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Dover Corporation (NYSE:DOV)

Q2 2012 Earnings Call

June 18, 2012 10:00 am ET

Executives

Paul Goldberg - Vice President, Investor Relations

Bob Livingston - President and Chief Executive Officer, Dover Corporation

Brad Cerepak - Senior Vice President & Chief Financial Officer

Analysts

Scott Davis - Barclays

Robert McCarthy - Robert W. Baird

Jeff Sprague - Vertical Research

Terry Darling - Goldman Sachs

Steve Tusa - JPMorgan

Nigel Coe - Morgan Stanley

Julian Mitchell - Credit Suisse

Shannon O'Callaghan - Nomura

Nathan Jones - Stifel Nicolaus

Operator

Good morning and welcome to the Second Quarter 2012 Dover Corporation Earnings Conference Call. With us today are Bob Livingston, President and Chief Executive Officer, Brad Cerepak, Senior Vice President and CFO, and Paul Goldberg, Vice President of Investor Relations. After the speakers' opening remarks, there will be a question-and-answer session. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference 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.

Paul Goldberg

Thank you, Jacquie. Good morning and welcome to Dover's second quarter earnings call. Today's call will begin with some comments from Bob and Brad on Dover's second quarter operating and financial performance and follow with our outlook for the balance of 2012. We will then open up the call for questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up.

Please note that our current earnings release, investor supplement and associated presentation can be found on our website, www.dovercorporation.com. This call will be available for playback through August 1st, and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you'll need to supply the following access code. 98721212.

Before we get started, I would like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties.

We caution everyone to be guided in their analysis of Dover Corporation by referring to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statement. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We would also direct your attention to our website, where considerably more information can be found.

And with that, I would like to turn the call over to Bob.

Bob Livingston

Thanks, Paul. Good morning, everyone, and thank you for joining us for this morning's conference call. Before I get to our second quarter results, I would like to share a few observations on the changes we saw in the macro environment during the quarter.

We entered the second quarter knowing, we were dealing with some modest challenges in Europe and a slowing economy in China. The decline in Europe was greater than our expectations. These weaker conditions were felt most notably within our Fluids platform and our Printing & Identification segment.

With respect to China, we experienced some of the effects of a slowing export market in a few of our businesses. Our U.S. markets held quite well, namely, refrigeration and food equipment, industrial, energy, commercial aerospace and life sciences.

Now, let me provide some comments on our second quarter results. We posted revenue of $2.2 billion in the quarter, an increase of 8%. Our second quarter EPS of $1.15 was a slight improvement over the prior year adjusted EPS.

In our Energy segment, we continued to see growth across our end markets with production in downstream being the strongest. As a result, we posted strong organic revenue growth in the quarter.

As I have shared with you before, while rig count has flattened, market dynamics provide a solid environment for our products and services. These dynamics include the ongoing shift from gas to oil, oil prices supporting continued CapEx for production and a strengthening downstream market. We expect Energy results to remain solid for the balance of the year.

At our Communication Technology segment, we saw the continuation of a strong smartphone market as well as solid commercial aerospace and life science markets. Telecom markets remained weak.

The highway was 25% organic growth in our MEM sales to the handset market in the second quarter and we expect even stronger MEMS performance in the second half. Although results at Sound Solutions continue to be significantly impacted by further OEM share shifts, I was especially encouraged by increasing order rates on new design wins in the quarter and expect shipments at Sound Solutions to accelerate through the second half.

Within our Engineered Systems segment, refrigeration and food equipment markets were solid as were most of our U.S. industrial end markets.

Regarding our Fluids platform. The strong start for Maag Pump was offset by a weaker Europe and China. The result for this segment was lower than anticipated revenue in fluids, largely offset by 8% revenue growth in refrigeration and food equipment.

Going forward, we believe second half results in refrigeration will remain solid on the strength of an active remodeling market, our leading technology and our customers' continued focus on energy efficiency. Our U.S. industrial markets which account for 65% of segment revenue should be rather stable.

Within our Printing & Identification segment, we continue to see a weak, but improving market for electronics equipment. Within our consumer goods and industrial markets, our focus on new products, channel expansion and service is making a difference.

Markem-Imaje this results in a 5% organic growth excluding the impact of currency, a strong result in North America and modest growth in China offset a weak Europe.

We expect improved results in the back half of the year driven by new product launches, normal seasonality and the benefits of our first half restructuring activities. Overall, the strength of our businesses enabled Dover to deliver segment margin of 16.7% in the quarter, inclusive of $11 million of restructuring and deal cost. We ended the quarter with a book-to-bill of 0.99.

I was pleased with our free cash flow generation in the second quarter as it improved 30% over the prior year period. Our teams continue to focus on working capital management and lean activity.

Our acquisition pipeline remains active and we remain highly disciplined on valuation. The opportunities in front of us are all strategic add-ons, highly synergistic and offer strong integration opportunities.

