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Executives

Robert Livingston – President and Chief Executive Officer

Brad Cerepak – Vice President, Finance and Chief Financial Officer

Paul Goldberg – Treasurer, Director of Investor Relations

Analysts

Jeff Sprague – Vertical Research Partners

Terry Darling – Goldman Sachs

Wendy Caplan – SunTrust

John Lynch – Bank of America/Merrill Lynch

Nigel Coe – Deutsche Bank

Scott Davis – Morgan Stanley

Alex Blanton – Ingalls & Snyder

Dave Tusa – JP Morgan

Scott Gaffner – Barclays Capital

Dover Corp. (DOV) Q2 2010 Earnings Call July 23, 2010 9:00 AM ET

Operator

Good morning, and welcome to the Q2 2010 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.

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

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

Paul Goldberg

Thank you, Melissa. Good morning and welcome to Dover’s Q2 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 Q2 operating and financial performance and our updated outlook for the rest of 2010. We will then open the call up to questions. In the interest of time we ask that you kindly 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 August 6th 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: 85-79-12-89.

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 expand their analysis of Dover Corporation by referring to our Form 10K 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. I’m pleased to report Dover posted significant Q2 gains in revenue, bookings, earnings, and margin, reflecting improved volume across the majority of our companies and continued benefits of our productivity initiatives.

Revenue increased 29% and orders were up 40%, both higher than we anticipated at the beginning of the quarter. Organic revenue growth was 24% while acquisitions contributed 4 points, and FX added 1. Positive trends continued in electronic technologies, energy, fluid management, refrigeration equipment and product ID. Specifically we saw better than anticipated gains in electronic technologies driven by recent design wins at Knowles, growth in our electronic assembly markets, and a growing silicon equipment business at DEK. Energy’s performance was driven by increased North American rig count and continued market share gains.

At Fluid Solutions, a broad, end-market improvement, especially in Asia and Latin America, helped boost results. At Product ID, demand for product marking and coding equipment remains quite healthy. Lastly, the anticipated seasonal ramp up at Hill PHOENIX was even stronger than expected in the Q2 driven by strong remodel activity and leveraging our recent capacity expansion enrichment.

With that, let me move to our Q2 results and Brad will discuss our 2010 guidance later in the call. Today we reported a 69% increase in quarterly earnings per share to $0.91. Q2 revenue was $1.8 billion, an increase of 29%. Earnings increased 70% to $172 million, as we benefited by strong earnings leverage in the quarter. On a sequential basis revenue and net margins increased 13% and 59% respectively.

Bookings increased 40% over last year to $1.9 billion, and were up 9% sequentially. For the third consecutive quarter bookings improved in all segments at both a year-over-year and a sequential basis. Book to bill finished at 1.08. Segment operating margin for the quarter was 16.9%, up 560 basis points. Year-over-year margins increased significantly in all segments, most notably in electronic technologies and industrial products.

For the second consecutive quarter, each segment posted sequential margin expansion. These results reflect strong conversion on volume and the benefits of our productivity initiatives. I am gratified to see how well our companies have converted volume to earnings.

In the Q2 we generated free cash flow of $184 million, representing 12% of revenue. I remain confident that full year free cash flow will be at least 10% of revenue. Our acquisition pipeline has become more aggressive as we continue to look for opportunities which complement our strong positions and diversify our geographic footprint. We closed two small deals in the Q2 totaling $10 million. However, we remain confident we will complete some larger strategic add-ons as the year unfolds.

Before I turn the call over to Brad I wanted to let you know that we moved to our new corporate headquarters in the Chicago suburbs in May. I’m excited to finally have our segment and corporate leadership under one roof. I am convinced that we will derive many benefits from being together including better communication and collaboration. With that, to Brad.

Brad Cerepak

Thanks, Bob. Good morning, everyone. I’d like to cover our Q2 segment performance and then discuss some additional financial information.

Starting on slide 5. As Bob mentioned, sequential revenue increased 13% across Dover reflecting solid demand on top of normal seasonality. This performance was strong across all our segments. Revenue grew 19% sequentially in both engineered systems and electronic technologies, while industrial products and fluid solutions' sequential revenue growth was 8% and 6% respectively. From a bookings perspective we saw sequential gains at all four segments. Also of note, booking trends were relatively stable thought-out the quarter.

From a geographic revenue perspective, Asia was our fastest growing region with a growth rate of 51%. North America grew at 29%, while Europe was up 14% and Latin America was up 20%.

Turning to slide 6. Industrial products posted revenue of $462 million and $62 million of earnings, an increase of 21% and 142% respectively. This strong earnings performance was the result of increased volume, the benefits of our prior restructuring efforts, and one-time gains of $4.1 million including the sale of a facility.

Bookings were $512 million, an increase of 38% resulting from modestly improved trends in our material handling platform. Book to bill for the quarter was 1.11.

Industrial products' quarterly operating margin was 13.3%, up 670 basis points from last year and 140 basis points sequentially. Adjusted segment margin was 12.2% excluding the one-time gains. Again, our earlier right sizing actions continue to put this segment in strong position to leverage any market recovery.

