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DOV > SEC Filings for DOV > Form 10-Q on 18-Jul-2012All Recent SEC Filings

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Form 10-Q for DOVER CORP


18-Jul-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Refer to the section below entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of factors that could cause our actual results to differ from the forward-looking statements contained below and throughout this quarterly report.

Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we refer to measures used by management to evaluate performance, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP). These include organic revenue growth, free cash flow and adjusted working capital. Organic revenue and organic growth refer to revenue and revenue growth excluding the impacts of foreign exchange, acquisitions and divestitures. Free cash flow is operating cash flow less capital spending, while adjusted working capital refers to accounts receivable, plus inventory, less accounts payable. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Reconciliations within this MD&A provide more details on the use and derivation of these measures.

OVERVIEW AND OUTLOOK

Dover is a diversified, multinational corporation that manufactures a broad range of specialized products and components and also offers related services and consumables. Dover provides its customers with outstanding products and services that reflect the Company's commitment to operational excellence, innovation and market leadership. Unless the context indicates otherwise, references herein to "Dover," "the Company," and such words as "we," "us," and "our" include Dover Corporation and its subsidiaries.

In the fourth quarter of 2011, we realigned our businesses into four new segments to more closely match our key end-markets. As a result, our principal business segments are Communication Technologies, Energy, Engineered Systems, and Printing & Identification. We believe the revised segment structure provides better alignment and focus around our end-markets, allows for better leverage of our executive leadership talent and expertise, helps improve the sharing and leveraging of resources within and between the four segments, enhances execution of business-specific strategies, and facilitates internal and external benchmarking against companies serving similar markets.

Our Communication Technologies segment is engaged in the design and manufacture of innovative products and components in the communications, life sciences, aerospace/industrial, defense, and telecommunication/other markets. Our Energy segment provides highly-engineered solutions for the safe and efficient extraction and handling of oil and gas in the drilling, production, and downstream markets. Our Engineered Systems segment is comprised of two platforms, Fluid Solutions and Refrigeration & Industrial, which are industry leaders in the fluids systems, refrigeration and food equipment, and certain other industrial markets. Our Printing & Identification segment provides integrated printing, coding, and testing solutions for the fast moving consumer goods, industrial, and electronics markets.

The following table shows the percentage of total revenue and segment earnings generated by each of our four segments for the three months ended June 30, 2012 and 2011:

                                              Three Months Ended           Three Months Ended
                                                June 30, 2012                June 30, 2011
                                                           Segment                      Segment
                                            Revenue       Earnings       Revenue       Earnings
Communication Technologies                    16.7 %         14.0 %        14.5 %         15.0 %
Energy                                        25.0 %         37.2 %        22.8 %         30.6 %
Engineered Systems                            41.1 %         37.2 %        41.2 %         35.6 %
Printing and Identification                   17.2 %         11.6 %        21.5 %         18.8 %

Total                                        100.0 %        100.0 %       100.0 %        100.0 %

We generated positive results during the second quarter of 2012, with second quarter revenue of $2.2 billion and gross profit of $817.6 million, representing increases of 8% and 5%, respectively, compared to the second quarter of 2011. The quarter's solid results were driven by our strong positions in the energy, handset and refrigeration and food equipment markets. We achieved this growth despite considerable headwinds, including a weak European economy and the currency impact of a strengthening U.S. dollar against the euro.


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Bookings remained solid in the second quarter, increasing 9% over the prior year quarter. Market dynamics, including the shift from gas to oil, oil prices supportive of continued production projects, and a strong downstream market should continue to provide a solid platform for our Energy segment's products and services. We also experienced strong activity in the handset market as well as solid demand in the commercial aerospace and life science markets served by our Communication Technologies segment. Our businesses serving the handset market began to receive orders connected to new product launches and we expect this activity to accelerate during the third and fourth quarters of 2012. Businesses within our Engineered Systems segment serving the refrigeration and food equipment markets generated solid results driven on the strength of an active remodel market and our customers' continued focus on energy efficiency. Similarly, our Engineered Systems businesses serving U.S. industrial markets continued to generate solid results during the quarter, and we expect these businesses serving the food equipment and industrial markets to remain strong in the second half. Despite a strong start from our recent Maag Pump Systems acquisition, the performance by our Fluid Solutions platform waned during the second quarter due to the economic weakness in Europe and slowing conditions in China, and we expect this portion of the business to remain challenged by these economic conditions. During the quarter, we experienced continued weakness in the electronics markets served by our Printing & Identification segment. Within our fast moving consumer goods sector, we have been focusing on new products, new channels and service which has helped to offset some of the impact of our exposure to Europe, a key geographic market for this sector. We expect improved results in the Printing & Identification segment over the remainder of the year, due to normal seasonality coupled with our continued focus on new products and new market opportunities in the fast moving consumer goods and industrial markets and the realization of benefits from our recent restructuring activities.