In summary, I believe our second half will be stronger than the first as revenue in our handset businesses will be up significantly. I also expect solid contribution from our businesses serving the oil production, downstream energy, fast-moving consumer goods and U.S. industrial markets.

With that, let me turn it over to Brad.

Brad Cerepak

Thanks, Bob. Good morning, everyone. Let's start on Slide 3. Today, we reported second quarter revenue of $2.2 billion comprised of 3% organic growth and acquisition growth of 7%, offset in part by a 2% unfavorable impact from foreign exchange.

Earnings per share was $1.15. This result was below our expectations, primarily due to a $0.07 impact from a weaker Europe and unfavorable foreign exchange.

After adjusting for $0.12 of tax benefit in the second quarter of 2011, EPS improved 1% over the prior year. Segment margin for the quarter was 16.7%, a decline of 140 basis points. This result reflects solid performance in energy offset by lower volume in Printing and identification, volume declines and cost associated with new design wins at Sound Solutions and mix within Engineered Systems.

We also absorbed nearly $11 million of restructuring and deal cost in the quarter. Absent these costs, segment margin would have been 17.2%. Bookings increased 9% over last year to $2.1 billion, reflecting double-digit growth in energy and communication technologies and a solid growth in Engineered Systems.

In Printing and Identification, bookings decreased 7%, or stable order rates in our consumer goods markets were offset by tough comps in our electronics markets. Overall, book-to-bill finished at 0.99. Backlog grew 12% to $1.7 billion.

In the second quarter, we generated $178 million of free cash flow or 8% of revenue, an increase of $45 million over the prior year. We expect free cash flow for the year to be around 10% of revenue.

Now turning to Slide 4, which shows our revenue growth. Organic growth remained strong at Energy, achieving 14% in the quarter. Engineered Systems and Communication Technologies, both grew by 4% driven by refrigeration and food equipment, commercial aerospace and handset markets. Printing and Identification was down 10%.

For the quarter, acquisition growth at Communication Technologies was 22%. Energy and Engineered Systems, both posted acquisition growth of 6% led by our recently completed deals PCS, and Maag, respectively.

Turning to slide five and our sequential results. Revenue increased 5% from the first quarter with all four segments showing sequential growth. Engineered systems increased 8%, primarily driven by refrigeration, food equipment and acquisitions.

Printing and Identification increased 5% with all markets except the silver portion of electronics showing sequential improvement. Communication Technologies and Energy, both increased 1%. In Energy, production in downstream markets performed well, sequentially.

Bookings decreased 2%, sequentially from the first quarter. Growth of 7% at Communication technologies was led by the handset market. Sequential bookings growth of 3% at Printing and Identification was broad based.

Engineered Systems' bookings declined 3%, sequentially, largely impacted by the timing of refrigeration orders and continued weakness in the refuse vehicle portion of our industrial markets. Energy bookings declined 9%, primarily driven by moderating North American rig count, Canadian spring thaw and large international orders in the first quarter.

Now on slide six. Communication technologies posted revenue of $362 million, an increase of 25% over the prior year. These results reflect strong MEMS, commercial aerospace and life sciences activities partially offset by weak telecom markets.

Sound Solutions volume accounted for 22 points of the revenue growth. Earnings of $50 million were down 8% and segment margin was 13.9%, a decrease of 500 basis points. Adjusting for Sound Solutions, margin would have been 20.8% in the quarter.

We continue to expect segment margin to improve in the second half on the anticipated benefits of higher volume. Bookings were 383 million, an increase of 24%. This growth was largely driven by our handset market book-to-bill finished at 1.06.

Now, turning to slide seven. Energy revenue increased 19% to $539 million, while earnings increased 21% to $134 million. Energy produced another strong quarter as the average North American rig count was up 6% from last year and oil prices remained constructive for continued production.

Although rig count remained flat sequentially, we continue to benefit from several factors, including approximately 70% of active rigs dedicated to oil as well as a solid downstream market. As was the case last quarter, we saw year-over-year growth across all end markets led by production.

Operating margin was 24.9%, a 60 basis point improvement from last year. Bookings were 530 million, a 12% increase over the prior year book-to-bill was 0.98.

Now on Slide 8. Engineered Systems sales were $886 million, an increase of 8% year-over-year. Earnings improved 4% to $134 million. Fluid Solutions grew 19% to 212 million, benefitting from recent acquisitions while Refrigeration Industrial grew 4% to $675 million.

In our Fluids platform organic revenue was down 4%, due primarily to a weaker Europe. Operating margin was 15.1%, a decrease of 50 basis points from the prior year. This performance included roughly 100 basis points of incremental acquisition and amortization costs. Bookings were 870 million, an increase of 9% resulting in a book-to-bill of 0.98.

Our Fluid Solutions platform bookings increased 16% to $204 million, while Refrigeration Industrial was up 7% to $666 million. Book-to-bill for Fluid solutions was 0.96, and Refrigeration Industrial was 0.99.

Bookings at Fluids Solutions included 21% acquisition growth while Refrigeration Industrial was principally led by our businesses serving food, equipment and U.S. industrial markets.

