Fitch Rates Dover's $500 Million 3.15% 10-Year Senior Notes 'A'
KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's expectations for solid operating results, despite near-term headwinds from weak energy markets and currency translation. Profitability should be flat from ongoing efficiency initiatives and an improving sales mix, even as Fitch expects organic revenues will decline by double digits in 2015.
Over the longer term, Fitch expects secular growth in each of Dover's end markets. For 2015, secular demand for engineered systems in industrial (20% of revenues) and refrigeration and food markets (25% of revenues) combined with acquisitions should offset revenue pressures from weaker drilling and production activity (20% of revenues) and attendant fluids.
Fitch anticipates operating EBITDA in the low 20x resulting in more than $500 million of annual free cash flow (FCF). Fitch expects the company will use FCF and the $1 billion commercial paper (CP) program to fund domestic spending on acquisitions and share repurchases, given the vast majority of cash and cash equivalents are located outside the U.S. Pension contributions should be minimal over the near term due to the over funded status of Dover's U.S. plans and contributions to foreign plans should be minimal.
Fitch expects mid-cycle total leverage (total debt to operating EBITDA) near 1.5x, versus a Fitch estimated 1.7x for the latest 12 months (LTM) ended Sept. 30, 2015. Fitch estimates interest coverage (Operating EBITDA to gross interest expense) of 11.9x and for this metric to remain above 10x.
The ratings and Outlook incorporate Dover's:
--Solid annual free cash flow (FCF);
--Strong operating profile from a diversified business portfolio;
--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's key assumptions within the rating case for Dover include:
--Organic sales will decline in the high single digits, mid-single digit negative impact from currency headwinds and low-single digit positive inorganic growth in 2015.
--Negative mid-single digit revenue declines in 2016 and resumption of positive revenue growth beyond the near-term.
--Operating EBITDA margin in the low 20s, driven by efficiency initiatives and improved sales mix following divestitures.
--Use of more than $500 million of annual FCF for acquisitions and shareholder returns.
--The company will moderate discretionary spending to return total leverage to 1.5x in the near-term.
Negative rating actions could occur if:
--Fitch expects total leverage will be sustained above 1.75x, driven by lower than expected profitability or debt-financed acquisitions or shareholder returns; or
--The combination of acquisition spending and stock buybacks continue to meaningfully exceed annual FCF, reducing financial flexibility.
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 inorganic growth
Liquidity was solid as of Sept. 30, 2014 and consisted of:
--$663 million of cash and cash equivalents, $642 million of which was located outside the U.S.;
--An undrawn $1 billion revolving credit facility (RCF) expiring November 2016, which Dover uses as a back-stop for the commercial paper (CP) program; $161 million of CP borrowings was outstanding at Sept. 30, 2015.
Fitch's expectation for FCF of more than $500 million also supports liquidity.
Pro forma for the issuance, total debt was approximately $2.8 billion at Sept. 30, 2015 and consisted of:
--$161 million of borrowings under the CP program;
--$349 million of 5.45% senior notes due March 2018;
--$335 million of 2.125% senior Euro notes due December 2020;
--$450 million of 4.3% senior notes due March 2021;
--$400 million of 3.15% senior notes due November 2025;
--$200 million of 6.65% senior debentures due June 2028;
--$297 million of 5.375% senior debentures due Oct. 2035;
--$248 million of 6.6% senior notes due March 2038;
--$346 million of 5.375% senior notes due June 2041; and
--$0.4 million of other debt.
FULL LIST OF RATING ACTIONS
Fitch currently rates Dover as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Senior unsecured RCF 'A';
--Senior unsecured notes 'A';
--Short-term IDR 'F1';