道爾 (DOV) 2007 Q2 法說會逐字稿

Good morning and welcome to the second-quarter 2007 Dover Corporation earnings conference call. With us today are Ron Hoffman, President and Chief Executive Officer of Dover Corporation; and Rob Kuhbach, Vice President of Finance and Chief Financial Officer of Dover Corporation; and Paul Goldberg, Treasurer and Director of Investor Relations of Dover Corporation.

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 a 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 Paul Goldberg. Mr. Goldberg, please go ahead, sir.

Thank you, Carly. Good morning and welcome to Dover's second-quarter earnings call. With me today are Ron Hoffman, Dover's President and Chief Executive Officer, and Rob Kuhbach, Dover's VP of Finance and CFO.

Today's call will begin with some comments from Ron and Rob on Dover's operating and financial performance. We will then open the call up to questions. In the interest of time, we kindly ask that you limit your questions to one or two with a follow-up.

Please note that our current earnings release and associated presentation can be found on our Web site, www.DoverCorporation.com. This call will be available for playback through 5 PM, August 8, and the audio portion of this call will be archived on our Web site for three months. The replay telephone number is 877-519-4471. When accessing the playback, you will need to supply the following reservation code, 8962828.

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 everybody 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 Web site, where considerably more information can be found.

With that, I would like to turn this call over to Ron.

Thanks, Paul. Good morning, everyone. Thank you for joining today's conference call.

I'm pleased to report that Dover posted the best quarterly results in its history and set new records for sales, bookings and backlog. Dover Company has delivered solid results with all segments posting improved earnings in sales with strong leverage compared to the first quarter of 2007.

As announced this morning and shown on Slides 3, 4 and 5, Dover posted record quarterly earnings from continuing operations of 175 million, or $0.85 per share, up 10% over the prior year. Quarterly revenue was 1.86 billion, up 12%, with operational earnings of $279 million, up 6% over the prior year. Five of the six subsidiaries posted revenue gains and three generated double-digit earnings growth compared to the prior-year period.

Diversified industries and resources reported quarterly earnings records. Earnings increases were posted at 7 of the 13 market groups led by material handling, product identification, mobile equipment, and oil and gas equipment. Sequentially, all six subsidiaries increased earnings, sales and margin, and Dover's operating leverage was 60%.

Year-to-date, earnings from continuing operations were $314 million or $1.52 per share, both up 8% over the prior year. Revenue is $3.64 billion year-to-date, up 15%, with operational earnings of $511 million, up 4% over the prior year. Bookings to date are $3.84 billion, up 15% over the prior year.

Material price headwinds moderated during the quarter for most commodities. Price increases and productivity improvements offset most of the quarterly cost increases.

The automation and measurement companies in Dover Technologies, though still fighting tough comparables from last year's robust second quarter, posted 41% operating leverage sequentially and achieved Dover metric margins during the period.

Incoming orders were a record $1.93 billion, up 17% over last year, generating a strong backlog of $1.6 billion, up 22% over last year. Product identification, electronic components, process equipment, fluid solutions, food equipment and service equipment posted booking gains both sequentially and year-over-year.

As shown on Slide 6, the global engagement of Dover's companies reflected robust growth in Europe and the Americas, offset by lower revenue in Asia due to the slowdown in the A&M Group.

As highlighted on Slide 7, Dover met four of its 5 target metrics for the quarter and continues to see positive impact from its Performance Counts program. Over the past two years, we have seen operating margins improve by 110 basis points, inventory turns improve by 9/10 of a turn, and working capital as a percent of revenue reduced by 190 basis points.

Operating cash flow for the quarter was a record $269 million, 15% of revenue.

Dover continues to be engaged in a number of acquisition processes, and the pipeline of activity remains robust. We continue to be highly selective in this price-competitive market and did not announce any new acquisitions during the quarter. Acquisition spending for the year will likely be 4% to 6% of annual revenue, but we are prepared to step-up our spending if a significant value-creating opportunity is identified.

We are very pleased and encouraged at the positive operational improvements and margin gains being made at Paladin and Markem. As anticipated, Paladin sales are off only 4% from the previous year, versus the +15% declines in the general construction market. Their broad engagement in light and heavy construction equipment, demolition, recycling, utility and forestry products allows them to buffer the housing market decline. Paladin has improved their operating margins each quarter during our ownership.

