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Dover Corporation (NYSE:DOV)

Q4 2008 Earnings Call

January 28, 2009 8:00 am ET

Executives

Paul E. Goldberg - Treasurer and Director of Investor Relations

Robert A. Livingston - President and Chief Executive Officer

Robert G. Kuhbach - Vice President, Finance and Chief Financial Officer

Analysts

Shannon O'Callaghan - Barclays Capital

Jerry Revich - Goldman Sachs

Robert McCarthy - Robert W. Baird & Co., Inc.

Stephen Tusa - J.P. Morgan

Wendy Caplan - Wachovia Capital Markets, LLC

John Inch - Banc of America

Scott David - Morgan Stanley

Operator

Good morning and welcome to the fourth quarter 2008 Dover Corporation earnings conference call. With us today are Bob Livingston, President and Chief Executive Officer of Dover Corporation, Rob Kuhbach, Vice President of Finance and Chief Financial Officer of Dover Corporation, and Paul Goldberg, Treasurer and Director of Investor Relations of Dover Corporation. (Operator Instructions)

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

Paul E. Goldberg

Thank you, [Kelly]. Good morning and welcome to Dover's fourth quarter earnings call. With me today are Bob Livingston, Dover's President and Chief Executive Officer, and Rob Kuhbach, our VP of Finance and CFO.

Today's call will begin with some comments from Bob and Rob on Dover's operating and financial performance and 2009 outlook. We will then open the call up to questions. In the interest of time, 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 11:00 p.m. February 11th and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-642-1687. When accessing the playback you'll need to supply the following reservation code: 79877024.

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 Corporation 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 statement. 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.

And with that, I'd like to turn this call over to Bob.

Robert A. Livingston

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

I am pleased to be here to report on our record 2008 results and to update you on our responses to the challenges we are facing. Today, Dover reported fourth quarter earnings per share from continuing operations of $0.91, up 3% over last year. Fourth quarter revenue was $1.7 billion, down 8% from last year, and net earnings from continuing operations were $170 million, down 3%.

For the full year we reported revenue of $7.6 billion and net earnings from continuing operations were $695 million, up 3% and 4%, respectively. Diluted earnings per share from continuing operations for the year were $3.67, up 11% over the previous year and in line with our guidance. Our 2008 revenue, operating earnings and diluted earnings per share results represent all-time highs.

Dover's 8% quarterly revenue decline was the result of a 6% decline in core revenue coupled with the negative impact of currency of 3%, partially offset by 1% net growth from acquisitions. For the full year, our 3% revenue growth was driven by 1% increases in organic growth, net acquisitions and the impact of currency.

Bookings for the quarter were $1.4 billion, down 21% over the prior year and did weaken sequentially through the quarter. Year end backlog was $1.2 billion, down 20% from last year and down 22% sequentially.

The fourth quarter proved to be most challenging, with significant declines in order rates across most of our end markets, conditions which appear to be continuing into 2009. Given this challenging environment, I am very pleased with our fourth quarter performance and full year results.

Operating margin for the quarter was 15.3%, up 70 basis points over the prior year. For the year, operating margins were also 15.3%, a 40 basis point improvement over '07. This improvement was driven by strong results and fluid management and by company wide synergy and leverage benefits.

We continued to make progress on our working capital and inventory metrics. We achieved working capital to sales of 18.3%, a 60 basis point improvement over last year. Our year end inventory turns were 7.1 compared to the prior year of 6.7.

Internal operational improvement continues to be the central theme for our operating companies. With end market demand weakening through the quarter, our companies were very focused on cost reduction activities.

We generated free cash flow of $228 million in the fourth quarter, 13.2% of revenue. For the full year we generated free cash flow of $835 million, which was 11% of revenue and a 70 basis point improvement over last year. Since the inception of our Performance Counts program in 2005, Dover has averaged free cash flow of 10.2% of revenue. We believe this strong performance reflects our focus on margins and working capital as well as a strong portfolio of companies.

We were highly disciplined in our capital allocation in 2008. CapEx was $176 million, essentially flat with 2007. We expect to see CapEx significantly decline in 2009.

In the third quarter we completed our share repurchase program previously announced in November of '07. For the full year Dover repurchased 10 million shares on the open market at a cost of $462 million.

Also in the third quarter, Dover raised its quarterly dividend to $0.25 per share, an increase of 25% and marking the 54th consecutive year we have raised our annual dividend.