With respect to our material handling platform, sales increased 40% to $214 million. Earnings improved ten-fold, driven by increased activity across most end markets with the notable exception of residential construction. Platform results were positively impacted by a $3.4 million gain on the previously mentioned facility sale. In total, material handling’s margins were up 1300 basis points, absent the one-time gains.

For the quarter, bookings were $224 million, an increase of 77% over last year and 10% sequentially, yielding a book to bill of 1.04. North America non-residential construction trends continue to show modest improvement.

With respect to our mobile equipment platform, sales were $249 million, up 8% from last year and earnings increased 22%. Margins increased 170 basis points, capitalizing on improving automotive service markets and restructuring actions in business integrations completed in 2009. Bookings were $289 million, an increase of 17% over the prior year. Sequentially, booking increased 25%, aided by a large military order at Sargent. We still anticipate a slow recovery in the commercial aerospace, bolt trailer, and refuse vehicle markets but expect our military and petroleum trailer markets to show improvement.

Turning to slide 7. At engineered systems sales were $577 million, an increase of 23% and segment earnings increased 47% to $85 million. Bookings were $602 million, an increase of 29% over the prior year, resulting in a book to bill of 1.04. The year-over-year growth in revenues is largely attributable to strength in Product ID and Hill PHOENIX. For the quarter operating margin was 14.7%, a 240 basis point improvement over last year and a 340 basis point improvement sequentially.

With respect to our Product Identification platform, Markem-Imaje continued to benefit from strong demand in Asia and Latin America, driven by fast-moving consumer goods end markets. Q2 sales were $220 million, an increase of 14%. Year-over-year margins increased 50% and margins increased 470 basis points. Book to bill was 1.02. As we exit the quarter we expect these end-markets to remain healthy.

Moving to engineered products. This platform posted an increase of revenue of 30% to $358 million and earnings increased 36%, resulting in margin expansion of 60 basis points over last year, and 420 basis points sequentially. Excellent margin expansion at Hill PHOENIX was partially offset by materials cost escalation and product mix at SWEP. Barber & Tyler (sp) provided acquisition revenue of $39 million in the quarter.

Engineered products bookings were $379 million, an increase of 46% over the prior year period for a book to bill of 1.06. This seasonal improvement is largely driven by strong remodel activity at Hill PHOENIX, which ended the quarter with a book to bill of 1.11. Although the Q4 will soften as per its normal seasonal pattern, we expect engineered products to have a strong Q3.

Moving to slide 8. At fluid management, revenue increased 37% to $404 million, while earnings increased 73% to $96 million. Bookings were $418 million, an increase of 43% from the prior year, resulting in a book to bill of 1.04. Q2 operating margin was 23.8%, a 500 basis point expansion over last year and an increase of 100 basis points sequentially. End markets continue to be solid in this segment.

With respect to our energy platform, revenue increased 56% to $216 million while earnings doubled. Margin improved 700 basis points from the prior year period on a significantly higher volume, driven by an expanding North American rig count, continued penetration of horizontal drilling, and the benefits of productivity.

Quarterly booking increase 70% year-over-year to $226 million. Book to bill was 1.05 reflecting solid dynamics in most served end markets. Looking forward to the next two quarters, we anticipate North American rig count will remain stable.

Moving to fluid solutions. This platform generated revenue of $188 million, an increase of 20%. Earnings increased 36% resulting in a 260 basis point margin improvement. Booking increased 20% year-over-year to $192 million. We are seeing the continuation of modest but broad improvements in most of this platform’s served markets.

Now turning to slide 9. Electronic technologies’ revenue was $346 million, an increase of 41% over 2009. The majority of end markets in this segment were up significantly year-over-year, with continuing strong demand for electronic assembly equipment, solar equipment, and MEMS microphones. Earnings were $60 million, three times better than the $18 million earned last year. Operating margin was 17.2%, driven by significantly higher volume and strong production on an improved cost base. Bookings were $394 million, up 62% over last year and 10% sequentially. Book to bill continues to be strong at 1.14.

Our electronic assembly equipment companies posted a 90% jump in revenue year-over-year and continued to see an improving orders booked for the fourth consecutive quarter. In fact order rates increased 20% sequentially. Q2 book to bill for this group of companies was 1.32. We expect a comfortable climate in electronic assembly markets to continue in the near term.

Lastly, our communication component companies posted another solid quarter, primarily reflecting strength at Knowles and increased demand in telecomm infrastructure markets. Bookings continued to be solid with a book to bill of 1.03.

Having reviewed the segments, I now would like to briefly provide some additional financial data. Moving to slide 10. Q2 net interest expense of $27 million was up $2 million from last year and in line with our full year guidance. This result reflected lowered returns on invested balances. Our net debt to total capitalization was 18.1%, largely unchanged from year-end 2009. Turning to taxes. Our Q2 tax rate was 29.2% and our year-to-date rate is 30.1%. We still expect the marginalized full year rate to be in the range of 29% to 30% excluding discreet tax items.

