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Dover Corporation (NYSE:DOV)

Q4 2009 Earnings Call

January 29, 2010 9:00 am ET

Executives

Paul Goldberg – Treasure, Director Investor Relations

Robert Livingston – President, Chief Executive Officer

Brad Cerepak – Vice President, Chief Financial Officer

Analysts

John Inch – BofA/Merrill Lynch

Nigel Coe – Deutsche Bank

Alexander Blanton – Ingalls & Snyder

Robert McCarthy – Robert Baird

Scott Davis – Morgan Stanley

Shannon O’Callaghan – Barclays Capital

Operator

Welcome to the fourth quarter 2009 Dover Corporation Earnings conference call. With us today are Bob Livingston, President and Chief Executive Officer of Dover Corporation, Brad Cerepak, Vice President and CFO 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 Mr. Paul Goldberg.

Paul Goldberg

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 Brad Cerepak, our CFO.

Today’s call will begin with some comments from Bob and Brad on Dover’s fourth quarter and full year operating and financial performance and our outlook for 2010. 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 February 12 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: 49660424.

Before we get started I’d like to remind everybody 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 statements.

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

And 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. Before we get into our results I’d like to provide some general comments on our end markets and the current business climate.

I’m pleased to report we finished the fourth quarter better than expected across the majority of our companies. Sequentially, order rates continue to be stable or up in virtually all our end markets.

Improving trends in electronic technologies, energy and product ID were supported by several factors such as increased demand for a new wave of consumer electronics, modest but steady improvement in the North American rig count, channel restocking and a relatively stable pricing environment.

We are encouraged by the way our business activities have developed the last two quarters and are entering 2010 with expectations of revenue growth across our segments.

With that, let me move to our fourth quarter and full year results. Today we reported fourth quarter earnings per share of $0.55 down 40% from last year. Fourth quarter revenue was $1.5 billion down 13% from last year and flat sequentially.

Fourth quarter revenue was stronger than anticipated at Fluid Management and Electronic Technologies while the revenue seasonality posted at Engineered Systems was as expected.

Net earnings from continuing operations were $102 million, down 40%. For the full year, Dover’s revenue was $5.8 billion down 24% from the prior year and in line with our previously provided guidance. Full year EPS of $1.99 and earnings from continuing operations of $372 million were down 46%.

Bookings for the quarter were $1.6 billion up 10% over the prior year and up 10% sequentially. I am very pleased to report all segments and platforms posted sequential improvements in order rates and all segments achieved book to bills of greater than one.

Operating margin for the quarter was 13.1% down 220 basis points. That said, operating margin sequentially improved at Fluid Management and Industrial products resulting from higher volume and the continuing benefits of restructuring actions taken earlier in the year.

For the full year operating margin was 12.3%, a 300 basis point decline but a performance we are pleased with given the economic environment. I am confident the restructuring actions taken throughout the year have positioned us well as we enter 2010.

In the fourth quarter we generated free cash flow of $211 million or 14% of revenue. For the full year free cash flow was $682 million, 12% of revenue. We continued to invest in strategic target markets, namely, product ID, energy, fluid solutions, refrigeration and food equipment and communication components.

We closed on four strategic add on acquisitions during the fourth quarter; Barker, Inpro/Seal, A La Cart, and Extech for a total investment of $184 million. These acquisitions fit squarely within our strategy and expand our product offerings in niche growth applications.

Our acquisition pipeline remains active as we continue to look for opportunities which complement our existing strong positions in our target markets.

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

Brad Cerepak

Thanks Bob. Good morning everyone. I would like to cover our segment performance and then discuss some additional financial information. My comments will focus on quarterly results while full year comparisons are in our slide presentation.

Turning to Slide 5, sequential revenue was up at three of our four segments and five of our six platforms on the strength of our fourth quarter bookings. Revenue grew 9% sequentially in Fluid Management and 6% in Electronic Technologies while Industrial Products revenue was up 3%. Engineered Systems revenue was down 9% sequentially, consistent with seasonality normally seen at Hill Phoenix.