In summary, we expect our 2012 full year organic growth to be in the range of 3% to 5% and acquisition related growth to be approximately 5% for acquisitions completed in 2011 and the first half of 2012. Based on these revenue assumptions and profitability expectations, we expect our diluted earnings per share from continuing operations for 2012 will be in the range of $4.70 to $4.85. If global or domestic economic conditions, including economic weakness in Europe, accelerate or deteriorate, our operating results for 2012 could be materially different than currently projected.


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RESULTS OF OPERATIONS

As discussed in Note 9 to the Unaudited Condensed Consolidated Financial
Statements, we are reporting three businesses that were sold during 2011 as
discontinued operations. Therefore, we have classified the results of operations
of these businesses as discontinued operations for all periods presented.

                                        Three Months Ended June 30,                    Six Months Ended June 30,
(dollars in thousands, except                                    % / Point                                     % / Point
per share figures)                  2012            2011          Change          2012            2011          Change
Revenue                         $ 2,156,508     $ 1,994,970       8.1  %      $ 4,219,872     $ 3,807,048      10.8  %
Cost of goods and services        1,338,911       1,218,974       9.8  %        2,621,951       2,319,301      13.0  %
Gross profit                        817,597         775,996       5.4  %        1,597,921       1,487,747       7.4  %
Gross profit margin                    37.9 %          38.9 %    (1.0 )              37.9 %          39.1 %    (1.2 )

Selling and administrative
expenses                            494,050         448,399      10.2  %          974,930         901,826       8.1  %
Selling and administrative as a
percent of revenue                     22.9 %          22.5 %     0.4                23.1 %          23.7 %    (0.6 )

Interest expense, net                29,717          28,157       5.5  %           59,744          56,475       5.8  %
Other expense, net                      142           1,477         -               2,764           2,665         -

Provision for income taxes           80,786          58,765      37.5  %          150,754         112,792      33.7  %
Effective tax rate                     27.5 %          19.7 %     7.8                26.9 %          21.4 %     5.5

Earnings from continuing
operations                          212,902         239,198     (11.0 )%          409,729         413,989      (1.0 )%

Earnings from discontinued
operations, net                       1,199          10,571     (88.7 )%              435          30,685     (98.6 )%

Earnings from continuing
operations per common share -
diluted                         $      1.15     $      1.26      (8.7 )%      $      2.20     $      2.18       0.9  %

Revenue

Revenue for the second quarter of 2012 increased $161.5 million or 8% from the comparable 2011 quarter reflecting organic revenue growth of 3%, growth of 7% related to acquisitions and a 2% unfavorable impact from foreign currency. The organic growth is driven by solid demand in our energy, refrigeration and handset end markets, which more than offset declining volumes in our electronics end markets, most notably in semiconductor and alternative energy, and the impact of a weakened European economy.

Revenue for the first six months of 2012 increased $412.8 million or 11% from the comparable 2011 period reflecting organic revenue growth of 6%, growth of 6% related to acquisitions and a 1% unfavorable impact from foreign currency translation, driven by the same factors as in the second quarter.

Gross Profit

Gross profit for the second quarter of 2012 increased $41.6 million or 5% compared to the prior year quarter reflecting the increased sales volumes and benefits from productivity initiatives. Gross profit margin as a percentage of revenue contracted 100 basis points to 37.9% due principally to the impacts of product and customer mix, the decline in semiconductor and alternative energy revenue, and the impacts of recent acquisitions which, combined, more than offset operating leverage.

