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Executives

Bob Livingston - President & CEO

Brad Cerepak - SVP & CFO

Paul Goldberg - VP, IR

Analysts

Nigel Coe - Morgan Stanley

Scott Davis - Barclays

Jeff Sprague - Vertical Research

Deane Dray - Citi

Steve Tusa - JPMorgan

John Inch - Deutsche Bank

Shannon O'Callaghan - Nomura Securities

Andrew Obin - Bank of America

Dover Corporation (DOV) Q4 2012 Earnings Call January 24, 2013 10:00 AM ET

Operator

Good morning, and welcome to the Fourth Quarter 2012 Dover Corporation Earnings Conference Call. With us today are Bob Livingston, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and CFO; and Paul Goldberg, Vice President of Investor Relations.

After the speakers' opening remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the conference over to Mr. Paul Goldberg. Mr. Goldberg, please go ahead sir.

Paul Goldberg

Thank you, Paula. Good morning and welcome to Dover's fourth quarter earnings call. Today's call will begin with comments from Bob and Brad on Dover's fourth quarter and full year operating and financial performance, and follow with our outlook for 2013. We will then open the call to questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up.

Please note that our current earnings release, investor supplement, and associated presentation can be found on our website, www.dovercorporation.com. This call will be available for playback through February 7th, and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you'll need to supply the following access code, 86837487.

And before we get started, I'd like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website, where considerably more information can be found.

With that, I'd like to turn the call over to Bob.

Bob Livingston

Thanks, Paul. Good morning everyone and thank you for joining us for this morning's conference call.

2012 was a strong performance year for Dover in revenue and earnings, and a truly important year for us as we continue to execute on our strategy. Before I get to our fourth quarter results, I'd like to comment on a few of our key accomplishments during this past year.

With respect to strengthening our company, we continue to concentrate on building our five key growth spaces. We achieve this in two important ways. First, we work quite active in acquiring market leading businesses, investing a total of $1.2 billion. These acquisitions expanded our markets, enhanced our technology and product offerings and broadened our customer base. For example, through the addition of Anthony in our refrigeration space, we now have access to new markets and new geographies. Our product offering is greatly expanded lead by the exciting close to key strength and we have gained access to another set of customers. The same can be said for our Mag Pump and PCS acquisitions, which also added market leading businesses and technologies to our fluids and energy spaces.

Secondly, we announced our plan to divest our electronic assembly and test businesses. Those strong performers these businesses served historically volatile end markets. We believe that this position, these businesses will greatly improve the consistency of our future results. These activities position us very well as we head into 2013.

Additionally in November, we announced a $1 billion share repurchase program. In total for the year, we repurchased 12.3 million shares for roughly $750 million, which includes $250 million against the $1 billion program.

Overall I am very pleased with our financial results for the year. The highlights include 5% organic growth, acquisition growth of 6%, margins exceeding 17%, and nearly $1 billion in free cash flow.

Now some comments on our fourth quarter results. We posted revenue of $2 billion in the quarter, an increase of 6%, and our fourth quarter adjusted EPS of a $1.09, was a 7% improvement over the prior year.

In our Energy segment, increased production activity, especially international markets and continuing strength in downstream distribution and retail fueling were among the trends that drove solid results in the quarter.

Our drilling results as expected continue to be impacted by the lower year-over-year North American rig count. Overall Energy's performance was characterized by modest revenue growth and strong margins.

At Communication Technologies, the consumer electronics market continue to be strong, especially smartphones. Our MEMs activity was again very strong reflecting the breadth of our OEM coverage and the benefits of multiple designs wins.

Regarding Sound Solutions, we are now on an improved path and achieved sequentially better performance in the fourth quarter. We expect this positive trend for Sound Solutions to continue sequentially and for 2013 to be a much better year.

Within our Engineered System segment, refrigeration and food equipment markets remain solid, and our business performance was again quite strong. We were also very happy to close the Anthony acquisition in the quarter.

Regarding our fluids platform, our acquisitions completed earlier in the year are performing very well and while overall markets remain much the same as last quarter, we began to see improvements in order rates during the fourth quarter.

Within our Printing & Identification segment, solid organic growth in our fast moving consumer goods market, more than offset the choppiness in our industrial markets. We also saw our European markets begin to stabilize in the fourth quarter. Our business teams achieved strong margin improvement driven by earlier restructuring activities.

Now, looking ahead to 2013. In Energy, we expect continued expansion in our production and downstream markets, driven by international activity and constructive oil prices. To accelerate this international activity, we completed a small bolt-on acquisition in the fourth quarter to serve the international artificial-lift market. We also expect North America rig count growth to turn positive in the second half of the year.