Though we've looked at several acquisition opportunities, we closed only one small deal in the fourth quarter. For the full year, we spent $104 million on four add-on acquisitions, three of which were in our Fluid Management segment. Though acquisition spending was very modest in 2008, acquisitions continue to be a key part of our value creation strategy. We have several interesting add-on opportunities currently under review and believe we will be more active on acquisitions in 2009.

Our conservative financial policies and solid cash generation has enabled us to delever in the fourth quarter. Our capital structure will allow us to continue to invest both internally and externally and puts us in a position of strength as we manage through the current business climate.

Now I'd like to turn the call over to Rob for his comments on our segment performance.

Robert G. Kuhbach

Thanks, Bob. Good morning, everyone. I'd like to quickly run through our fourth quarter segment performance and then cover some additional financial information.

At the Industrial Products segment, sales were $562 million, down 6% over last year, with earnings of $58 million, down 19% from the fourth quarter of '07.

Operating margin was 10.3%, down 170 basis points from last year, largely driven by moderating conditions across most end markets and restructuring charges.

Within Industrial Products, sales in our material handling platform decreased 7% and earnings decreased 23%. Revenue and earnings growth in our industrial winch business was offset by softness in the infrastructure and automotive markets and by plant integration and consolidation costs at Paladin. The mobile equipment platform recorded both sales and earnings down 5%, holding margin constant. This sales and earnings performance reflected strong results at Heil Environmental and Sargent, offset by weakness in the automotive service markets. Our solid refuse vehicle backlog, strong military tanker business and aerospace exposure will help mitigate the effects of soft auto service and bulk transport end markets.

Turning to the Engineered Systems segment, sales were $448 million, down 17% from last year, with earnings of $53 million, down 31%. For the quarter, operating margin was 11.9%, down 260 basis points over the prior year period. This margin decline was primarily the result of lower margin, a currency impact of 4%, as well as restructuring and other one-time costs.

Our product identification platform maintained healthy margins despite sales being down 18% and earnings down 25%, and full year margins were essentially flat with last year. This performance mainly reflected generally weak demand, customer and distributor destocking activities, and the impact of foreign currency. Margins were aided by the ongoing integration activities across the platform which will result in a unified business that is able to service its customers seamlessly around the world. Recurring revenue accounts for over 50% of product identification sales, giving us a healthy baseline of activity as we begin 2009.

The engineered products platform posted decreases in both sales and earnings year-over-year of 16% and 42%, respectively. Demand was down across the platform, especially at Hill PHOENIX, which had an exceptionally strong fourth quarter in 2007. This performance was further impacted by other one-time costs incurred in our food packaging equipment businesses. Although our main customer in this platform, Wal-Mart, significant reduced its new store openings in 2008, we are encouraged by recent order trends across our expanding customer base and do expect business levels to pick up in the first quarter.

Turning to Fluid Management, results continued to be strong in the fourth quarter, with revenue of $414 million, up 8% over last year, reflecting organic growth of 8.8% for the quarter. Fourth quarter earnings of $100 million were up 28% over the prior year period, and operating margins were 24.1%, up 380 basis points over last year and 150 basis points sequentially.

Our energy platform finished the year at an exceptionally high level across all companies. Fourth quarter revenue increased 19% and earnings for the platform increased 45%. Expiration and production project activity did weaken during the fourth quarter, and we expect those trends to continue into 2009. Our proactive initiatives, coupled with our base of 25% recurring revenue, lead us to believe that we will maintain strong margins.

The fluid solutions platform posted a revenue decline of 4% while producing an earnings gain of 1%, displaying a strong focus on margin maintenance. Productivity gains and synergy activities, particularly at our pump solutions group and the OPW companies helped offset the revenue decline, which was driven by weaker demand across several of our served markets and significant destocking activities.

Lastly, Electronic Technologies also felt the effects of the global slowdown. Revenue was $302 million, down 17% for last year, while earnings were $53 million, up 11% from the prior year. Margin was 17.4%, an improvement of 450 basis points over the prior year. Strong earnings and margin results were primarily driven by excellent performances at Knowles and MPG and a one-time gain of $8 million on the sale of Rasco, formerly part of Everett Charles. Absent that disposition, earnings and margin would have been $45 million and 14.9%, respectively, a 200 basis point margin improvement over 2008.

Knowles posted double-digit earnings gains on flat sales. Overall, we continue to see solid demand for hearing aid components, MEMS microphones, and military products. The balance of our markets, particularly our electronic assembly and semiconductor-related markets, experienced a significant decline in demand as the quarter wore on. We expect a challenging first quarter, partly due to seasonality, weak activity in China, and restructuring charges. The plans we have implemented should position this segment to achieve 10% plus margins for the full year of 2009.

