Dover Q3 2021 Earnings Report

Dover EPS Results

• Actual EPS: $1.98
• Consensus EPS: $1.85
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $1.60

Dover Revenue Results

• Actual Revenue: $2.02 billion
• Expected Revenue: $1.99 billion
• Beat/Miss: Beat by +$23.94 million
• YoY Revenue Growth: +15.40%

Dover Announcement Details

• Quarter: Q3 2021
• Date: 10/18/2021
• Time: Before Market Opens
• Conference Call Date: Monday, October 18, 2021
• Conference Call Time: 8:00PM ET

Dover (NYSE:DOV) is a diversified global manufacturer of industrial products, components and specialty systems that serve a wide range of commercial and industrial end markets. Headquartered in Downers Grove, Illinois, the company has built a portfolio of operating businesses that design, manufacture and distribute engineered equipment, aftermarket parts and related services for customers around the world.

Dover’s activities span several product and solution categories, including fluid-handling and pumping systems, material handling and processing equipment, refrigeration and foodservice technologies, product identification and printing systems, precision components and automation and sensing solutions. Many of its operating companies focus on engineered, application-specific equipment and the aftermarket services that support long-term customer relationships.

The company serves customers across the Americas, Europe and Asia, supplying equipment and services to industries such as food and beverage, packaging, healthcare, industrial manufacturing and energy. Dover has expanded its capabilities and geographic reach through a combination of organic investment and strategic acquisitions, while maintaining a decentralized operating model that empowers business-unit management.

As a publicly traded company, Dover emphasizes product innovation, operational execution and aftermarket service as drivers of sustainable revenue and profitability. Its business model is oriented toward providing technical solutions and lifecycle support to industrial customers, with an overall focus on improving productivity and uptime for end users. Dover is listed on the New York Stock Exchange under the ticker DOV.

Dover Q3 2021 Earnings Call Transcript

Key Takeaways

• Dover delivered 15% year-over-year revenue growth in Q3 with broad-based demand, exiting the quarter with a record-high backlog, 25% bookings growth and driving a 31% increase in GAAP EPS alongside an 18% rise in free cash flow.
• The company faced significant inflationary and supply-chain headwinds—from raw materials and labor to logistics—that cost an estimated $25–30 million in EBIT, but expects price actions and moderating input costs to achieve cost-price neutrality by Q4 and generate margin tailwinds in 2022.
• Dover raised its full-year EPS guidance, remains optimistic about a strong 2022 demand environment across all segments, and has not assumed any material improvement or deterioration in the challenging operating backdrop for Q4.
• Year-to-date the company closed seven strategic bolt-on acquisitions in areas like industrial 3D visualization, signal intelligence and LNG/hydrogen dispensing, and divested its Unified Brands foodservice unit to sharpen portfolio focus.
• Segment highlights include 14% organic growth in Engineered Products despite margin dilution, 25% growth in Pumps & Process Solutions driven by biopharma connectors and industrial pumps, and 16% growth in Refrigeration & Food Equipment, prompting capacity expansions for 2022.

Presentation

[Operator]

Good morning, and welcome to Dover's third quarter 2021 earnings conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Brad Cerepak, Senior Vice President and Chief Financial Officer, and Andrey Galiuk, Vice President of Corporate Development and Investor Relations. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, please press star and the number one on your telephone keypad.

[Operator]

If you would like to withdraw your question, please press the pound key on your telephone keypad. As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recordings of this call. If you do not agree with these terms, please disconnect at this time. Thank you, and I would now like to turn the call over to Mr. Andrey Galiuk, please go ahead, sir.

[Andrey Galiuk, VP of Corporate Development and Investor Relations at Dover]

Thank you. Good morning, everyone, and thank you for joining our call. This call will be available on our website for playback through October 26th, and the audio portion will be archived for three months. Dover provides non-GAAP information. Reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. Our comments today will include forward-looking statements that are subject to uncertainties and risks. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and our most recent Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks, Andrey. Good morning everyone? Let's go to page three. Dover Corporation and its operating companies had a solid quarter. The performance stats indicate that our product strategies, coupled with our ongoing productivity initiatives, continue to deliver top-line growth, margin accretion, and attractive cash flow to our investors. Our revenue and bookings growth continued to outpace our pre-pandemic levels, and we exit the quarter with a record high and sequentially increased backlog while posting top-line growth of 15% over the comparable period. Demand strength was broad-based as each segment posted year-over-year growth in bookings and a book-to-bill above one. Revenue growth, positive product mix, and ongoing productivity initiatives drove comparable operating margins up, resulting in a 31% increase in U.S. GAAP diluted earnings per share in the quarter.

[Richard Joseph Tobin, President and CEO at Dover]

Our free cash flow performance was strong, with an 18% year-over-year increase despite significant investments we've made in inventory as we begin to reap the benefits of investments in the centralization of financial processing activities. We continue to enhance and prune our portfolio with several acquisitions completed in the last three months and the divestiture of our commercial food service business announced last week. Our organic investments in capacity expansions and productivity projects are on track, providing us the building blocks for the future top-line growth and margin expansion. As one of the first multi-industrials to report each quarter and because of our wide end market exposures, we have the pleasure to be the operating environment bellwether.