From a booking perspective, fourth quarter bookings sequentially improved at four segments and all six platforms. Also of note, December bookings were the strongest month of the quarter.

Turning to Slide 6, Industrial Products posted fourth quarter revenue of $408 million and $42 million of earnings. Although these results were down 28% and 29% respectively from 2008 this quarter’s earnings were the best of the year for Industrial Products.

Bookings were $433 million, up 5% indicating improving trends in most end markets. Industrial Products generated quarterly operating margins of 10.2% essentially flat with last year as we continue to see the benefits of our earlier right sizing actions.

With respect to our Material Handling platform, sales decreased 35% to $166 million in the quarter while earnings decreased 53%. This resulted in platform margins down about 300 basis points from 2008’s results.

For the quarter, bookings were $180 million. Though down 13% compared to last year they were strong sequentially with a book to bill of 1.09. We anticipate improving results for several of our businesses in this platform over the next few quarters; however remain cautious for our construction related businesses.

With respect to our Mobile Equipment platform, sales were $242 million in the quarter, down 21% from last year while earnings declined only 6%. Margins were strong; up 260 basis points. Consistent with the third quarter margin performance was solid across the platform, capitalizing on aggressive restructuring actions and business integrations

Bookings were $253 million in the quarter, up 24% and also significantly up sequentially. We anticipate solid business conditions of environmental and vehicle services group; however we are not expecting commercial aerospace or trailer markets to recover rapidly.

Turning to Slide 7, at Engineered Systems sales were $473 million, up 6% from last year while segment earnings were down 10% to $48 million. Bookings for the quarter were $487 million up 17% and up sequentially.

The year over year growth in revenue and bookings is primarily attributable to the acquisitions of Tyler and Barker, partially offset by end market softness and seasonality. For the quarter operating margin was 10.2%, 140 basis point decline. The margin performance was impacted by the lower volume due to lower seasonality, approximately $3 million of one time costs associated with acquisitions and roughly $4 million of restructuring charges.

With respect to our Product Identification platform, we continue to see benefit from the improved demand trends first seen during the second quarter of the year. This is the third consecutive quarter where both revenue and bookings improved sequentially indicating improved channel dynamics and end market demand.

For the quarter, sales were $220 million up 5% primarily driven by FX. Year over year earnings were up 2% though margins were down 50 basis points compared to last year. Though still very strong in absolute terms, the reduction in margin was driven by product mix and restructuring costs in the quarter.

We are very pleased with the positioning of our Product ID platform and expect continuing improvements in our end markets supported by a solid book to bill of 1.02.

The Engineered Products platform posted an increase in revenue of 6% while earnings declined 9% year over year. Platform margins declined due to seasonally lower volume, product mix and one time acquisition costs.

With the acquisitions of Barker and Tyler, Hill Phoenix has built a leading position in the North American refrigeration case market. These acquisition provided revenue of $43 million in the fourth quarter and $132 million for the year.

Engineered Products bookings were $263 million up 20% over the prior year period for a book to bill of 1.04. We expect Hill PHOENIX and SWEP to show improvement in the first quarter but generally remain seasonally down. Their results will improve in the second and third quarters in line with normal seasonal upswings.

Moving to Slide 8, at Fluid Management sales declined 19% to $336 million and earnings were $68 million a decline of 32%. Bookings were down only 7% from the prior year. Fourth quarter operating margin was 20.1% down 400 basis points but strong considering the weakness in demand experienced throughout 2009.

For the year operating margin was 20.4%. We began with the goal to keep full year margins in this segment around 19% to 20% and I am happy to report we exceeded this goal.

We continue to see signs of improving end markets and sequential growth in revenue, earnings and bookings for the last two quarters.

Our Energy Platform continued to see sequential revenue growth in conjunction with improving North American rig count. However, as was the case in the fourth quarter and will be the case next quarter, year over year comparison in Energy are difficult.

Fourth quarter revenue declined 30% to $165 million while earnings were 42% lower. Fourth quarter margin remains strong but declined 530 basis points from the prior year period on lower volume and product mix.