Corporate expenses for the Q2 were $32 million, up $3 million from last year primarily due to increased deal expenses.

Turning to slide 11. As we discussed, Q2 revenue and bookings were quite strong for us. Accordingly, we have raised our full year outlook. We now expect full-year revenue growth excluding acquisitions to be in the range of 13% to 15%. Let me take a minute to talk about the revenue range by segment.

We now expect industrial products and engineered systems revenue should increase 7% to 9%, and fluid management’s revenue growth should be in the range of 17% to 20%. Lastly, electronic technologies should grow revenue at the high 20% level. Further, we expect acquisition growth to be roughly 3%, bringing our full year range to 16% to 18%. Based on these revised revenue expectations, we are now forecasting full year 2010 EPS to be in the range of $3.05 to $3.25.

Now let’s go to the full year earnings beginning on slide 12. Volume is the primary driver of the increased earnings. Volume, product mix and pricing should improve earnings $0.98 to $1.15. This compares favorably to our previous range of $0.56 to $0.80. Restructuring productivity continues to be a big driver of EPS growth in 2010. This is primarily due to an absence of restructuring costs, carryover benefits, and savings from our supply chain initiatives. Our acquisitions continue to perform at a high level, and now will deliver $0.12. Lastly, compensation expense and the tax rate impact is a function of our improved revenue and earnings forecast.

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

Robert Livingston

Thanks, Brad. I am pleased with our very strong performance in the first half of this year, especially with regard to revenue and bookings growth, conversion, and operating margin. We expect to see a solid Q3 on the strength of our bookings and backlog. Although the Q4 should be seasonally softer than the third, we fully expect to finish the year in a strong form.

I am constantly encouraged by the many positive developments around Dover, several of which are related to product innovation, market expansion activities, and customer service. I’m particularly excited about the rapidly-growing silicon equipment business at DEK and the recent design wins at Knowles. I've also taken note of several instances where our growth has significantly outpaced the growth rate of our end markets, especially at companies like Hill PHOENIX, US Synthetic, Heil Environmental, Markem-Imaje, and SWEP. These companies have had great success expanding their share through strong customer focus and investing in the right products. I’ve also been encouraged by the modest end market improvements seen in industrial products, which bode well for the future. Lastly, our global supply chain initiative is slightly ahead of pace and is now forecasted to achieve $35 million of savings in 2010.

In closing, I’d like to commend everyone at Dover for all their efforts and contributions to a very solid first half of 2010.

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

Paul Goldberg

Thanks, Bob. At this point I’ll turn the call back over to Melissa, and I’d just like to remind you before I do so that we would just like you to ask one question with a follow-up so we can take as many questions as possible. Thanks again for your cooperation, and Melissa, please compile the questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Your first question comes from Jeff Sprague at Vertical Research Partners.

Jeff Sprague – Vertical Research Partners

Thank you very much. Just a couple quick questions. First on the Hill PHOENIX, can you give us a little bit more specific color on how that business performed in the quarter, in terms of year-over-year revenue growth and orders?

Robert Livingston

Well, maybe Brad can comment more. Our orders, our book to bill was again quite positive for the quarter, Jeff. Organic revenue growth at Hill PHOENIX was 15%, 15.5%. Very strong quarter for Hill PHOENIX. And I guess I would want to comment if I, is I’d comment on organic growth rate at Hill PHOENIX. Part of that also reflects the ability we have to rapidly respond to some quick delivery needs of our customers in the Q2, and Jeff, that reflects the decision we made last year to actually expand some manufacturing capacity at Hill PHOENIX.

Jeff Sprague – Vertical Research Partners

Great. And then Bob, just on the purchasing initiatives, the fact that you’re running ahead, is that indication just of good production or is the target looking bigger, therefore implying maybe there’s more out in ’11 and ’12 than you thought?

Robert Livingston

We have not publicly changed are target run rate. As we’ve said for the past four or five quarter now, Jeff, that we expect to exit this year at a run rate of savings of $75 million to $100 million. We will update you on a future look toward that at Dover Day in November. And with respect to the increased savings, the guys, the teams, the folks are executing very well.

Jeff Sprague – Vertical Research Partners

Okay, thank you very much.

Operator

Your next question comes from Terry Darling of Goldman Sachs.

Terry Darling – Goldman Sachs

Thanks, well done gentleman. Quite possibly the best quarter across our coverage versus overall expectations. Congratulations. You know, I think one of the things that surprised me about the forward commentary is that you’re really not looking for organic to tail off very much in the back half. And I’m wondering if you could talk about the pieces of the puzzle there. I mean presumably electronic technologies does tail off. I was expecting industrial and engineered systems to fall off as well. Maybe that’s where your outlook is moving up the curve. But maybe you could just take us through the pieces there in the back half organic.