Now, let's turn to Slide 9. Printing and Identification revenue was $370 million, a decrease of 14% from the prior year. Earnings decreased 39% to $42 million. The revenue decline reflects the expected continued weakness in our electronics' markets as compared to a very strong prior year, a weak Europe as well as unfavorable foreign exchange.

The solar and semi exposure of our electronics market now about 16% of revenue was down approximately $47 million year-over-year. That aside our consumer goods and industrial markets continued to perform well. Excluding the impact of foreign currency, organic growth and consumer goods and industrial end markets was 5%.

Operating margin declined 450 basis points to 11.3%, reflecting significantly lower volume in electronics and $5 million of restructuring cost and continued strategic investments. The restructuring actions taken in the quarter are to better align our global footprint with higher growth geographic markets.

Also, our investments in sales and service are yielding benefits in the form of year-over-year growth in North America and Asia. Bookings were $358 million, a decrease of 7% from last year. In the consumer goods and industrial markets, bookings increased 3%, book-to-bill ended at 0.97.

Now on Slide 10. First quarter net interest expense and corporate expense were generally in line with expectations. Our second quarter tax rate was 27.5%. This rate was slightly higher than our prior forecast and largely impacted by mix of geographic earnings.

Now, turning to Slide 11, and our 2012 revenue guidance. We now expect full year revenue growth of 8% to 10%. Organic growth is estimated to be 3% to 5%, and completed acquisitions adding around 5%.

Breaking down revenue growth by segment. We expect Communication Technologies growth to be 17% to 18% for the year about five percentage points lower than our last guidance. This forecast is comprised of 7% to 8% organic growth and 10% from acquisitions. The main drivers of this revision are primarily OEM share shifts and timing of orders at Sound Solutions.

Energy growth is expected to be in the range of 15% to 16%. Organic growth is largely unchanged at 10% to 11%. Acquisition growth will be around 5%.

Engineered Systems is forecasted to grow 9% to 10%. Organic growth is down roughly 1.5 points to 3% to 4% from our prior guidance on a weaker Europe and a slowing China market, acquisitions at 6%.

Lastly, in Printing and Identification, a weak Europe including unfavorable foreign exchange and a more conservative outlook on electronics is driving our organic revenue forecast down six points. We now expect revenue to decline 7% to 8.5% as compared to the prior year.

Moving onto slide 12, which shows our full year guidance. As previously mentioned, we now expect revenue to be in the range of 8% to 10%. Corporate expense, interest expense and CapEx remain substantially unchanged. We now expect our 2012 tax rate to be around 27%.

Based on the above, we expect full year earnings per share from continuing operations to be $4.70 to $4.85. This guidance reflects a $0.125 reduction from our prior forecast at mid-point. This change primarily reflects a $0.15 reduction related to Europe, China and unfavorable foreign exchange.

Now, let's turn to the earnings bridge on slide 13. As a reminder, 2011 EPS was $4.26 after adjusting for $0.22 of discrete tax benefits. Volume mix and price will contribute roughly $0.28 to $0.37 for the full year while net productivity will add $0.22 to $0.32.

Investment and compensation is now $0.08 to $0.14, reduced by $0.11 from our forecast. We expect completed acquisitions to deliver roughly $0.03 to $0.05 for the year, down from our prior forecast. This revision largely reflects the timing of orders and OEM share shifts at Sound Solutions.

Interest expense, share count and our tax rate should yield a $0.01 benefit, down slightly from our prior forecast, largely driven by slightly higher tax rate. The net result is EPS growth of 12% over our adjusted 2011 EPS at the mid-point.

With that, I would like to turn the call back over to Bob for some final comments.

Bob Livingston

Thanks, Brad. As I mentioned upfront, I am convinced that our second half will be stronger than our first half. Our participation in the handset market, our production in downstream energy businesses and our businesses serving the vast moving consumer goods and U.S. industrial markets will lead the way.

I expect Dover's second half revenue to be up about 7%, sequentially, and anticipate solid leverage on the increased volume. As always, our teams are focused on programs and initiatives to reduce cost and increase productivity.

As I look beyond 2012, I remain confident in our positions and our five key growth basis. I am convinced our play and the energy, fluids, refrigeration and food equipment, product identification and communication components offer growth opportunities built on technology leadership, geographic expansion and commitment to our customers.

In closing, I would like to thank our entire Dover teams for their hard work and dedication. Their focus on servicing customers and achieving results will continue to drive Dover's success.

With that, Paul, let's take some questions.

Paul Goldberg

Thank, Bob. Before we take questions, I just want to remind everybody if can limit yourself to one question with a follow-up, we'll be better able to get more questions.

So with that, Jacquie, can we have our first question?

Question-and-Answer Session

Operator

Your first question comes from the line of Scott Davis with Barclays.

Scott Davis - Barclays

Guys, I know this is kind of a tough question to answer I am guessing. But, when you look at Comm Tech. and your book-to-bill 1.06. I mean, how do you see that kind of guessing that's a little bit better than you thought it would be for the quarter, but when you think about 3Q, is this something that ramps up and continues to improve from here and to what magnitude do you think?