Quarterly bookings continue to improve sequentially but were down 16% year over year. Book to bill was 1.07 reflecting continued momentum in served end markets.

Our Fluid Solutions platform generated $171 million in the quarter, a decline of 4%. Earnings also decline 4% yet we held margins. Bookings improved 5% year over year to $170 million. We expect this platform to gradually improve during 2010.

Now turning to Slide 9, Electronic Technologies continued to see improved end market demand for their communication components in electronic assembly equipment. They also continued to benefit from restructuring activities taken earlier in the year.

Fourth quarter revenue was $292 million only down 3%. Earnings were $40 million, the high point of 2009. Operating margin was 13.6% for the quarter driven by higher volume but impacted by roughly $2 million in restructuring costs. Book to bill continues to be strong at 1.05.

Our Electronic Assembly Equipment companies continue to see improving order book for the third consecutive quarter which contrasted with normal seasonality. In fact, order rates were up 26% sequentially in the fourth quarter.

We anticipate favorable climate in the Electronic Assembly markets to continue in the near term as a new wave of investment seems to be taking hold. Favorable market conditions resulted in a book to bill of 1.07 for this group of companies.

Our Communication Component companies continued to post strong results benefiting from relative stability in our key military hearing aid and NEMS markets and strong operational execution. Bookings continue to be strong in this space with a book to bill of 1.03.

Having reviewed the segments, I would now like to briefly provide some additional financial data. Going to Slide 10, fourth quarter net interest expense was $26.8 million. For the full year, net interest expense increased 5% to $100 million primarily reflecting low returns on invested balances.

Our net debt to total capitalization was 18.4%, a 650 basis point reduction from year end 2008 due to strong cash flow and relatively low CapEx and acquisition spending.

Turning to taxes, our fourth quarter tax rate was 27.2%. For the full year, our tax rate was 24.4% and compares favorably to last year’s 26.6% rate. The primary driver of our lower full year tax rate was a relatively large discrete benefit recognized in the second quarter of 2009.

Corporate expenses for the fourth quarter were $29.6 million essentially flat with last year. Full year corporate expense was $118 million, a 2% increase over 2008. This increase primarily reflects investments in our supply chain program, costs associated with other scale and leverage activities and increased corporate development costs.

Turning to Slide 11, in the fourth quarter restructuring charges were $10 million. For the full year restructuring costs and benefits were $72 million and $125 million respectively and in line with our original guidance.

Turning to Slide 12, now with respect to guidance, looking at 2010 we estimate full year organic growth revenue to be in the range of 4% to 6%. Electronic Technologies should show organic revenue growth in the low double digit range. Engineered Systems and Fluid Solutions should be in the overall 4% to 6% range and we expect Industrial Products to be flat with 2009.

We also expect acquisition related growth to roughly 3% for transactions completed in 2009. Corporate expense, interest expense and CapEx should all be up versus 2009 as we continue to invest in our businesses, and the tax rate is expected to normalize.

Based on these expectations, we are forecasting 2010 EPS to be in the range of $2.35 to $2.65.

Now let’s go to the earnings bridge on Slide 13. Borrowing improvement, product mix and pricing should improve earnings $0.23 to $0.45 while net acquisitions will add about $0.08. All 2009 acquisitions will be accretive to our 2010 EPS.

The benefits of restricting net productivity includes the absence of $72 million in restructuring charges from 2009, $30 million to $40 million of incremental benefits from those actions plus minor 2010 restructuring costs and includes supply chain, material and other productivity benefits which should add $0.40 to $0.48 to 2010 EPS.

Compensation increases will be about a $0.10 headwind as we restore some salaries and benefits. Corporate expense and interest expense will impact EPS $0.04 and $0.03 respectively.

Lastly, our normalized tax rate of 29% to 30% will impact EPS $0.17 to $0.19.

Of course each line item is subject to some level of risk but we feel confident that we can achieve full year EPS growth of 18% to 33%.

Now I’d like to turn the call back over to Bob.