Robert Livingston

Okay, let’s sort of start at the top line and look at our guidance numbers. If you look at the second half of the, sort of the midpoints we’re looking at organic growth for the second half to be about 13% when you do the math. That compares to organic growth in the first half of 16%.

Terry Darling – Goldman Sachs

Right, so not a lot of degradation there.

Robert Livingston

Well, not a lot of degradation and a little bit of a more difficult comp, Terry.

Terry Darling – Goldman Sachs

If you look at some of the other companies, you’re coming down from, you know, kind of low double digits, upper singles down into the mid to low, so…

Robert Livingston

Again, it’s a little bit of a difficult comp against the second half of last year. And when you look across the business and look at the four segments, your comment or assumption is right on electronic technologies. Sort of look at electronic technologies as being somewhat flat for the second half of the year. But we do expect to continue to see some transactions at engineered systems and industrial products. Within fluid management…

Terry Darling – Goldman Sachs

I’m sorry, Bob. Your electronic technologies organic for the back half is flat year-over-year?

Robert Livingston

Second half revenue would be flat with the first half.

Terry Darling – Goldman Sachs

With the first half, okay. You’re talking absolute dollars now.

Robert Livingston

Absolute dollars.

Terry Darling – Goldman Sachs

Okay.

Robert Livingston

We don’t have any acquisition activity within electronic technologies to speak about. Within fluid management, we do expect the energy business to be somewhat flat, both revenue and earnings in the second half of the year versus the first half; but we do expect to continue to see some growth in fluid solutions.

Terry Darling – Goldman Sachs

Okay. And then you know, on the segment margin for the company overall, almost 17% recognizing it’s your seasonally strongest quarter there, but you talked about that longer-term goal of trying to get to that number exiting 2011. And so on the back of Jeff’s question, maybe the bar is moving a little bit higher here. How should we think about kind of the structural margin opportunities as we look longer term relative to your prior comments of trying to get that to 17%? We’re kind of already there.

Robert Livingston

Well, I wouldn’t change the comments that I shared with you in April. I think longer-term we do expect our operating margins to be 17% plus, 17% and a fraction. I think it’s a product of three to four things that we’re focused on. One is the supply chain initiative will benefit that. The additional productivity initiatives will obviously help that. I think a continued focus and a growing focus on product development and geographic expansion is going to help the top line. That will flow eventually into margins. Terry, we’re tying to expand the business.

Terry Darling – Goldman Sachs

Okay, I’ll turn it over. Thanks.

Operator

Thank you. Your next question comes from Wendy Caplan of SunTrust.

Wendy Caplan – SunTrust

Thanks, good morning. As we look at your working capital in the quarter and the first half it looks fairly well controlled in the face of this strong demand that we’ve been talking about. Can you talk about your metrics there – where you’re targeting specific improved metrics and where’s the focus at this point?

Robert Livingston

Well we’re, like anything else we’re always striving for continuous improvement in working capital, not unlike any other part of the business. And the focus as you know, Wendy, for the last four or five years had been to get working capital below 20%. I think in the first half we were in the 18% range, we’re feeling very positive about that. We think we have some additional opportunities to bring it down. We have not set a different formal target. That’s something we’re looking at here over the next couple of months.

Wendy Caplan – SunTrust

Okay. And the cash that that generates in terms of improving working capital, can you talk about- You mentioned acquisitions, that you have a high level of confidence in them going forward. Can you give us a little color in terms of what you’re looking at relative to the acquisitions in terms of size, location, kind of segment, and multiples that you’re seeing at this point please?

Robert Livingston

Well, do we have a half an hour? Let me comment, you made a comment about the focus on working capital and the cash that it generates. And I just want to point out, Wendy, that in the first half, especially in the Q2 with our 12% cash flow, 12% of revenue, I’ll tell you I think the benefit in the first half has come as much from margin expansion as it has from a working capital focus. Not that we haven’t made some strides in working capital but the margin expansion has a significant impact on that number as well.

Our areas of focus have not changed from the message we shared with investors and analysts at Dover Day last November. The bulk of our capital deployment in M&A we still believe is going to be focused in the areas of refrigeration equipment, energy, fluid solutions, especially pumps, communication components, and product ID. And again, I feel like I’m on a repeating needle here, but you look at the acquisitions we made last year – they fall squarely into those five categories. The two small acquisitions we made in the Q2 fall directly into those five categories. And the areas that we’re looking at that are in our current pipeline today are also in those five spaces.

Wendy Caplan – SunTrust

And the ones that you have in the pipeline, are they, can you speak to the size of those and kind of location as well as what multiples seem to be doing?

Robert Livingston

Multiples aren’t that much different than what we were seeing in the Q1 and perhaps even in the Q4 of last year. You look at - It depends on the business, it depends on the growth rate that you have with the opportunity, but I would say that EBIDTA multiples are into let’s call it the 7 +/- 1. If the earnings are depressed you may end up seeing a little bit higher multiple on the earnings. But on an ongoing basis the business will perform, we’re seeing EBIDTA 7, 7.5 +/- 1.