In Communication Technologies, the smartphone market is forecasted to be strong in 2013, supported by numerous new product releases. While OEM market share shifts are always possible, we expect to have a key position in virtually all planned smartphone releases and remain highly confident with our full year forecast. We expect 2013 to be a very strong year for Engineered Systems. In fluids, we expect a year of growth, as we leverage our recent acquisitions and continue to expand geographically.

Within the refrigeration and industrial platform, we anticipate a year of strong growth for refrigeration and food equipment, driven by customer wins and active remodel market, our expanded product offerings, and recent acquisitions.

In Printing & Identification, we expect the fast moving consumer goods market to remain strong in 2013. We are also excited about the release of several new products in the coming months and expect our industrial markets to improve. Our acquisition pipeline remains active and I am confident our M&A program will continue to strengthened over.

Our outlook for the year is unchanged from Dover Day. We expect to leverage our strong market position, productivity initiatives, and share repurchase program to deliver EPS of $5.05 to $5.35, which represents 17% growth at the midpoint of our range.

With that, let me turn it over to Brad.

Brad Cerepak

Thanks Bob. Good morning everyone. Let's start on Slide 3 of the presentation deck. Today, we reported fourth quarter revenue of $2 billion, an increase of 6% over the prior year. This was comprised of 2% organic growth, 5% from acquisitions, and an unfavorable impact of 1% from FX.

Earnings per share were $1.16, which included a $0.07 benefit from discrete tax matters settled during the quarter. After adjusting for tax benefits realized in the fourth quarter of both periods, adjusted EPS of $1.09 improved 7%. Segment margin for the quarter was 16.6%, down 30 basis points. This result reflects acquisition related costs and significantly higher restructuring, as we continue to pursue productivity and cost reduction initiatives.

In the fourth quarter, these costs were more than $14 million and roughly $7 million being incremental over the prior year period. Bookings increased 4% over the prior year to $2 billion. These results represent solid 6% growth in Energy and 4% growth in Engineered Systems. Bookings were essentially flat in Communications Technologies and Printing & Identification. Overall, book-to-bill finished at 0.98, which is in line with historical trends. Backlog grew 7% to $1.5 billion.

In the fourth quarter, we generated $482 million of free cash flow. For the year, free cash flow was $964 million, which was 12% of revenue and a 116% of net income. Cash flow generation continues to be a strength of Dover.

Now, turning to Slide 4, which shows our revenue growth. For the quarter we achieved organic revenue growth in all segments. Engineered Systems driven by refrigeration and food equipment lead the way with 4%. Communication Technologies, Energy, and Printing & Identification each achieved 1% organic growth, driven by strong MEMs activity along with our medical technology, energy production, and fast moving consumer goods and markets. For the quarter, our acquisition growth was in our Engineered Systems and Energy segments as they posted 9% and 5% growth respectively.

Turning to Slide 5, in our sequential results. Revenue decreased 4% from the third quarter largely in line with normal seasonality. Communication Technologies increased 1% on solid 7% sequential growth at Sound Solutions. Energy decreased 4% principally due to lower drilling activity, while Engineered Systems decreased 8% largely the result of normal seasonality in the refrigeration end market. Printing & Identification increased 3% driven by their continued market expansion activities and favorable FX.

Bookings were essentially flat from the third quarter and in line with historical trends. We achieved growth at three of the four segments, with Energy largely driven by its production end market growing at 4%. Engineered Systems grew 2% driven by solid fluids orders and Printing & Identification was up 3%. Communication Technologies bookings declined 14% sequentially. This result reflects normal seasonality in the handset market, as well as lower order rate late in the fourth quarter, indicating a sequentially softer start for the year.

Now, on Slide 6. Communication Technologies posted revenue of $401 million, an increase of 1% from the prior year. These results reflect solid growth in the MEMs portion of consumer electronics, offset by lower revenue at Sound Solutions.

Our Medical Technology and Aerospace/Defense markets were strong, while Telecom markets remained weak. Although Sound Solutions revenue decreased year-over-year, it improved 7% sequentially as previously mentioned.

Earnings decreased 18% to $58 million and segment margin was down 330 basis points to 14.6%. This performance reflects weak telecom markets, lower Sound Solutions volume, and $4.7 million of restructuring costs and one-time charges.

As we start the year, we expect segment revenue and margin to moderate sequentially on anticipated lower volumes primarily due to seasonality. Bookings were $353 million, essentially flat with last year. Also consistent with last year, book-to-bill finished at 0.88.

Now, turning to Slide 7. Energy revenue increased 6% to $540 million, while earnings increased 10% to $134 million. Energy produced another solid quarter as oil prices remained supportive of continued production activity and downstream markets continued to expand. Rig count declined year-over-year impacting our drilling business. Our focus on product innovation and international growth, especially in Australia and Middle East, allowed us to post another quarter of solid revenue growth in both production and downstream.