Robert Livingston

Thanks Brad. With respect to our 2010 guidance, I am more confident today than two to three months ago about our 2010 outlook. The second half order rates are encouraging and do provide a base for revenue growth in 2010. In fact, our revenue guidance is a little bit stronger than the outlook provided at our November investor day.

Aside from the gradual improvement in our end markets, I am also extremely pleased with the progress we made on several initiatives throughout the year. Those initiatives include our focused M&A program inclusive of our improved post merger integration processes, our global supply chain initiative, the establishment of our China regional headquarters and co-locating our corporate and segment management teams to our new office in Chicago.

The benefits of these initiatives have already begun to accrue and will continue to benefit Dover and our shareholders in 2010 and beyond. I am pleased we undertook these initiatives in 2009 despite the weak global economy.

Our leadership teams realized we needed to make some changes to emerge from a downturn a stronger company, and we have. In fact, once we realized the severity of the recession, we set two key financial objectives for 2009; achieve full year double digit operating margins and 10% free cash flow as a percent of revenue.

Full year operation margin was 12.3% and free cash was 11.8% of revenue. Our leadership teams did a great job executing on these objectives.

In closing, I’d like to take this opportunity to thank all of the Dover employees for their hard work and support. Through our collective efforts we have emerged from the recession a stronger company. We are now focused on growth.

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

Paul Goldberg

Thanks Brad and Bob for that summary. At t his point we’d like to turn it back to the operator and if you could compile the questions. Before you do that, I’d just like to remind everybody to limit your questions to one with a follow up we’ll be better able to serve everybody who wants to ask a question. Thanks.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Inch – BofA/Merrill Lynch.

John Inch – BofA/Merrill Lynch

A question about the Engineered Product business, if I’m mistaken, Tyler had pretty big share with the big box retailers and those companies have actually pulled out not insignificant ramp ups in their intended CapEx remodeling, grocery store openings, that sort of thing. I’m curious, post Tyler have you seen any sort of a share shift on the part of those customers. We obviously know who the other competitor is, but have those customers looked and said well we can’t give you too much business because of Tyler with Hill Phoenix together. Have you realized that or maybe a little color around the expectations on that front?

Robert Livingston

My first comment would be no, we haven’t seen a share change or a share mix change but within that leading comment, you are going to see a little bit of noise from customer to customer. But we actually fee quite positive with the share that we have held over the Tyler business.

John Inch – BofA/Merrill Lynch

Your construction businesses where I think Brad said that the outlook still remains challenged. What are your thoughts toward the balancing between some sort of a future divestiture in terms on waiting for profitability to potentially come back even though non res construction still looks challenged in the U.S. versus think about maybe wiping the slate clean with respect to those businesses particularly given that it wasn’t really on your watch that they were acquired? How are you thinking about that?

Robert Livingston

I think your comment about being on our watch has nothing to do with the decision we make. But to respond to your question, we have made no decision nor do we have anything in the planning for any divestitures in 2010.

John Inch – BofA/Merrill Lynch

But I guess my point is are you in any way averse to selling businesses that may cyclically be at a bottom? May X those businesses that are cyclically at a bottom versus wanting to refocus Dover I guess is sort of the question.

Robert Livingston

I think we will work toward refocusing the portfolio a little bit over the I call it the medium term, the next two to three years but don’t look for a major shift in 2010 as we deal with the bottom of this market.

John Inch – BofA/Merrill Lynch

You’ve started all these initiatives from supply chain on down. Do you feel comfortable in terms of the management of the multiple balls that Dover has right now? I’m just curious on that front. How do you balance the concerns that perhaps you’ve taken on more than you can chew in the short run?

Robert Livingston

I think 2009 is behind us. I think the initiatives that were introduced in late ’08 and during 2009 have started to gain traction and our focus in 2010 and ’11 is on execution. I feel comfortable.

Operator

Your next question comes from Nigel Coe – Deutsche Bank.

Nigel Coe – Deutsche Bank

I actually missed your organic growth assumptions by segment, could you just repeat those please?

