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Executives

Robert Livingston - President & Chief Executive Officer

Robert Kuhbach - Vice President of Finance & Chief Financial Officer

Brad Cerepak- Vice President of Finance

Paul Goldberg - Treasurer & Director of Investor Relations

Analysts

John Inch - Merill Lynch

Nigel Coe - Deutsche Bank 

Steve Tusa - JP Morgan

Alex Blanton- Ingalls & Snyder

Terry Darling - Goldman Sachs

Shannon O’Callaghan - Barclays Capital

Dover Corp. (DOV) Q2 2009 Earnings Call July 24, 2009 9:00 AM ET

Operator

Good morning and welcome to the second quarter 2009 Dover Corporation earnings conference call. With us today are Bob Livingston, President and Chief Executive Officer of Dover Corporation; Rob Kuhbach, Vice President and Chief Financial Officer of Dover Corporation; Brad Cerepak, Vice President of Finance of Dover Corporation; and Paul Goldberg, Treasurer and Director of Investor Relations of Dover Corporation. After the speakers opening remarks, there will be a question-and-answer period. (Operator Instructions)

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

Paul Goldberg

Thank you, Jackie. Good morning and welcome to Dover’s second quarter earnings call.

With me today are Bob Livingston, Dover’s President and Chief Executive Officer; Rob Kuhbach, our CFO; and Brad Cerepak our Vice President of Finance.

Today’s call will begin with some comments from Bob and Rob on Dover’s second quarter operating and financial performance and 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 pm July 24 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: 18160188.

Before we get started I’d like to remind everyone today that our comments 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.

We also undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We would also direct you to our website, where considerably more information can be found.

With that, I’d like to turn this call over to Bob.

Robert Livingston

Thanks Paul. Good morning everyone and thank you for joining us for this morning’s conference call. I am pleased to be here and report on our business trends and our second quarter results. Before I get into the numbers, I want to give you a sense of the economic environment and our expectations going forward.

Though second quarter trends unfolded much the way we thought they would, our anticipated seasonal pick-up was less than expected. We did however see order rates stabilize across the majority of our platforms and even accelerate through the quarter in product ID, refrigeration, energy and electronic assembly.

While we are comfortable that our markets generally speaking will not get worse in the back half of the year, we do not believe they will meaningfully improve either. We are working on the assumption that third quarter volume and revenue will modestly improve from the second quarter, and then seasonally adjust in the fourth quarter.

Today, Dover reported second quarter earnings per share from continuing operations of $0.54, down 45% from last year. Second quarter revenue was $1.4 billion, down 31% from last year, and net earnings from continuing operations were $101 million, down 46%.

Dover’s 31% quarterly revenue decline was the result of a 29% decline in core revenue, coupled with a 3% negative impact of FX and a 1% gain from net acquisitions. Consistent with the first quarter, revenue declines in Europe, Asia, and the rest of the world were generally more severe than in North America, which was down 25%.

Bookings for the quarter were $1.4 billion, down 32% over the prior year, but showed a positive sequential trend at all segments and platforms, except energy. Our book-to-bill ratio was 0.99 for the quarter, fairly consistent across all segments and a meaningful improvement from the first quarter rate of 0.91.

It is interesting to know that our sequential bookings improvement was very board based, with 26 of our 36 operating companies reporting improved bookings, and these 26 companies represent roughly 75% of the revenue. Second quarter backlog was $1.1 billion, down 31% from last year, but up 5% sequentially.

With regard to pricing we are seeing increased price pressures, both competitively and due to lower commodity cost. I am very pleased with how our companies have proactively managed the cost versus price spread, resulting in a positive margin contribution year-to-date.

In the second half of the year we anticipate that pricing pressures will continue, if not intensify; however our cost management efforts should largely offset any price reductions. Given the very difficult market conditions, our operating performance reflects very solid execution by our business leaders.

Operating margin for the quarter was 11.3% and though down 450 basis points over the prior year, we were up 110 basis points sequentially. This performance reflected significant weaker volume versus a year ago, partially offset by the benefits of our restructuring efforts.

Electronic technologies, operating margins sequentially improved from a negative 5.7% in the first quarter to 7.3% in the second quarter; and Engineered Systems improved margins 150 basis points sequentially. Another note; in the first half, nine of our 36 companies posted year-over-year margin improvement, eight achieved this while managing revenue declines.

From a working capital perspective, we continue to manage inventory levels and accounts receivable aggressively in the phase of weak market conditions. As a result we achieved a working capital to sales percentage of 19.9% and an inventory turn of 6.4%. Although, these results are weaker than the prior year, we are pleased with this performance considering revenue was down over 30%. We continue to pay close attention to working capital and expect improvement in our metrics over the next few quarters.

Cash flow generation has historically been a source of strength for Dover and the second quarter results bared us out. We generated free cash flow of $165 million in the second quarter which was 12% of revenue. This percentage represented a 250 basis point improvement over the last year. We converted 164% of net operating earnings into free cash flow, a significant improvement over the last year’s rate of 101%.