Wendy Caplan – SunTrust

Thanks very much, Bob.

Operator

Your next question comes from John Lynch of Bank of America/Merrill Lynch.

John Lynch – Bank of America/Merrill Lynch

Thanks. Good morning, everyone. Now I just want to go back to the speaker prior to Wendy. I think his opening comments were you guys were expecting to have very strong organic growth in the back half and he thought it was going to taper off. I actually have quite a different view. It strikes me that 13% to 15% is calling for a fairly significant deceleration of back half organic growth. I know, Bob, you’ve referenced seasonality. I guess I’m, I just don’t- If you look at your overall level of activity since the recession of 2008 volumes are really depressed. I mean are comps really the way to look at this? Why shouldn’t we begin to see a continuation of the improving trend that should lead into the second half regardless of the comps?

Robert Livingston

Okay, I’m not sure even what the question was, John.

John Lynch – Bank of America/Merrill Lynch

Are you just being conservative on your organic growth? You’re referencing traditional seasonal and I’m arguing volumes have been really depressed regardless of the comps. That’s all I’m asking.

Robert Livingston

Right. Number one, I’ll tell you we’re not being conservative on the organic growth. If you look at the guidance that we’re providing now for the year, and you compare that to what we were looking at 90 days ago on our April call, Brad’s probably got a more specific number but we’ve actually increased our revenue outlook for the second half by about $300 million in revenue. When you do your year-over-year comps and look at organic growth the numbers change a bit because we started to see a pick up in the second half of last year.

The second half, our outlook right now for the second half is that revenue’s going to be a little bit higher than it was in the first half on a sequential basis.

Brad Cerepak

John, if you’ll recall, too, the second half, when we were on the call last time we were thinking about low, mid single digits growth rate. And now we’ve increased that quite substantial to the, as Bob indicated, 13% organic growth rate. So again, from first half to second half, 16% in the first half to 13% in the second half. A pretty sizable move in the second half from where we were.

Robert Livingston

And John, we’ve got, sitting here today we’ve got pretty good visibility for the Q3 and I would share with you, for everyone, that the order rates in July continue to hold up quite well. It’s not any different than what we saw or expected, anticipated in the Q2. The Q4, the Q4 always is a little bit of a concern for me just because of the sort of the seasonality pushes and pulls that we see most notably at Hill PHOENIX, and some of the seasonality that we typically see within electronic technologies, especially the electronic assembly equipment.

Brad Cerepak

One other way to think about it, John, would be our Q2 into Q3, we would expect that our Q3 looks a lot like the Q2. And so from a sequential point of view, if you just think sequentially for a second, we would expect our revenues and orders to maintain the pace of the Q2 into the Q3, and then as Bob said seasonally adjust into the Q4.

John Lynch – Bank of America/Merrill Lynch

Okay, that’s actually helpful. Brad, the comp and benefit increases which you referenced as a function of the improved revenue and earnings, is that a headwind in the second half or has that been absorbed as a run rate from the Q2?

Brad Cerepak

It’s been absorbed at this point.

John Lynch – Bank of America/Merrill Lynch

Okay. That’s all I have, thanks much.

Operator

Your next question comes from Nigel Coe of Deutsche Bank.

Nigel Coe – Deutsche Bank

Yeah, thanks. Good morning. I just want to echo Jon’s comment there about the second half revenues. I mean if you take the high end of your guidance range, the sequential second half over first half increase, it’s about 2%. And I think that’s towards the lower end of where you've been recently. So it does appear that you're not factoring in much additional momentum from the Q2 certainly.

Robert Livingston

I won’t disagree with the math.

Nigel Coe – Deutsche Bank

Great. So just I think you mentioned, well $35 million of cost savings this year from the procurement program. Is that correct?

Robert Livingston

Yes.

Nigel Coe – Deutsche Bank

What is the net number? Because obviously you’ve made some investments in the first half of the year. What is the net number? Where does that stand right now?

Robert Livingston

Oh my goodness. Do you have that answer, Brad? The net is positive.

Brad Cerepak

It’s probably on the order of magnitude of $0.05.

Robert Livingston

$0.05, yes.

Nigel Coe – Deutsche Bank

Okay. And if I’m correct you’ll turn positive for the first time in Q3?

Robert Livingston

I’m sorry, Nigel. Can you repeat that?

Nigel Coe – Deutsche Bank

So you go from a net investment to a net benefit from Q2 to Q3. So Q2, that’s drag.

Robert Livingston

Correct. Yes, that’s correct.

Nigel Coe – Deutsche Bank

Okay, I just wanted to make sure that was correct. So basically we’re going from a net of 15 to 20 to a similar range of 75 to 100 in 2011?

Robert Livingston

Correct.

Nigel Coe – Deutsche Bank

Okay, great. Just wanted to make sure that was the case. And secondly, the sentiments of management really surprised me. I thought rig counts were down Q to Q which was normalized as the Canadian rig count-

Robert Livingston

No, let me correct that, Nigel. When you look at the average rig count, the average deployed rig count in the Q1 versus the Q2, there was actually a slight increase in the Q2. Q2 was up 4% or 5% or 6% over the Q1.