Bob Livingston

Well, the driver in the second half is going to be very similar to what we saw driving the strong book-to-bill in the second quarter and it is going to be around our handset business both, Knowles and Sound Solutions. Maybe Brad has the number. I can't recall what the book-to-bill is in the second half for our handset business, but I know it's very positive.

Scott Davis - Barclays

Okay. When you think about Sound Solutions, I mean at what point do you call a text, I guess or how close are we to that?

Bob Livingston

Well, I'm not going to label it fixed until we are performing like we expected this business to perform at the time of the acquisition, so I think you are going to see some trends here in the second half of the year with a much stronger fourth quarter than third quarter. It is going to accelerate during the second half.

Brad can probably correct me here on my answer, but I think sequentially as we look at Sound Solutions coming out of the second quarter, the revenue expectations in the third quarter are up about 20% to 25%, and another sequential improvement in revenue in the fourth quarter of additional 20% to 25%. And, Scott, I think by the time we get to the end of the third quarter and the fourth quarter, we are going to start to see the operating margins of this business set the base for what we will expect in 2013, which I think will be very reflective of the business performance on this business that we expected when we made the acquisition, so you asked a very important question had we seen the trough. I think we have.

Scott Davis - Barclays

Fair enough. Good answer. Thanks, guys.

Operator

Your next question comes from the line of Robert McCarthy with Robert W. Baird.

Robert McCarthy - Robert W. Baird

Good morning, guys.

Brad Cerepak

Good morning

Bob Livingston

Good morning, Bob.

Robert McCarthy - Robert W. Baird

I'm just a little bit confused about the components of the change and outlook of communications technology. The 11 to 13 that goes down to 7 to 8, how much of that is a function of more adverse currency translation and how much of that is the change in the actual organic outlook?

Brad Cerepak

I would say, you are talking about Comm Tech in particular, it's very negligible, very small impact in currency in that particular segment or segments on currency that impacted the most are DBS and DPI, on foreign currency. The whole move down on DZT is really related to Sound Solutions.

Robert McCarthy - Robert W. Baird

Okay. As opposed to, in terms of its organic contribution, second half of the year.

Brad Cerepak

Yeah. Exactly. As you know, when we turned the first year of ownership, we put it into organic, so we are seeing now our last forecast the decline in Sound Solutions of approximately let's say $80 million in the second half, and the way to think about that, we've been chasing no key and rimmed down the whole year, big share of that over 50% of that revised forecast is due to continue what we call these OEM share shifts, where we are seeing losses of volume, continued loses in volume in Nokia and RIM and some other smaller handset providers.

Then again, the other piece of that is really timing related to how we see the launch coming now as we are in launch in phase and how we see that launch progressing the third quarter into the fourth.

Robert McCarthy - Robert W. Baird

Okay. Thank you. That's very helpful. Then again, in terms of the actual blocking and tackling. My recollection is that you expected to bring two of the new lines up in the quarter and it would leave you one more to do in the third? Do I have that right and are we still on that track? And, is there any change in progress just in terms of executing the transition of manufacturing?

Bob Livingston

I would label this after quarter as being successful at Sound Solutions with respect to our automation projects. It actually may be signed off today, Rob, by the time we closed the month of July, we will have five of our new lines not just turned over to manufacturing, but signed off on by our customers. Pretty good.

Robert McCarthy - Robert W. Baird

Okay.

Bob Livingston

So, I am very positive with the progress we made in the second quarter on that activity.

Robert McCarthy - Robert W. Baird

Okay. Then if I can follow-up. Just two quickly in terms of Printing and ID, I think I got the message that your outlook in fast-moving consumer goods is essentially unchanged. A quarter ago, you were talking about expectations for high single digit growth there. Except any impact from currency has that changed any material way?

Bob Livingston

My answer is no. Brad may have something more definitive, but the impact you are seeing is primarily FX.

Robert McCarthy - Robert W. Baird

In the shortfall it's concentrated in the electronic sector. I understood that. I just want to make sure that your outlook for fast moving consumer good was essentially unchanged.

Bob Livingston

Essentially unchanged.

Robert McCarthy - Robert W. Baird

Okay. Very good. Thank you.

Operator

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

Jeff Sprague - Vertical Research

Thank you. Good morning, guys. Wondering if you could just put a final point on a couple of points, I'd appreciate the info so far, so if we think about Nokia and RIM coming down about.

Brad Cerepak

Jeff, come a little closer to the phone.

Jeff Sprague - Vertical Research

Can you hear me little better now?

Brad Cerepak

Yes.

Jeff Sprague - Vertical Research

Can you give us a sense of where Nokia and RIM are now or what percent of your handset sales?

Brad Cerepak

No. I can't give you an exact number. I do know that it's less than 20% in the second half. I don't think it's less than 15%, so I am giving you a range. It's between 15% and 20%, but I actually don't know the exact number, Jeff.

