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DOV > SEC Filings for DOV > Form 10-Q on 17-Oct-2012All Recent SEC Filings

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Form 10-Q for DOVER CORP


17-Oct-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 September 30, 2012 and 2011:

                                              Three Months Ended           Three Months Ended
                                              September 30, 2012           September 30, 2011
                                                           Segment                      Segment
                                            Revenue       Earnings       Revenue       Earnings
Communication Technologies                    17.9 %         16.0 %        18.9 %         14.8 %
Energy                                        25.5 %         34.9 %        23.9 %         34.4 %
Engineered Systems                            40.4 %         36.2 %        38.5 %         34.5 %
Printing & Identification                     16.2 %         12.9 %        18.7 %         16.3 %

Total                                        100.0 %        100.0 %       100.0 %        100.0 %

We generated positive results during the third quarter of 2012, with revenue of $2.2 billion and gross profit of $846.9 million, representing increases of 3% and 5%, respectively, compared to the third quarter of 2011. The quarter's results were led by our strong positions in the energy, handset, food equipment and waste and recycling markets. We achieved this growth despite modestly weaker global economic conditions, including continued weakness in Europe and China, which have contributed to


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generally slower revenue growth rates in the quarter.

Third quarter bookings of $2.1 billion were relatively flat as compared with the prior year period. Strong growth in our Energy segment and modest increases in our Engineered Systems and Communication Technologies segments were offset by weaker electronics end market bookings in our Printing & Identification segment.

Within our Communication Technologies segment, several OEM's launched new products in the handset market towards the end of the third quarter which drove solid sequential results. These launches were generally later than our expectations at the end of the second quarter and impacted volume in the third quarter. Our microelectronic mechanical ("MEMs") microphone activity was very strong once the new OEM product launches commenced. However, our performance at Sound Solutions was weaker than anticipated. The Sound Solutions business continued to work through operational challenges in the third quarter and is making good progress, yet such challenges led to lower volumes than anticipated. This lower volume, coupled with normal seasonality in the handset market, will likely continue to impact the handset results through year-end. Our aerospace/industrial and life sciences markets remained stable during the quarter, while our telecom markets continued to be weak.

In our Energy segment, expanding production activity and strong downstream investments in distribution and retail fueling are among the trends that drove solid results during in the quarter. This strong production and downstream performance was partially offset by the softening North American rig count, which impacted our drilling end market results. In all, the segment had solid performance, characterized by continuing growth and strong margins. We expect this trend to continue for the balance of the year.

Within our Engineered Systems segment, the refrigeration and food equipment markets were solid, as were most of our U.S. industrial end markets, especially waste and recycling. The results of our Fluid Solutions platform continued to reflect solid performance from our first quarter Maag Pump Systems acquisition, which helped to mitigate the impacts of weakened markets in Europe and China. The result for the segment was 15% earnings growth as revenue growth was leveraged by strong margin performance. We expect the segment's fourth quarter performance to be impacted by the normal seasonality of our refrigeration markets and slightly moderating global economic trends.

In our Printing & Identification segment, we experienced further weakening in the electronics markets during the quarter. Strong organic growth of 6% in our fast moving consumer goods market, excluding the impact of currency, was driven by solid North American demand coupled with the benefits of our second quarter restructuring activities, which helped minimize the impact of softening electronics markets and a weak Europe. We expect this segment's performance to remain weak in the fourth quarter, due to low order rates in the electronics market.

Overall, the strong market positions of our businesses and cost management initiatives enabled us to generate segment margin of 18% despite the aforementioned challenges in our Communication Technologies and Printing & Identification segments. This strong margin performance, supplemented by increased share repurchase activity in the quarter, enabled us to deliver double-digit diluted earnings per share ("EPS") growth. As such, we generated EPS from continuing operations of $1.32 in the third quarter of 2012 compared to $1.19 in the same quarter of last year.