As this summary indicates, Dover's fourth quarter results reflected very strong performance at our energy platform and several other end markets, including refuse vehicles, aerospace, military, and industrial winches, offset by moderating results across our other end markets. Our bookings and backlog trends indicate to us that we will need to take additional profit maintenance actions in 2009 and we will. In fact, many of those actions are well under way, as Bob will discuss later.

Now I'd like to briefly provide some additional financial data. Regarding geographic sales, Dover's mix remained essentially unchanged. Further, the declining growth rates for each region were fairly consistent, giving evidence that the recession is truly global in scope.

Fourth quarter net interest expense was $19.3 million, down from $22.5 million last year, reflecting lower commercial paper rates, a lower debt level, and a favorable investment mix. For the full year, net interest expense was $96 million, an increase of 7% over 2007's expense of $89.6 million. This reflects the incremental debt related to our share repurchase activities.

We continue to have good access to the commercial paper market and our outstanding CP balance at year end was $192 million. Further, we had no direct bank borrowings and have no long-term maturities until 2011 and had over $800 million of cash and cash equivalents at year end. Our net debt to total capitalization was 24.9%, which is down from the prior year end of 27.3%, again reflecting our strong cash generation and our relatively light year in acquisitions.

Turning to taxes, our fourth quarter rate for continuing operations was 21.4%, down 320 basis points from last year, reflecting benefits from settled tax positions, the retroactive extension of the federal R&E credit, and higher earnings in lower tax jurisdictions. For the full year, our tax rate was 26.6%, essentially unchanged from the prior year and right in line with our earlier guidance of 26% to 27%.

Corporate expenses were higher for both the quarter and full year, reflecting increased activities connected with our synergy and global supply chain projects as well as discrete management transition costs. For the quarter, corporate expense was $29.5 million, while the full year number was $115 million. These costs will moderate in 2009.

With that, I'd like to turn this call back over to Bob, who will update you on our key initiatives to maintain margin and improve our long-term positioning.

Robert A. Livingston

Thanks, Rob. As I mentioned at the beginning of this call, we experienced a slowdown in business activity in the fourth quarter and are currently facing uncertainty in the global economy. Our internal plans do not anticipate an economic recovery in 2009.

That said, we are committed to manage our businesses with the determination to maintain strong operating margins. The management team and business leaders are focused on this task and are actively implementing restructuring plans.

I'd like to comment now on our synergy activity. At our November '07 investor day we committed to $40 to $60 million of earnings improvement in the 2008 - 2009 timeframe from leverage and synergy initiatives. We have previously discussed the integration of Markem-Imaje, the combination of Norris and Alberta Oil Tool, and the creation of the Pump Solutions Group. These initiatives are on or ahead of schedule and new opportunities are being pursued.

For example, we are consolidating the back office functions of Everett Charles, [DEC] and OK International and are combining our MPG and CPG component companies.

For the fourth quarter, all synergistic activities, including business integrations, resulted in a $0.04 EPS benefit net of cost, and year to date that number of $0.15. We believe our synergy and business integration activities will yield an additional $0.10 to $0.13 of EPS in 2009. We will clearly exceed our two-year synergy goal. Synergy is no longer a special activity at Dover. It is how we manage.

On our previous call, I commented on our new global procurement initiative, which started with a comprehensive review of our supply chain sourcing and spending. We have now almost completed the analysis and prioritization phase and will be launching several projects this year to leverage our procurement and sourcing activities. We expect the total earnings contribution of these projects to be $75 to $100 million in the 2010 and 2011 timeframe.

The above initiatives, along with others, are tactical projects which drive stockholder value and benefit Dover over the long term. They are not directly related to the current market dynamics. The current economic climate does require bolder actions and quicker responses. We are committed to protecting profitability, specifically margins, and we are being proactive across all of our businesses.

In the fourth quarter of 2008 we incurred restructuring costs of $14 million that yielded saings of approximately $11 million. Two-thirds of the 2008 restructuring costs were absorbed in Industrial Products and Engineered Systems, with the majority of the remaining cost in Electronic Technologies.

For the full year of 2008, we reduced our global work force by 6%. We closed 19 manufacturing facilities. We incurred $27 million of restructuring costs, which saved $35 million in 2008 and will save another $50 million in 2009. And in the first quarter of 2009, we expect to close several more facilities. We will reduce our global work force by another 5%. We will incur additional restructuring charges of about $20 million, with well over half the charges in Electronic Technologies. These actions will provide first quarter savings of $14 million. For the full year 2009, our capacity rationalization efforts and work force reduction of 6% will result in a $40 million restructuring charge. The anticipated full year 2009 benefit of these actions will be approximately $75 million.