For the six months ended June 30, our free cash flow was $249 million or 9% of revenue. We will continue to focus on activities that drive cash flow and are confident that our full year free cash flow will be in excess of 10% of revenue. Our companies continue to work on what they could control, particularly cost management, product innovation and leverage activity.

We incurred $19 million of restructuring cost in the second quarter, which was $7 million less than forecasted. We still expect full year restructuring cost to be roughly $73 million, with $10 million expected in the third quarter.

We also spent roughly $5 million on our global supply chain program in the second quarter, $8 million year-to-date, and we expect the second half investment in this program to be roughly $14 million. We have made a strategic decision to accelerate the pace of the program and remain highly confident that this investment will bare significant benefits in the upcoming years.

Finally, we have the financial capacity and flexibility to pursue value adding acquisitions, even in a down market. We closed on one such opportunity in May. While we are proactively pursuing other opportunities and continually evaluating a steady stream of acquisition candidates, we still see a disconnect with regard to servers timing and value expectations. Thus, we expect a modest year in acquisitions, but are prepared to move quickly through, should attractive opportunities materialize.

CapEx was $27 million and inline with our full year expectations. We expect no changes to our long standing dividend policy and we had no share repurchase activity in the quarter. Our strong balance sheet is a tremendous asset in these challenging times, and will serve as a competitive advantage going forward.

Now, let me turn the call over to Rob for comments on our segment performance.

Robert Kuhbach

Thanks Bob. Good morning everyone. I’d like to cover our second quarter segment performance and then discuss some additional financial information. At Industrial Products sales were $383 million, down 41% from last year, with earnings of $25 million, down 71% from the second quarter of 2008. Bookings were $372 million, down 41% from last year, but up sequentially 13%, indicating some stability in their end markets.

Operating margin was 6.6%, down 690 basis points from last year and also down 130 basis points sequentially. This performance was largely driven by extremely weak conditions across the majority of end markets, particularly the infrastructure, automotive and energy related markets served by our material handling platform.

Sales in our material handling platform decreased 50% to $154 million, while earnings decreased 82%, resulting in platform margins down about 1100 basis points. Our aggressive cost cutting activities, including significant reductions in work force and facility consolidations, helped to partially offset continued weak conditions and essentially all end markets.

Although bookings increased sequentially, the second quarter book-to-bill was 0.82. We do expect revenue in this platform to remain challenged, but anticipate a sequential improvement in operating margins. Our low government economic stimulus should provide opportunities for this platform, and we are not currently anticipating any benefits in 2009.

The mobile equipment platform recorded sales and earnings declines of 33% and 39% respectively, while margins were relatively strong down, only 160 basis points. In general, margin performance was solid across this platform, capitalizing on aggressive restructuring actions taken earlier. Heil Environmental and Sargent were the relative revenue out performers in this platform.

Quarterly bookings were $246 million down 23% from the prior year, but up 17% sequentially, yielding a positive book-to-bill of 1.07. Internal initiatives, combined with modest market improvement, should provide a climate which results in consistent second half mobile equipment revenue performance.

Turning to the Engineered Systems, sales were $467 million, down 13% from last year, but up 17% sequentially. Segment earnings were $57 million, down 28% over the prior year period, but up 33% over the first quarter. Bookings for the quarter were $466 million, down 12% year-over-year, but up 13% sequentially. This strong sequential performance was driven by Hill PHOENIX and product ID.

For the quarter operating margin was 12.3%, a 260 basis points decline over the prior year period, but up 150 basis points sequentially. This margin decline was primarily the result of lower volume, restructuring costs and acquisition expenses. We did see favorable trends in booking, revenue, earnings and margin as the quarter unfolded.

Our product identification platform saw improved demand trends during the second quarter. For the quarter, sales were $193 million, down 23%, reflecting a 17% core revenue decline and a 6% FX impact. On a sequential basis revenue improved 9%, suggesting relative end market stability.

While year-over-year earnings were down 35% and margins dropped 310 basis points, margins sequentially improved 220 basis points. This performance was consistent with generally weaker global demand, and a modest recovery from some of the channel destocking we experienced earlier in the year.

Also notable, the integration of Markem-Imaje was completed during the quarter. Further, the pipeline of new product opportunities and favorable book-to-bill ratio of 1.07 give us comfort that we should see improved business conditions in the second half. The engineered products platform posted decreases in both sales and earnings year-over-year of 5% and 10%, respectively.

Margin performance remained relatively strong and operating margin was down only 90 basis points. The highlight in this platform has been the acquisition and integration of select assets of Tyler Refrigeration by Hill PHOENIX. This added $33 million of revenue to the quarter and we continue to be excited by this strategic and economic potential of this acquisition.

Hill PHOENIX excluding Tyler, also showed strong performance in the quarter. In a North American refrigeration market that is estimated to be down 13% this year, Hill PHOENIX delivered revenue down only mid single digits.