[Richard Joseph Tobin, President and CEO at Dover]

Let's get on the front foot here by providing some color on inflationary inputs, labor, and supply chain challenges so that we have time to discuss the constructive demand environment for 2022 in the Q&A. Let me start by saying that we're particularly concerned that there have been no discernible policy changes, particularly in the U.S., to deal with these headwinds. In fact, many proposed policies run the risk of extending their duration. We take no satisfaction in the fact that we've been telegraphing these issues all year and incorporating them into our forecast of the businesses that bear the brunt of these challenges, which I'll expand upon during the segment review.

[Richard Joseph Tobin, President and CEO at Dover]

We have taken the appropriate actions to offset these headwinds moving into 2022, and we are comforted by the fact that we've been given the opportunity to demonstrate the resilience of our business model and the strength of the breadth of our product and geographic market exposures that are ultimately reflected in these quarterly results. To be clear, we are very constructive about 2022 demand for our products and services and remain optimistic that there will be a recognition that protecting the duration of the current strong economic demand environment needs proactive policy decisions. We are raising our full-year EPS guidance as a result of our strong year-to-date performance. Our updated forecasts do not incorporate any material improvement nor deterioration of the challenging operating environment in the fourth quarter.

[Richard Joseph Tobin, President and CEO at Dover]

Our priorities remain the same, supporting our customers with products and services for the long term and the health and welfare of our employees. I'll skip to slide four, which provides a more detailed review of our results for the third quarter. Let's move to slide five. Engineered Products revenue was up 14% organically, with a significant portion of the growth from pricing actions. Vehicle Services posted a strong top-line quarter, and market indicators remain positive with vehicle miles driven recovering and average vehicle age continuing to increase. Industrial Automation demand was up double digits with strong activity in Americas and China. Environmental Services Group revenue was up year-over-year, and its backlog remains strong moving into 2022.

[Richard Joseph Tobin, President and CEO at Dover]

Aerospace and Defense posted a decline year-over-year, largely a result to changes in program shipment timing. The margin performance in the quarter was unfortunately what we expected to occur as we progress through the year. Our Engineered Products segment, as we've discussed previously, has the largest exposure to raw materials, assembly labor as a percentage of cost of goods, and supply chain complexity. As such, it is more than just a price cost issue, where even in equilibrium, drives negative margin performance. It is exacerbated by numerous component supply issues that necessitated us to intermittently curtail production to stabilize the manufacturing system in the quarter. Our management team is doing exactly what we'd expect of them to protect profitability in the short term, while managing the relationships with our strategically important customers.

[Richard Joseph Tobin, President and CEO at Dover]

I have absolute confidence that the profit margin in this segment will bounce back as we move into 2022 as a result of actions already taken in price, and as raw materials and supply chain constraints moderate, as can be seen in the raw materials futures, and stabilizing container shipping rates. Fueling Solutions was up 3% organically in the quarter on solid demand in North America for above-ground and below-ground retail fueling. We believe our production schedule and delivery times are driving share gains, particularly in the above-ground category. Vehicle Wash posted another strong quarter with some encouraging customer conversion and cross-selling benefits from our recent ICS acquisition. Activity in China remains subdued, driven by the lasting impacts of COVID and near-term uncertainty related to energy supply. Fuel transport components were negative for the quarter, but we believe that this is [inaudible] forward.

[Richard Joseph Tobin, President and CEO at Dover]

Margins in the segment declined 150 basis points in the quarter, as productivity headwinds from supply chain constraints and sub-components and negative mix more than offset higher volumes and pricing. We have taken the appropriate actions on pricing to counter these headwinds going forward. Sales in Imaging & Identification grew 7% organically. The core marking and coding business grew well on good demand for printers and consumables. Serialization software also grew ahead of expectations, and we are working to add additional resources here as we integrate the recently acquired Blue Bite brand management software into our solutions. The digital textile printing business was up significantly year-over-year against a low bar comparable quarter and is continuing its gradual recovery. Margins in Imaging & ID improved by 250 basis points as volume leverage, pricing, and productivity initiatives more than offset input cost inflation.

[Richard Joseph Tobin, President and CEO at Dover]

Pumps & Process Solutions posted another solid quarter at 25% organic growth. Demand for biopharma connectors and pumps continued to be strong. We continued to expand clean room capacity for our biopharma connectors and single-use pumps in the period. We are encouraged by specification wins in Em-tec biopharma flow meters, which we acquired last year. Industrial pumps were up based on broad-based end customer demand with particular strength in China. Precision components was up year-over-year as compression OEM and aftermarket businesses continued their recovery. Polymer processing was down in the quarter due to a combination of shipment timing and a very strong third quarter from the prior year. New order rates remain strong and outlook is positive moving into 2022. Margins in the quarter expanded by a robust 630 basis points on strong volume, fixed cost absorption, favorable product mix, and pricing.

[Richard Joseph Tobin, President and CEO at Dover]

Top-line results in Refrigeration & Food Equipment remained strong, posting 16% organic growth. Revenue and beverage can-making equipment doubled in the quarter. The business is booked into late 2022 and is taking orders for 2023. The heat exchanger business grew on robust demand in all geographies, led by residential heating and industrial end markets, and a recovery in the global commercial HVAC demand. Order intakes continue to exceed our ability to ship. We are adding additional capacity in two geographies to ensure that we can meet forecasted demand in 2022. Demand in food and retail remains robust with elevated bookings and backlogs across all our product lines. However, much like our Engineered Products business, we have a difficult time with labor constraints and in particular, sub-component supply, which has necessitated significant operational costs in logistics, intermittent production curtailments, and in one case, the deferment of a delivery into 2022.