Jeff Sprague - Vertical Research

That's the second half.

Brad Cerepak

Second half. And, if I had to take a guess on this, I am doing some recall here. If I need to take a guess for the second quarter, it was probably high teens.

Jeff Sprague - Vertical Research

Okay. Maybe those teens in Q2, it probably should be lot more in 15% to 20% in the second half, right?

Bob Livingston

It might be closer to the 15 number, Jeff. I know it's less than 20.

Jeff Sprague - Vertical Research

Then if we think about what you expect for ongoing profitability for Sound Solutions. If even margins were 20-ish in 2011, clearly you would have expected the margins to come down on investment spending, purchase accounting and all those sorts of things but just remind us where you do think Sound Solutions' margins can kind of normalize once you get on the other side of this investment spend and this remixing of the portfolio is behind you.

Bob Livingston

We are still convinced that once we get into a steady state with this business that our operating margin should be in the mid-20s. I think help me here, Brad. I think as we look at the second half of 2012, the outlook we have now for the fourth quarter, the operating margins are probably going to be in the mid-to-high teens. I think Brad wants to clarify.

Brad Cerepak

Mid-teens in the second half, and I would just want to clarify that when Bob says operating EBIT, that's creating the step-ups.

Jeff Sprague - Vertical Research

Okay.

Brad Cerepak

Yeah.

Jeff Sprague - Vertical Research

And then finally, what are you thinking on share purchase? Obviously, unfortunately the stock has not been great this year. You've got a lot of liquidity. It doesn't look like you did anything in Q2 and as it was late in the quarter, what's your thought process there?

Brad Cerepak

It's a discussion topic, but I have nothing to announce, Jeff.

Jeff Sprague - Vertical Research

All right. Thank you.

Operator

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

Terry Darling - Goldman Sachs

Thanks. Good morning.

Bob Livingston

Morning, Terry.

Brad Cerepak

Morning, Terry.

Terry Darling - Goldman Sachs

Bob or Brad, I wonder if you talk about the second half organic revenue growth outlook for the energy division. I think the guidance might imply 4% or 5% year-over-year growth. I wonder if you can give us a little color by drilling production downstream on that assumption and then also given the book-to-bill is sub-1, why do you think we can get some positive organic growth in the second half?

Bob Livingston

Brad may have the year-over-year comps for the second half. What's forefront in my thinking is right now is sequentially, so let me response sequentially.

Terry Darling - Goldman Sachs

Okay.

Bob Livingston

With the three sectors, drilling, production then downstream. Drilling, I hope we are being conservative, but we are actually putting in into the guidance that our drilling activity will be down in the second half versus the first half modestly. I think 2% or 3%.

Production remains fairly strong, Terry. I don't remember now what the number is, but I think it's about 8% second half over the first half in production. Some of that is through the benefit of the acquisition we made in, what was it? I guess, April of PCS, and some of the big chunk of the growth in the second half is actually from our international activity. Downstream, I think that's also about 8% or 9% sequential growth in the second half. Strong activity in downstream right now.

Terry Darling - Goldman Sachs

And what is the book-to-bill sub-1 worry a little bit with regards to the overall total organic outlook in the second half? Is there more production in downstream business? It just doesn't run through the orders in the backlog, or is it something else?

Bob Livingston

I would say that the negative in the second quarter, book-to-bill at energy, we always deal with the Canadian strength. Some years that gets highlighted and some years it doesn't, but it was very real here in the second quarter, and I think in the drilling activity, we did see some moderation of orders in the early part of the quarter, especially April, little bit better order rates in June, but I think the whole decline in orders from what the expectation would have been in the second quarter would be able to (Inaudible) and some moderation activity in drilling.

Terry Darling - Goldman Sachs

Okay. Then in the Q, you mentioned some signs of life in the telecom piece within communication technologies. I wonder if you can elaborate on that.

Bob Livingston

Help me again here, Brad. I think that comment may deal with booking activity. Our bookings in the first, I'm going to say two-thirds of the quarter, April and May were actually fairly positive and gave us some positive comps year-over-year in bookings. I can't say the same about June. June was soft again, but for the quarter the activity was up in telecom. It's not reflected in our revenue in the second quarter. We are expecting a little bit better second half at our telecom than we had in revenue in the second quarter.

Terry Darling - Goldman Sachs

Okay. Then just jumping back over to PID and the outlook for margin improvement in the second half. Obviously, the second quarter you called out the $5.5 million or so restructuring impact there, but second half guidance is still got big margins probably moving into what the mid-teens or something like that and is that new product effect and how should we think about the risk reward around that assumption given the uncertainty in Europe.

Brad Cerepak

Well, I would like to think we have discounted Europe appropriately here as we look at Product ID. You've got two label in structural items in the second half that are providing some windage to the margin and that is the restructuring activity we've taken here in the first half. We'll capture some of the benefits of that in the second half of the year.

We've been sharing with you for the maybe the past year our increased investment activity in sales and customer service activity. That continued to expand during the first half. I would label the second half as being rather flat with that spend activity.