The combined Hill PHOENIX Tyler results helped to partially offset weak performance in the food packaging and preparation and HDAC end markets. Here as well, platform bookings strengthened as the quarter progressed, suggesting improved demand in the third quarter. Innovative products that focused on sustainability and deep customer engagement supported by strong operational execution will help to provide a favorable climate for our engineered products as we move forward.

Turning to Fluid Management, demand appears to have stabilized in the second quarter across the segment, albeit at significantly lower levels, particularly in our oil and gas businesses. For the quarter, sales declined 34% to $295 million and earnings were $56 million, a decline of 43%. Bookings were down 38% from the prior year, but flat sequentially.

Second quarter operating margins were 18.8%, down 310 basis points over last year, largely driven by a prior year one-time litigation settlement. For the six months ended June 30, operating margin was 20.9%, just 70 basis points lower on 26% less revenue. We expect to continue to deliver strong margin performance for the full year.

Our energy platform, which is closely linked with North American rig count and oil and gas pricing experienced a significant revenue decline in the second quarter, due to reduced demand for sucker rods, drill bit inserts and gas compression products. Although second quarter revenue and earnings declines were 41% and 42% respectively, second quarter margins were consistent with last year due to effective price and cost management.

Quarterly bookings declined only 7% sequentially and strengthened throughout the quarter. Our order rates are consistent with a stabilizing North American rig count and fairly steady commodity prices. While we do not expect a sharp recovery in our energy platform, we are anticipating a more stable revenue environment in the back half of the year, in line with the second quarter.

The fluid solutions platform posted revenue and earnings declines of 25%, yet produced margins that were up slightly from the prior year. Market conditions seemed to have stabilized through the quarter, primarily driven by moderating channel inventory issues.

Bookings were down 27% from the prior year, but up 6% sequentially, yielding a positive book-to-bill of 1.02. This platform continues to benefit from integration and leverage initiatives and is well positioned to maintain strong profitability in the anticipated stable demand environment.

Finally, electronic technologies continue to feel the effects of the weak electronic assembly market, but improved sequentially off of a very tough first quarter. Revenue was $246 million, down 35% from last year, but up 15% sequentially. Further, a first quarter loss of $12 million rebounded to a second quarter profit of $18 million, yielding an operating margin of 7.3%. Aggressive first quarter restructuring coupled with a 15% sequential revenue growth resulted in vastly improved margins.

Our electronic assembly equipment companies, namely ECT, DEK and OK began to benefit from improving factor utilization rates and to focus on serving emerging applications such as MEMS and Solar. We expect to see seasonal improvements and factory utilization rates, which should board well for the electronic assembly companies in the third quarter.

Our electronic component companies continue to post strong operating margins, buoyed by relative stability in their key military hearing aid and MEMS markets. Knowles executed at a very high level and continues to benefit from its small MEMS technology and market expansion strategies, resulting in year-over-year organic sales growth. Bookings showed improvement from April through June, indicating an increase in seasonal demand in these markets connected with consumer electronics.

In this segment, we continue to focus on product innovation, market expansion, and being the technology leader, which allows us to outperform our competitors in weak markets and generate signification earnings when markets are strong. While we don’t anticipate a strong electronic assembly market for some time, we still believe this segment will attain 10% operating margins during the second half of 2009.

Having reviewed the segments, I’d like to briefly provide some additional financial data. Regarding geographic sales for the six months ended June 30, Dover experienced a higher percentage of sales in the United States than in the previous year. US sales were 59% of the total revenue, compared to 56% for the same period last year. The rate of revenue decline in North America was less severe than in Europe and Asia. Week electronic assembly markets and the revenue mix at product ID were the main drivers of this shift.

Second quarter net interest expense was $24.8 million, down $2.5 million from last year, reflecting lower commercial paper outstanding and lower commercial paper cost. We continue to have excellent access to the commercial paper market and our outstanding commercial paper balance at quarter end was $100 million. Our net debt to total capitalization was 22.6%, a 230 basis point improvement from year end 2008.

Turning to taxes, our second quarter rate for continuing operations was 1.1%, a significant reduction from last years second quarter rate of 29.3%. Year-to-date our tax rate of 17.4% compares favorably to last years 29.4% rate. The primary driver of our low second quarter tax rate was $28.4 million and discreet benefits recognized for domestic tax positions that were affectively settled during the quarter.

Although, the impact of these benefits was factored in to our original full year tax rate guidance, the exact timing of such benefits is often uncertain. While we expect the rate to revert to more normative levels as the year unfolds, lower first year earnings coupled with the relative domestic foreign mix leads us to believe that the full year tax rate will be in the range of 25% to 26%.

 

Our restructuring activities enabled us to maintain solid margins in this recessionary environment. We remain on track for full year restructuring costs to be about $73 million, unchanged from our earlier guidance. Further, we still expect the 2009 benefits of these actions to be $125 million with the benefits skewed to the back half of the year.