Markem has also shown significant margin improvement and is working with [Emage] to identify positive synergy opportunities.

During the quarter, Dover spent $50 million buying back 1 million shares of Dover stock, bringing the year-to-date share repurchase to 1.5 million shares, essentially offsetting the dilution of our stock option program.

As shown on Slide 8, Dover's organic revenue growth rate was 1.5% negative for the quarter, due to the tough comparables in Technologies. Diversified Industries and Resources each posted 5% to 6% organic growth. For the full year, we anticipate organic growth in the 3% to 5% range.

We continue to be very excited about the new product initiatives and market-share gains being exhibited across a number of our companies. Revenue growth from acquisitions was 11.5%, reflecting the impact of Paladin, Markem and Pole/Zero, while foreign currency accounted for 2% of our growth.

Looking forward to the third quarter, we anticipate continued improvement based on the positive order rates and solid backlogs across the majority of our businesses. I was especially pleased with a very positive sequential leverage across each of our subsidiaries. Product identification, mobile equipment, process equipment, and the food equipment groups should continue to improve. The second-quarter slowdown in Canadian gas drilling should reverse as the year progresses, and the comparables over automation and measurement companies will be less challenging. I'm pleased to see Dover companies exhibiting their global scope and taking advantage of the business opportunities in all geographies.

To refresh our memories, a year ago this time, we announced our planned exit from the majority of our technology companies, which has proven to be value-creating for Dover. With our portfolio of companies now refreshed and the Performance Counts program producing positive results, we are turning our attention to simplifying the strategic focus and transparency of Dover. We will soon be announcing a new organization structure that will group our companies into more easily understood market segments. The earned autonomy of our operating companies will continue to be the hallmark of Dover. We are also reevaluating our capital allocation strategy in light of our strong cash generation and reduced acquisition spending.

In closing, I want to applaud Dover's employees around the world for their hard work, creative ideas, and talented contributions in establishing a new quarterly earnings per share record for Dover shareholders. Our share price recently reached a new all-time high, eclipsing the previous high set in April of 2000. Your performance is definitely counting and is very much appreciated. I am confident that we can continue to deliver improved results for our shareholders going forward.

With that, I will turn it over to Rob Kuhbach for an overview of our subsidiary performance and financial highlights, before we open up the call to your questions. Rob?

Thanks, Ron, Good morning, everyone.

Taking a closer look at each segment, starting with Slide number 9, Dover Resources continued to lead Dover with record revenue and earnings in the second quarter of 2007. From an earnings perspective, the Oil and Gas Equipment group had another great quarter, driven by continued strength in the U.S. market.

Following close behind in earnings, the Material Handling group turned in a good quarter, reflecting its acquisition of Paladin in August 2006 and strength in the winch industry.

The Fluid Solutions group turned in positive results with revenue and earnings increases and moderately lower margins.

Dover's Technologies had the second-highest earnings contribution to Dover in the second quarter of 2007. The December 2006 acquisition of Markem, which continues to perform above expectations, drove the segment's revenue increase in the quarter, more than offsetting the sales decline in the A&M group. However, the A&M businesses experienced a significant reduction in quarterly earnings compared to a strong prior-year period, overriding the positive earnings contributions from Markem. Although the year-over-year comparisons have not been positive, the A&M group had Dover metric margins for the quarter, showed nice leverage with sequential growth in earnings, revenue and bookings of 22%, 7% and 18%, respectively, and had quarterly bookings at their highest level since the second quarter of 2006, generating a book-to-bill of 1.07.

Dover Industries leveraged a 27% earnings increase on a 6% revenue increase as the Mobile Equipment group benefited from strong energy and defense markets as well as a $5.3 million net pre-tax gain on a facility sale. Even without this one-time event, mobile equipment earnings would have been up 20% for the quarter.

Weakness in the carwash industry served by the Service Equipment group somewhat offset these gains. However, the group did end the quarter with a 27% higher book backlog over the prior year. Double-digit growth in quarterly bookings and backlogs suggests continued strength through the balance of 2007.