We expect the fourth quarter to be challenging in light of continued economic uncertainty, coupled with the unfavorable conditions that we expect to continue in our handset and electronics markets. As a result, we estimate our 2012 organic growth to be approximately 3% (inclusive of a 2% unfavorable foreign exchange impact) and acquisition related growth to be approximately 4% for acquisitions completed in 2011 and the first half of 2012. Based on these revised revenue assumptions and profitability expectations, diluted earnings per share from continuing operations for 2012 is estimated to be in the range of $4.55 to $4.65. If global or domestic economic conditions 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 September 30,               Nine Months Ended September 30,
(dollars in thousands, except                                     % / Point                                     % / Point
per share figures)                   2012            2011          Change          2012            2011          Change
Revenue                         $  2,208,699     $ 2,138,606       3.3  %      $ 6,428,571     $ 5,945,654       8.1  %
Cost of goods and services         1,361,769       1,332,324       2.2  %        3,983,720       3,651,625       9.1  %
Gross profit                         846,930         806,282       5.0  %        2,444,851       2,294,029       6.6  %
Gross profit margin                     38.3 %          37.7 %     0.6                38.0 %          38.6 %    (0.6 )

Selling and administrative
expenses                             476,573         476,640         -  %        1,451,503       1,378,466       5.3  %
Selling and administrative as a
percent of revenue                      21.6 %          22.3 %    (0.7 )              22.6 %          23.2 %    (0.6 )

Interest expense, net                 30,388          30,061       1.1  %           90,132          86,536       4.2  %
Other expense, net                     3,962              48         -               6,726           2,713         -

Provision for income taxes            93,794          76,095      23.3  %          244,548         188,887      29.5  %
Effective tax rate                      27.9 %          25.4 %     2.5                27.3 %          22.9 %     4.4

Earnings from continuing
operations                           242,213         223,438       8.4  %          651,942         637,427       2.3  %

Loss from discontinued
operations, net                       (1,167 )       (51,158 )   (97.7 )%             (732 )       (20,473 )   (96.4 )%

Earnings from continuing
operations per common share -
diluted                         $       1.32     $      1.19      10.9  %      $      3.51     $      3.37       4.2  %

Revenue

Revenue for the third quarter of 2012 increased $70.1 million or 3% from the comparable 2011 quarter reflecting organic revenue growth of 1%, growth of 4% related to acquisitions and a 2% unfavorable impact from foreign currency. The organic growth was driven by solid demand in our energy, handset, food equipment, and other industrial end markets, which more than offset declining revenue in our electronics end markets, most notably electronics assembly and alternative energy, and the impact of a weakened European economy.

Revenue for the nine months ended September 30, 2012 increased $482.9 million or 8% from the comparable 2011 period reflecting organic revenue growth of 4%, growth of 6% related to acquisitions and a 2% unfavorable impact from foreign currency translation, driven primarily by the same factors as in the third quarter, coupled with solid results in our refrigeration end market through the first nine months of the year.

Gross Profit

Gross profit for the third quarter of 2012 increased $40.6 million or 5% compared to the prior year quarter reflecting the increased sales volumes, favorable net material costs, and benefits from productivity initiatives. Gross profit margin as a percentage of revenue increased 60 basis points to 38.3% due principally to the impacts of favorable net material costs and benefits of productivity initiatives and operating leverage, which more than offset unfavorable product and customer mix, the decline in electronics sales volume, and the unfavorable impact of foreign currency.

For the nine months ended September 30, 2012, gross profit increased $150.8 million or 7% from the comparable 2011 period while gross profit margin decreased 60 basis points to 38.0%, primarily due to a greater impact of unfavorable product and customer mix on a year-to-date basis.


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Selling and Administrative Expenses

Selling and administrative expenses in the third quarter remained consistent at $477 million on a year-over-year basis. The 2012 expenses include 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. However, these increases were offset by cost containment efforts in response to the continued weakening in the economic climate. As a percentage of revenue, selling and administrative expenses improved by 70 basis points to 21.6% in the third quarter of 2012 compared to 22.3% in the prior year quarter, principally due to the leverage from higher revenues.

