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

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Form 10-Q for DOVER CORP


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.


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. We believe the segment reorganization 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 March 31, 2012 and 2011:

                                Three Months Ended           Three Months Ended
                                  March 31, 2012               March 31, 2011
                            Revenue   Segment Earnings   Revenue   Segment Earnings
Communication Technologies    17.3%              14.0%     14.9%              16.1%
Energy                        25.8%              39.6%     23.5%              31.7%
Engineered Systems            39.8%              36.6%     39.9%              33.6%
Printing and Identification   17.1%               9.8%     21.7%              18.6%

Total                        100.0%             100.0%    100.0%             100.0%

We generated positive results during the first quarter of 2012, with first quarter revenue of $2.1 billion and gross profit of $780 million, representing increases of 14% and 10%, respectively, compared to the first quarter of 2011. The quarter's solid results were driven by our Energy segment, which continued to experience strong activity across all of its end-markets, and our Engineered Systems segment, which realized positive demand in its refrigeration and food equipment, fluid solutions and other industrial end-markets.

We also made significant progress on our globalization efforts and, as a result, our first quarter revenue from developing economies, including Asia, Latin America, Russia and the Middle East, grew 22% to approximately $489 million.

Bookings remained solid in the first quarter, increasing 7% over the prior year quarter. Market dynamics, including the shift from gas to oil, are expected to fuel continued strength in our Energy segment. The performance by our Fluid Solutions platform was driven by the significant investments we have made during the year in product development and geographic expansion, including our recent acquisition of Maag Pump Systems, a leading manufacturer of external gear pumps and related products and services serving the plastics and petrochemical markets. This acquisition was aligned with our focus on growth within the fluid solutions space, and we anticipate further acquisitions within our key growth spaces in the coming months. We also experienced strong activity in the handset market as well as solid demand in the life science and commercial aerospace markets served by our Communication Technologies segment.

Strength in these markets helped to offset continued weakness in the alternative energy, semi-conductor, and telecom infrastructure markets served by our Printing & Identification and Communication Technologies segments, along with the impacts of softer volumes and higher manufacturing costs at Sound Solutions and continued economic challenges in Europe. Despite these impacts, we believe that through continued execution of our strategies around positioning ourselves to capitalize on global growth trends, capturing the benefits of common ownership and disciplined capital allocation, we remain well positioned for solid growth through the remainder of 2012.

In summary, we expect our 2012 full year organic growth to be in the range of 5% to 7% and acquisition related growth to be approximately 5% for acquisitions completed in 2011 and the first quarter 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 $4.80 to $5.00. If the global or domestic economic conditions accelerate or deteriorate, our operating results for 2012 could be materially different than currently projected.

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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, and the assets and liabilities of discontinued operations have been reclassified and are segregated in the consolidated balance sheet for the year ended December 31, 2011.

                                                     Three Months Ended March 31,
(dollars in thousands, except per share figures)        2012                2011          % / Point Change

Revenue                                            $     2,063,364       $ 1,812,078                   13.9 %
Cost of goods and services                               1,283,040         1,100,327                   16.6 %
Gross profit                                       $       780,324       $   711,751                    9.6 %
 Gross profit margin                                          37.8 %            39.3 %                 (1.5 )

Selling and administrative expenses                $       480,880       $   453,427                    6.1 %
  Selling and administrative as a percent of
revenue                                                       23.3 %            25.0 %                 (1.7 )

Interest expense, net                              $        30,027       $    28,318                    6.0 %
Other expense, net                                 $         2,622       $     1,188                      -

Provision for income taxes                         $        69,968       $    54,027                   29.5 %
  Effective tax rate                                          26.2 %            23.6 %                  2.6

Earnings from continuing operations                $       196,827       $   174,791                   12.6 %

(Loss) earnings from discontinued operations,
net                                                $          (764 )     $    20,114                 -103.8 %

Earnings from continuing operations per common
share - diluted                                    $          1.05       $      0.92                   14.1 %


Revenue for the first quarter of 2012 increased $251.3 million or 14% from the comparable 2011 quarter reflecting organic revenue growth of 9%, growth of 5% related to acquisitions and a negligible unfavorable impact from foreign currency. The organic growth reflects strength in the Energy and Engineered Systems segments, driven by solid demand in the energy, fluid solutions and refrigeration end markets served by these segments.

Gross Profit

Gross profit increased $68.6 million or 10% 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 150 basis points to 37.8% due principally to the impacts of product and customer mix, the decline in semiconductor and alternative energy revenue, higher depreciation and amortization from recent acquisitions, and other costs relating to the Sound Solutions acquisition which, combined, more than offset operating leverage.

Selling and Administrative Expenses

Selling and administrative expenses increased $27.5 million or 6% compared to the prior year quarter primarily due to general increases across the segments in support of higher volumes and growth initiatives. As a percentage of revenue, selling and administrative expenses declined to 23.3% in the first quarter of 2012 compared to 25.0% in the prior year quarter. This 170 basis point improvement is largely a result of leverage from the higher revenue levels, partially offset by higher amortization relating to recent acquisitions and investments in global growth initiatives.