[Richard Joseph Tobin, President and CEO at Dover]

Again, management is straddling cost recovery actions and meeting demands of our customers, but it clearly comes with a cost. Margins were largely flat in the quarter as excellent operating performance in SWEP and Belvac offset refrigeration headwinds despite their smaller revenue base. I'll pass it to Brad here.

[Brad Cerepak, SVP and CFO at Dover]

Thanks, Rich. Good morning, everyone. Let's go to slide six. On the top is the revenue bridge. Our top-line organic revenue increased by 13% in the quarter with all five segments posting growth, with strong demand in our Engineered Products, Pumps & Process Solutions, and Refrigeration & Food Equipment segments. FX benefited the top line by about 1% or $21 million. Acquisitions added $18 million of revenue in the quarter. There was no year-over-year impacts from dispositions. The revenue breakdown by geography reflects strong growth in North America and Europe, our two largest regions, and modest growth across Asia and the rest of the world.

[Brad Cerepak, SVP and CFO at Dover]

The U.S., our largest market, posted 16% organic growth in the quarter on solid trading conditions in retail cooling, Industrial Automation, biopharma, and can making. Europe grew by 16% in the quarter on strong shipments in marking, coding, biopharma, and industrial pumps, can making, and heat exchangers. All of Asia was up 5% organically on growth of biopharma and industrial pumps and heat exchangers, partially offset by year-over-year declines in polymer processing, below-ground retail fueling, and fuel transport. China, which represents approximately half of our business in Asia, was up 8% organically in the quarter. Moving to the bottom of the page, bookings were up 25% organically, reflecting the continued broad-based momentum across the portfolio. In the quarter, we saw organic growth across all five segments. Let's go to the earnings bridges on slide seven.

[Brad Cerepak, SVP and CFO at Dover]

On the top of the chart, adjusted segment EBIT was up $64 million, and adjusted EBIT margin improved 80 basis points as improved volumes, continued productivity initiatives, and strategic pricing offset cost inflation and production stoppages. Going to the bottom chart, adjusted net earnings improved by $57 million as higher segment EBIT and lower corporate expenses more than offset higher taxes. Deal expense in the quarter were $3 million. The effective tax rate for the third quarter, excluding tax discrete benefits, was approximately 21.8% compared to 21.5% in the prior year. Our effective tax rate estimate pre-discrete for Q4 and the full year remains unchanged at 21%-22%. Discrete tax benefits were $8 million for the quarter, or $4 million higher than in 2020, for approximately $0.03 of year-over-year EPS impact.

[Brad Cerepak, SVP and CFO at Dover]

Right-sizing and other costs were a $2 million reduction to adjusted earnings in the quarter as a one-time recovery related to a cancellation settlement more than offset our ongoing productivity and right-sizing initiatives. On slide eight. We are pleased with the cash performance thus far this year. With free cash flow of $667 million, a $104 million increase over last year. Free cash flow conversion stands at 11% of revenue year to date, despite a nearly $250 million investment in working capital. As we discussed last quarter, we remain focused on delivering against our customer's strong order rates, and we are carrying high inventory levels to ensure we can meet current demand for the rest of the year and into next year. Let me turn it back to Rich.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks, Brad. I'm on slide nine, which is a familiar format we used during the Investor Day in 2019 to describe our inorganic growth priorities. I'm pleased to report that our activity since then has lined well with those priorities, and we remain busy adding logical, synergistic bolt-ons that will support the long-term growth of our core businesses. As you can see that we are investing in the highest priority platforms with an emphasis on high growth, high gross margin products and solutions. We remain disciplined in our approach to acquisitions. Despite the challenging asset prices in today's environment, we have acquired seven bolt-on acquisitions year to date that meet our investment return criteria, including two in the third quarter and one that closed last week.

[Richard Joseph Tobin, President and CEO at Dover]

The most recent deals, highlighted in green, were CDS in industrial 3D visualization software, which we expect to grow in third-party revenues and also adopt across the Dover portfolio in our journey towards digitizing the front end of our businesses, lowering our transaction costs. Espy, which complements our Aerospace and Defense business with software-driven signal intelligence solutions, and LIQAL, which is an emerging leader in LNG and hydrogen dispensing solutions. Each transaction is modest addition to our aggregate portfolio, but we are very excited about scaling up these innovative and strategic technologies over time and the positive impact to EPS as these investments mature. We remain on the hunt for acquisitions and have a solid M&A pipeline that aligns well with our portfolio priorities.

[Richard Joseph Tobin, President and CEO at Dover]

We also took advantage of recent market activity in the food equipment sector to sell Unified Brands, our professional cooking equipment business for commercial food service operators. The deal was announced in early October and is expected to close in the fourth quarter. Unified Brands represents less than 2% of our overall revenue and its sale will have negligible impact on our 2021 adjusted EPS. I would like to thank the management and employees of Unified Brands for the many years of service in the Dover family. As we look to the end of the year, demand outlook remains favorable across the majority of the portfolio. Backlogs and bookings remain robust, and we expect to post strong organic growth in Q4. Overall, we remain on track to deliver strong returns this year through a combination of robust growth in revenue, operating profit, and cash flow, coupled with disciplined capital allocation.

[Richard Joseph Tobin, President and CEO at Dover]

We also look forward to closing out this year and laying the foundation for what we believe to be a positive demand environment in 2022. We have clarity about the nature of the inflationary input and supply disruption costs that we have incurred in Q3 and expect in Q4 due to the challenging operating environment. We have conviction that we can turn them into profitability tailwinds as conditions improve and the calendar progresses from here. Before wrapping up, I would like to thank Dover for all their perseverance and accomplishments executing in today's environment. With that, let's turn it to Q&A.