Operating margin remained very strong. Our 24.7% margin was an 80 basis point improvement from last year, reflecting our strong market position and productivity initiatives. Bookings were $550 million, a 6% increase over the prior year. Book-to-bill was 1.02.

Going to Slide 8. At Engineered Systems, sales were $819 million, an increase of 12% year-over-year. Earnings improved 10% to $102 million.

Fluid Solutions revenue grew 27% to $207 million benefiting from acquisitions completed earlier in the year. Fluid Solutions organic revenue was down 4% with solid results in North America and Asia, offset by a weak Europe. Refrigeration & Industrial grew 8% to $613 million, including 6% organic growth.

Operating margin was 12.4%, a 30 basis point decrease from the prior year. This result primarily reflect acquisition related cost associated with Anthony. Excluding Anthony, segment margin would have been 15.4%, an increase of 270 basis points. Bookings were $816 million, an increase of 4% resulting in a book-to-bill of 1.

Our Fluid Solutions platform bookings increased 32% to $210 million, while Refrigeration & Industrial decreased 3% from last year to $607 million. Refrigeration & Industrial bookings included approximately $40 million of orders in the prior year, primarily related to Target's PFresh project, which is now winding down.

Book-to-bill for Fluid Solutions was 1.02, while Refrigeration & Industrials was 0.99.

Now, let's turn to Slide 9. Printing & Identification revenue was $254 million essentially flat with the prior year. Earnings increased 22% to $41 million. Revenue gains in our fast moving consumer goods market helped to mitigate relative softness in our industrial markets. Excluding the impact of foreign currency, organic growth in our fast moving consumer goods end market was 4%.

Operating margin improved 280 basis points to 16%. The benefits of prior restructuring, continued cost improvements, and favorable customer mix helped drive margin improvement. Bookings were $253 million flat with last year. Book-to-bill ended at 1.

Going to Slide 10. Fourth quarter net interest expense was $2 million higher than last year driven in part by higher debt levels related to our recently completed acquisitions. Corporate expense decreased by $1 million year-over-year.

Our fourth quarter tax rate, absent discrete tax benefits of $0.07 was 28.5%. This rate was slightly higher than our prior forecast, reflecting mix of geographic earnings. For the full year, our normalized tax rate was 28.2% after adjusting for $0.09 of discrete tax benefits.

Our capital expenditures were $88 million in the quarter. Lastly, we repurchased 5.8 million shares in the fourth quarter, which includes 4 million shares repurchased under the $1 billion program. For the year our share repurchase activity contributed $0.12 to our EPS.

Turning to Slide 11, in our 2013 revenue guidance. Our revenue guidance remains unchanged from Dover Day. We expect full year revenue growth of 7% to 9%; organic growth is estimated to be 3% to 5% for the full year, with the impact of foreign exchange being essentially neutral. Completed acquisitions will add around 4%.

Now breaking down revenue growth by segment. We expect Communication Technologies growth to be 9% to 11% for the year, primarily driven by an active consumer electronics market. Energy growth is expected to be 5% to 7%, including 3% to 5% of organic growth, and 2% from acquisitions. Engineered Systems is forecasted to have strong growth at 10% to 12%, which includes 2% to 4% organic, and around 8% growth from acquisitions, primarily Anthony. Lastly within Printing & Identification we expect growth of 2% to 4%.

Moving on to Slide 12, which shows our full year guidance. As previously mentioned, we expect full year revenue 7% to 9%. Corporate expense will be around $150 million, largely reflecting higher pension costs driven by a lower discount rate.

Interest expense will be around $130 million, which is up from last year, and reflects higher debt levels. CapEx should be in the range of 3% to 3.5% of revenue. We expect our 2013 tax rate to be in the range of 27.5% to 28%.

Turning to the earnings bridge on Slide 13. 2012 adjusted EPS was $4.44. For the full year, volume and mix will contribute roughly $0.28 to $0.46, and we expect pricing to be essentially stable. Net productivity should add $0.12 to $0.22. We expect completed acquisitions to be $0.13 to $0.16 accretive for the year largely driven by Anthony.

Investment and compensation, including higher pension expense will have a $0.10 to $0.16 impact for the year.

Our ongoing $1billion share repurchase program, coupled with the tax rate and offset in part by incremental interest expense should have a net benefit of $0.23 to $0.28. The largest component of which is our reduction in our weighted average shares, which will provide a $0.25 to $0.30 benefit.

Based on above we are reaffirming our full year earnings per share to be $5.05 to $5.35 representing 17% growth at the midpoint.

With that, I'll turn the call back over to Bob for some final thoughts.

Bob Livingston

Thanks Brad. As I mentioned earlier I am very pleased with our fourth quarter and 2012 performance. We delivered strong revenue and earnings growth in a tough environment. This is clearly a testament to the strength of our businesses and the responsiveness of our leadership teams across the company.