Non-Operating Items

Net interest expense for the first quarter of 2012 increased by $1.7 million or 6% compared to the same quarter last year. In mid-February 2011, the Company issued $800 million in new notes, approximately half of which repaid outstanding commercial paper balances, resulting in a net increase in debt of approximately $400 million. As a result, the higher average outstanding debt balances in the 2012 period led to a $0.6 million increase in interest expense. Additionally, in the first quarter of 2012, the Company generated $1.1 million less in interest income on its cash and cash equivalents due to lower average levels of cash on hand. In the first quarter of 2011, the Company's average cash and cash equivalents were approximately $300 million higher, a portion of which was used to fund acquisition activity in subsequent periods.

Other expense, net for the quarters ending March 31, 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.

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Income Taxes

The effective tax rate for continuing operations for the three months ended March 31, 2012 was 26.2% compared to 23.6% for the same period of the prior year. Net discrete items of $1.4 million had a nominal impact on the effective rate for the first quarter of 2012; however, the effective tax rate for the first quarter of 2011 was favorably impacted by net discrete items totaling $8.0 million. Excluding discrete items, the effective tax rate for the three months ended March 31, 2012 and 2011 was 26.8% and 27.1%, respectively. After adjusting for discrete items, our effective tax rate is lower during the 2012 first quarter due to change in the geographic mix of earnings and the impact of lower effective rates on the non-U.S. earnings. While we believe additional uncertain tax positions will be settled within the next twelve months, an estimate cannot be made due to the uncertainties associated with the resolution of these matters.

Income from Continuing Operations

Earnings from continuing operations for the first quarter of 2012 increased 13% to $196.8 million, or $1.05 diluted earnings per share ("EPS"), compared to $174.8 million, or $0.92 diluted EPS, in the prior year first quarter. The increase was primarily a result of sales volume growth, as discussed above.

Discontinued Operations

In the second half of 2011, we sold three businesses which were reported as discontinued operations. As a result, we realized income from discontinued operations of $20.1 million in the first quarter of 2011, or $0.11 diluted EPS, which reflects net earnings of approximately $9 million generated by these three businesses, coupled with $11 million of tax benefits for discrete tax items settled during the period relating to other previously discontinued operations.

For the three months ended March 31, 2012, we realized a net loss from discontinued operations of $0.8 million, resulting in less than a one cent impact to diluted EPS. This loss relates primarily to accrual adjustments relating to businesses that were sold in prior years.

Restructuring Activity

In the three months ended March 31, 2012 and 2011, we undertook a few targeted facility consolidations at certain businesses. As a result, we incurred restructuring charges totaling $1.5 million in each of these periods.

We are continuing to drive actions that increase our flexibility and operating leverage within our Printing & Identification segment in light of the challenges the segment faces in its alternative energy and semi-conductor end markets, coupled with its greater exposure to European markets. As such, we are currently considering expansion of some restructuring programs in this segment in the second quarter, to better align our footprint with the present market conditions that we face. We are also developing plans to improve the cost base of our operations within the Communication Technologies segment that serve the telecom infrastructure market to better reflect the current market dynamics.

We continue to monitor business activity across our end markets and will take additional actions to adjust capacity as necessary, depending on the economic climate and other internal business factors.

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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 first quarter 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

                                                      Three Months Ended March 31,
(dollars in thousands)                                  2012                 2011               % Change
Revenue                                            $      357,575       $      269,582                    32.6 %

Segment earnings                                   $       46,556       $       47,325                    -1.6 %
Operating margin                                             13.0 %               17.6 %

Other measures:
Depreciation and amortization                      $       31,513       $       18,685                    68.7 %
Bookings                                                  356,386              274,611                    29.8 %
Backlog                                                   435,912              410,843                     6.1 %

Components of revenue growth:                                                              Q1 2012 v. Q1 2011
Organic growth                                                                                             6.9 %
Acquisitions                                                                                              26.0 %
Foreign currency translation                                                                              -0.3 %
                                                                                                          32.6 %

Revenue generated by our Communication Technologies segment in the first quarter of 2012 increased by $88.0 million, or 33%, compared with 2011, with $70.1 million, or 26%, 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 7% 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 37% of 2012 first quarter segment revenue) increased $83.3 million, or 171% (25% 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 (18% of 2012 first quarter segment revenue) increased by $8.0 million, or 14%, principally due to increased hearing aid demand and overall stronger 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 (16% of 2012 first quarter segment revenue) increased $0.4 million, or 1%.

Revenue derived from our defense market (15% of 2012 first quarter segment revenue) increased $4.4 million, or 9%, mainly due to timing and funding of key programs in which we participate. The defense market in Asia remained relatively flat while Europe continues to show the effects of its economic malaise.