Corporate expenses for the second quarter were $29.6 million, an increase of $4.6 million over last year. Year-to-date corporate expense is $54.3 million, slightly lower than 2008, but up about 10% over our previous estimated run rate for the full year. This increase primarily reflects accelerated investments in our strategic global supply chain program. We now expect full year corporate expenses to be higher than originally anticipated in the range of $110 million to $115 million. 

With that I’d like to turn this call back over to Bob. 

Robert Livingston 

Thanks Rob. Just to recap, those second quarter trends unfolded much the way we thought they would. Our anticipated seasonal pick-up was less than expected. On the positive side, we expected good margin and cash flow performance which our business leaders delivered.

In the second quarter we saw order rate stabilize across the majority of our platforms and even accelerate through the quarter and product ID, refrigeration, energy and electronic assembly. We believe we will see these trends continue during the third quarter. 

Now let me update you on a couple of activities that will drive long-term value; our MNA program and our Global Supply Chain program. As you are aware, we have put in place a more disciplined MNA process, including a formal post merger integration capability. A great example of this improved process is the strategic investment we made in early may to grow our position in the refrigeration system and case business.

The Tyler acquisition while only $34 million, will deliver significant value to Dover. Through this acquisition, Hill PHOENIX is now serving new customers, expanding its technology and complementing its sales and service talent. Tyler’s former customers and employees have embraced this acquisition and we are confident that customer retention rates will be higher than originally anticipated.

This acquisition is expected to have a payback of less than 24 months and demonstrates our post merger integration process and focus on speed of execution. I am confident that our new pro-active MNA process will enable us to create value more quickly than we have before. 

Next, let’s talk about our strategic Global Supply program. We have been moving quickly to leverage the scale of Dover like developing a coordinated sourcing and procurement process. During the second quarter, we began to aggressively build an infrastructure to support this strategy. Thus far we’ve made good progress on internal training, tool and process development and have begun to qualify as supplier base in the categories of logistics, plastics, castings, motors and indirect supplies.

We hosted a conference in May that was attended by over 500 suppliers looking to do business with Dover. I was very impressed with the interest and motivation shown by the attendees supporting this important Dover initiative. Although this program will be a net investment in 2009, we remain committed to save between $75 million and $100 million in the 2010 and 2011 timeframe. This is a great program that will deliver significant results. 

Now, looking forward to the balance of the year, we see an economic environment that may offer some slight improvement, but will generally be moving sideways. Accordingly, we do not foresee a meaningful recovery in revenue in the second half. At this time we expect full year revenue to be down roughly 24% to 26% from last year, including a 3% impact from FX. 

Based on the revised revenue forecast, we now expect 2009 EPS to be in the range of $1.75 to $2. This guidance includes $0.02 accretion from the Tyler acquisition and assumes a 25% to 26% tax rate for the whole year. We will continue to control those things in our power, such as working capital management, cost containment, investing for the future, and product innovation. We stand very well prepared to leverage any improvement in our markets when they incur.

 

I’d like to comment on two executive retirements announced in the quarter; Dave Ropp, CEO of Industrial Products who retired earlier this month, and Rob Kuhbach, who will retire later this year. Dave was with Dover for about 12 years, and not only made significant business contributions, but was always very engaged in developing our next generation of business leaders. Tom Giacomini, who served as President of Warn and then ran the Material Handling Platform, has succeeded Dave as President of Industrial Products.

Rob Kuhbach has served as Dover’s Chief Financial Officer for nearly seven years and before that, was General Counsel for 10 years. His financial stewardship has allowed Dover to build upon its strong representation for financial integrity and transparency. We will all miss Rob’s business judgment, sharp wit and tireless work ethic. Hired last month as Rob’s successor was Brad Cerepak. Brad comes to Dover after most recently serving as Vice President and Controller for Train. 

As always, I’d like to take this opportunity to thank all the Dover employees who have worked extremely hard to weather this economic storm. I’m sure for many it felt as if this storm would never subside. It now feels that the worst may be behind us, and we can focus on growth, designing building and supporting world-class products, and providing our customers with outstanding service and winning new business through innovation and flexibility. This downturn has shown me the true strength of Dover. I think the future is right for Dover.

 

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

Paul Goldberg 

Thanks Bob. At this point, I’d just like to remind everybody if you can limit your question to one with a follow up, that will better enable us to get everybody’s questions. So at this point Jackie, if you could please compile the questions? 

Question-and-Answer Session 

Operator 

(Operator Instructions) Your first question comes from John Inch - Merill Lynch. 

John Inch - Merill Lynch 

Could we get a little color on how the quarter progressed and I’m thinking, obviously you saw some improvement sequentially. Did things pick up toward the end and what have you seen thus far in July and maybe if you could provide a little color on kind of a segment basis, that would be helpful? 