Looking ahead to 2013, I remain confident in the positions we hold in our five key growth spaces, which now represent nearly 80% of our revenue. Our continued focus in these areas offer substantial growth opportunities.

I feel very good about the prospects for 2013 in all four segments. The acquisition of Anthony and new product offerings will help drive growth at Engineered Systems. Communication Technologies will continue to grow as consumer demand for better audio products and their mobile devices surges on. Global expansion opportunities in production and downstream will fuel Energy's growth. And Printing & Identification will benefit in growth from a expansion of core applications and new product launches.

Going forward, we continue to make internal investments to ensure we can properly support and service our customers. Included in our plans this year is the build out of a manufacturing facility in the Philippines, which will support the growth we anticipate in both the handset and hearing aid markets.

In addition, we are supporting our growing heat extinguisher business with a new manufacturing plant in Oklahoma. We also plan to consolidate several facilities serving the Energy market into a new Houston operation and consolidate some of our refrigeration plants into a new facility in Georgia.

Of course, we will continue to make innovation investments to ensure we stay at the forefront in technologies that help our customers win in their markets.

In closing, I'd like to thank our entire Dover team for the hard work and dedication in 2012. Their focus on serving customers and achieving results will continue to drive our success.

Okay, Paul, let's take some questions.

Paul Goldberg

Thanks Bob. At this point I'd just like to remind everybody, if you can limit yourself to one question with a follow-up, we will be able to get more questions. So with that, Paula, if you can give us the first question.

Question-and-Answer Session

Operator

Your first question comes from the line of Nigel Coe of Morgan Stanley.

Nigel Coe - Morgan Stanley

Yeah, since -- okay I am first up, so maybe I'll steal this question. Can you make comment on any noise that might create in 1Q for Compaq?

Bob Livingston

For 1Q?

Nigel Coe - Morgan Stanley

Just for 1Q, yeah. So it looks like there's going to be sequential down tick in handsets volumes in 1Q, which is not untypical, but it looks like I mean the book-to-bill within Compaq was 0.88, which was flat year-over-year, but I would have expected that I had given up Sound Solutions on an upswing. So, I'm wondering should we expect sharp a seasonal down tick within Compaq in 1Q versus 4Q?

Bob Livingston

Well, let me back up and put this in a little bit of context, Nigel and I think we shared a lot of this with you and others at Dover Day, but there are several trends driving our handset business in 2013. We still expect the smartphone market to grow in the mid 20% range this year and it will be supported by several new product releases probably from every major OEM and we continue to see the transition to smartphones from the lower end handsets.

We continue to see the trend of using multiple mikes in each smartphone. We expect that to expand. In fact, we're now seeing several of the OEMs and there new designs for releases this year that are moving to three mikes per phone. You commented on Sound Solutions. We continue to expect Sound Solutions to improve sequentially through the year as they work to rebuild their share and we saw the evidence of this in the fourth quarter.

The first quarter seasonality, it will be similar to what we have seen in the past, it will be down from the fourth quarter, but it is interesting, Nigel, as we look at a current look at the first quarter, our outlook for this segment for the first quarter isn't any different than we were looking at it 60 days ago, as we were finalizing our plans for 2013. We're going to see some market share shifts in the quarter but I think our broad coverage of the OEMs and the multiple design wins we have will prove to be quite a benefit.

Nigel Coe - Morgan Stanley

That's great to hear. And then switching to Anthony, so you caught a three points of margin degradation within ES, which I calculated to be about $0.10 EPS dilution which is which changes complexion of the quarter quite a bit, but I'm wondering as if we now move to EPS neutral stroke-positive from 1Q onwards? And I'm wondering if the 15.5 underline margin for that segment in 4Q, which is normally quite a weak seasonal margin in 4Q where that's a good run rate ex-Anthony going into 2013?

Brad Cerepak

Hi, Nigel, it's Brad. Let me try to answer that and then maybe we need a follow on but Anthony as you know acquired mid-December we have a lot of acquisition related costs and rollover of inventory happening in the fourth quarter tagging into the first. We still feel we're still on our same forecast for Anthony. I think I said at Dover Day we deliver $0.10 to $0.12 of full year EPS accretion for us. That continues to be our view except that first quarter will be more neutral as more acquisition rollover happens and then it picks up from that point forward. Some of that is -- they don't have this same seasonality picture as a Hill PHOENIX but there is some seasonality in the Anthony business of course as well.

I guess I want to just back up for a second on this question of how we move sequentially into the quarter and into 2013. Bob talked about our expectations in the handset market, I've covered a little bit about the expectation on Anthony will not be contributing in the first quarter, but also the PFresh program was very powerful for us early part of 2012, that's not repeating itself. So, Hill PHOENIX will also have some more normal or traditional seasonality. And then, lastly, as we indicated earlier in the year -- earlier in the call we see rig counts growing throughout the year. So, our drilling business will get sequentially better throughout as well.

