CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'A-' to Dover Corporation's (Dover) $500 million senior unsecured one-year term loan facility. The facility is a delayed draw facility that will be drawn to finance the acquisition of Wayne Fueling Systems Ltd. (Wayne) when that acquisition closes. Fitch currently rates Dover's Long-Term Issuer Default Rating (IDR) 'A-' and the Short-Term IDR 'F2'. The Rating Outlook is Negative.
KEY RATING DRIVERS
The Wayne acquisition will strengthen Dover's retail fueling business, adding a business with a global presence and significant exposure to North America. Wayne produces fuel dispensing, payment systems and aftermarket services for retail and commercial fuel stations. The Wayne business complements Dover's Tokheim business, which was acquired in January 2016 for $436 million, and offers similar products primarily to the European market.
The acquisitions of Wayne and Tokheim, for a combined total of $1.2 billion, will push Dover's financial leverage (debt/EBITDA) to a pro forma level of around 2.8x-2.9x at the end of 2016 from 2.5x as of June 30, 2016. This assumes the company does not repurchase shares during 2016 and uses free cash flow (FCF) of around $500 million primarily for debt reduction.
Fitch believes that leverage will improve to the low to mid-2x range in 2017 assuming the bulk of FCF is again used for debt reduction and Dover's underlying business is relatively stable. This remains high for the 'A-' rating, but Fitch notes that the pace of deleveraging could be faster should Dover sell assets and apply the proceeds to debt reduction.
The Negative Outlook reflects the potential that leverage may be sustained above 2x for an extended period due to Dover's soft operating results and its ongoing acquisition activity.
Dover's revenues declined 10% in 2015, due primarily to weak results in its energy segment, which realized a 26.4% decline in revenues and a 62.5% drop in operating earnings. This segment, which generated 16.8% of Dover's operating profits in 2015 has been negatively affected by the sharp drop in North American upstream oil and gas markets. Fitch expects another sharp drop in revenues from this segment in 2016 as oil and gas drilling and production will remain depressed, with a gradual turnaround beginning in 2017.
Dover's other businesses are relatively more stable, with modestly lower organic sales in the fluids segment, which has some oil and gas exposure, offset by modest organic growth in the engineered systems and refrigeration and food equipment segments. These segments, which produce a wide range of products and address a variety of end markets, would be expected, in total, to produce modestly positive organic growth over time, supplemented by acquisitions.
On a consolidated basis, Fitch expects Dover's sales will decline by low-single digits in 2016 as the impact of acquisitions is offset by a high-single digit organic sales decline and the negative effect of foreign currency translation. The EBITDA margin narrowed from 20.7% in 2013 to 18.3% in 2015, and is expected to narrow modestly in 2016. Fitch expects some margin recovery over the medium term supported by synergies from the acquired companies, a gradual recovery in energy markets and the company's ongoing efficiency initiatives.
In addition, Fitch expects Dover will continue to pursue acquisitions, resulting in further revenue diversification but also raising integration risk and potentially weakening credit protection measures further.
FCF after dividends is projected to track around $500 million annually over the next two years, supported by relatively low capital intensity (capex/revenues of around 2.3%). Fitch assumes FCF will be used to repay commercial paper (CP) as the pace of share repurchases slows over the near term. Fitch expects FCF will be used for a combination of acquisitions and share repurchases longer term.
The ratings and Outlook incorporate Dover's:
--Solid annual 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;
--Credit metrics at the weak end for the current rating.
KEY ASSUMPTIONS
--Sales decline by low single digits in 2016 as the impact of acquisitions is offset by a high-single digit organic sales decline and the negative effect of foreign currency translation. Sales increase around 5% in 2017 due in part to the full-year effect of the Wayne acquisition.
--EBITDA margins narrow modestly in 2016 and gradually recover thereafter.
--FCF after dividends of around $500 million annually in 2016 and 2017.
--Debt/EBITDA increases to around 2.8x-2.9x in 2016, improving to the low to mid-2x range in 2017. Fitch sees the potential for further deleveraging to below 2.0x with more aggressive debt paydown with asset sale proceeds.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--Debt/EBITDA is sustained above 2.0x, driven by lower than expected profitability or a slower pace of deleveraging due to debt-financed acquisitions or shareholder returns.
--Funds from operations (FFO) adjusted leverage sustained above 3.0x.
--Margin compression or increased capex or dividends compress the FCF margin to below 4%-5%.
Positive rating actions are unlikely in the absence of a commitment to maintaining lower financial leverage.
LIQUIDITY
Liquidity was solid as of June 30, 2016 and consisted of:
--$255 million of cash and cash equivalents;
--An undrawn $1 billion revolving credit facility (RCF) expiring Nov. 10, 2020, which Dover uses as a back-stop for the CP program; $337 million of CP borrowings were outstanding at June 30, 2016.
FULL LIST OF RATING ACTIONS
Fitch rates Dover Corporation's $500 million senior unsecured term loan facility 'A-'.
Fitch currently rates Dover as follows:
--Long-Term IDR 'A-';
--Senior unsecured credit facility 'A-';
--Senior unsecured notes 'A-';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Negative.
Date of Relevant Rating Committee: June 9, 2016
Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
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