Dover Systems experienced declines in revenue and earnings growth in the quarter primarily due to some moderation in market conditions as well as the timing of shipments. However, margins in the food equipment companies, which are the primary drivers of the segment's results, remained in-line with last year, and bookings for these companies rose 8%, generating a 1.17 book-to-bill.

On a sequential basis, the Food Equipment group did see improvements in revenue, earnings and margins and had its best quarter since last year's second quarter. The Packaging Equipment group results were modestly down, reflecting softness in the beverage equipment market as well as timing and product mix.

Dover Diversified turned in a strong quarter, leveraging a 23% earnings increase on a revenue increase of 8% due to the continued strength of the broad heat exchanger and energy markets served by the process equipment companies. Partially offsetting these increases, the Industrial Equipment companies continue to see year-over-year softness in the construction market and in their Aerospace service results. However, on a sequential basis, the Group's earnings improved 8%.

Dover Electronics had mixed results in the second quarter of 2007. The segment's revenue increase was largely attributable to the February 2007 Pole/Zero acquisition, as core business revenue at this segment modestly declined. However, the components companies did experience increased sales of micro-acoustic and military products, generating positive leverage and improved margins. The commercial equipment companies negatively impacted the segment's earnings due to difficult market conditions in the ATM businesses. However, the group did see improvements in order levels compared to last year.

Here is some additional corporate information. Looking at our capitalization, Dover ended the quarter with a net debt-to-total capitalization of 25.2%, down from the 2006 year-end level of 26.8%. This largely reflects higher cash from operations and a decrease in long-term debt.

Free cash flow generated in the second quarter of 2007 was $218.4 million, up $99.7 million from the prior-year period due to higher earnings from operations and improved working capital management. For the six-month period, free cash flow was strong at 6.5% of revenue. We still expect full-year free cash flow to be in the range of 8% to 10% of revenue.

Our effective tax rates for the 2007 second quarter and year-to-date periods of around 27% were favorably impacted by benefits recognized for tax positions that were effectively settled.

Finally, we closed on the sale of a previously discontinued business and recorded other adjustments to discontinued operations for a net after-tax loss of $8.3 million.

With this overview, let me turn the call back to Paul for questions.

Thank you, Rob. Carly, if you wouldn't mind getting questions now?

Thank you. (OPERATOR INSTRUCTIONS). Wendy Caplan, Wachovia.

A couple of things kind of on your-- Ron, on your discussion about your capital usage and the substantial free cash flow, the use of the substantial free cash flow, can you talk about some of the alternatives that the Board is considering, and when we should -- if there will be some sort of -- if we should expect some sort announcement about some use of that cash?

Wendy, as you know, we've been a very acquisitive company over the last couple of years; we've had high demand for acquisition spending. So far this year, I would say we've seen the pipeline of acquisitions stay very healthy. However, I think, at these high pricing levels, we are being very selective as to what we want to pursue.

We are evaluating our capital allocation strategy. We have a board meeting next week, which will be our opportunity to review our actions and our plans with the Board. So I would say that, at this point in time, as we build cash, we certainly will take a second look at the acquisitions we have in the hopper now to see what our probability of close is on those as one of the uses. We feel we've got plenty of cash to cover the internal capital (inaudible) requirements of our companies. So certainly, we will be analyzing the potential for share repurchases during that meeting as well.

Thanks. One quick follow-up -- do you anticipate any future divestitures? Are there any companies that potentially could be sold in your portfolio today?

Well, we've done a nice cleanup over the last two years, Wendy. We have certainly the lion's share of that work behind us. I think we've said that will continue to be an ongoing function for each of our business leaders, so there's likely that there could be a couple more that would happen but certainly not to the magnitude of what you've seen Dover do over the last couple of years.

Thank you very much. I will get back in line.

John Inch, Merrill Lynch.

Good morning. So, Ron, you are now thinking that organic growth kind of 3 to 5; I think the last call, the last quarter, you still thought it was going to be high-end of 5 to 7. Can you just give us the primary moving parts that have adjusted in your thinking for the year, and what's not rebounding to account for the 3 points of delta in the forecasted organic growth?

Well, John, it's really just a mathematic function of the decline in the A&M Group against tough comparables of the prior-year period. We had peak business conditions in the A&M group a year ago that certainly didn't repeat this year, so that's the impact of the numbers mathematically.