So, in terms of the way we see starting the year, our starting the year will be more consistent with what we've experienced in years prior to 2012 in essence. And 2012 had a lot of strength to it in the first quarter. And so I would expect -- we don't give quarterly guidance but I would expect that the first quarter EPS should be around 20% of our full year, where I see it today.

Nigel Coe - Morgan Stanley

Okay. And just to clarify on the last point. So, 15.5 margin ex-Anthony within ES. I mean was there any mix issue pushing up higher that could wind or, is that a good one rate, just the seasonality for 2013?

Bob Livingston

No, there is nothing unusual than the fourth quarter. And I would expect the margins at Engineered Systems to be reflective in '13 of what they were in '12 with perhaps a little bit of improvement.

Operator

Your next question comes from a line of Scott Davis of Barclays.

Scott Davis - Barclays

Want to talk a bit more about Compaq and I know there is some seasonality here in such but the book-to-bill of 0.88. Can you help us kind of reconcile, booking is flat versus book-to-bill at 0.88 versus kind of a seasonality; I know a year ago was also lower but I figure the timing of some of your handset guys ramping up production would have caused that book-to-bill to be a little bit higher, so can you help us out there?

Bob Livingston

We see a lot of noise on any given quarter around book-to-bill with individual companies or individual customers. Scott, it's interesting to note that it's probably a little bit different here with this part of our business than it is with the rest of our portfolio, in that we typically are only showing bookings in our handset activity for about the next two to two and a half months worth of production expectations. So, I think we are seeing some seasonality return to this business that's reflected in the book-to-bill especially in the latter part of the fourth quarter. As I commented, I think it was on Nigel's question, we will see the handset business down in the fourth quarter sequentially from the -- or in the first quarter sequentially from the fourth but we're still showing -- we're still expecting the business to show growth in their first quarter year-over-year.

Scott Davis - Barclays

Okay. And we will go back to Sound Solutions. There is a couple of things I'm trying to figure out here. I mean, in the slide it says, improved sequential performance to Sound Solutions then, to lower is lower Sound Solutions revenue. I mean are we at the point now where sequentially revenue is going to go up each quarter or you're just talking about profitability improving?

Brad Cerepak

Both.

Scott Davis - Barclays

Okay. So, we are at the bottom as far as the revenue ramp?

Brad Cerepak

Q3 was the bottom.

Scott Davis - Barclays

Q3 was the bottom.

Brad Cerepak

Q3.

Scott Davis - Barclays

Okay. All right, fair enough. And then, last question just same topic here. I mean, how much do you I know it's really hard to talk with individual customers here, but how much do you guys really care about the share shifts that are going on in the handset market? Is it -- are you somewhat customer agnostic I guess is my question or they're kind of diseconomies to scale as you need to ship less to one customer but a little bit more to another customer? I mean, how does that workout?

Bob Livingston

Well, it always gives little bit of angst within the short-term or the near term as you see the shifts. But again, let me try to put this in context and let me use Knowles Acoustics as an example. I think in 2012, we produced and shipped a little over 1.2 billion microphones. Our plan for 2013 is about 1.5 billion microphones. You break that down if it were absolutely equal every quarter, which it's not, but if you looked at our quarterly average, what is that about 370 million or 375 million mikes per quarter for Knowles, you see a little bit of noise in ship during the quarter or during a half year period from customer-to-customer, we have to manage through that. But the volume expectations in serving the broader market and we do have a very, very good design coverage on the border market still gives us plenty of opportunity to grow for the year and to manage internally the ships that we do experience from customer-to-customer.

Operator

Your next question comes from a line of Jeff Sprague at Vertical Research.

Jeff Sprague - Vertical Research

A little more on Sound Solutions and Compaq. It looks like we're back to kind of a business with 3% of sales being 90% of the conference call, food for thought. Just wondering, I just want to be clear. So, on handsets you're expecting Q1 down sequentially for your business overall but Sound Solutions up sequentially?

Brad Cerepak

Honestly, yes.

Jeff Sprague - Vertical Research

Yes. Can you give us some color, Bob, on just how to think about the profit comparison, the loss you absorbed in 2012, does that move to a zero in '13, the magnitude of that swing and is that swing kind of in your sights given where the current yields are?

Bob Livingston

Okay. So when you look at our guidance for '13, gosh what is the V or the delta, Brad, on Sound Solutions from '12 to '13. It's --

Brad Cerepak

Yeah, we would expect the year-over-year would be all in, and when I say all in Jeff, I am talking about including AD&A, which is quite substantial in this business. As you know it would be $0.13 to $0.18 where our expectation on Sound Solutions will contribute $0.13 to $0.18 for 2013.

Jeff Sprague - Vertical Research

On a V basis.

Brad Cerepak

Yeah.