Nigel Coe – Deutsche Bank

In the US or this is in North America?

Robert Livingston

North America.

Nigel Coe – Deutsche Bank

North America, okay.

Robert Livingston

Now if you look at March 31st to June 30th there is a decline.

Nigel Coe – Deutsche Bank

Right.

Robert Livingston

If you look, there’s a quarter end number. But if you look at the average for the Q1 versus the Q2 the Q2 was up slightly.

Nigel Coe – Deutsche Bank

Okay. I’m getting bad data from my oil & gas guy. So any impact whatsoever, be it positive or negative, from what’s gone on in the Gulf?

Robert Livingston

I would just say no impact.

Nigel Coe – Deutsche Bank

No impact whatsoever. Great. And again, can you maybe just make some comments on pricing – what you’re seeing in terms of pricing and what you’re assuming for the rest of the year?

Robert Livingston

Well, we spent some time talking about this on the April call, and I will tell you, I think I expressed this and I know I felt it – a little bit more concerned on the April call with commodity price rev pressure and the need to push though some price increases in the Q2 and Q3. As we wrap up the Q2 our concerns on the price management spread is much less than it was 90 days ago. We’ve seen some declines in some of the base metal costs during the quarter. I think the, Brad’s going to correct me here if I’m wrong but I think the number we shared with you in April is that we were looking at an almost 100 basis point headwind on gross margin, on what we call the price/cost management spread, and that headwind today, I would say…

Brad Cerepak

About half.

Robert Livingston

…sub 50 points, yeah.

Brad Cerepak

It’s about half.

Robert Livingston

Actually we feel, we feel that the pricing issue is being well managed.

Brad Cerepak

And that’s really for the two reasons Bob mentioned. One is the stabilization on the commodities, especially steel, and then our teams are doing a much better job executing on our price. And so think about it as catching the curve faster than we anticipated last time we had a call.

Nigel Coe – Deutsche Bank

And Brad, that 50 bps you’re seeing on the price/cost management, have you seen some of that already or is that now coming into affect for the rest of the year?

Brad Cerepak

It’s most, it’s actually mostly in the first half of the year.

Nigel Coe – Deutsche Bank

Okay, fantastic. Thanks, guys.

Brad Cerepak

I just want to correct one statement back to the supply chain. When you were thinking 15 net to 75 net, there is going to be some cost carry into next year. But Paul can get with you on that and make sure you have the cost numbers as we’re thinking about it.

Operator

Your next question comes from Scott Davis of Morgan Stanley.

Scott Davis – Morgan Stanley

Hi, good morning, guys. I wanted to talk a little bit about, just a couple small issues. I mean one, understanding the, I think this is the second quarter in a row you’ve talked about remodel programs at Hill PHOENIX. What’s the traditional trend here? Does this last a year you have pent-up demand or 18 months, and then it kind of goes back to more normalized growth rates? Or is the any kind of historical precedence to this type of remodel program? How should we think about the kind of forward outlook?

Robert Livingston

Okay. I guess maybe I’d have to start first by sort of looking at a historical perspective here. If you look at the grocery store casings systems business, probably up until 2007 it was about 60% new store construction and about 40% remodel. So over the last two to three years that ratio has flipped. It’s now I would say roughly 60% remodel and 40% new store construction, primarily because the new store construction has flattened out and dropped so much over the last three years.

Cycles, you have to, you look at the product life of these cases and it’s, depending upon the retailer they view the product life to be in the 5, 6, to 7 year range. They may get moved out quicker than that if there’s a strong shift in a merchandising change or whatever. But the typical life of the case is five to seven years. And that’s what we’re dealing with. Now, there was a little bit of deferred spending during maybe the second half of ’08 and the first part of ‘09, and maybe there’s a little bit of a catch up in that area right now. I think another thing you’re seeing right now in this market space is a rather significant CAPEX program at Target. I don’t remember the exact numbers but I think they’re looking at remodeling 300 to 400 stores this year and a similar number next year.

Scott Davis – Morgan Stanley

Okay, so there’s actually some visibility into 2011.

Robert Livingston

That’s a big number.

Scott Davis – Morgan Stanley

Yeah, that’s a huge number. That’s kind of why I asked. I want to move over to Brad and one of the things that, you know, it’s been pretty clear, some of the initiatives you’ve been working on have been yielding really nice results. But one of the areas that is not quite as clear I processes around M&A. I mean historically Dover had a very good track record and then, you know, had just a couple maybe ill-advised transactions and then it’s been a little bit slow the last few years. I mean Tyler was a fantastic deal but there hasn’t been a lot of those things I can kind of think of off the top of my head. How, has there been any changes, Brad, in kind of how you guys are approaching M&A to filter targets and think about increasing the hit rate?