For the six month period, gross profit increased $110.2 million or 7% from the comparable 2011 period while gross profit margin decreased 120 basis points to 37.9%, due to the same drivers as noted for the quarter.


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Selling and Administrative Expenses

Selling and administrative expenses increased $45.7 million or 10% compared to the prior year quarter primarily due to general increases across the segments in support of higher volumes and growth initiatives, higher amortization expense resulting from recent acquisitions, and increased restructuring expense from 2012 initiatives undertaken at certain businesses. As a percentage of revenue, selling and administrative expenses increased by 40 basis points to 22.9% in the second quarter of 2012 compared to 22.5% in the prior year quarter, principally due to higher amortization and restructuring costs incurred in 2012, which more than offset the leverage from higher revenues.

Selling and administrative expenses for the six months of 2012 increased $73.1 million or 8% compared to the same period of 2011 due to the same drivers as in the quarter. As a percentage of revenue, selling and administrative expenses declined to 23.1% from 23.7% in the comparable 2011 period. This 60 basis point improvement is largely a result of leverage from the higher revenue levels, partially offset by higher amortization relating to recent acquisitions and higher restructuring charges.

Non-Operating Items

Net interest expense for three and six months ended June 30, 2012 increased by $1.6 million (6%) and $3.3 million (6%), respectively, compared to the same periods of last year. The increase in net interest expense for the three and six month periods is attributed to higher average outstanding debt balances, which led to a $0.4 million and $1.0 million increase in interest expense, respectively, coupled with lower average levels of cash on hand, which generated $1.2 million and $2.3 million less of interest income, respectively. In the second quarter and first six months of 2012, our average cash and cash equivalents were approximately $540 million and $300 million lower than in the comparable periods of 2011, respectively, due in part to cash used to fund acquisition and share repurchase activity over the last twelve months.

Other expense, net for the three and six month periods ended June 30, 2012 and 2011 primarily reflects the impact of net losses from foreign exchange fluctuations on assets and liabilities denominated in currencies other than the functional currency, coupled with other miscellaneous non-operating gains and losses, none of which were individually, or in the aggregate, significant.

Income Taxes

For the three and six months ended June 30, 2012, the effective tax rates before consideration of discrete items were relatively flat as compared with the prior year periods. The pre-discrete tax rate was 27.4% and 27.1% for the respective three and six months ended June 30, 2012, and 27.2% for each of the comparable three and six month periods of 2011. Net discrete items of $0.4 million for the second quarter and $1.1 million year to date did not significantly impact the 2012 effective tax rates. Discrete items totaling $22.3 million in the second quarter of last year and $30.4 million in the first half of last year reduced 2011 effective tax rates to 19.7% and 21.4%, respectively, for the comparable three and six month reporting periods. The unfavorable impact of increased U.S. earnings mix in the 2012 periods was more than offset by the favorable impact of lower effective tax rates in foreign jurisdictions neutralizing rates on a comparative year over year, pre-discrete basis. If the mix of U.S. earnings increases more than anticipated over the remainder of the year, our 2012 effective tax rate could be unfavorably impacted. In addition, we believe uncertain tax positions could be settled within the next twelve months, for which an estimate cannot currently be made due to the uncertainties associated with the resolution of these matters.

Income from Continuing Operations

Earnings from continuing operations for the second quarter of 2012 decreased 11% to $212.9 million, or $1.15 diluted earnings per share ("EPS"), compared to $239.2 million, or $1.26 EPS, in the prior year second quarter. Earnings from continuing operations for the six months ended June 30, 2012 decreased 1% to $409.7 million from $414.0 million in the respective prior year period; however, EPS for the six months ended June 30, 2012 increased to $2.20 compared to $2.18 EPS for the same period of 2011. The dollar decrease in earnings from continuing operations in both the three and six months periods of 2012 is primarily the result of higher acquisition related expenses and increased restructuring charges relative to the 2011 periods, coupled with the impact of the slowing Europe economy. The EPS increase for the six month period of 2012 is primarily the result of lower weighted average shares outstanding for the 2012 period relative to the same period of 2011.