Bob Livingston

On a V basis. So what I would tell you though is that full in with AD&A, we're still showing some drag on our EPS, there is small amount, but some drag. And by the time we exit though and we've consistently talked about it in this fashion, as we exit out the second half it's a positive contributor to our EPS.

Brad Cerepak

Yeah.

Bob Livingston

And at the operating level ignoring the AD&A, the second half of the year we do have expectations so that the operating margins at Sound Solutions would be in low double digits.

Jeff Sprague - Vertical Research

Okay. Great. All right. Shifting if I could to the production business a) it looked good and b) you know called out Energy.

Bob Livingston

Are you referring to Energy?

Jeff Sprague - Vertical Research

Yeah, Energy.

Bob Livingston

Okay.

Jeff Sprague - Vertical Research

The strength in production, could you elaborate a little bit on the international trends you've obviously spoken about markets opening up in Oman and Mexico and other places, was there some clear inflection in your penetration in those markets? Just a little bit of elaboration on what's going on there.

Bob Livingston

Yeah, nothing new that we haven't been sharing with you over the last four or five or six quarterly calls. This has been a focus for us for the last two or three years. I think, last year, we probably experienced better than a 20% growth in our international business related to production that that continued in the fourth quarter. We see it continuing in '13, though it may be at a smaller growth rate but off of the higher base, but we're seeing it around the world not just Mexico, but other regions in South America, the Middle East, and Australia. Australia, over the last goodness 12, 15 months has proven to be a strong growth market for us as well.

Operator

The next question comes from the line of Deane Dray of Citi.

Deane Dray - Citi

Hey, in product ID the margin improvement that's 280 basis points you called out both restructuring and mix and maybe you can give us some color as to what the contribution of those two were for the quarter?

Brad Cerepak

Oh my goodness. I'm not sure I can split the difference for you. The margin performance to margin improvement in the fourth quarter one, number one, it was expected. We've been working towards this for the last two or three quarters and the restructuring of the third quarter.

Deane Dray - Citi

It is actually. It was.

Brad Cerepak

It was quite consistent with the third quarter. But the restructuring activity that we referred to were some changes we made in the business back in late first quarter and the second quarter and Deane it takes a few months for some of the benefits to flow through when we were starting to see those benefits in the third and fourth quarter. We think the -- we like where we're at now with Markem-Imaje. We had pretty decent growth at Markem-Imaje in the fourth quarter; I think it was 3% or 4%. We saw some softness in our industrial markets and that's specifically around our Datamax-O'Neil business that we think will change and we'll see some recovery in 2013. But the margins that we have at Markem-Imaje today and for the second half of the year we view as sustainable and we're looking for ways to incrementally improve of going into '13.

Deane Dray - Citi

And what specifically was going on with mix is it new product introductions, you capturing more of the business?

Brad Cerepak

I would say it's almost all new product introductions.

Deane Dray - Citi

Okay. Good. And just one last quick follow-up over on the Compaq side, Bob you referenced the trend towards some of the lower price point phones with some of the reduced features would that also result in fewer microphones or is the market kind of locked into more is better?

Bob Livingston

No, I think on the lower-end phones it's still pretty safe to use a number of one microphone per phone. On the smartphones, as I commented earlier, we are seeing the growing trends in multiple mikes and actually it is we've been convinced of this for the last couple of years and I think '13 is going to be a proving point for us. We see it happening now that most of the -- a lot of the -- most of the new phones being introduced in 2013 will have three microphones.

Deane Dray - Citi

Right. And I'll just add on that that they're actually advertising some of the microphone technology and filtering and so forth, so that's becoming a bigger cell feature. But that just remains.

Bob Livingston

I've actually noticed that.

Operator

Your next question comes from the line of Steve Tusa of JPMorgan.

Steve Tusa - JPMorgan

So what do you think -- thanks for the unit, the volume numbers for the year on those? What did the Knowles revenue grow this year and maybe if you give the exact detail in the fourth quarter. I noticed you guys re-segmented that segment and now it's a much, you can't really see those numbers. So just curious as to you give us the units which is great, but maybe just the revenue numbers.

Bob Livingston

You're asking for the gross or the year?

Steve Tusa - JPMorgan

Yeah gross or because out on from last year, you used to disclose what the Knowles revenues were for this year. What were they? You know non-stamp solutions and I think you moved some other stuff into that consumer electronic sub-segment for Compaq. So I'm just trying to pass that out because it's very hard to see what that particularly is doing now?

Bob Livingston

Actually Steve I think what we're showing, what we're showing in consumer electronics actually is a bit cleaner than what we probably have initially. But consumer electronics, I think is entirely Knowles Acoustics. I'm excluding hearing aid business. Knowles Acoustics and Sound Solutions.

Paul Goldberg

Right. So within that Steve, its Paul, I think what you'll see is the MEMs. I think the question you're asking is what MEMs volume, what MEMs revenue growth is. Is that correct?