[Operator]

As a reminder at this time, if you would like to ask a question, that's star and one. We do ask that you please limit yourself to one question and one follow-up. We'll take our first question from Jeff Sprague with Vertical Research, please go ahead your line is open.

[Jeff Sprague, Analyst at Vertical Research]

Thank you. Good morning everyone?

[Richard Joseph Tobin, President and CEO at Dover]

Hi, Jeff.

[Jeff Sprague, Analyst at Vertical Research]

Hey. Hi. Great color here. Hey, first just on inflation. Rich, it sounds like supply disruptions and what it did in your factories was much more of a challenge than getting price to overcome cost. Can you just address that a little bit more? Were you relatively price cost neutral in the quarter?

[Richard Joseph Tobin, President and CEO at Dover]

We were not price cost neutral in the quarter, in the segments where you can see the dilution at the operating margin. It's a little bit of a twofold story. Where we're getting the most price is where we're getting impacted the most. Not only are you driving with price increases driving the top line, even in equilibrium, that's dilutive to operating margins. When you're in a negative position, you get kind of the 300-point dilution. The bad news is we're not in equilibrium in Q3. From here, we begin to squeeze that down in Q4, and if conditions don't deteriorate, go positive moving into 2022.

[Jeff Sprague, Analyst at Vertical Research]

Unrelated, but the backlogs and what you're kind of pointing to here in Q4. Looks like at the midpoint, your Q4 revenue is guided down about 9% sequentially, which would be more than normal and certainly seems high, especially relative to the backlog. Could you just address that and give us a little more color on how you might be able to uncork these backlogs and the visibility, and maybe what a normal backlog situation would look like?

[Richard Joseph Tobin, President and CEO at Dover]

I think that we're hopeful that we can get out what we're projecting in our guidance. Clearly, not only in the revenue, but the EPS. We're driving towards the top end here. It's a normal Q4 despite, and Brad went over cash flow. We will run for cash somewhat at the end of the year. We have certain businesses that are seasonal, that don't deliver much in December, and then we lose production days just because of Thanksgiving and Christmas. We're talking about double-digit growth quarter-over-quarter into Q4, and we're going to endeavor to get it out, Jeff.

[Jeff Sprague, Analyst at Vertical Research]

Great. Thank you.

[Operator]

We'll take our next question from Steve Tusa with JPMorgan.

[Steve Tusa, Analyst at JPMorgan]

Hey, good morning?

[Richard Joseph Tobin, President and CEO at Dover]

Hi.

[Richard Joseph Tobin, President and CEO at Dover]

Steve.

[Steve Tusa, Analyst at JPMorgan]

Just to clarify on that last one. You said price cost neutral, pricing was, I think 3.5% or something like that. Roughly $60 million of kind of favorability. Do you mean on kind of an absolute basis that you had more cost inflation than that in the quarter?

[Richard Joseph Tobin, President and CEO at Dover]

There's three buckets, right? There is raw materials, there's logistics and supply chain, and then there's business interruption costs that we incurred during the quarter. The vast majority of the negative impact is reflected in the segments that you can see. A conservative view of what that cost was in the quarter is somewhere in the order of $25 million-$30 million in EBIT lost. That compresses in Q4 on a lower revenue line.

[Steve Tusa, Analyst at JPMorgan]

Right. That's from the disruption you said?

[Richard Joseph Tobin, President and CEO at Dover]

That's all three.

[Richard Joseph Tobin, President and CEO at Dover]

That's all it.

[Richard Joseph Tobin, President and CEO at Dover]

That's all three.

[Steve Tusa, Analyst at JPMorgan]

Oh, okay. Why wouldn't it be positive price cost if that's the case?

[Richard Joseph Tobin, President and CEO at Dover]

A lot of it is still in inventory. You've got that roll based on you've got the raw materials inventory, and you've got the orders in backlog, and depending on when you took the orders and when they cycle through.

[Steve Tusa, Analyst at JPMorgan]

Right.

[Richard Joseph Tobin, President and CEO at Dover]

In the two most affected businesses that we have, the price cost in total, including all three categories, narrows from the number that I just gave you. It does not get positive. Without getting granular here, it may get positive on raw materials, but not pick up on the logistics side. From a total portfolio point of view, I think that we are in neutrality in Q4.

[Steve Tusa, Analyst at JPMorgan]

Got it. Are these supply constraints, is there any that really stands out? Are there like onesies and twosies of components, or is there something that really stands out? Ultimately, could you give any visibility on kind of, I guess, the million-dollar question is timing of a resolution on these things? Are we going to be going into the second quarter of next year still kind of dealing with this stuff in your view?

[Richard Joseph Tobin, President and CEO at Dover]

Well, look, as Brad mentioned, we're carrying the inventory, so we won't liquidate all of that in Q4. To a certain extent, we're over-ordering on the component side just because of it's a little bit of a whack-a-mole. It was hydraulics back in Q2, and to a certain extent, the beginning of Q3. That's lightening up, and now it's electronic components. It's a myriad of stuff, but unfortunately, all it takes is one missing piece here. It seems like it's not getting worse, I guess is what I'm saying. I'm a bit concerned about policy decisions making it worse. I don't have a lot of faith in announcements about port activity having a demonstrable impact in the short run, quite frankly. I think that because of the fact that we've been over-ordering to a certain extent ourselves, I think it should modulate.