Selling and administrative expenses for the nine months of 2012 increased $73.0 million or 5% compared to the same period of 2011. As a percentage of revenue, selling and administrative expenses declined to 22.6% from 23.2% 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 nine months ended September 30, 2012 increased by $0.3 million (1%) and $3.6 million (4%), respectively, compared to the same periods of last year. The increase in net interest expense for the three and nine month periods is primarily attributed to lower average levels of cash on hand at reduced interest rates, leading to $0.9 million and $3.2 million less of interest income, respectively. In the third quarter and first nine months of 2012, our average cash and cash equivalents were approximately $370 million and $50 million lower than in the comparable periods of 2011, respectively, due in part to cash used to fund acquisitions and share repurchase activity in recent quarters.

Other expense, net for the three and nine months ended September 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. During the three and nine months ended September 30, 2012 our foreign exchange losses totaled $4.2 million and $7.7 million, respectively, compared to $0.9 million and $5.2 million for the same periods of 2011, primarily due to the weakening of the U.S. dollar relative to the euro and other major currencies. These foreign exchange losses are reflected net with other miscellaneous non-operating gains and losses, none of which were individually, or in the aggregate, significant.

Income Taxes

The effective tax rates for continuing operations were 27.9% and 27.3% for the three and nine months ended September 30, 2012, respectively, and 25.4% and 22.9% for the comparable periods of 2011. The effective tax rates for the three and nine month periods of 2011 were favorably impacted by net discrete items, principally settlements with U.S. federal and state taxing authorities, totaling $2.4 million and $32.7 million, respectively. Comparatively, settlements during the 2012 three and nine month periods totaled $4.5 million and $5.6 million, respectively. Excluding these discrete items, the effective tax rates were 29.3% and 27.9% for the three and nine months ended September 30, 2012, and 26.2% and 26.8% for the comparable periods of 2011. On a year-over-year basis, the higher rates in the 2012 periods resulted from the unfavorable impact of increased U.S. earnings mix offset by lower effective tax rates in foreign jurisdictions.

Dover and its subsidiaries file U.S., various state and local, and foreign tax returns. We are routinely audited by the tax authorities in these jurisdictions and a number of audits are currently underway. The Internal Revenue Service is currently auditing our consolidated income tax returns for the 2009-2010 tax years. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits which would result in an income tax provision benefit. At this time, it is not possible to estimate the range of change due to the uncertainties associated with the resolution of these matters. We believe that adequate provision has been made for all income tax uncertainties.


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Income from Continuing Operations

Earnings from continuing operations for the third quarter of 2012 increased 8% to $242.2 million, or $1.32 diluted earnings per share ("EPS"), compared to $223.4 million, or $1.19 EPS, in the prior year third quarter. Earnings from continuing operations for the nine months ended September 30, 2012 increased 2% to $651.9 million, or $3.51 EPS, compared to $637.4 million, or $3.37 EPS, in the respective prior year period. The dollar increase in earnings from continuing operations in both the three and nine month periods of 2012 is primarily the result of higher revenues and benefits from productivity and cost containment initiatives, offset in part by higher acquisition-related expenses and increased restructuring charges relative to the 2011 periods. The EPS increases for the three and nine month periods of 2012 reflect the increase in earnings, as well as impact of lower weighted average shares outstanding for the 2012 periods relative to the same periods of 2011. As discussed in the "Financial Condition" section, we have repurchased incrementally more common shares in the 2012 periods.

Discontinued Operations

We realized a net loss from discontinued operations of $1.2 million, or $0.01 EPS, in the third quarter of 2012 and $0.7 million, with a negligible impact to EPS, in the nine months ended September 30, 2012. In both the three and nine month periods, the net loss 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 third quarter of 2011, we sold two businesses which were reported as discontinued operations. As a result, in the three and nine months ended September 30, 2011 we realized a net loss from discontinued operations of $51.2 million, or $0.27 diluted EPS, and $20.5 million, or $0.11 EPS, respectively. The net losses from discontinued operations in the 2011 periods reflect the net loss generated by the sale of these businesses, including an after-tax goodwill impairment charge of $76.1 million, offset in part by the earnings from operations generated by these businesses.