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 $7.6 million, or 13%, in our telecommunication/other revenue market (14% of 2012 first quarter segment revenue). Although we started to see encouraging end-of-quarter activity which may indicate optimism in telecom market investment, there is still uncertainty regarding the timing of a recovery.

Communication Technologies earnings in the first quarter of 2012 decreased $0.8 million, or 2%, compared with 2011, with a decrease in operating margin of 460 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. Excluding the impact of Sound Solutions, earnings would have increased by $5.8 million, or 12%, and operating margin would have increased by 90 basis points as compared with the 2011 first quarter.

First quarter 2012 bookings indicate continued strength in the communications, aerospace and defense markets which was offset by continued softness in the telecommunication market. Backlog at March 31 remained relatively consistent quarter over quarter.

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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 following business lines: Drilling, which comprises products supporting the cost-effective drilling of oil and gas wells; Production, which comprises products and components facilitating the extraction and movement of fuel from the ground; and Downstream, which comprises systems and products that support the efficient, safe and environmentally-sensitive handling of fuel, hazardous liquids and dry-bulk commodities.

                                                      Three Months Ended March 31,
(dollars in thousands)                                  2012                 2011               % Change
Revenue                                            $      531,570       $      425,424                    25.0 %

Segment earnings                                   $      132,115       $       93,051                    42.0 %
Operating margin                                             24.9 %               21.9 %

Other measures:
Depreciation and amortization                      $       21,184       $       18,573                    14.1 %
Bookings                                                  585,775              495,125                    18.3 %
Backlog                                                   296,360              240,198                    23.4 %

Components of revenue growth:                                                              Q1 2012 v. Q1 2011
Organic growth                                                                                            23.3 %
Acquisitions                                                                                               2.2 %
Foreign currency translation                                                                              -0.5 %
                                                                                                          25.0 %

Our Energy segment again posted record organic revenue, earnings and bookings in the first quarter of 2012. Revenue and earnings were up 25% and 42%, respectively, due to continued strength in the drilling, production and downstream energy markets served by the segment. Acquisitions made in 2011 generated revenue growth of 2%, and foreign currency translation had a negligible impact during the quarter.

Drilling sector revenue (22% of 2012 first quarter segment revenue) achieved record levels and grew 30% due to stronger exploration activity and increased market share.

Production sector revenue (representing 52% of 2012 first quarter segment revenue) also reached record levels, increasing 29% over the comparable prior year quarter, driven by higher drilling and well completion activity, higher demand for winch products serving the energy, infrastructure and recovery markets, and increased equipment maintenance activity. Acquisitions completed in 2011 contributed 4% to the production sector's growth during the quarter.

Our revenues in the drilling and production sectors are impacted by changes in the number of active North American drilling rigs. The first quarter's average North American drilling rig count was up 12% over the comparable prior year quarter, driven by increased oil exploration. The quarter's average rig count also reflects a 4% improvement over the fourth quarter 2011 average rig count, as Canadian activity peaked in February before the Spring thaw, and U.S. activity dropped slightly as gas activity declined faster than oil drilling increased.

Downstream sector revenue (26% of 2012 first quarter segment revenue) was up 14%, reflecting continued strong demand for power generation and energy equipment products, loading equipment for the rail, cargo tank and chemical/industrial markets and fuel delivery systems.

Energy earnings in the first quarter of 2012 increased $39.1 million, or 42%, from the higher organic and acquisition volumes. Energy operating margin increased 300 basis points compared to the prior year quarter, due to operating leverage associated with the higher volumes, strategic pricing and productivity gains, coupled with the positive impact of lower acquisition related costs in the 2012 quarter, which more than offset higher material and labor-related costs in the quarter.

Both bookings and backlog had solid increases compared to the prior year quarter, with a significant driver being higher international activity in the Production sector. We expect current market dynamics, including the ongoing shift from gas to oil, to continue to be favorable for the Energy segment.

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Engineered Systems

Our Engineered Systems segment is comprised of two platforms, Fluid Solutions
and Refrigeration & Industrial. The Fluid Solutions platform designs and
manufactures pumps, compressors, and chemical proportioning and dispensing
products. The Refrigeration and Industrial platform manufactures products and
systems which serve three key end-markets: Refrigeration & food equipment, Waste
and recycling, and Other industrial.

                                                      Three Months Ended March 31,
(dollars in thousands)                                  2012                 2011               % Change
Refrigeration & Industrial                         $      642,213       $      560,453                    14.6 %
Fluid Solutions                                           180,364              163,196                    10.5 %
Eliminations                                                 (453 )               (382 )
                                                   $      822,124       $      723,267                    13.7 %

Segment earnings                                   $      122,092       $       98,235                    24.3 %
Operating margin                                             14.9 %               13.6 %

Other measures:
Depreciation and amortization                      $       19,582       $       18,415                     6.3 %

Refrigeration & Industrial                         $      711,911       $      660,449                     7.8 %
Fluid Solutions                                           184,711              173,626                     6.4 %
Eliminations                                                 (408 )               (733 )
                                                   $      896,214       $      833,342                     7.5 %

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