[Richard Joseph Tobin, President and CEO at Dover]

I'm not ready to prognosticate about how much better it gets in Q1, other than to say that we believe that we've got positive pricing roll forward into Q1, and based on raw materials, that the forward curves are constructive.

[Steve Tusa, Analyst at JPMorgan]

Great. Thanks a lot. Appreciate the color.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks.

[Operator]

We'll take our next question from Andrew Kaplowitz with Citigroup, please go ahead your line is open.

[Andrew Kaplowitz, Analyst at Citigroup]

Hey, good morning guys? Rich, nice quarter.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks, Andy.

[Andrew Kaplowitz, Analyst at Citigroup]

You ended up recording mid-20% incrementals in Q3, and you're projecting something close to that in Q4. It's still kind of in your range or close to your range of that 25%-35%. You talked about price versus cost starting to turn. As you look out into 2022, how much confidence does it give you that you could deliver incrementals at or above 25%-35%, given all of the ongoing projects you have? You've got productivity projects in DP, you got that structural cost that you always talk about. Do you have more confidence given how well you've performed with these headwinds this quarter?

[Richard Joseph Tobin, President and CEO at Dover]

I think that what we believe that is structural in nature in terms of the inflation is the labor. If we're constructive about raw mats coming down somewhat, and we're constructive about the lagging effect of price increases in inventory turns, that we believe, as I mentioned in my comments, that we can bring back the margin profile of the biggest impacted business that we have. In any given year, we expect to offset inflationary inputs at the factory level with productivity. Now, we've got to do a little bit more of that just because of the labor inflation, but I think that that's doable.

[Andrew Kaplowitz, Analyst at Citigroup]

Got it. Maybe I can ask you specifically about DPPS. We know you've been building out capacity in biopharma. You've talked about that. I think you've got some cyclical improvement in precision components. This segment is up over 20% versus 2019 with a backlog that's up 90%. I think some people are worried about DPPS eventually running into more difficult comps. Based on your own organic investments, does DPPS stay one of your fastest-growing segments? How would you say now that can you maintain the recent margin performance that you've had?

[Richard Joseph Tobin, President and CEO at Dover]

Well, we get asked this every quarter. The answer is yes. As we talked about in the call, we're expanding capacity. We wouldn't be doing that if we weren't proactive about the demand environment going into 2022. Do we get a little bit of margin fade due to mix? Maybe. Is it going to be material? No. We look at it this way. We understand that this has been material in terms of the year-over-year profitability of the group. Would we rely on that level of profitability change moving forward from here? No. I think that we've got a lot of ammunition, back to your other question about what we think that we can roll forward in the portfolio next year. We don't need that kind of pickup next year, just relative to the size of the change in earnings this year.

[Andrew Kaplowitz, Analyst at Citigroup]

Appreciate it, Rich.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks.

[Operator]

We'll take our next question from Scott Davis with Melius Research, please go ahead.

[Scott Davis, Analyst at Melius Research]

Hey, good morning guys? Thanks for being bold and being first this morning. Guts or stupidity, one of the two. No, nonetheless.

[Richard Joseph Tobin, President and CEO at Dover]

I'll take the latter, Scott, but go ahead.

[Scott Davis, Analyst at Melius Research]

Yeah. Rich, you talked a little bit about how you are kind of strategically building inventory. Are your customers strategically building inventory too? Is there a chance that some of the channels getting a little fat in certain SKUs?

[Richard Joseph Tobin, President and CEO at Dover]

Not in inventory. There's a big question. Look, the thing we've been discussing all year is the backlogs are so large. Is that being influenced? Sure, it's being influenced because the supply chain constraints are becoming so difficult. No one wants to live with that next year, so lead times are stretching out, and that's reflected in the backlog to a certain extent. I'm not aware, and based on the yelling and screaming that goes on around here about getting the product out the door, that we've got any channels that are carrying excess inventory. Pretty much right now, everything that we get out the door, our customers and distributors will take.

[Scott Davis, Analyst at Melius Research]

Okay. Rich, can you just help understand. You talked about curtailing some production. Logistically, help us understand what that means. Did you shut something down for a week and give everybody paid time off? Is it just a shift here and there? What's kind of the extent of when you do a shutdown like this, and are you eating full labor costs and such in that time period, or are there adjustments that are made in that regard?

[Richard Joseph Tobin, President and CEO at Dover]

Yeah, it's a mixed bag. At a certain point, you can't have half-built or three-quarter built units. The logistics, if you think about refrigeration units, you think about ESG truck bodies, you think about vehicle lifts. You just get to the point where the cost of reworking those goods, putting in those last pieces of component parts as they arrive, the math doesn't make sense, and it gets really complicated, and then you just say, we need to stop. Sometimes you stop for two or three days. Sometimes you stop for a shift, depending on inventory deliveries and everything else. I would tell you that a lot of it is driven by the size of the goods, if you think about it that way. If you're thinking about it like a pump, we've got enough warehousing space to take that.

[Richard Joseph Tobin, President and CEO at Dover]

You're thinking about truck bodies, and you're thinking about refrigeration units, you get to the point where you're just better off taking the whole machine down for two or three days. When you do so, you don't carry all the labor, but you carry most of it, so the negative absorption is what you'd expect.