In summary, our restructuring activities over 2008 and 2009 will cost over $65 million, with an associated work force reduction of about 4,000 employees or approximately 12% of our global work force. These actions have yielded $35 million of savings in 2008 and will yield another $125 million of savings in 2009.

Though the year presented several challenges, I am extremely proud we continued to focus on two core elements of our long-term value creation strategy - product innovation and talent development. These activities are key to our growth initiatives.

In conclusion, our ongoing business improvement programs, such as synergy capture, pricing discipline, lean business practices, and global procurement, put us in an excellent position to leverage our restructuring efforts and to continue to grow our market share.

With that being said, the recession and the uncertainty is a reality. We are forecasting an 11% to 13% decline in revenue for the full year, including a negative currency impact of 3%. We expect Electronic Technologies, Fluid Management and Industrial Products to experience revenue declines slightly in excess of our overall sales forecast, while Engineered Systems should outperform due to solid product ID performance and stable demand for refrigeration equipment and products.

We forecast 2009 EPS to be in the range of $2.75 to $3.05. This guidance does not contemplate any acquisitions, additional share repurchases, or an economic recovery in 2009. From an earnings distribution standpoint, the first quarter will be the weakest due to normal seasonality and restructuring costs, compounded by the prevailing mood of uncertainty and caution. The rest of the year should follow our typical earnings pattern. Recognizing the uncertainties we face, we are fully prepared to take additional actions should the year unfold weaker than our current plans.

I believe Dover is a different company than the one that dealt with the recession of 2001 and 2002. First, we have a much different portfolio. Seven years ago we had a higher exposure to capital equipment markets, a much higher exposure to the electronic assembly markets, and an inability to pursue significant synergy. Today we have a more focused mix of businesses participating in more stable end markets and in higher value applications. We have made strategic investments to grow our energy, product identification, electronic components, fluid solutions and industrial winch businesses. Through these actions, recurring revenue has grown to be 25% of total revenue.

We are much leaner, thanks in great part to our focus on margins, working capital and customer service. The result is a company that is much better positioned to respond to this downturn.

In closing, I want to recognize the retirement of Ron Hoffman. Ron was instrumental in laying the groundwork that will enable us to weather this global recession. From his Performance Counts program to his portfolio work, Ron has handed over a company that is less asset intensive, better focused on operational excellence, and more profitable. I personally will miss his insight, his sense of humor and his encouragement. We wish him much health and happiness in his retirement.

Lastly, I want to sincerely thank all the Dover employees who have worked very hard to produce our strong results in 2008. It is never easy to work in this type of uncertain environment, and I am very proud of the way our employees have risen to the challenge. I am confident we will make the changes necessary to emerge from this downturn an even better enterprise.

With that, I'll turn it back to Paul Goldberg for questions.

Paul E. Goldberg

Thanks, Bob. At this point, I'd like to ask Kelly to compile the questions, and I'd like to remind everybody to limit your question to one with one follow up so we can get everybody's questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Shannon O'Callaghan - Barclays Capital.

Shannon O'Callaghan - Barclays Capital

You said you're not anticipating any economic recovery, but can you give us a sense of how you do expect your businesses to flow across the year? I mean, you've had some weakening towards the end of '08 with businesses like Electronic Technologies and energy, I mean, how do you expect them to progress through the course of the year?

Robert A. Livingston

The sales pattern for 2009 should be very consistent with the sales pattern we've shown in the last two or three years, the first quarter typically being the weakest, the second and third quarters typically being the strongest, the fourth quarter a little less than the second and third quarters. We don't see any difference in 2009.

Shannon O'Callaghan - Barclays Capital

Okay, so you're not dealing with kind of a sharp inventory correction or something?

Robert A. Livingston

In a few of our businesses, Shannon, we are. I think about - I don't have the data here in front of me, so this is a bit of an attempt at recall - but about 30% to 35% of our business activity around Dover does go through distribution. We know - this is not a guess - we know that there was significant destocking activity with distributors in November and December. We see that continuing in January. We don't believe it'll continue for the next three months, but it is continuing here into the first quarter. At some point we do expect that to level out. That destocking activity with the distributors is probably very pronounced in our results at product ID in the fourth quarter and the Pump Solutions Group.