Brad Cerepak

Well, I guess, I’m actually going to turn it back to Bob because as you know I’ve been here a year, so I can’t really comment on what our process were like with these, as you termed, maybe less than desirable acquisitions in the past versus where we are today.

But my comment would be our internal process is very robust in terms of how we look at it - our package, our thought process, our focus on where we want to invest our capital, and the returns we’re looking for from those businesses, both in terms of a base core business as well as through our synergy activities. Bob, do you want to comment?

Robert Livingston

I think, number one you say the activity has been a bit low of late over the last couple of yeas and my sense is that’s probably been true across the board in the industrial space. We clearly have made some changes over the last couple of years, and I’d start first by joust pointing out the areas that we’ve shared with you that we’re focused on; the five primary end markets that we’ve shared with you.

The second thing, it’s rather glaring that when you look at the properties, the opportunities that have been in our pipeline over the past 12 to 18 months, less than 10% of them have been what I would call a marketing process or an option. Nine out of ten have been direct collect, proactive target opportunities where we’ve either gone to the owner or the owner has approached us after a few years of getting to know them, and that’s rather different from what we were seeing in the ’05, ’06, ’07, and ’08 timeframe when it seemed like 2/3 of the properties we were looking at in our pipeline were option processes.

Scott Davis – Morgan Stanley

Yeah, for sure.

Robert Livingston

Now I happen to think that’s gogni to change a little bit here over the next 12 to 18 months. I think we will see a lot of companies, a lot of owners – whether they be private equity shops or corporate owners or private owners – start to move more opportunities through an option process. But over the last 12 months that has not been the case. We clearly have been focused on add-ons.

Scott Davis – Morgan Stanley

Okay, I’ll break the rules and add another follow-up question. It just appears, you know, I mean it sounds encouraging when you talk to all these kinds of private guys. I mean how much of a catalyst is the eventual increase in capital gains tax? I can imagine there might be just a rush of transactions that can get done before tax increases eventually go through. I mean is that just me hoping or is that real?

Robert Livingston

I would agree with you.

Scott Davis – Morgan Stanley

Okay. Alright, well that’s it. T Hanks, guys.

Operator

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

Alex Blanton – Ingalls & Snyder

Hi, good morning. I’d like to sort of ask a general question rather than focusing on individual units, although I do commend you – you’ve provided an awful lot foe tail in breaking down the company. But we’re looking forward at the end of this year, and it does seem as if the total revenue is going to sort of latten out according to your guidance. And then looking at 2011 what concerns you the most in the global outlook, global economic outlook? What bothers you? What are you worried about?

Robert Livingston

I suspect my response is very similar to what you’re receiving from other folks that you ask that question of, Alex. It’s what is the GDP forecast and outlook for not only the US but Europe, the Asian economy, especially China? We think we’re well positioned for some of the, to participate and capture some business in the emerging economies, especially China and Latin America, but what’s going to happen?

The 55%, 60% of our business is still here in North America. In fact in the US GDP estimate for next year, what we’re actually going to see is a concern. And will the consumer return to the table? And is there eventually going to be some type of housing recovery that we’ll start to see in 2011? I thnk those are the major questions that we wrestle with.

Alex Blanton – Ingalls & Snyder

Okay. Do you have any comment on where you might be going in 2011 with the results or is it too early to tell?

Robert Livingston

We’ll share some commentary around 2011 at Dover Day like we did last year.

Alex Blanton – Ingalls & Snyder

Okay, thank you.

Operator

Your next question comes from Dave Tusa of JP Morgan.

Dave Tusa – JP Morgan

HI, good morning. I’m not going to ask you for 2011 guidance but I just wanted to maybe clarify, I think Nigel was talking a little bit about this, just some of the puts and takes in the next year; so what you have as far as what you’ve spent in restructuring this year or what kind of benefits you have from sourcing next year. If you could just walk through what I would call some of the non-fundamental items, not really giving us incremental guidance but what just carries over into next year – compensation expense, anything like that that carries over into next year. Sourcing benefits, I don’t know, I just wanted to get a clear picture of-

Robert Livingston

The only thing is I would label it as incremental based on what we’ve shared so far, wodl be around the supply chain. And again, this, we’ve not updated nor, we haven’t changed the number we’ve been saying for the last few quarters. We anticipate exiting the year with a supply chain savings run rate of $75 million to $100 million. What we’re saying now is that of that range of $75 million to $100 million, we’re going to capture $35 million of that this year.

Dave Tusa – JP Morgan

Okay.

Robert Livingston

Compensation change next year… It’s going to be incremental based upon volume and earnings.

Dave Tusa – JP Morgan

So in other words, in a flat kind of volume environment maybe a little bit of FOREX headwind, but other than that you have, you know, still a nice bump from supply chain benefits.

Robert Livingston

Yes. We continue to look for productivity opportunities, but they’re going to be- I think they’re going to be measurable but they're not going to be as significant as we sit here and talk about supply chain right now.