[Scott Davis, Analyst at Melius Research]

All right. Good luck in 4Q. Thanks, guys.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks.

[Operator]

We'll take the next question from Julian Mitchell with Barclays, please go ahead.

[Julian Mitchell, Analyst at Barclays]

Hi. Good morning? Maybe just wanted to circle back, unfortunately, to this sort of price net of cost topic.

[Richard Joseph Tobin, President and CEO at Dover]

Yeah.

[Julian Mitchell, Analyst at Barclays]

Stepping back from the sort of quarterly back and forth, for full year 2021, what is that net dollar price cost headwind? Is it sort of $10 million, that type of range? When we think about next year, do you think Dover should benefit from a lag as we see those forward cost curves come down? Maybe that's reflected in the real costs coming in. What's the ability of your pricing to kind of hang in there relative to that cost normalization next year if we see it?

[Richard Joseph Tobin, President and CEO at Dover]

Okay uhm, the three components that were are talking, I don't want to rewind the clock here, but we started in Q4 and Q1 of last year talking about raw material price cost, where we said at the time we would be in neutrality. When we went from there to a labor inflationary environment and even more problematic supply chain logistics. Labor inflation, I'm not even going to get into it. It's up to us to offset that just in terms of raw productivity. Where we are, and I think that I gave you the number, it was $25 million-$30 million of negativity in the two segments that you see dilution in the quarter. We expect that to compress some in Q4, which is driven by two things.

[Richard Joseph Tobin, President and CEO at Dover]

One is the revenue in Q4 relative to Q3, and the fact that you've got to roll forward and the catch up on pricing as you work off older dated backlog. Back to the question I was asked before, all things being equal, as that older dated backlog reprices itself because of pricing actions taken through the year, that it becomes a positive moving into Q1 under the assumption that things don't get worse from here and under the assumption that the pricing in the market structure remains as it is today. Which we believe it's going to, by the way.

[Julian Mitchell, Analyst at Barclays]

Got it. To next year where you do get that spread, or you think the market is sort of too efficient for that?

[Richard Joseph Tobin, President and CEO at Dover]

Well, we're going to have to fight it out, Julian. We've taken the pain to make deliveries to our customers, and we've been having discussions with them that we're not repricing backlog in a lot of instances. We're taking it through the P&L, which also means that as future prices of metals come down, we're also not repricing the backlog that we have. Our backlogs are actually up sequentially despite the fact having 15% growth. It's not going to be easy, but that's kind of the way that we're managing the process.

[Julian Mitchell, Analyst at Barclays]

That's very helpful. Just a last one on this point. Your gross margin up a lot in the first half, down slightly year-on-year in the third quarter. Should we assume by first quarter next year as things look today that it's up year-on-year again?

[Richard Joseph Tobin, President and CEO at Dover]

Year-over-year again. You know what? I don't have the gross margin for Q1 in my head. I would assume that our projections for the majority of the portfolio are to grow the top line next year. I'm not aware of segmental negative mix. On absorption alone, we would expect that.

[Julian Mitchell, Analyst at Barclays]

That's great. Thank you.

[Richard Joseph Tobin, President and CEO at Dover]

You're welcome.

[Operator]

I want to take our next question from Andrew Obin with Bank of America, please go ahead. your line is open.

[Andrew Obin, Analyst at Bank of America]

Hi. Yes, guys. Good morning?

[Richard Joseph Tobin, President and CEO at Dover]

Hi, Andrew.

[Andrew Obin, Analyst at Bank of America]

Hey. Just in terms of supply chain disruption, and folks talked about it, but could you quantify the magnitude of delayed shipments on third quarter revenue? If supply chain issues remain the same in fourth quarter, should we think about these showing up in 2022? What happens with all these delayed shipments?

[Richard Joseph Tobin, President and CEO at Dover]

Well, first and foremost, our guidance incorporates our view of what happens going forward, number one. Number two. Could we have shipped more in Q3? Clearly, we could have. I think that this argument about lost revenue is an interesting one because everybody, I suppose, all market participants could claim lost revenue because demand is high and supply constraints are tight. Monetizing that as lost is a little bit of a fool's game. We could have shipped out more in Q3. It would've reduced our backlog slightly, is my presumption, and I don't believe that it would allow us to ship more in Q4 materially.

[Andrew Obin, Analyst at Bank of America]

Got you. Can you just touch on cadence of bookings as you went through third quarter and any early feel for changes here in the fourth quarter? Clearly, the end market looks robust, but maybe a little bit more color.

[Richard Joseph Tobin, President and CEO at Dover]

I think that the last time we did this was August, and we said that August is always a choppy month for bookings, so we'd have more clarity as we went through the quarter. Clearly, they've got better in September and October based on the results that we've posted. My expectation that they will slow on a run rate basis going into Q4 because essentially Q4 is already in backlog for the most part.

[Andrew Obin, Analyst at Bank of America]

Got you. That makes sense. Thanks a lot.

[Richard Joseph Tobin, President and CEO at Dover]

Thank you.

[Operator]

We'll take our next question from Joe Ritchie with Goldman Sachs.

[Joe Ritchie, Analyst at Goldman Sachs]

Thanks. Good morning everybody?

[Richard Joseph Tobin, President and CEO at Dover]

Joe.