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Discontinued Operations

We realized net income from discontinued operations of $1.2 million, or $0.01 EPS, in the second quarter of 2012 and $0.4 million, with a negligible impact to EPS, in the six months ended June 30, 2012. In both the three and six month periods, the net income resulted from adjustments to sale proceeds of businesses sold in prior periods, offset in part by expense and accrual adjustments for these and other businesses sold in prior periods.

In the second half of 2011, we sold three businesses which were reported as discontinued operations. As a result, in the second quarter of 2011 we realized net income from discontinued operations of $10.6 million, or $0.06 diluted EPS, which is driven by net earnings of approximately $14 million generated by these three businesses. For the six months ended June 30, 2011, we realized net income from discontinued operations of $30.7 million, or $0.16 EPS, which primarily reflects net earnings of $26 million generated by these three businesses, coupled with $12 million of tax benefits for discrete tax items settled during the period relating to other previously discontinued operations.

Restructuring Activities

2012 Restructuring Activities

In recent months, we initiated restructuring actions relating to ongoing cost reduction efforts, including targeted facility consolidations and headcount reductions at certain businesses. As a result, in the three and six months ended June 30, 2012, we incurred restructuring charges totaling $8.1 million and $9.6 million, respectively, related to these programs.

The Communication Technologies segment has incurred restructuring charges of $1.7 million in the six months ended June 30, 2012, and expects to incur an additional $1.4 million over the remainder of 2012, relating to a facility consolidation and related headcount reductions within its operations that serve the telecom infrastructure market to better reflect the current market dynamics.

The Energy segment has incurred restructuring charges of $0.5 million in the six months ended June 30, 2012, primarily representing costs for the integration of recent acquisitions and minor headcount reductions.

The Engineered Systems segment has incurred restructuring charges of $1.4 million in the six months ended June 30, 2012, and expects to incur an additional $2.5 million over the remainder of 2012, mainly relating to a couple of facility consolidations and related headcount reductions undertaken to optimize its cost structure.

The Printing & Identification segment has incurred restructuring charges of $6.0 million in the six months ended June 30, 2012, principally relating to rationalization of global headcount within its marking and coding and alternative energy businesses to better align its footprint with present market conditions.

In light of the economic uncertainty in certain of our end markets and our continued focus on improving our operating efficiency, we expect to initiate additional restructuring programs in the second half of 2012.

2011 Restructuring Activities

Restructuring initiatives in 2011 were limited to a few targeted facility consolidations. We incurred restructuring charges in the three and six months ended June 30, 2011 of $2.0 million and $3.5 million, respectively.

Restructuring Accrual

The following table summarizes our restructuring activity for the six months
ended June 30, 2012:
(dollars in thousands)             Severance       Exit        Total
Balance, December 31, 2011        $    2,463     $ 3,129     $ 5,592
Restructuring charges                  8,548       1,019       9,567
Payments                              (4,362 )    (2,020 )    (6,382 )
Other, including foreign currency        (20 )       (27 )       (47 )
Balance, June 30, 2012            $    6,629     $ 2,101     $ 8,730


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The accrual balance at December 31, 2011 primarily reflects ongoing lease commitment obligations for facilities closed in earlier periods, the majority of which will be paid over the next twelve months. We also expect to fund the majority of the payments for the 2012 programs over the next twelve months.


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SEGMENT RESULTS OF OPERATIONS

As noted previously, in the fourth quarter of 2011 we realigned our businesses into four new segments to more closely match our key end-markets. As such, the three and six month information for 2011 as presented herein has been recast to conform to the current segment structure.