Steve Tusa - JPMorgan

Yeah, yeah I mean you guys used to say, call it handsets I think.

Bob Livingston

So for MEMs revenue growth in the fourth quarter, I think it was about 30%.

Steve Tusa - JPMorgan

Okay that makes a lot of sense. So then and so that finished the year somewhere in the kind of up 25% to 30% range for the annual number?

Bob Livingston

Yes.

Steve Tusa - JPMorgan

Okay. Great. What was the $5 million charge there at Compaq?

Bob Livingston

Oh, my goodness, restructuring in three or four, nothing major at any one business, but restructuring activity I think at three or four businesses. And maybe the largest one at any given business was probably a $1.5 million or $1.8 million, something like that. Brad does that sound right?

Brad Cerepak

Yeah about a $1.4 million.

Bob Livingston

Yeah.

Brad Cerepak

So at one of our businesses. But a lot of spend this year in Compaq has been around restructuring our Telecom business. So we've had restructuring charges a little bit each quarter and that continued into the fourth quarter and we'll continue to look at that in 2013 to take more cost out as the Telecom markets remain fairly weak.

Steve Tusa - JPMorgan

Okay. And then one last question is on Engineered. What -- you mentioned a very helpful with the bookings number of $40 million I think you said at PFresh last fourth quarter?

Bob Livingston

Yeah.

Steve Tusa - JPMorgan

Is that right? So what were the PFresh revenues for -- in '12 for you guys and what were the orders?

Bob Livingston

I am not sure I can give you the orders for the year. I would say that if you wanted some context on the PFresh Program and Steve, I would think in 2011, it was about a $130 million.

Steve Tusa - JPMorgan

Okay.

Bob Livingston

In 2012 it was about $30 million down. In 2012, with all most all of that down comparison being in the second half of last year.

Steve Tusa - JPMorgan

Okay.

Bob Livingston

And in '13, we expected to be down another $40 million or $50 million.

Operator

Your next question comes from a line of John Inch of Deutsche Bank.

John Inch - Deutsche Bank

If you were to exclude your tech businesses, what did you see in China in the quarter? I realize you're not penetrate across the spectrum of your company but just would you corroborate sort of these trends that you are seeing toward Chinese macro improvements? Just how does that play out?

Bob Livingston

If we were to exclude the tech businesses well, I do not have the data but we would have had growth but it would have been probably single digits in China in the fourth quarter. Actually, John it is interesting. If you look at all of Asia for the fourth quarter, the growth was probably little bit better than that.

John Inch - Deutsche Bank

So, China is still a little bit of a laggard.

Bob Livingston

Well, we are seeing a recovery in China, we did see it.

John Inch - Deutsche Bank

Okay.

Bob Livingston

The headline news that everyone reads with respect to the improving activity in China was reflected in our activity as well in the fourth quarter.

John Inch - Deutsche Bank

Yeah, that is really well, I was -- what I am searching for. Bob, the outlook for smartphone is obviously very robust, you got microphone penetration story. What I am wondering about is that as smartphones are now going to be penetrating, a lot of these overseas markets. The OE have plans to introduce kind of low-end phones or lot of lower price phones. That certainly is a conjecture what Apple should respectfully be doing, and it is not just them it is others. What do you think that does to kind of your pricing in the outlook? I am not talking about your first quarter anything, but does that change anything in any way and is it superseded maybe because you got more penetration but lower future pricing or is it still premature to kind of call that out?

Bob Livingston

Okay. Is this a question specific to Knowles?

John Inch - Deutsche Bank

Yes, it is.

Bob Livingston

Okay. We tend to play -- let me step back. With speakers and receivers, we tend to have a position across the entire market whether it is the lower-end handsets

With respect to our microphone business, it tends to be much higher concentration in the smartphone segment. And again, it comes back to the multiple mikes per phone. The last year or so, I guess the example I would use would be Samsung, who has not only got the top-end smartphone product offerings but the mid range in the lower-end smartphone product offerings. We have a very, very strong design and share position with that customer and the products that we sell them tend to be same.

John Inch - Deutsche Bank

Okay.

Bob Livingston

Which is irrespective of their price point on the product offering.

John Inch - Deutsche Bank

So, you are suggesting that the window into prospectively billions in pricing?

Bob Livingston

I think the relationship in the example I just used here was Samsung, is indicative of what we will see with other lower-end smartphones as they could introduce by other customers. It does increase the market for us.

John Inch - Deutsche Bank

Just last on Sound Solutions, from an outsiders perspective it seems some of inevitable that you maybe even have to take a write down. You just talked to us about sort of the process. Brad, like what -- does this happen kind of once in terms of your review and has it just happened or I mean, how do you do it, is it too soon to kind of make that call obviously, given the sequential improvement that is happening?