[Joe Ritchie, Analyst at Goldman Sachs]

Hey, Rich, just maybe going back to this supply chain discussion for a little bit. Maybe bigger picture question here. You have had some announcements from the government that they're trying to ease the supply chain issues by going to a 24/7 model at the ports. What I'm hearing from you is that you're not really seeing much of an improvement at this point, but I want to make sure that I'm getting that correctly on latest data point. Just very curious, what would you do if you had to do proactively change policy decisions? What would you do to try to ease some of this burden?

[Richard Joseph Tobin, President and CEO at Dover]

Going and just announcing 24/7 operations as if you have all the employees and all of the moving parts to make that happen overnight is naive. I think the intent is there, but we don't believe there's going to be any demonstrable change in performance between now and the end of the year. It's just too complex of an ecosystem. I'm not an economist. If you go back and look at our comments all year long, this notion of transitory inflation and blaming used car prices has been naive at best. It's been manageable for corporates as corporates have priced inflation, but that is a how long is a piece of string argument. Coupled with a lot of other proposed agenda items that one conceivably could say would cause additional inflation and port congestion, I'm not entirely sure that's a strategy that's well thought out.

[Joe Ritchie, Analyst at Goldman Sachs]

Got it. Okay. That's super helpful. I guess maybe just kind of thinking about this pricing and the backlog. Clearly backlog is in great shape going into next year, maybe even beyond. I guess the concern in the market is your ability to make sure you can get pricing or reprice portions of the backlog to meet what the cost environment looks like. As you kind of look at your backlog and your portfolio, are there any areas where there's maybe a little bit more concern on potentially repricing the backlog or should we feel good going into 2022 that the margin on that backlog is in good shape?

[Richard Joseph Tobin, President and CEO at Dover]

We are not repricing backlog materially in any portion of the group. We're actually doing quite the opposite. We're holding pricing in the backlog to the detriment of margins as we push the product out the door because we believe that preserving our strategic customer relationships and not forcing demand destruction is a more favorable equation than having fights about repricing backlog when we are actually repricing all new orders as we progress through the year. The only negative scenario that ends up being a rolling credit unless one wants to make an assumption about inflationary inputs getting worse going into 2022 from where the baseline is right now.

[Joe Ritchie, Analyst at Goldman Sachs]

Super helpful. Thank you.

[Operator]

We'll take our next question from Josh Pokrzywinski with Morgan Stanley, please go ahead. your line is open.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Hey, good morning guys?

[Richard Joseph Tobin, President and CEO at Dover]

Josh.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Rich, just maybe first on some of these kind of bottlenecks that you guys are seeing. At what point, just based on what you can see in terms of what comes up next in the backlog or some sort of business mix, do you think you can get past that 2Q high water mark for what is able to get out the door? Is that something that you have line of sight to right now in the way you guys are thinking about the next couple of quarters?

[Richard Joseph Tobin, President and CEO at Dover]

I guess I'm allowed to make one positive comment since we're going to deconstruct all this. Remember that our margins are up quarter-to-quarter for the [inaudible] here. Yeah, look, at the end of the day, Q3 was tough. We still had COVID Delta going on at the time with absenteeism driven by that, which we're largely behind. There's nothing that's fundamentally changed in our ability to manage output. It's been a little bit of a struggle. I think that we were, I guess, a little bit disappointed on the labor equation. We had projected it to get materially better in Q3, and it got a little bit better as we exited Q3, but the first couple of months were quite difficult.

[Richard Joseph Tobin, President and CEO at Dover]

I'm not overly concerned on our ability to get to high water marks and we've got some relatively robust projections for revenue growth for 2022, and we've got the footprint to deliver it. Again, unless we want to make an assumption that supply constraints deteriorate from here, which we don't believe, then I think that we're positioned appropriately just by the fact that we've over-ordered on the inventory side. At least we start off on the front foot.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Got it. Just specifically on Pumps & Process Solutions, you guys have a mountain of backlog there. It doesn't seem like the order intake is really slowing. Just if you get down that backlog to a normal level, and I don't know what normal is anymore, but it seems like that business sort of has to grow double digits next year. A little early on 2022, that isn't a long cycle business and you got more backlog than maybe you know what to do with. What's missing in that equation?

[Richard Joseph Tobin, President and CEO at Dover]

I think that we mentioned it before, we're going to get into 2022, and if we're all positive about input costs and logistics and supply chain, backlogs are going to drop. Lead times are going to shrink and everybody's going to panic, and you shouldn't. I think that the bottom line is, because of these constraints, backlog is good. It gives us a lot of visibility going into the year. Our expectation that total backlog will fade proportionally, but that's actually a good sign. I'm not going to give out growth rates by segment for 2022, as I mentioned in my comments. I think that we've done our early looks at what 2022 is setting up to be, and I think from a top-line point of view, which is portfolio-wide, we're constructive.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Got it. Works for me. Thanks, Rich.

[Operator]

We'll take our next question from Nigel Coe with Wolfe Research, please go ahead your line is open.

[Nigel Coe, Analyst at Wolfe Research]

Thanks. Good morning everyone?

[Richard Joseph Tobin, President and CEO at Dover]

Nigel.

[Nigel Coe, Analyst at Wolfe Research]

Hey. Obviously, the backlogs, not so much the backlogs, the book-to-bill ratios have been off the scale. I understand the lead times impacting backlogs, but book-to-bill has been very strong now for the last three or four quarters. I really want you to address the question of what's changed and what's different about this recovery versus the last couple, which have been pretty anemic. What do you think is driving such strength here? Then maybe just address, you talked about how you're pre-ordering or maybe buffering some of the components. To what extent do you think your customers are doing the same thing as well?