Brad Cerepak

What we said was, and this is a little bit of a change from what we said at Dover day, so we can talk a little bit about that too, but Electronic Technology should show organic revenue growth in the low double digit range and we have Engineered Systems and Fluid Solutions within that range, 4% to 6% of the overall total company, and we expect Industrial to be flattish from 2009.

Nigel Coe – Deutsche Bank

Within Industrial, what is the mix between what you’re handling and the other segments?

Brad Cerepak

I would tell you at this point we see both of those platforms being relatively flat, no real difference.

Nigel Coe – Deutsche Bank

Digging into the guidance, what do you see for cost flow back in 2010? I love industrials but talk about some of the temporary cost actions put through in 2009 come back in 2010. How much have you embed in for that?

Brad Cerepak

What we have, it’s right in the bridge there for comp and benefits, so we’re saying it’s about $0.08 to $0.12 so if you figure pick the mid point at $0.10 roughly $30 million.

Nigel Coe – Deutsche Bank

On the book to bill ratio of 1.04, typically speaking the fourth quarter is the weak book to bill quarter for you. What does that tell you about 1Q? Does that mean that 1Q is going to be stronger than normal relative to the fourth quarter?

Robert Livingston

With respect to the revenue outlook for 2010, we typically do see a seasonally weaker first quarter, a seasonally weaker fourth quarter with the strong shoulders in second and third quarter. You should still expect to see that similar pattern through the weakness in the first quarter may not be as significant as it has been in the past.

Nigel Coe – Deutsche Bank

The .02 of discontinued in the quarter, what was that?

Robert Livingston

Related to trucking.

Operator

Your next question comes from Alexander Blanton – Ingalls & Snyder.

Alexander Blanton – Ingalls & Snyder

I’d like to address the guidance item of restructuring savings briefly. At $0.40 to $0.48 which is quite a big number in terms of the gain you’re forecasting, and very often when companies build those things into their guidance, all of it doesn’t get realized because competitors are also restructuring and some or all of it winds up being given back to the customers in lower prices. So very often we just don’t see those restructuring. My question is, have you built in any safety factor for that in this number? What’s the risk that you won’t see all of that because there’s pricing pressure from competitors who have also restructured?

Robert Livingston

If you look at the bride we deal with pricing in a separate line than we deal with the restructuring benefits. The most significant item in the $0.40 to $0.48 for the restructuring line is actually the absence of the restructuring charges that we took in 2009.

Brad Cerepak

If you think about the mid point of that range, $0.36 of the $0.44 at the mid point is for things already completed and the absence of as Bob said, the absence of the cost. That’s the predominant share of that line item.

Alexander Blanton – Ingalls & Snyder

These are cost savings that you expect, am I correct?

Robert Livingston

These are not only cost savings we expect from completed actions, but also the absence of the $72 million we spent in 2009.

Alexander Blanton – Ingalls & Snyder

That has been expensed. That’s a good point. What is that per share?

Robert Livingston

That piece is $0.24 per share.

Alexander Blanton – Ingalls & Snyder

So it includes the absence of $0.24 of restructuring charges.

Robert Livingston

Yes.

Alexander Blanton – Ingalls & Snyder

Good point. Let’s just hope that you’re strong competitively that even if your competitors cut costs too, they won’t be able to force you to reduce prices even more than you expect.

My second question is on the acquisitions; you mentioned four acquisitions but I don’t believe you described them in any detail. Are they both on or standalone and also did you mention how much they’ll add to sales in the quarter?

Robert Livingston

Actually I think on three of the four acquisitions we actually issued press releases during the fourth quarter at the time of the acquisition. The largest acquisition was Barker and it is an add on to Hill PHOENIX. They are a manufacturer of specialty cases for the grocery stores.

The next largest acquisition was Inpro/Seal which was an add on acquisition for Waukesha Bearing, a manufacturer of isolator technologies or bearing applications in turbo machinery. The two smaller acquisitions were A La Cart which was an add on for Unified Grams and Extech which was a small add on for portable printing technology in our Product ID group.