Terry Darling - Goldman Sachs

Okay. Thanks very much.

Operator

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

Nigel Coe - Morgan Stanley

Yeah. Thanks. Good morning.

Bob Livingston

Hi, Nigel.

Nigel Coe - Morgan Stanley

Bob, could you maybe switch gears and talk about the U.S. It looked like we saw some weakening from a macro level in June. Can you maybe talk about what you saw in June and going into July?

Bob Livingston

Just with the U.S.?

Nigel Coe - Morgan Stanley

Within U.S. Yeah.

Bob Livingston

Nigel, I think we've called this out. I think, Brad called it out in his prepared comments. Our U.S. industrial activity has held up quite well in their first half. Maybe with the exception and this is where it think Brad called it out in a refuse market, but if you look at business grow across the board from all of this to the refrigeration and food equipment business activity, the activity continue to be strong during the quarter as we ended the quarter and the early read in July as order activities continue to be fairly healthy here in July.

Nigel Coe - Morgan Stanley

Okay, so sounds like nothing surprise you to downside.

Bob Livingston

Nothing surprised us in the second quarter. Engineered Systems and as I had in my prepared comments, we're expecting our U.S. markets to be stable in the second half.

Nigel Coe - Morgan Stanley

Okay. Then you talked about the Sound Solutions listen to the forecast in the second half of the year. You referenced some OEM share mixes, but then you also referenced about timing on shipments, which I am assuming is timing on some of the new platforms. If something happens in terms of the supply chain or intelligence that you had from your customers suggests that there's no platforms now later in the year than you had expected?

Bob Livingston

Well, you've got two questions there. Supply chain and then the launch of the platforms. The launch of the platforms are probably at least month or six weeks later than we were expecting three or four months ago. We also have heard some of the noise and the chatter about supply chain constraints with some of the product platforms that are being launched, but it's hard to point anything specific, Nigel. We hear the same chatter that I am sure you do.

Nigel Coe - Morgan Stanley

Okay. And then just finally, FX. Can you just tell us what you are using for planning in the second half of the year, and maybe if you just call out, Brad, what the guidance looks like by segment axe FX.

Brad Cerepak

Okay. Well, first on FX. In our previous guide, we were about around €34. We're about €122 in this particular forecast. It cost us in terms of our growth rate total Dover at about 0.06, 0.07 of FX impact.

To put that in dollar terms, point to point at the mid-point, just to clarify the thing we've been talking about, we're down about $180 million or so at the mid-point of our revenue guidance range. A piece of that or let's say $50 million of that give or take a few dollars is FX. $50 million of it is the Europe and slowing China, and the rest remaining to be Sound Solution.

Bob Livingston

About 80.

Brad Cerepak

As it relates by segment, most of the FX is in DPI. DPI was negative 2 to start in our earlier guide in the year, down negative 4. And then a little bit in DES, where you get about a 0.5 impact on FX related to their European-based business mainly in pumps by the way and in the [business].

Nigel Coe - Morgan Stanley

Okay. And just a clarification, so the 3% to 5% organic, if we take out FX, that's more like what 5%?

Bob Livingston

If we take out FX, FX is 2 for the year.

Nigel Coe - Morgan Stanley

Okay. Yeah. Okay. Great. Thanks, Bob.

Operator

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

Steve Tusa - JPMorgan

Just curious on the dynamics of the third and fourth quarter. You've been giving a lot of good detail on first half to second half, but your bookings were I guess 2.14 in the second quarter, and your sales have somewhat tracked your bookings. I mean, you are not that long cycle in nature, so maybe it's got two to three month lead time, so I am just curious usually you have a decent performance from 2Q to 3Q, but the bookings are kind of down sequentially.

Is the difference there, can you just maybe talk about that walk and I guess, will everything kind of perform seasonally with the exception of this ramp in Comm. Tech and I guess on the ram in Comm. Tech it sounds like that's little more fourth quarter weighted than third quarter?

Bob Livingston

Okay. Well, let's see. We've got three or four questions there, so let's.

Brad Cerepak

Maybe I'll start backward, Steve.

Steve Tusa - JPMorgan

Yes.

Brad Cerepak

For Sound Solutions, the answer is the definite yes. The fourth quarter is heavier than the third quarter on revenue and contribution margin obviously. That's not true. That's not true in our MEMS business. I think we've got a fairly even spread in the second half between third quarter and fourth quarter with the total Knowles business.

The other part of your question was around seasonality?

Steve Tusa - JPMorgan

Yes.

Brad Cerepak

The only difference in the second half of this year with respect to seasonality would be around the Comm. Tech part of the business and it is interesting. Just because of the timing of these product launches, Steve, historically we've always looked at the Knowles MEMS business is being 45% in the first half and 55% in the second half, and historically that's where you can sort of lay the revenue waterfall during the year because of the strong product launches in the second half. It's probably closer to 40.60, and that's a significant change. Beyond that, you are not going to see any other differences in our seasonality. We still look at a seasonably weaker quarter from Hill PHOENIX in their fourth quarter than we do the proceeding three quarters and I am not sure if there is any other business in Dover that has such a strong seasonal trends, HP.