[Richard Joseph Tobin, President and CEO at Dover]

Nigel, I think I've answered the question before that we do channel checks right now, and we are not aware of inventory of our products being elevated in any of our end-markets. Order rates are a reflection of backlog build, and that's why order rates continue to be elevated and backlog has not come down, despite the fact that the top-line growth has been good. The backlog will fade over time. I don't want to repeat myself over and over again here. What's driving the recovery? I think a couple things. From a Dover point of view, I think that the portfolio is a lot different than it was in the past. I think that clearly it looks like we're moving into a CapEx cycle in a lot of our end markets.

[Richard Joseph Tobin, President and CEO at Dover]

We discussed refrigeration before, but that seems we're getting quite proactive about the energy complex, for example. I think that we've got some market exposures with the biopharma platform that we've had in the past that you can't compare. Overall, I think it's a combination of we've expanded capacity in markets that are growing, so we've got available product, and that the profile of the end markets at Dover has changed meaningfully over the last five years.

[Nigel Coe, Analyst at Wolfe Research]

Right. The CapEx cycle is what I was trying to get at. You sound pretty confident we're in a CapEx cycle. That's great. The portfolio slide was really helpful because your M&A has been maybe each deal flies below the radar a little bit, but when you add them together, they're meaningful. Are you happy to maintain this kind of cadence with smaller bolt-on type deals, but additive in aggregate, or do you think that there could be one or two larger opportunities down the road?

[Richard Joseph Tobin, President and CEO at Dover]

We look at larger opportunities all the time. The problem with larger opportunities, the bigger the opportunity, the more it attracts in terms of interest because of just scale. Pricing becomes difficult. If we look at where value has been created for Dover historically, it's these bolt-ons that use the network effect of Dover that have been high-value returners. I don't think we'll ever stop doing the small ones, because I think that we've got a lot of conviction behind that process. Would we like to do some bigger ones? Sure we would. We just need to find the appropriate-priced deals out there.

[Nigel Coe, Analyst at Wolfe Research]

That's great. Thanks, Rich.

[Richard Joseph Tobin, President and CEO at Dover]

Thanks.

[Operator]

Our last question will come from Deane Dray with RBC Capital Markets, please go ahead your line is open.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you. Good morning everyone?

[Richard Joseph Tobin, President and CEO at Dover]

Hi, Deane. Good morning.

[Deane Dray, Analyst at RBC Capital Markets]

Hey. Maybe we stick with M&A, but on the divestiture side.

[Richard Joseph Tobin, President and CEO at Dover]

Okay.

[Deane Dray, Analyst at RBC Capital Markets]

Maybe just put in context the Unified Brands divestiture. Is it truly a one-off opportunistic divestiture, or might it be the start of a pivot away from selectively in Refrigeration & Food Equipment?

[Richard Joseph Tobin, President and CEO at Dover]

We evaluate annually market structure participation by all of our operating companies. The fact of the matter is, over the last three to four years, the market structure in food service equipment has changed for a variety of reasons. We just did not believe that Unified Brands within the Dover family was going to be able to extract the value and that it was more appropriately owned by someone that has the scale to participate in that structure.

[Deane Dray, Analyst at RBC Capital Markets]

That's helpful. You're not going to give specifics, I understand. Just how does that pipeline of potential divestitures, the pruning that you're doing, where does that stand?

[Richard Joseph Tobin, President and CEO at Dover]

There's not a lot. Like I said, we evaluate it annually. We've got a view of the value creation that's embedded in each piece of the portfolio. As a multi-industrial, if we were to get an inbound request where the value paid is in excess or equal to the value that we think that we could create, then we'd have to take a look at it. Right now, there's nothing on the table that we're actively looking at.

[Deane Dray, Analyst at RBC Capital Markets]

Got it. Just last one, to go back on pricing. Rich, you talked about this during the quarter, that you felt that a fourth price increase could actually start to result in some pushback, demand destruction. You answered the question not repricing backlog, but just broadly within the businesses, are you seeing that sort of price elasticity coming through where a fourth price increase might be problematic?

[Richard Joseph Tobin, President and CEO at Dover]

It depends, Deane. We have not been aggressive on replacing a backlog because we take seriously our commitment when we accept an order that we accept to deliver against those commercial terms. Having said that, we have been sequentially moving on price primarily because of raw materials, not so much due to labor and supply chain.

[Deane Dray, Analyst at RBC Capital Markets]

That's helpful. Thank you.

[Richard Joseph Tobin, President and CEO at Dover]

You're welcome.

[Operator]

Thank you. That concludes our question and answer period in Dover's third quarter 2021 earnings conference call, you may now disconnect your line at this time. Have a wonderful day.

Participants

Executives

• Andrey Galiuk, VP of Corporate Development and Investor Relations
• Brad Cerepak, SVP and CFO
• Richard Joseph Tobin, President and CEO

Analysts

• Andrew Kaplowitz, Analyst at Citigroup
• Andrew Obin, Analyst at Bank of America
• Deane Dray, Analyst at RBC Capital Markets
• Jeff Sprague, Analyst at Vertical Research
• Joe Ritchie, Analyst at Goldman Sachs
• Josh Pokrzywinski, Analyst at Morgan Stanley
• Julian Mitchell, Analyst at Barclays
• Nigel Coe, Analyst at Wolfe Research
• Scott Davis, Analyst at Melius Research
• Steve Tusa, Analyst at JPMorgan