Fitch Affirms Dover Corporation at 'A'; Outlook Revised to Negative

Fitch Ratings has affirmed Dover Corporation's long-term Issuer Default Rating (IDR) at 'A' and short-term IDR at 'F1' and revised the Rating Outlook to Negative from Stable. Dover had $2.8 billion of debt outstanding as of Dec. 31, 2015. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Negative Outlook reflects Dover's soft operating results and weaker credit metrics, which Fitch expects will persist through 2016 and into 2017. 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 oil and gas drilling and production will remain depressed in the first half of 2016 before reaching bottom and beginning a gradual recovery.

The company's other three segments also had lower revenues in 2015 but to a lesser degree than the energy segment, while producing steady to improved margins in the year. 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 increase 1-2% in 2016 as the impact of acquisitions offsets negative low single digit organic growth and the negative effect of foreign currency translation.

Over the past two years, Dover's EBITDA declined from $1.8 billion in 2013 to $1.3 billion in 2015 due to lost EBITDA from the spin-off of Knowles Corporation in 2014 and the downturn in energy markets in 2015. EBITDA margin narrowed from 20.7% in 2013 to 18.3% in 2015. Fitch expects EBITDA margins will gradually recover over the next three years toward 20%, supported by a recovery in energy markets and the company's ongoing efficiency initiatives.

While EBITDA was down sharply over the past two years, debt levels of $2.8 billion at the end of 2015 were down only slightly from year-end 2013 levels. As a result, debt/EBITDA increased from 1.6x at year-end 2013 to 2.2x at year-end 2015. Over that period, FFO adjusted leverage increased from 1.7x to 2.9x, and EBITDA/interest declined from 14.5x to 10.0x. Going forward, debt/EBITDA is projected to improve to around 2.0x in 2016 and to around 1.8x in 2017, though this remains high for the current rating level. In addition, Fitch expects Dover will continue to be aggressive on the acquisition front, resulting in further revenue diversification but also raising integration risk and potentially weakening credit protection measures further.

FCF after dividends is projected to be a healthy $500-$600 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 CP as the pace of share repurchases slows over the near term. The company has aggressively repurchased its shares over the past two years, with $600 million repurchased in 2015 and $581 million in 2014, and 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 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;

--Credit metrics at the weak end for the current rating.

KEY ASSUMPTIONS

--Sales increase 1-2% in 2016 as the impact of acquisitions offsets negative low single digit organic growth and the negative effect of foreign currency translation. Sales increase 4% annually in 2017-2018.

--EBITDA margins gradually recover over 2016-2018 toward their recent level above 20%.

--The company pays off its commercial paper during 2016 and debt levels are flat thereafter.

--FCF after dividends of $500-600 million annually is assumed to be used for acquisitions and share repurchases.

--Debt/EBITDA improves from 2.2x at December 2015 to around 2.0x in 2016 and to around 1.8x in 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Debt/EBITDA is sustained above 1.75x, driven by lower than expected profitability or debt-financed acquisitions or shareholder returns; or ii) 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.

LIQUIDITY

Liquidity was solid as of Dec. 31, 2015 and consisted of:

--$362 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 commercial paper (CP) program; $151 million of CP borrowings were outstanding at Dec. 31, 2015.

FULL LIST OF RATING ACTIONS

Fitch affirms Dover Corporation's ratings as follows:

--Long-term IDR at 'A';

--Senior unsecured credit facility at 'A';

--Senior unsecured notes at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

The Rating Outlook is revised to Negative from Stable.

Date of Relevant Rating Committee: Feb. 1, 2015

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/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998873

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998873

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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