Steve Tusa - JPMorgan

Right. So, we basically the bookings for this quarter and then add on what we kind of figure out for the ramp at the Comm. Tech business everything else should be kind of track the bookings pretty closely.

Brad Cerepak

Yes. Now, let's see. Maybe I can give you a little bit more detail on that and I'll comment, I shared with you in my prepared comments that the second half revenue, we see it being up about 7%, sequentially. Those 7 points, so even better. 1.5 of that is coming from acquisitions that were made in the first half of the year. That's primarily the Maag and PCS, but that's 1.5% of the 7%.

Steve Tusa - JPMorgan

Okay, and then you are not going to give us.

Brad Cerepak

Half of the 7 points.

Steve Tusa - JPMorgan

And then you are not going to give us the 2Q to 3Q. Just seems like it's pretty fourth quarter. Just to make sure our models are right, because there are a lot of moving part heading into fourth quarter.

Brad Cerepak

Steve, I don't have that data in front of me. But, I will comment. Again, on this seven-point sequential growth in the second half, half of that is coming from our handset business.

Steve Tusa - JPMorgan

Right. Okay. Thank you.

Operator

Your next question comes from the line of Julian Mitchell with Credit Suisse.

Julian Mitchell - Credit Suisse

Thanks a lot. I just wanted to follow-up on the Printing and ID business in terms of the, obviously the decremental margins in the first half very strong sort of 40% or 50%. It sounds like that they actually little bit better in the second half because of the absence of the year-on-year effect of increased spending, but could you just clarify a little bit how you expect the margins to tend in the second half when you take the combination of less investment spending and some cost savings starting to come back?

Bob Livingston

Well, I know the number. I have in memory, Brad is looking at me to make sure I give you the right number, but I think sequentially second half over the first half just within, you asked about segment or you asked about MI?

Julian Mitchell - Credit Suisse

Yes. Segment Printing and ID overall. Yeah.

Bob Livingston

Okay. What is it about 350 basis points, Brad? Second half versus first half?

Brad Cerepak

Yes. About that. For an average, yes.

Bob Livingston

Yes. About 350 basis points improvement in the second half. Most of that is coming from Markem-Imaje. We are seeing a little bit of an increase in margins in the second half from our electronics businesses, but it's very modest.

Julian Mitchell - Credit Suisse

Okay. Thanks. And then on Markem-Imaje, specifically, could you talk a little bit about what trends you are seeing in different regions? I think back in early June, you talked about Northern Europe slowing a little bit. It's about business China was still good. How are things looking right now?

Bob Livingston

You're referring to the second quarter?

Julian Mitchell - Credit Suisse

Yes, so just the trends you've seen in recent weeks or months and how you think about the second half by region after Markem-Imaje?

Bob Livingston

Second quarter we had our strongest growth region in the second quarter was actually North America. Actually to be more specific was actually U.S.

I think our second strongest growth region and it was high single digit growth in the U.S. Our second growth area in the second quarter was China. Brad, I want to say it was mid-single digit, 5%, 6% in China?

Julian Mitchell - Credit Suisse

Yes.

Bob Livingston

Europe was down. Gosh, I don't remember. How do I pull out FX from this? I think organically, MI was probably a couple of points maybe one point in Europe, in the second quarter and the rest were about as expected or as you would expect. Second half, I don't think the growth rates are any different in the second half than what we were experiencing in the second quarter. Julian

Mitchell - Credit Suisse

Okay. Thanks. And then finally just on your China business overall, I mean you've referenced the slowing there a couple of times on this call. Are you seeing any change in demand conditions or something getting excited because certain time calling a turn and so just. What are you seeing in China?

Bob Livingston

Well, we talk about it internally and it's really the tale of two different industries in China, or the business activity in China that is in support of what I call the China export machine. It has been weak in the second quarter and it weakened during the quarter. You would see a little bit of that impact at Markem-Imaje and some of the verticals that they support and service really geared towards the export activity.

You would see some of that lower activity in our pumps business in some of the verticals they support. You would see this in our Electronics equipment business. In the parts of our business and in the verticals we serve that I would label as domestic consumption, the activity held up fairly well during the second quarter.

As far as your other comment, some people calling it a turn now in the second quarter, I'm not willing to do that yet. I think we've taken a rather cautious outlook for China in the second half.

Mitchell - Credit Suisse

Okay. Thank you.

Operator

Your next question comes from the line of Shannon O'Callaghan with Nomura.

Shannon O'Callaghan - Nomura

Good morning, guys.

Bob Livingston

Morning.

Shannon O'Callaghan - Nomura

On sound solutions in terms of this timing and share shift stuff, I mean does that mean obviously the second half is $18 million lower, does that mean the exit rate for the year is lower do we ramp further into first half of '13 to get to where you thought you were going to be or is it the whole number just reset lower now?