Shannon O'Callaghan - Barclays Capital

On the Fluid Management margins, exceptionally strong in the quarter. You gave some feel for what you expect Electronic Technologies margins to be in 2009. When you say maintain strong margins for Fluid Management, can you give us a little more feel for what that means and was there anything unusual in the fourth quarter margin?

Robert G. Kuhbach

Well, let me answer the second question first. There is nothing unusual in the fourth quarter activity at Fluid Management that would have a very positive impact beyond the normal on margins.

You're asking for guidance on margins for 2009. Shannon, you know what our metric is. Our metric is 15%. The Fluid Management segment will perform several points higher than our margin metric.

Operator

Your next question comes from Jerry Revich - Goldman Sachs.

Jerry Revich - Goldman Sachs

Can you rank for us your thoughts on use of cash relative to M&A and share buyback in '09?

Robert A. Livingston

Well, as I mentioned in my prepared comments, acquisition activity was fairly light in 2008. We do expect our acquisition activity to increase in 2009.

Share repurchase will continue to be an economic option for our cash and capital allocation. Having said that, I do believe that it will take a back seat here in the first half of the year to some of our acquisition activity that we do have today in our pipeline.

This is something that we will review with the Board on a quarterly basis.

Jerry Revich - Goldman Sachs

And Bob, your acquisitions over the past year have been mostly bolt-ons. Is that still your strategy for 2009? And it sounds like the bid-ask spread in the M&A market is improving based on your comments to the last question here?

Robert A. Livingston

Our four small acquisitions in 2008 were all add-ons, and the bulk of the acquisitions - the majority of the acquisitions - in our pipeline as we speak are add-ons. That will continue to be the focus in 2009.

Pricing, we did see pricing moderate in '08. What we didn't see in '08 was a reflection by the sellers of what we viewed the economic conditions to be in 2009 and 2010, so we still saw a little bit of a spread not so much on price expectations but I would call it business expectations. We see that gap narrowing quite a bit here as we go into 2009.

Let me give you a follow up comment to your acquisition question. One of the reasons we are very focused on add-on acquisitions both in '08 and '09 going forward is that this does give us a great opportunity to capture synergy and leverage with the existing product portfolio.

Jerry Revich - Goldman Sachs

Lastly, what does your guidance assume for pricing and raw material costs in '09?

Robert A. Livingston

Well, input costs from commodities has come down sharply during the second half of '08, even more so in the fourth quarter of '08. We expect to continue to see favorable input costs in '09.

Having said that, we do expect pricing pressures. We do not at this time believe that we will have margin degradation on the spread between the two.

Jerry Revich - Goldman Sachs

And any potential for positive impact?

Robert A. Livingston

My response would be that that potential exists, but it's not in our plans.

Operator

Your next question comes from Robert McCarthy - Robert W. Baird & Co., Inc.

Robert McCarthy - Robert W. Baird & Co., Inc.

You have a $103.9 million loss in discontinued for the full year. Can you explain what's the biggest factor there?

Robert G. Kuhbach

Bob, the biggest factor there for the full year is that we wrote down our valuation of Trident based on the fact that we initially discontinued it and then have finalized the sale process with the buyer, so the lion's share of that full year number reflects that. The balance is mostly settlement and accruals for federal and state tax resolutions of different sorts. As a practical matter, we go through this process every year, as you know, under FIN 48. So I would say the lion's share of that number really is the writedown of Trident.

Robert McCarthy - Robert W. Baird & Co., Inc.

And in helping us understand just how difficult things might be short term, very short term, your organic growth in Engineered Systems, Electronic Technologies in the fourth quarter strongly negative, where do those go directionally in the first quarter? In other words, are you expecting things to get worse before they get better?

Robert A. Livingston

Two different segments there, Electronic Technologies and Engineered Systems. Let me move on first to Electronic Technologies.

Rob comment earlier about our revenue mix from a geographic point of view. Rob, it was pretty obvious that during the fourth quarter, when we looked at our revenue decline across Dover of 8%, the geographic mix was quite different. We actually had about a 3% decline in revenue year-over-year in the fourth quarter in North America, about an 8% decline in Europe, and about a 20% decline in Asia. That decline in Asia was felt at Electronic Technologies in their electronic assembly businesses as well as at Vectron in telecom space.

It was also felt at product ID. As I mentioned earlier to one of the other questions, about 40% of product ID's business is through distributors, perhaps a higher percentage of distributor sales in Asia, and there was significant destocking activities going on in November, December and continuing here in January.