Brad Cerepak

What we said was they would provide 3% of our top line growth in 2010. The way to think about it is before as Bob was speaking to is about two points of that three and the other piece being the carry over from Tyler year over year.

Operator

Your next question comes from Robert McCarthy – Robert Baird.

Robert McCarthy – Robert Baird

I wonder if I could get you to speak to again your comments about seasonality expected in Engineered Systems which I guess we’re really talking about the refrigerating case business. Did you really just speak to normal seasonality, low first quarter followed by stronger second and third or was there something more there that I missed?

Robert Livingston

Are you referring to the outlook or are you referring to the fourth quarter?

Robert McCarthy – Robert Baird

The outlook.

Robert Livingston

It is quite normal and Hill Phoenix’s business and end market for the fourth quarter and the first quarter to be a little bit light relative to the second and third quarters. We see the normal seasonal upswings in the second and third quarter. We’re expecting the same patterns in 2010.

It does appear to be a bit more pronounced but I have to tell you the reason it may appear that way to the audience is that we have made a rather major investment in the Hill Phoenix business with a couple of acquisitions to build out their position in that space and it has become a larger piece of the Engineered Systems portfolio. It’s normal seasonality. Nothing else.

Robert McCarthy – Robert Baird

Are thinking of that market as one like many others has some pent up demand in it?

Robert Livingston

We would like to think so. Now the question is, does some of that pent up demand get released in 2010 or does some of that demand continue to be deferred until 2011. We’re taking a rather conservative approach right now with the outlook and we’ve given guidance here on the Engineered Systems revenue for 2010 of organic of about 4% to 5% to 6%, in the mid point of our range.

Let me add one other comment. There’s two pieces to this Hill Phoenix business. One is the remodel, the other is the new store construction. And you have to appreciate some of this pent up demand that we all may think exists in the market space truly is tied to commercial construction.

It was weak in ’08, it was weak in ’09 and we’re taking a similar attitude towards 2010.

Robert McCarthy – Robert Baird

It certainly seems appropriate given the evidence. I’d like to ask about your forecast for relatively flat organic growth in Mobile Equipment where as I’m sure you’re aware, a lot of your potential customers anyway are talking about fairly substantial production increases compared with last year when they were producing so far below retail demand. I would think that might be particularly true for the customers at [Kremlow]. I’m wondering if that forecast is a function of an element that I might not appreciate or if it’s a function have you been beaten up so badly in that business that you don’t want to count on any growth?

Robert Livingston

You question was about Mobile Equipment, but you’ve referenced a company or two.

Robert McCarthy – Robert Baird

I’m sorry, I meant material handling.

Robert Livingston

You make a good point there on Mobile Equipment. We see some ups and downs within the portfolio. We do have some companies in that portfolio that should see some organic growth as their end markets do recover.

We have a couple of drags going into 2010. We do expect our trailer business to be down and that is still related to end market demand around the oil and gas part of their business. And we have some caution in our plan with respect to commercial airspace.

Robert McCarthy – Robert Baird

Do you have the ability to get some upside from Kyle Trailer from military?

Robert Livingston

That’s a very significant part of the product portfolio and customer set and Kyle Trailer and we do enjoy that business, but it is lumpy. We are actually forecasting our military business at Kyle Trailer to even be down as well in 2010. Not significantly, but down as well.

Robert McCarthy – Robert Baird

And to my question as it turns out was really mobile material handling companies?

Robert Livingston

I understand the point you make. I read the same press and trade articles that you do or perhaps some of the same. All I can tell you right now is we are not seeing an uptick in the material handling business that you and I would refer to as construction related. Is it better in the second half? Maybe, but we don’t have that visibility right now.

Operator

Your next question comes from Scott Davis – Morgan Stanley.

Scott Davis – Morgan Stanley

I want to get a sense of what more, maybe quantify or at least directionally talk to what more can be done as far as taking costs our of supplier consolidation and centralizing your corporate functions, things that Brad’s really talked about, having some potential to do in 2009 and 2010. Maybe one way to ask it is what inning are we in in that and any way to quantify it at all as a tailwind or an opportunity.