Robert Kuhbach 

Well, instead of commenting by month through the quarter, I would split the quarter into first half versus second half. We clearly saw a strengthening and order rates building through the second half of the quarter versus April and the first half of May, and John, we’re very interested in this. So we have been monitoring activity so far in July and the July order rates seem to support the activity we were seeing in the second half of the quarter.

 

John Inch - Merill Lynch 

Meaning, the improvement or pick up through the quarter held in July. Is that’s what you normally see in the third quarter or is the third quarter technically weaker first half, stronger second half? 

Robert Livingston 

It can be mixed. We would normally expect the second half of the quarter to feel some impact from what we would prefer to a European holidays. Though we can imply to a couple of years here in the last three to four, well, that has not happened. It’s been rather solid during the quarter. So we watching it very closely, John.

 

John Inch - Merill Lynch 

Bob did that trend hold or was it kind of consistent graphically, because some companies are calling out actually deceleration in Europe, I’m just curious what you guys say there… 

Robert Livingston 

No, I would say that it held geographically, and the trend that I commented on fist half versus second half through the quarter, was rather consistent across all four segments. 

John Inch - Merill Lynch 

Okay and then just lastly, the $33 million you booked from Tyler, did that provide any kind of a clue as to what the kind of annualized or normalized run rate for revenues for Tyler could be.

If I’m not mistaken, I know when you had talked about it originally, you were fairly conservative in sort of what you thought you might be able to get and not every customer moves over, but I don’t know, the $33 million, does that provide a clue or are you able to retain more customers than you though. What sort of an annualized number do you think this could hold a clue toward? 

Robert Livingston 

Well I hope it provides more than a clue. Second quarter revenue was $33 million; that was from May 8, which is when we closed through the end of the quarter. Our second half forecast on the Tyler revenue is about $90 million. Sitting here today, we believe the run rate for the Tyler acquisition can be somewhere between $150 and $200 million annually.

 

Paul Goldberg 

John, it’s Paul. I would just add, there’s been some confusion in the marketplace. When we have fired the company, the 2008 revenue run rate was about $300 million. Some people had $400 million, some people had $300, the right number is around $300 million. 

John Inch - Merill Lynch 

Okay so around $300, so what happens to the 100? Let’s say you do 200 because you are being conservative or a little bit better. Where do the other 100 go from where it was? Does that just get absorbed by other customers or what happens there? 

Robert Livingston 

Well we’re telling you that our expectations are $150 million to $200 million. We are at this time seeing much higher customer retention rates that we had in our original acquisition plan.

We’ll see how that falls out over the next several months as many of the customers do go through the process of their annual contract towards, but to your specific question, what happens to the other 100? We intend to capture our fair share of that extra 100, but it is going to be absorbed by other competitors in the market. 

Robert Kuhbach 

Keep in mind John that the market to some degree is not as strong this year, so you’re basically talking about last year’s 300 versus this year’s number which would be otherwise lower.

 

John Inch - Merill Lynch 

Okay, that makes sense. So in theory if you captured everybody, you could actually get to a run rate that’s higher, that’s all? 

Robert Kuhbach 

Correct, yes. 

Operator 

Your next question comes from Nigel Coe- Deutsche Bank. 

Nigel Coe - Deutsche Bank 

I just want to pick up on John’s questions on the Tyler deal; $33 million you picked up May 8, what sort of attachment rate do you think that represents? 

Robert Livingston 

What do you mean by attachment rate?

 

Nigel Coe - Deutsche Bank 

Well, how many customers do you think; you’ve seen some of them between 50% and 65% retention; well, what do you think your retention was in May, June? 

Robert Livingston 

Again, I want to profess my comment by saying this is very early days, but the revenue in the second quarter was $33 million; for all intense and purposes, that revenue was in the acquired backlog on May 8.

Now when you look at the order rates from May 8 through the closing, we believe we captured a very, very high percentage of the customer requirements that were booked between May 8 and June 30; perhaps well north of 80%. 

Nigel Coe - Deutsche Bank

Okay, that’s helpful. You mentioned, a payback of less than two years. I guess the emphasis is on less than, but if I see in two years?

Robert Livingston

More kind of like 18 to be honest to with you.

Nigel Coe - Deutsche Bank

But that still implies the contribution margin. If I take $2 million which is your projection, that implies a contribution margin of somewhere between 12% and 15%. Seems somewhat low, but is that the kind of range that you think about?

Robert Livingston

That’s our starting point.

Nigel Coe - Deutsche Bank

Okay. Then you told you obtained the $125 million of cost savings from the headcount actions. At this stage, what is your projection for 2010 roll through for those actions?

Robert Livingston

Well first of all, it was more than just headcount actions Nigel. We look at the $73 million of restructuring cost in 2009 and all the activities underneath that charge. I think the number rate now that we are looking at for carry through into 2010 on an incremental over 2009 is about $40 million.

Nigel Coe - Deutsche Bank

Then just finally, similar to that on the global sourcing, I think you previously said $75 million to $100 million of savings in 2010. You obviously had more time to go through the bandwidth now, is that still a good range?