Bob Livingston

So, the question is our fourth quarter outlook lower than it was 90 days ago for Sound Solutions. The answer is yes.

Brad commented earlier that our outlook for Sound Solutions, we've taken $80 million of revenue out of the second half forecast. I am not sitting here who is doing a recall on how that split between the third and the fourth quarter, but I do believe the bulk of it was in the third quarter, but not all of that, so the fourth quarter hit a little bit lower.

We're looking at an exit rate here fourth quarter revenue forecast for Sound Solutions, somewhere around $110 million. If you want to annualize that, Shannon, I would expect that to be what I call the absolute base line for 2013, and I will tell you our expectations are going to be it will be hard.

Shannon O'Callaghan - Nomura

Okay. And then maybe just a question on M&A. I mean, you did really actually ramped the buyback in the quarter, I think. Right? I mean, it was around 3.5 times that you did in the first quarter, or lot more than you guys have done in a while, so I am just.

Bob Livingston

Recall that 1.6 million shares or so related to the shares we issued in connection with the PCS acquisition.

Shannon O'Callaghan - Nomura

Okay.

Bob Livingston

So, we went right back into the market and bought those shares back. Think about that as really an acquisition cost.

Shannon O'Callaghan - Nomura

Okay. So, as you think about the M&A pipeline out there in terms of what could be out there relative to attractiveness of buy back or on stock here. I am just wondering how you are thinking about that trade-off?

Bob Livingston

There is a trade-off. As I commented earlier, it is. The share repurchase topic is getting a lot of discussion, but I have no announcement to share with you.

Shannon O'Callaghan - Nomura

Okay.

Brad Cerepak

But I think, I would just add to that as Bob put in his commentary, maybe our focus has shifted a little bit, Shannon, to highly integrative bolt-on deals and price discipline and that's key, I think. That's a key thought process that.

Bob Livingston

Okay. Yes. Any further color on that I guess would be, don't expect us in the second half of this year to announce a large acquisition.

Shannon O'Callaghan - Nomura

Okay. So, any deals would be fairly small, easily integrated bolt-ons?

Bob Livingston

I don't think we have anything in our pipeline that has any likelihood of closing in the second half of the year. Help me here, Brad. That would be greater than $250 million.

Brad Cerepak

Yeah. Well, roughly speaking.

Shannon O'Callaghan - Nomura

Okay. All right. Thanks a lot, guys.

Operator

Your next question comes from the line of Nathan Jones with Stifel Nicolaus.

Nathan Jones - Stifel Nicolaus

Good morning, Brad, Bob.

Bob Livingston

Good morning.

Brad Cerepak

Good morning.

Nathan Jones - Stifel Nicolaus

Still a pretty strong quarter for bookings in refrigeration and in industrial, but it was probably below the normal seasonal increase in those businesses. Can you talk about the drivers? What impacts with the benefit of you think would weather in the first quarter that might have had in pulling demand forward. What impact the economic uncertainty is having and what your expectations are for the back half of the year?

Bob Livingston

I am not sure I can label any activity in the first quarter as a go forward related to weather. With maybe one possible exception and it's just hard to know. It's all supposition. We had a very, very strong start to the year at Hill PHOENIX, and I don't remember the comps from the first quarter but good news. I think books in the first quarter were up 16%, 17%, 18%?

Brad Cerepak

Yes.

Bob Livingston

Over the first quarter of last year. Again, we had a very, very strong start. Second quarter revenue at Hill PHOENIX is probably what, Brad, up? 9% or 10%? 9% or 10% over the second quarter of last year. I would label that the Hill PHOENIX market activity and the Hill PHOENIX business activity has been quite strong in the first half. I'm not sure any of us could point to anything else within Engineered Systems that could either be remotely labeled as a go forward of activity into the first quarter.\

Nathan Jones - Stifel Nicolaus

Okay. Then just jumping over the balance sheet. Inventory seems to be getting up to reasonably higher levels. Can you talk about what's driving that build? Whether it's primarily related to Comm. Tech versus other areas where inventories building to satisfy back half demand or maybe if the downturn in Europe caught you with too much inventory and if you are satisfied with where the inventory levels are.

Bob Livingston

I would say it's more normal seasonality, a little bit related to acquisitions, but there is nothing unusual about the working capital, nor the inventory in the quarter based up on what we normal think. So, in other words, I think our working capital as a percent of sales is roughly around 17.92% of sales and that's historically about where we would expect to be, so we'll sit here today with a feeling that we have excess inventories in any particular area of any significance.

Nathan Jones - Stifel Nicolaus

Okay. Thanks a lot.

Operator

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

Paul Goldberg

Thank you, Jacquie. This concludes our conference call. With that, we thank you for your continued interest in Dover and we look forward to speaking to you again next quarter. Thank you very much for your participation. Have a good day.

Operator

Thank you. That concludes the second quarter 2012 Dover Corporation earnings conference call. You may now disconnect your lines and have a wonderful day.

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