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 nine months ended September 30, 2012, we incurred restructuring charges totaling $4.1 million and $13.7 million, respectively, related to these programs.

The Communication Technologies segment has incurred restructuring charges of $2.6 million in the nine months ended September 30, 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 nine months ended September 30, 2012, primarily representing costs for the integration of recent acquisitions and minor headcount reductions.

The Engineered Systems segment has incurred restructuring charges of $4.6 million in the nine months ended September 30, 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 $5.9 million in the nine months ended September 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.

We expect to incur additional restructuring charges of approximately $8 million over the remainder of the year in connection with the above-mentioned projects, as well as certain other programs to be initiated in the fourth quarter to optimize operations relating to recent acquisitions and further reduce headcount. In light of the economic uncertainty in certain of our end markets and our continued focus on improving our operating efficiency, it is possible that additional programs may be implemented in 2012 and 2013.


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2011 Restructuring Activities

Restructuring initiatives in 2011 were limited to a few targeted facility consolidations. We incurred restructuring charges in the three and nine months ended September 30, 2011 of $3.1 million and $6.6 million, respectively.

Restructuring Accrual

The following table summarizes our restructuring activity for the nine months
ended September 30, 2012:
(dollars in thousands)             Severance       Exit        Total
Balance, December 31, 2011        $    2,463     $ 3,129     $  5,592
Restructuring charges                 10,463       3,187       13,650
Payments                              (8,465 )    (3,332 )    (11,797 )
Other, including foreign currency          7          83           90
Balance, September 30, 2012       $    4,468     $ 3,067     $  7,535

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 2012 programs currently underway 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 nine 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 September 30,                    Nine Months Ended September 30,
(dollars in thousands)               2012              2011         % Change            2012            2011           % Change
Revenue                         $    396,470       $  405,357        (2.2 )%      $   1,115,734      $ 963,782             15.8  %

Segment earnings                $     63,706       $   53,433        19.2  %      $     160,584      $ 155,285              3.4  %
Operating margin                        16.1 %           13.2 %                            14.4 %         16.1 %

Other measures:
Depreciation and amortization   $     32,997       $   34,360        (4.0 )%      $      97,338      $  71,578             36.0  %
Bookings                             412,092          410,616         0.4  %          1,151,613        994,961             15.7  %
Backlog                                                                                 473,007        483,512             (2.2 )%

                                                                  Q3 2012 v. Q3
Components of revenue growth:                                         2011                                         YTD 2012 v. 2011
Organic growth                                                       (0.9 )%                                                2.9  %
Acquisitions                                                            -  %                                               13.9  %
Foreign currency translation                                         (1.3 )%                                               (1.0 )%
                                                                     (2.2 )%                                               15.8  %

Third Quarter 2012 Compared to the Third Quarter 2011

Revenue generated by our Communication Technologies segment in the third quarter of 2012 decreased by $8.9 million or 2% compared to the same period of 2011. The overall decline in revenue resulted primarily from the unfavorable impact of foreign exchange, pricing reductions corresponding to normal product life cycle maturities and reduced volumes across most end markets, a significant portion of which was offset by increased MEMs volumes stemming from new product introductions and market share gains.

Our revenue in the communications market (representing 38% of 2012 third quarter segment revenue) decreased $3.5 million or 2% due to delays in the launches of OEM product releases. Additionally, we experienced continued operational challenges in the Sound Solutions business during the quarter which have led to lower volume for this portion of the business. Overall, we continue to experience solid demand for components serving the handset market. Our 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 (16% of 2012 third quarter segment revenue) decreased by $0.7 million or 1% due to a slowing of hearing aid demand and weakened European economic conditions, slightly offset by overall stable medical equipment demand.

We experienced increased revenue in the commercial aerospace market primarily driven by continued increase in build rates of commercial . . .

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