Robert Livingston

Let me clarify that. We are in the early days of a multi year program. As I commented earlier, this is going to be a significant net investment for us this year. It will continue to be a significant net investment for us in the first half of next year, and we will receive some benefits in the fourth quarter this year.

They are going to be modest, we’ll receive more benefits in the first half of next year growing, but in the second half of next year we look at the program to be a net add to the bottom line, and that our run rate in the second half of next year; I’m looking at $75 million run rate in the second half of next year, annualized.

Operator

Your next question comes from Steve Tusa - JP Morgan.

Steve Tusa - JP Morgan

The fluid margins, how should we expect those to trend over the next couple of quarters?

Robert Livingston

We will continue to see some modest pressure on margins during the second half. Steve I’m not sure if I responded to you in January or one of the other callers with respect to DFM margins for the year. I think my response was 19% to 20% margins was our expectation for 2009,that still looks very good.

Steve Tusa - JP Morgan

So to get to19% to 20%, you’re looking at a sequential uptick?

Robert Livingston

I think if you do the math, it would come into about an 18% margin for the second half.

Operator

Your next question comes from Alex Blanton- Ingalls & Snyder.

Alex Blanton- Ingalls & Snyder

Just a clarification on what you said earlier, that you expect a modest seasonal uptake in the third quarter and then seasonal adjustment in the fourth quarter, but are we talking EPS here, because it looked to me like from what you said you had a $0.15 a share tax benefit in the second quarter, is that correct?

Robert Livingston

A little high, it’s probably

Alex Blanton- Ingalls & Snyder

Didn’t you say 28.2.

Paul Goldberg

Average 13.

Paul Goldberg

Generally right.

Robert Livingston

It’s around $0.13

Alex Blanton- Ingalls & Snyder

So then you really did only $.40, $0.41 on a normalized basis.

Robert Livingston

Correct.

Alex Blanton- Ingalls & Snyder

So that was below the forecast of the analyst. So then when we are talking a modest uptick in the third quarter, are we talking from $0.54 that you reported or the $0.41 adjusted for the tax benefit?

Robert Livingston

Well first of this, the seasonal comment, let me speak for the second half and then I’ll break it into the quarters. If you pick the mid point of our revenue range for the year, down 25%, at that mid point, we look at second half revenue be up about 5% over the first half. Now over that 5%, 3% organic and 2% is coming from the Tyler acquisition.

Alex, I’m really pleased with how our companies and our business leaders have responded in the first half of this year to protect the margins. We will see more of that activity in the second half. We actually do believe our operating margins will be up 150 to 200 basis points in the second half of the year over the first half.

Alex Blanton- Ingalls & Snyder

Okay, but in terms of the earnings per share, when you say an uptick, are you talking from the $0.54 in the second quarter to the third quarter or from the $0.41?

Paul Goldberg

We were talking revenue there Alex.

Alex Blanton- Ingalls & Snyder

Revenue only?

Paul Goldberg

Yes, we don’t give EPS quarterly guidance.

Alex Blanton- Ingalls & Snyder

Okay, earnings per share could easily be below this tax benefited quarter, correct?

Paul Goldberg

We gave you the full-year of EPS range and we gave you what our revenue expectations are.

Alex Blanton- Ingalls & Snyder

Second question is, you’ve had improvement in the second half of the quarter in orders and activity, which you said continued into July. Do you have any sense of how much of that might have resulted from the end of destocking; in other words, earlier in the year people were reducing inventories quite a bit and quiet a bit more than they have in any other cycle that I can remember and faster. So they could have reduced their orders to you below the level of end-of-market demands.

So that is if they stop reducing inventory, they will have to increase their orders to you just to meet their end-to-market demand, even if it was still falling; it could be still falling, but they would have to raise their orders because they had reduced inventory so quickly. Do you have any sense of how much of that’s going on?

Robert Livingston

I don’t have hard data on that Alex. It would be more anecdotal in opinion.

Alex Blanton- Ingalls & Snyder

Yes.

Robert Livingston

Late in ‘08 and towards the first couple of months in the first quarter was absolutely brutal under the stocking activity. We did see it moderate in March. We continue to see it moderate in the first half of the second quarter, the destocking activity and we did see some of what you’re referring to, I’ll call it retrenchment of the channel in the second half of the second quarter. I would also tell you that not all of our distribution channels have started restocking yet.

Alex Blanton- Ingalls & Snyder

Well, you don’t have to restock. You can keep the inventory level the same, but you have to raise your orders, because what you are ordering was so far below demand.

Robert Livingston

I understand–. This is something that all of our companies struggle with and Alex we are being a bit pressed for times, so I’m going to ask for the next question.

Operator

Your next question comes from the line of Terry Darling - Goldman Sachs.