Now, for the first quarter comment, we don't see any improvement at Electronics in the first quarter with respect to order rates. In fact, our plans call for the order rates to be even weaker in the first quarter than they were in the fourth quarter. At Engineered Systems, we believe there's an underlying stability there, that the destocking activity with the distributors in Asia and to a degree in Europe will stabilize early in the year, and the other positive for the first quarter for Engineered Systems is we have loaded very well going into the first quarter for production at Hill PHOENIX.

Robert G. Kuhbach

Remember, too, Bob, that we basically said that the revenue decline, that the target annual revenue decline percentage is going to be somewhat exceeded by three of the segments, and Engineered Systems will actually have a lower revenue decline. So realistically, to give you some sense of direction, the decline at Engineered Systems on a full year basis is roughly half, in that ballpark, of what the others are likely to see or what the target rate is, let's put it that way.

And going back to Electronic Technologies, as Bob said, their first quarter will be their worst quarter, so you're going to see an even sharper decline organically in the first quarter and then it will moderate in the second quarter and it will come back as the third and forth wore on.

But let me just emphasize, as we always do, Bob, our visibility for the first quarter is reasonable; thereafter, it's like everything else, it's more problematic, as everybody in this market is aware.

Operator

Your next question comes from Stephen Tusa - J.P. Morgan.

Stephen Tusa - J.P. Morgan

On the non-energy businesses, the bookings were down I think around 20% in the quarter. Obviously, there's foreign exchange in there, but is there something else? Are there any kind of adjustments or anything like that or is that a good revenue number to think about for kind of the first quarter?

Robert G. Kuhbach

I think that's a good number to use for modeling for the first quarter.

Stephen Tusa - J.P. Morgan

So the revenues are going to be pretty weak in a pronounced way in the first quarter?

Robert G. Kuhbach

Perhaps, with the exception being Engineered Systems.

Stephen Tusa - J.P. Morgan

And then getting back to the Fluid margin question, several points above 15% is - obviously 24%, even 20% is a very strong number, but several points above 15% - can you maybe just clarify that a little bit because that's a very wide range between 15% and 24%. I'm just curious as to how you see this cycle playing out, given that it's going to turn in the back half of this year assuming oil prices and gas prices stay the way they are. How do we see that margin progressing from peak to trough? Your previous troughs, I think - you know, the segment has changed a little bit - are in the low teens. Do you envision at any point in time this cycle that these margins will get back to kind of that 15% metric? If you could just talk about maybe what's different about the business and why it wouldn't return to those levels this cycle?

Robert A. Livingston

Well, I'm going to restrict my comments to our 2009 expectations rather than deal with the peak to trough comment.

The margins we're planning and looking at for Fluid Management will not be as healthy or as strong as they were in '08. They will be above our metric. You've used two numbers. You said 15% and 24%. I'd pick the midpoint.

Operator

Your next question comes from Wendy Caplan - Wachovia Capital Markets, LLC.

Wendy Caplan - Wachovia Capital Markets, LLC

Can we talk about, Rob, your inventory moves this year in terms of expectations, where the opportunities are and potentially where, if you feel comfortable giving that metric, where you think the turns could end up 12 months from now.

Robert G. Kuhbach

Wendy, I think the trend rate we've been showing is - we were at 6 - 7 last year; I think we were 7 - 1 this year - I would expect that should improve some although in the short term you're going to see some degradation in that just because of the dynamic in the marketplace. But I would say we would like to believe that by the end of this year we would show some additional progress, whether it's 7.3, 7.4, but, you know, it should continue to show progress, but it will not show progress in the first quarter realistically because of the relatively dramatic falloff in order rates and so forth.

So I think you're going to see some moderation in that, and then it'll start picking back up towards the latter half of the year.

Wendy Caplan - Wachovia Capital Markets, LLC

And any specific pockets or is it pretty much across the board?

Robert G. Kuhbach

I would say it's pretty much across the board. I mean, this has become - the Performance Counts program has become heavily embedded in the culture. And I would say there are still areas that are below that number, meaningfully below that number, that are working hard to get to the target and there are still a number of companies that are way above it that are going to continue to make progress, but I would say no significant pockets that are identified at this point.

Wendy Caplan - Wachovia Capital Markets, LLC

And Bob, can you address market share at the company? I know there are a lot of different markets and products, but are there any places where you believe that we've either gained or lost share over the past 12 months and how important is that on a strategic basis to gain share for Dover today and to what lengths would you go to increase your share?

Robert A. Livingston

Let me restrict my response to maybe three or four of our larger companies.

Wendy Caplan - Wachovia Capital Markets, LLC

That'd be great.

Robert A. Livingston

Okay, let's talk about market share in '08 and then how important it is going forward.