Brad Cerepak

Let me speak specifically to the supply chain initiative. Our targets going into 2010 have not changed from what we shared with you at our investor conference in November or what we shared with the audience on a couple of calls we had in 2009.

We expect to close 2010 with an annualized run rate on I call it savings capture of $75 million to $100 million. Within our forecast or within our guidance we have about $0.06 in the EPS guidance from those savings. It’s going to be very much second half of the year and I will tell you of the $0.06 the bulk of it may be in the fourth quarter.

But our outlook towards that has not changed over the last four or five months.

Scott Davis – Morgan Stanley

Is there more to do I guess is kind of my question. The $75 million to $100 million, I assume that’s what’s been done and in the process right now.

Brad Cerepak

Let’s call it initiated and that savings probably comes from I’m going to do, it’s a bit of a stretch here, but it’s seven or eight what we call spend categories. So there are additional opportunities over the next three to four years and we look at this as a three to four year program.

Let me just add one piece to that, and it’s not directly related to your question about more consolidation at the corporate level, but we do have in our guidance let’s say $8 million to $10 million of increment restructuring. So I would call these normal things we’re going to continue to do to take cost out of our businesses and continue to look for efficiencies.

So we haven’t stopped there. It’s just not something as big as what we did given the economy in 2009.

Scott Davis – Morgan Stanley

How would you characterize between the spread between low hanging fruit and structurally difficult stuff to get at? What do you think, how would you break that down? I’m just trying to get a sense of what’s easy and what’s hard.

Robert Livingston

I’ll be real direct with you. I think we captured the low hanging fruit. On the restructuring and business combinations and integrations of existing companies within our portfolio, we’ve captured the low hanging fruit.

Scott Davis – Morgan Stanley

My last question is on the average size of deals. You’ve done a pretty darn good job I think in cash reinvestment and these $50 million kind of deals are interesting. Are there bigger deals out there kind of like the Tyler’s of the world that you envision for 2010?

Robert Livingston

There’s two parts to your question. Are there bigger deals out there?

Scott Davis – Morgan Stanley

Are there bigger deals that you’ll get done? The probability of getting done.

Robert Livingston

We would label a couple of them as being in the pipeline now but they’re more targets than they are responses to offer memorandums. You understand the difference. Will a larger deal get done in 2010? I could not sit here and predict that.

Operator

Your next question comes from Shannon O’Callaghan – Barclays Capital.

Shannon O’Callaghan – Barclays Capital

A question around electronic assembly; the book to bill is strong. What are your thoughts there heading into early 2010 in terms of the sequential pattern. And then you mentioned a new wave of investment. What’s you visibility into the length of this upturn at this point?

Robert Livingston

We wish we had better visibility than we have is the way I would open. But the fourth quarter order rates with the electronic assembly companies were fairly healthy as we shared with you. They were up 26% sequentially.

I can share with you that the pattern here in January has held consistent with the fourth quarter and I don’t mean consistent by it being up 26%, consistent at a run rate with the fourth quarter. We believe the order rates for the first quarter could be similar to the fourth quarter.

We are not, we are not sitting here expecting 2010 order rates to be up 25% in 2010 over the fourth quarter run rate.

We do as we said here in our script, we do see signs that we are in the early days of a new investment wave here in this market space but I temper that statement by saying I think it has as much to do with new product launches, maybe even more so than it does with increased consumer spending.

That would be the tempering comment that I would offer is that I don’t think this is really being driven by a huge increase in consumer spending.

Shannon O’Callaghan – Barclays Capital

When you think about, this can swing the way your year plays out because typically that would contribute to some of the seasonality in one cube but it sounds like the assembly business might be up sequentially. Are you assuming it kind of stays up or increases from there for the rest of the year or are you assuming it comes back in the second half or in ’11? What’s your thinking when you’re guiding, what are you assuming for that.

Brad Cerepak

We’re not guiding for ’11.