Terry Darling - Goldman Sachs

Bob, I’m trying to just interpret the second half margin expectations versus previously you had a lot of moving pieces with Tyler and FX and corporate. If we just look at kind of segment margins for the company before corporate, the operating margin expectation for the second half was up 150 to 200 basis points. Is that change versus previous within the context to the lower guidance and if so, can you talk about which segments of the driver’s there.

Robert Livingston

Gosh, I don’t have that hard data in front of me Terry. My sense is, the second half margins, we’re looking at it verses the first half; we do see an improvement about 150 to 200 basis points. My senses is, that margin for the second half is probably down about 100 basis point from what we were looking at in April.

Terry Darling - Goldman Sachs

Okay, and perhaps that ties out with your comment about mainly mix, but maybe also with your comment about the competitive pricing pressure that you talked about in the opening remarks. I’m wondering if you can talk about; number one, which business are you seeing that most acute, really from the stand point of the competitive element of your comment. Then second, why wouldn’t you accelerate restructuring efforts to try to offset that.

Robert Livingston

I’m not sure I can give you a company by company dissertation on the second half. I would say that the segment that continues to be probably most challenged with respect to margins is industrial products, and even though we do expect in our forecast, improvements in margins in the second half, this is the segment that is most challenged with respect to the margin performance, relative to the forecast that we gave you in April.

Terry Darling - Goldman Sachs

I’m sorry, I was talking about pricing pressure comments. They are probable related to some degree, but which areas are you seeing the most comparative...

Robert Livingston

Throughout the industrial products segment and in some parts where energy platform. Now its interesting Terry, I don’t have real hard data on this, but if you look at the companies that have the greatest exposure to commodity costs, especially metal, we’ve got a lot of discussion with these companies during the first half, very focused in the second quarter, and we can see price pressures in the first half with those group of companies, within industrial product and the energy platform, that may have impacted their revenue or their top line by two to three points.

Collectively when you aggregate that for Dover that may have given the headwind in the first half for Dover, about 1% to up to 1.2% of sales. We would expect it to increase in the second half. For that same group of companies, may be instead of a headwind of two to three points, maybe its three to four points. That will provide some headwind to Dover of about 1.5% on the top line.

Now, the flip side of that is during the first half we did a very, very good job of managing what I call the price versus cost spread, and I do believe the collectively around over, we probably added to our operating margin one point on that activity. Our forecast in the second half is for that to be neutral.

Terry Darling - Goldman Sachs

Bob, on the supply chain, I think maybe Rob called out what the total investment is, but can you just come back to us on that, and just to make sure we’re clear, you’re talking system here, this is really a big IT spend but maybe there’s more to it.

Robert Livingston

The IT spend is part of the increased spending in the second half and Terry, that will continue for a while. We will not complete an IT package here in the second half of ‘09, but its not only IT; we are spending a tremendous amount of money in training, several million dollars in training, and process development and the tools we need to do the right analytics.

This is not just a cost down exercise that we are going through with our suppliers; again, this is a multi year program and we want to embed a capability in the organization that will benefit over for a long time. The discreet spend in the supply chain initiative in ‘09 will be about $22 million. That’s off set by some savings, frankly are less than $1 million in ’09

That spend rate in the second half would very unlike continue through all of 2010. That second half spend rate will continue through 2010. In the second half of the 2010, the bottom line impact of Dover should turn positive.

Terry Darling - Goldman Sachs

So we can essentially use the corporate expense this quarter as a run rate, kind of through next year, plus some inflation on the other.

Robert Livingston

That’s true.

Terry Darling - Goldman Sachs

Then lastly, Rob just on tax rate thinking for 2010, it look like the low end or high end of the range, the second half can be as high as 32%. As we think about 2010 account for there, does that come back to the upper 20’s.

Robert Livingston

I would say in a normalized rate it’s 29 to 30. As always, we’re going to have these discreet events come up that’ll impact our quarterly rate and that’s just the nature of FIN 48 and we have to deal with. I would say 29 to 30 would be a normalized rate for ‘10.

Operator

Your final question comes from Shannon O’Callaghan - Barclays Capital.

Shannon O’Callaghan - Barclays Capital

Can you tell us the product ID thoughts a little bit? I mean last quarter it started off weak and March was looking better, and then 2Q didn’t turn out to be better. I mean can you talk about what you saw happen there, both kind of on the equipment and consumable side?

Robert Livingston

Okay. Let me start first by just reminding you that for our product ID its really two differences businesses, even though we run the logistics as a leverage activity. We’ve got bar-coding, which is data banks in O’Neil, and we’ve got direct coding, which is Markem-Imaje .

The business has been struggling, it’s been struggling for a while Shannon, it’s our bar coding business. We had a leadership change there in December to try to affect some changes. The activity in the first half on order rates was rather flat through. The second quarter was flat with the first quarter. We did not see an improvement. We had a loss in the bar coding business in the first quarter. It’s linked to modest earnings in the second quarter.

