the record year at Belvac, the turnaround at A-C Compressor, and a sharp improvement in sales and profitability at Sargent Controls.

 

Another record performance by Tranter and modest gains at other companies balanced an earnings decline at Mark Andy, which made heavy investments in new product development and information technology following a record financial performance in 1995. Although the financial results at Hill Phoenix did not show much improvement, manufacturing performance at Hill’s facility in Richmond, Virginia did make progress, as quality and timeliness improved. We hope this has set the stage for significant financial gains in 1997.

 

Dover Resources

Profits at Dover Resources improved 16% on an 11% gain in sales. It was a solid year for all Dover Resources companies, with earnings gains at most businesses and only three modest profit declines. There was no single "driver" of Resources’ overall performance. All companies but one had pretax margins in excess of 10%, averaging 17% on a look-through basis.

 

Earnings at the three companies serving the North American oil patch – Norris Sucker Rod, Norriseal and Alberta Oil Tool – improved sharply, but still accounted for only about 15% of Dover Resources’ profits.

 

At the end of the year, De-Sta-Co was divided into two companies – De-Sta-Co Industrial Products, which includes recently acquired Robohand, and De-Sta-Co Manufacturing, which now also includes Stark. A majority of De-Sta-Co’s valves, and almost all of Stark’s manifold and tubular assemblies, are sold to automotive manufacturers. De-Sta-Co Industrial has a broad line of clamps and related work-holding products, which are sold to a wide variety of industrial customers. Bob Leisure became president of De-Sta-Co Manufacturing and Jon Simpson became president of De-Sta-Co Industrial. Both will continue to report to Bill Rogerson, who has been De-Sta-Co’s President since 1982.

 

Dover Elevator International

After a change in top management and special charges of $32 million in the second half of 1995, I wrote in last year’s annual report that we "hope that these efforts have established the base for a new era of prosperity for Dover Elevator International." While the transformation of DEI from a loosely affiliated group of companies into a unitary, though regionally decentralized, business is continuing, the financial results of 1996 are even better than I had hoped. Reported profits more than doubled, while operating profits – excluding 1995 special charges – rose 39%. Margins exceeded 10%, their highest level since 1990. Sales also set a record, with a modest 5% growth.

 

Dover Elevator now operates as a single business, with a factory operation and three field organizations reporting to a single president. The company’s senior operating management – Nigel Davis as president, Gary and Steve Bailey as co-vice presidents of the Eastern Marketing Group, Buzz Dana as vice president of the Western Marketing Group, including Canada, and Bill Wilkinson, as vice president of international (Europe, Australia, Asia and exports) – made an extraordinary effort during the past year. Their leadership and the increasingly enthusiastic cooperation of DEI’s thousands of employees have revitalized this enterprise – bringing it back, despite a difficult market, to where it should be.

 

Profit improvement reflected a flatter organizational structure, reduced factory operating costs, better construction management, firmer pricing, a weeding-out of unprofitable service contracts, and a renewed field focus on selling to improve hydraulic elevator market share.

 

Outlook

I again attended almost all of our year-end review and planning meetings. Almost all Dover companies are planning for improved profits in 1997. Significant exceptions are Belvac and Midland, where current operating levels are substantially below prior year as the unusual boom in demand for their products has ebbed.

 

Continuous improvement – of products, processes, and skills – is the most important factor underlying Dover’s growth expectations for 1997 and future years. Specific events affecting 1997 will be margin improvement at Hill Phoenix, stronger orders at Belvac to limit its anticipated profit decline, and the continued success of our newly acquired businesses. A moderately growing economy is also important to each of our businesses. At this point, no single market, opportunity or company stands out as the potential "driver" of Dover’s overall performance. Rather, we expect some growth in most businesses to result in another record earnings year for your company.

 

Thomas L. Reece

President and Chief Executive Officer

 

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