We know obviously that we have captured a little bit of market share at Hill PHOENIX in '08. That's been happening for the last two or three years. We do not anticipate to give back any of the market share in '09.

The Knowles business, especially in the MEMS microphone area as it relates to cell phones, continues to gain market share in that application. We expect to see that continue again in 2009.

And we've got several companies in our Industrial Products segment - in our winch business, our refuse management - that are very focused on increasing their market share.

Having said that, Wendy, how important is market share in itself? The focus is on growing the earnings and generating the free cash flow. To do that we've got to not only capture market share but it has to be profitable market share. So though market share gains are important and will continue to be important, the focus is on profitable market share gains.

Operator

Your next question comes from John Inch - Banc of America.

John Inch - Banc of America

So a lot of numbers were thrown out with respect to restructuring costs and benefits and all the different metrics used. Can we just look at, if you take this stuff all in, what was the net savings realized in 2008 from an earnings standpoint after - pre-tax - and what do you expect the net savings to be in 2009 as it pertains to your guidance? So all in, including absorbed costs, your program, etc.

Robert A. Livingston

All right, well let's let the response be very specific to the restructuring activity.

John Inch - Banc of America

Sure.

Robert A. Livingston

2008, full year, we incurred $27 million of restructuring costs, and picked up, as a result of that restructuring activity, $35 million of savings, pre-tax savings, in '08.

John Inch - Banc of America

Which were realized, Bob?

Robert A. Livingston

Realized.

John Inch - Banc of America

So that's not an annualized number?

Robert A. Livingston

That was realized in '08. Now that restructuring activity in '08 that cost us $27 million and generated savings in '08 of $35 million, we see that generating another flow-through into '09 generating savings of $50 million. That's not incremental; that's the $35 million plus $15 million equals $50 million in 2009.

John Inch - Banc of America

So $15 million incremental, okay.

Robert A. Livingston

$15 million incremental.

Robert G. Kuhbach

It's a total of $50 million. In '09, we're looking at $40 million of restructuring charges. I commented earlier that a full $20 million of that will incur in the first quarter. The remaining $20 million, John, will be primarily in the second quarter. There may be a few million that goes into the third quarter, but most of it's going to be incurred in the first half.

That $40 million of restructuring charges and the related activities in the first and second quarters will generate a full year benefit in '09 that we'll actually book of $75 million in savings.

So when we look at the two years together, our plans show $125 million of savings that we'll book in '09 as a result of the restructuring activities taken in '08 and in the first half of '09.

John Inch - Banc of America

Incrementally, it sounds like there's about $0.35 to $0.40, which maybe helps to explain why your EPS is where you're setting it versus what's happening in your top line. Is that a fair statement?

Robert G. Kuhbach

That's a very fair statement.

John Inch - Banc of America

I want to go back to the whole philosophy around share repurchase. And I understand that you're an acquisitive company but, Bob, you're sort of looking at this from a pair of fresh eyes and, to the outside observer, I mean, Dover, well, you know, maybe you had loaded up earlier in the decade too much on some of the semicon stuff and that's out and you're still sort of taking writedowns, whether it be for Trident or other things.

I guess I don't fully understand why, if you spent all this money last year buying your stock at $46 and depending on sort of where things average, your stock's down considerably, I mean, $20 below that threshold, why is share repurchase taking a back seat? Are there just things that are so attractive out there right now or perhaps are you, I think, going back to an earlier question, I mean what are the opportunities to perhaps do a larger deal, create a new platform or kick in something that really sort of needs to be added with respect to product or geographic share opportunity or something like that.

Robert A. Livingston

Okay. That's a multilayered question. Let me remind you that my previous comment about share repurchase and acquisition activity, I was restricting that comment to the first half of the year. Okay?

At the current time we do believe based upon what's in the pipeline and in anticipation of some things that will happen here over the next few months that we will have some more attractive acquisition opportunities to look at here in the first half and to perhaps close on than we did in '08. And we're rather positive on that right now, John.

As I said earlier as well, the share repurchase will compete economically with our acquisition program, and this is something that we will review with the Board on an ongoing basis. This will be a topic at our February Board meeting.

My comment about share repurchase, again, taking a back seat in the first few months of the year.

Robert G. Kuhbach

I think the other thing, John, just to make an obvious observation is that for the first couple of months, at least, we're going to be cautious on our balance sheet situation given the highly uncertain economic climate. We think we've got a very strong balance sheet. We're delevering consciously for the time being, in part because we want to make sure we can manage the process through the next several months.