Brad Cerepak

Yeah, I think it is the latter. It's too soon to make that call. We do obviously have to look at goodwill impairments, once a year and we do that in the fourth quarter.

John Inch - Deutsche Bank

Okay.

Brad Cerepak

But we are seeing sequential improvement. We continue to articulate our high expectations for this company and the prospects for it. As Bob indicated, we are going to see sequential growth for 2013 and exit at a level that is not satisfactory to us, but a significant improvement. We see our way back to the historical levels of profitability. You recall this business at one point had high 20s EBITDA margins and I think that is still within our reach.

Operator

Your next question comes from a line of Shannon O'Callaghan of Nomura Securities.

Shannon O'Callaghan - Nomura Securities

So, just one last one hopefully, on Sound Solutions we will see, but did it achieve breakeven kind of core pre-AD&A in the quarter and what did you get the yields too on speakers and receivers?

Bob Livingston

Yes, to your first question on an operating basis it was about break-even. We continue to see we'll use the phrase our financial yields continue to improve and in a couple of the product areas, we're actually quite pleased with the yields that we're at now coming into 2013.

Brad Cerepak

More to do.

Brad Cerepak

More to do, we're not done yet, but it's we were quite pleased with the progress that we made in the fourth quarter.

Shannon O'Callaghan - Nomura Securities

So are both pieces basically to break-even type yields at that point?

Bob Livingston

We mean both pieces.

Shannon O'Callaghan - Nomura Securities

The speakers and receivers.

Bob Livingston

For product areas, I would say, yes, for individual lines, we probably still have a little bit more work to do on receivers and we have on speakers on the speaker boxes.

Shannon O'Callaghan - Nomura Securities

Okay. And then in terms of this drilling outlook through the year, I mean how much was drilling down this quarter and when do you expect that to bottom and turn positive?

Bob Livingston

Are you referring to our business or the rig count?

Shannon O'Callaghan - Nomura Securities

Both.

Bob Livingston

Okay. So, let's see our drilling activity -- our drilling this revenue in the fourth quarter I think was down about 10%. Brad does that sound about right, year-over-year?

Brad Cerepak

Right.

Bob Livingston

And again about as expected as we came into the quarter. Our outlook for '13 for our drilling business is essentially flat. You'll see it -- you'll see some different numbers during the year when we report quarterly, but our outlook for the year is going to be essentially flat. Embedded in our guidance is the assumptions and the data we use on what we think rig count will be in 2013.

If you look at average for '12 versus average for '13 in the U.S. market, we expect the rig count average for '13 to be down again versus '12. Again and again I'm using average for '12 versus average for '13 about 3%. But if you look at where we ended the year at year-end '12 rig count, I think was like 1,760 units here in the U.S. We see it moderating down a bit further during the first quarter, but it's -- all indications are after the first quarter is that this will start to increase again and I think the average for '13 versus the year-end number for '12 it's up about 3% or 4%.

Operator

Your final question comes from the line of Andrew Obin of Bank of America.

Andrew Obin - Bank of America

Just a follow-up on the Energy, how should we think about mix change within the segment between domestic and international during the year?

Bob Livingston

Mix change. I'm not sure; it's going to be any different in '13 than it was in '12. Other than, we continue very strongly to push the expansion of our artificial-lift business and some of our downstream applications into international markets. I mentioned in my prepared comments, small acquisition that we closed on in December and even though, it's a U.S. business that we acquired, our intent with this business is to dedicate all of its production capability over the next year or so to serving some of our international customers, it will continue to grow.

Andrew Obin - Bank of America

But I guess the question of the U.S. rig count is sort of flattish and international is growing, why wouldn't the mix change more towards international or the U.S. is just so big, North America is so big?

Bob Livingston

Therein, is you answer, I still think our North America business -- our North America slice of our drilling and production business is probably still 83%, 85% of the total.

Andrew Obin - Bank of America

Just a -- in terms of this pace of buybacks throughout the year, should we expect them to rough financial free cash flow or is there any specific pattern that you should -- we should keep in mind?

Bob Livingston

Yeah, I guess when we were at Dover Day, I said at that time that we would complete somewhere around 70% to 80% of the buy against the $1 billion program. We completed 250 in the fourth quarter. I think you'll -- you should expect that we'll continue to buy more weighted towards the first half of the year in 2013, not necessarily lining up with free cash flow.

Operator

Thank you. That concludes our question-and-answer period. I would now like to turn the call back over to Mr. Goldberg for any closing remarks.

Paul Goldberg

Thanks, Paula. This concludes our conference call. With that, we would like to thank you for your continued interest in Dover and we look forward to speaking to you again next quarter. Have a good day.

Operator

Thank you. That concludes today's fourth quarter 2012 Dover Corporation earnings conference call. You may now disconnect your lines at this time and have a wonderful day.

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