Communication Technologies

Our Communication Technologies segment is engaged in the design and manufacture
of innovative products and components which serve the following five major
markets: Communications, Life Sciences, Aerospace/Industrial, Defense and
Telecommunication/Other.
                                       Three Months Ended June 30,                     Six Months Ended June 30,
(dollars in thousands)              2012          2011         % Change         2012          2011           % Change
Revenue                         $  361,689     $ 288,843        25.2  %      $ 719,264     $ 558,425             28.8  %

Segment earnings                $   50,322     $  54,527        (7.7 )%      $  96,878       101,852             (4.9 )%
Operating margin                      13.9 %        18.9 %                        13.5 %        18.2 %

Other measures:
Depreciation and amortization   $   32,828     $  18,533        77.1  %      $  64,341     $  37,218             72.9  %
Bookings                           383,135       309,734        23.7  %        739,521       584,345             26.6  %
Backlog                                                                        457,624       431,558              6.0  %

                                                             Q2 2012 v. Q2
Components of revenue growth:                                    2011                                    YTD 2012 v. 2011
Organic growth                                                   4.4  %                                           5.6  %
Acquisitions                                                    22.1  %                                          24.0  %
Foreign currency translation                                    (1.3 )%                                          (0.8 )%
                                                                25.2  %                                          28.8  %

Second Quarter 2012 Compared to the Second Quarter 2011

Revenue generated by our Communication Technologies segment in the second quarter of 2012 increased by $72.8 million, or 25%, compared to the same period of 2011, with 22% attributed principally to the inclusion of Sound Solutions, a 2011 acquisition which supplements our product offerings in the growing handset market. Although there was a slight decrease in revenue due to normal pricing concessions for our communications and telecommunication products corresponding to normal product life cycle maturities, this decrease was more than offset by revenue growth from new product introductions, market share gains and product mix.

Our organic revenue growth of 4% was largely due to continued strong demand for smart phones serving the communications market which continues to grow significantly period over period. Our revenue in the communications market (representing 34% of 2012 second quarter segment revenue) increased $75.4 million, or 163% (29% excluding Sound Solutions). Our microelectronic mechanical ("MEMs") microphones are well positioned to capitalize on this market's growth as we have continued to invest in capacity to meet the growing market demands.

Our life sciences revenue (19% of 2012 second quarter segment revenue) increased by $3.1 million, or 5%, principally due to increased hearing aid demand and overall stable medical equipment demand.

We also experienced increased demand in the commercial aerospace market primarily driven by our global aftermarket products and continued increased build rates of commercial aircraft. This demand was partially offset by our products sold in the industrial markets. Our aerospace/industrial revenue (17% of 2012 second quarter segment revenue) increased $3.5 million, or 6%.


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Revenue derived from our defense market (14% of 2012 second quarter segment revenue) increased $1.0 million, or 2%, mainly due to timing and funding of key programs in which we participate. The defense market in Europe continues to show the effects of its weak economic conditions.

This overall growth was partially offset by weakened demand in the global telecom markets, driven in part by continued deferred industry investment. This contributed to a decrease of $10.2 million, or 15%, in our telecommunication/other revenue market (16% of 2012 second quarter segment revenue). Although we see encouraging end-of-quarter activity which may indicate improving telecom market investment, there is still uncertainty regarding the timing of a recovery.

Communication Technologies earnings in the second quarter of 2012 decreased $4.2 million, or 8%, compared with 2011, with a decrease in operating margin of 500 basis points. The margin decline mainly resulted from higher acquisition-related depreciation and amortization, higher manufacturing costs and lower margins from the integration of the Sound Solutions acquisition.

Bookings for the second quarter of 2012 and backlog at June 30, 2012 indicate continued strength in the communications market as we head into the second half of the year when new products are generally launched.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Revenue generated by our Communication Technologies segment for the six months ended June 30, 2012 increased by $160.8 million, or 29%, compared to the 2011 period, with 24% attributed principally to the inclusion of Sound Solutions. The revenue trends for the six month period were relatively consistent in all of our end markets to those outlined for the quarter.

Earnings for the six months ended June 30, 2012 decreased $5.0 million, or 5%, compared with the 2011 period, while operating margin decreased 470 basis points to 13.5%. The margin decline mainly resulted from higher acquisition-related depreciation and amortization, higher manufacturing costs and lower margins from the integration of Sound Solutions.

Energy

Our Energy segment serves the oil, gas and power generation industries, with products that promote the efficient and cost-effective drilling, extraction, storage and movement of oil and gas products, or constitute critical components for power generation equipment. The Energy segment operates through the . . .

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