So I think on top of the opportunities in the acquisition area is just a caution about not, you know, considering much of a leveraging situation at least in the near term. So for at least the first quarter, I think we're going to be cautious and then we'll see how it plays out as we move into the second quarter.

John Inch - Banc of America

Just lastly, Bob, when Ron got there I guess in '05, as part of his assessment of the company you guys went through a fairly large divestiture, discontinued ops program, much of it being in the electronics businesses. For the past few months, have you looked at your portfolio? Are you satisfied, whether it be Paladin or some of the other businesses, do you like what you see with respect to the platforms or should we be looking for some other changes? How would you contrast today versus what happened when Ron took over?

Robert A. Livingston

I like very much the organizational structure and our platform structure that we have today and the company portfolio that we have. It is much stronger and a much better positioned company portfolio than we had, that Ron has given me versus what he inherited five years ago.

Will there be selective decisions this year, next year, the year after, with respect to divestitures? Yes, that will be an ongoing part of our process.

Should you anticipate a new platform this year? No.

Should you anticipate a major divestiture this year? No.

Operator

Your next question comes from Scott David - Morgan Stanley.

Scott David - Morgan Stanley

Most of my questions have been answered, but I wanted to ask a little bit just to follow up on previous questions, what size of deals do you find to be in your sweet spot right now because the deals in '08 were relatively small. And then what do you view as your total buying power in a normalized situation? I understand that it's fluid right now and you may have to preserve some capital in the near term, but what do you think the balance sheet allows in kind of a normalized environment at this point?

Robert A. Livingston

Again, let me try to deal with your questions one at a time. The sweet spot of a deal size, I'm assuming you're referring to the price.

Scott David - Morgan Stanley

I'm actually just referring to total size of the transaction. I mean, if you want to reference price, that's helpful as well.

Robert A. Livingston

I would say that the sweet spot on a deal size from a revenue point of view, the size of the target, $50 to $125 million would fall in the sweet spot. The price is going to be dependent upon the business and the earnings stream, but that would, from an add-on acquisition focus -

Scott David - Morgan Stanley

Are you seeing any - not to jump in before you finish the answers - are you seeing the type of transaction prices that you saw six, seven years ago, that 5 - 6 times EBITDA?

Robert A. Livingston

Yes.

Scott David - Morgan Stanley

With a solid asset - you're starting to see that again?

Robert A. Livingston

Yes.

Scott David - Morgan Stanley

Okay. I'm sorry to interrupt. You can finish the question on the total buying power.

Robert A. Livingston

Total buying power, there's two parts to that. One is the free cash flow generation we'll have this year. And, after peeling off the cash for our dividend program, that would leave you with about $550 - $600 million of free cash flow for either share repurchase or acquisitions, and this is before we add any debt to our balance sheet. And we do have a fairly comfortable debt to capital ratio right now.

Scott David - Morgan Stanley

Right. So theoretically you could do a billion dollars or so of acquisitions.

Robert G. Kuhbach

We have capacity -

Robert A. Livingston

You said that, not me.

Scott David - Morgan Stanley

Okay, just kind of back of the envelope. And then lastly just to clarify, product ID came in substantially weaker than one of your key competitors in the quarter and I was just understanding there's some differences in the businesses, but were there any major contract shifts or anything that may explain some of the delta between you and your primary competitor that I'm thinking of?

Robert A. Livingston

Not that I'm aware of. I commented earlier about our destocking activity that we have seen during the fourth quarter and so far here in January with distributors. Product ID, their overall business is about 40% - 45% distribution. It is a much higher percentage in Asia. And, as I commented earlier, our revenue decline in Asia was significantly higher in the fourth quarter than our year-over-year declines in the U.S. and in Europe. And this was felt very much so at product ID and a significant piece of this was the destocking activity by the distributors.

Full year for product ID was much more attractive on the revenue line than what we shared with you here in the fourth quarter.

Scott David - Morgan Stanley

Just out of curiosity, I've always suspected that the distributors in Asia are a little bit less sophisticated so maybe more apt to have wide inventory swings?

Robert A. Livingston

Correct.

Scott David - Morgan Stanley

And not quite understand the cycle, not control their inventory levels. You would agree with that?

Robert A. Livingston

Yes.

Paul E. Goldberg

Thanks. If there are no more questions, this will conclude our conference call and we'll be very happy to speak with you next quarter. Thanks for your participation.

Operator

Thank you. That concludes today's third quarter 2008 Dover Corporation earnings conference call. You may now disconnect your lines at this time and have a wonderful day.

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