Dave Tusa – JP Morgan

Okay. In electronics, you know, what gives you guys the confidence that this cycle is deferent than kind of the last few mini-cycles where things boomed for a couple quarters and then they roll over? Are you seeing, are you booked in your cap equipment business, not necessarily Knowles but in your cap equipment business? Are you booked through year end? I mean what kind of visibility do you have and how does that compare to prior cycles?

Robert Livingston

Well, as Brad shared with you in his commentary for the electronic- Let’s put the component companies aside and just refer to those three companies in electronics, DEC and Everett Charles and OK. Q2 was the fourth consecutive quarter of a rising order book. That’s important to note, Dave. That one, that is a little bit different than, I call that the past couple- what I call short up tick cycles. Four quarters in a row of a rising order book. Your question is are we loaded, is there a backlog, is our production schedule filled now through year end? No, but there aren’t a lot of pen slots. It is especially with DEK and Everett Charles, it is pretty loaded throughout Q3 and October looks pretty strong right now. But we are not yet taking orders where we have to tell the customer it’s going to be a January and February delivery date. We may be taking orders for January and February because the customer requests delivery then, but we’re not forcing it till January and February

Dave Tusa – JP Morgan

Okay, and since Scott took another question I’ll take one more. Your portfolio has gone through a very positive facelift over the last few years. Is there anything, you talk about ramping up the M&A a bit – anything left to sell here? Are there any ongoing evaluations? Is there an ongoing evaluation of the portfolio that you’re willing to maybe take some cash off the table and redeploy elsewhere?

Robert Livingston

Yeah, that’s possible over the next couple of years. And the evaluation of the portfolio is something, we don’t do it every day but we sit and look at it two or three times a year. And I think there’s a high likelihood that there will be a little bit of shaping over the next couple of years with respect to divestiture activity. There is nothing in place, we do not have a marketing process underway on any property in Dover, any of the operating companies. And I suspect you're gogni to see most of the focus on M&A is going to be around the current strong market position we have and that the next- I thnk the shaping on the M&A is going to be around performance and not changing the outlook of the portfolio or the profile of the portfolio. It’s going to be around performance.

Dave Tusa – JP Morgan

Okay, thanks a lot.

Operator

Thank you. Your final question comes from Scott Gaffner of Barclays Capital.

Scott Gaffner – Barclays Capital

Good morning. Good quarter. Just looking at the organic growth guidance, I think that one thing that sort of struck me as being the most favorable would be the industrial products organic growth guidance, up 7-9% from 1-4% before. I thought maybe you could just give us a bit more detail. I think you called out Heil Environmental in your comments but do you see anything else that’s changed to improve the guidance there?

Robert Livingston

Again, you look at the commentary around the Q2, you’ll see a fairly significant recovery in the Q2 in our material handling companies. We had a very solid performance in mobile equipment but a very strong recovery in material handling. And I think the markets that we’re playing in with industrial products, with the exception, with the very notable exception of residential construction, are going to be flat to positive during the next two quarters and perhaps even maybe even two or three quarters.

You mentioned specifically Heil Environmental. Actually, we like what’s going on at Heil with respect to business activity and how they’re interacting in their end market, but I do need to point out that that business is actually going to be one of the few businesses that’s going to be down in 2010 versus 2009, and it is a result of the end market. The end market activity in the refuse market is a little lighter this year than it was in 2009.

Scott Gaffner – Barclays Capital

And then just looking at the margins there. I mean even if you exclude the gain that you had in the quarter, low 12% margins, you’re starting to get back to 2008 levels. Can you just walk us back through the capacity that you took out in this segment and the downturn, and where you think margins could get to in a higher sales environment this time around, with maybe low capacity?

Robert Livingston

Oh gosh, my first response to your capacity question is that the takeout was significant. I cannot sit here and recall all that, but the takeout of capacity across the board in industrial products is rather significant. You look t margin expansion at industrial products, the outlook for the balance of the year, we actually have raised not only their revenue outlook, their organic growth rate, we’ve- Embedded in our outlook is a 1 point improvement in their operating margin from what we were looking at 90 days ago. Ninety days ago we were giving some guidance that was around an 11 point operating margin at industrial products, and now we’re looking at a very solid 12%.

Going forward, the way you can look at this is as we get some volume increased through the industrial product mix and portfolio, look at the follow through, the conversion here should be 28%, 30%, 31%. Make your guesses on the revenue but I think that’s a safe number to use on conversion for industrial products.

Scott Gaffner – Barclays Capital

Right. And then just lastly, any change on operating margin targets for, just for 2010 on the rest of the segments?

Robert Livingston

No, no change.

Scott Gaffner – Barclays Capital

Okay. Thanks. Good quarter.

Operator

That was our final question. I’m sorry, I’m just turning it back to you all for closing remarks.

Paul Goldberg

Yep, thank you very much. This concludes our conference call. With that we thank you for you continued interest in Dover and we look forward to speaking with you at the end of the Q3. Thanks a lot.

Operator

Thank you. This concludes today’s Q2 2010 Dover Corporation earnings conference call. You may now disconnect your lines at this time and have a great day.

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