The real driver of our business is the direct coding, which is Markem-Imaje. To give you a relative size here, Markem-Imaje is about six times the size of our bar coding business. Second quarter for direct coding, we had about a 10% revenue growth in direct coding versus the first quarter. We had a 17% increase in bookings in the second quarter sequentially. We had a 16% improvement in earnings sequentially at direct coding.

From a geographic perspective, I commented about Dover having less of a decline in North America than we are seeing in the rest of the world. This is very true at product ID and direct coding. Our North America business held up better during this downturn than did Europe and Asia. In fact our North America decline in revenue at direct coding in the first half of the year; it’s about five or six points less than the overall decline.

The largest decline for direct coding has actually been at Asia. Our business mix is quite different there than it is in North America and Europe. North America and Europe is predominantly food and beverage, more than half. Food and beverage, I call it consumer staples.

In Asia, it’s a much higher percentage towards industrial and electronics applications that really support the export market out of China. The export market’s been pretty week in the first half. We do see signs coming out of China that the export market is picking up and we are expecting some improvement in the second half in China for product ID.

Aside from bar coding, the business is performing quite well. As Rob mentioned, we’ve essentially said we’re done with the integration of Markem-Imaje, its complete and the leadership team at product ID is very, very focused now on growing the top line

Shannon O’Callaghan - Barclays Capital

The focus now also is fixing the problems over in barcode and what you really need to do there?

Robert Livingston

I think we’ve gone through, I will call it our internal remediation action in the first half. That included headcount reductions, it included a couple of facility consolidations. I commented that the second quarter bookings were flat with the first quarter.

We saw a little different activity in June there that was positive and we believe that’s continuing in July. I think we’ve got the right team in place now at bar coding and I think they are pretty focused on the right things and what they need to do. I think we are in the mode of improving it now.

Shannon O’Callaghan - Barclays Capital

Okay. Last one is just, can you say a little more of your thoughts on where electronic assembly business is heading into the second half.

Robert Livingston

We expect a little bit more of an improvement in the third quarter, even over the second quarter on electronic assembly. Order rates are going to be a little bit higher in the third quarter. We expect revenue to be up a little bit. Both second quarter and third quarter activity, I wouldn’t label to just normal patterns in the electronics assembly markets.

Fourth quarter, we do and it is in our guidance. The fourth quarter, we do see a seasonal adjustment down in electronic assembly, that’s normal. We are seeing signs especially in the semiconductor area of factory utilization rates improving, not where they need to be.

The other comment I would make about electronic assembly is that our restructuring activity, not only of the electronic assembly, but within the electronic technology segment is complete. The earnings and the margins in the second half will not be weighted by restructuring charges and we’ll see some benefits from the restructuring activity.

Operator

Thank you. At this time we have no further questions. Mr. Goldberg are there any closing remarks.

Paul Goldberg

Yes, thanks. Thanks everybody for joining us. Before we conclude this conference call, I’d just like to turn it back to Rob for some final comments.

Robert Kuhbach

Thanks Paul. It was about 17 years ago that I got a call from Tom Sutton, Dover’s former Chairman and CEO, inviting me to join the Dover team as Dover’s first Vice President, General Counsel and Secretary.

I did some homework and decided to join Dover early in 1993. Before doing so I was impressed that I bought 500 shares of Dover stock, which I still own. It’s been a tremendous experience to have spent nearly 17 years at Dover in two different, yet very rewarding careers.

This is a tremendous company with a proud culture. It has changed a lot, all to the good. More good things are coming, yet despite all these positive changes, the core values of trust integrity and an intense respect for people remain intact. Well deserved and critical for future success.

I want to thank three audiences today. First, to all of the current and former Board members, executive, employees, I say thanks for a great career and all the help and support and you have shown me in Dover. You have made my work here intellectually stimulating and rewarding. It’s been a great ride. I wish you all, particularly the new executive management team and especially Brad Cerepak my successor, much success going forward.

To Bob Livingston, the fourth CEO of Dover for whom I worked, a special thanks for making my final year at Dover so rewarding. I have enormous confidence that you will leave Dover wisely and well in the years ahead. As I know own over 80,000 shares of Dover stock, I will be watching with great interest as you make Dover an even more successful company going forward, and as a number of retiring executive have been known to comment, just don’t mess it up.

Second, to all the analysts and investors I’ve know over the years, I say thanks for all your support and enthusiasm. Again, it’s been a tremendous experience meeting and working with great people who have shown a keen interest in this company and I trust you will continue to stay engaged with Dover as it achieves more success in future years.

Last, but not the least, I want to thank my family; in particular my wife and partner Sheryl Andrews who has supported me enormously over these past 17 years, as I worked for Dover. Without your top wide enthusiasm, my success with Dover would not have been possible.

Paul Goldberg

Thanks a lot Rob. This concludes our conference call. We thank you for your interest, and we look forward to speaking to you in the next quarter.

Operator

Thank you. That concludes today’s second quarter 2009 Dover Corporation earnings conference call. You may now disconnect your lines at this time and have a wonderful day.

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