Shannon O’Callaghan – Barclays Capital

For the second half of ’10 then.

Robert Livingston

What you also have to appreciate is, don’t look at TET. Don’t look at Electronic Technologies as being only electronic assembly or semi comm equipment. If you look at the end markets we serve, the semi comm equipment piece of our portfolio, we would expect year over year to be up better than 20% every year.

I’m not talking 2010 over the fourth quarter. I’m saying year over year to be better than 20%. For the board assembly and test, that growth rate is going to be more modest, 12% to 15%. And then you look at our component businesses which are the cell phone market, the hearing aid market. The cell phone market may be up 10% in our unit volume. For the hearing aid business, that’s a rather modest growth rate. It’s in the 3% to 5% to 6% range. If you look at the other parts of the component of businesses, it’s around military, telecom infrastructure, some industrial applications, 3% or 4%, 5%.

So when you blend it all as Brad said, low single digits, I would say the range for the segment bracketed around 10% to 12%.

Operator

Your next question comes from Robert McCarthy – Robert Baird.

Robert McCarthy – Robert Baird

Just for everybody’s benefit, could you remind everybody roughly how much of Electronic Technology is accounted for by the non component, the semi comm and board businesses?

Robert Livingston

If you look at the three equipment companies versus the three component companies, it’s roughly a 50/50 split, probably 60% to 65% components and 35% equipment in 2009.

Robert McCarthy – Robert Baird

A couple of things I’m not sure I got quite right. Did you specifically attribute the change in your organic growth guidance to this segment?

Robert Livingston

No. Are you referring to the change from our guidance at Dover day versus now?

Robert McCarthy – Robert Baird

Three to five up to four to six.

Robert Livingston

I would tell you it’s around two segments and we’re talking organic growth. It’s around Electronic Technologies. It’s also around Fluid Management.

Robert Livingston

We did see a stronger business activity in the fourth quarter, especially in our energy portfolio of companies and as we enter 2010 we see the fourth quarter activity sort of moving sideways for the next couple of quarters, albeit at a higher rate than we were seeing in the third quarter.

Some of the growth is at DFM, some of the growth is at ET.

Brad Cerepak

Coming off Dover day, think of that as about a point and a half worth of growth versus three to five that we said then. There’s also an incremental one point of FX. That was in our organic growth guidance.

Robert McCarthy – Robert Baird

Did I hear specifically a comment about the size of your acquisition pipeline right now?

Robert Livingston

No.

Robert McCarthy – Robert Baird

Well then can we get one and can you speak to what you are thinking notionally of an acquisition spend budget for the year?

Robert Livingston

That’s difficult to do. The only specific guidance I can give you with respect to the pipeline is we don’t anticipate closing on an acquisition in the first quarter. The targets that we’re looking at are clearly in the four or five spaces that we identified at Dover day as the areas that we would like to put to play most of our M&A dollars over the next two or three years.

If you look at size of spending chest so to speak, pick something in the $400 million to $600 million range, and I’m not sitting here predicting that we’ll do that.

Robert McCarthy – Robert Baird

That’s aspirational right?

Robert Livingston

Yes.

Robert McCarthy – Robert Baird

Could I get you to talk a little bit about equipment versus consumable trends over the last couple of quarters, specifically the fourth and how that goes into next year for PID?

Robert Livingston

Third and fourth quarter, again this is specific to Product ID, third and fourth quarter we did see more of an increase in equipment sales than we did consumable sales. Consumable sales actually held up fairly well during the first half of ’09 and going into 2010 we view it to be rather normal from historical perspective and that’s going to be about 55% consumables and about 45% equipment.

Robert McCarthy – Robert Baird

Which is I gather another way of saying you think they’re going to grow at about the same pace?

Robert Livingston

We would look at the Product ID expectation of being around the 5% to 6% range.

Paul Goldberg

Thank you very much. That will conclude our conference call for today. We thank you for joining us and we will speak to you next quarter. Thank you very much.

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Source: Dover Corporation Q4 2009 Earnings Call Transcript
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