If I might draw your attention back to Dover Diversified, Dover Industries and Dover Resources running at the 5 to 6 organic growth rate levels, that's more in line with what I would have anticipated across the board. I think that's where our confidence came in making that statement last time, but I think the mathematics worked against us a little bit there.

Without A&M, we would probably be closer to 4%. Again, the comparables at A&M get better during the course of the year. I think it's just more of a math progression issue that leads us to say roughly that 3% to 5% range. I'm still hopeful that we will be on the high end of that. We've always said, John, that 5% to 7% is what we believe is our long-term performance in organic growth. We've certainly operated above that for the last five years; we've averaged about 7% with certainly double-digit peaks during that period. So I'm pleased with our organic growth overall. Unfortunately, the mathematics have hit us in a couple of cases.

Yes, the other area that seems to be the systems business, you called out I guess a little bit of lumpiness in the food equipment shipments. Does that come back in the second half?

Yes. Don't read too much into that. We had a very high period at Hill PHOENIX a year ago, coupled with some very high [bell back] shipments that just, from a timing standpoint, didn't time into the second quarter this year -- booked very well at Hill PHOENIX. The business is very healthy. We would anticipate the third quarter to perform at good levels at Hill PHOENIX.

[Bell backs] is always going to be a function of when these large bottling companies close projects out, so they will always have a little bit of lumpiness, quarter-to-quarter.

The A&M business, I mean you said hit Dover metrics, which implies 15%. The whole Technologies segment swung over 500 basis points up in terms of profitability margin sequentially. I guess could you give us a little more color on that? I don't really understand how that business went down 21% -- topline revenues could have swung so much back into the profit range. Did you cut a lot of heads or is it mix? Just a little more color on what's the outlook there?

Well, quite candidly, John, this group has always had a wonderful history of really leveraging well on the upside, so any uptick and business level at all they tend to capitalize on quite well. In this particular case, I think some of it with some nice mix arrangement at DEK, OTAI International. Both performed very well in the quarter. I think the product mix at Everett Charles was a more favorable product mix than the prior quarter, so those were things that impact this.

But quite candidly, this is historically in line with what we see there. This group, I think to quote [Dave van Loan], he would want to say that, in the downtimes which we would classify this as one of the down periods, he feels that group should operate in low double digits kind of worst-case, and they ought to be in very solid above Dover metrics in the uptick. I think he has been exhibiting that. So we are kind of coming off one of those troughs. We've got nice leverage coming up. Some of it is due to headcount reductions that were taken in the first-quarter kicking in at full value in the second quarter. But I think, if you look at it, margins are up roughly 200 basis points, 7% sales increase leveraging to 22%. If we see further uptick in that industry, I would think we would continue to exhibit very nice leverage like this.

You know, right now, I would say as we look to A&M, it's still a bit of an unsettled market. We had a nice second quarter; bookings certainly improved. It buoys our spirits for the third quarter but I wouldn't say that we're headed back to where we were at the first half of last year.

Okay, but Ron, I still don't really understand. The A&M business saw substantial revenue declines, yet you basically hit your target metrics. So does that imply, for the rest of the year, you could actually be substantially above that rate, in terms of the profit margins for technologies?

Yes.

Okay, thanks very much.

Steve Tusa, JPMorgan.

Good morning. I'm not sure if this question was asked already but just looking at your commentary, you talked about kind of steady-state trends in the third quarter. I know, last year, the third quarter was kind of flat with the second quarter with regards to EPS. Is that kind of how you're thinking about flat-to-up for the third quarter, relative to this quarter?

Well, you know, quite candidly, we saw the A&M business really kind of lever over into the third quarter last year, so we have a different business dynamic.

I think there's puts and takes in about every one of the market groups that we serve as we look to roll into the third quarter. I think we should be up in the third quarter, probably record-setting again in the third quarter, but this tends to moderate growth for the year typically, second quarter to third quarter.

I got you. Okay, that's it. Thank you.

Shannon O'Callaghan, Lehman Brothers.

So, can you just talk a little bit more about the softness in Electronics in the quarter, you know, what you're seeing there and your expectations? I guess the follow-up to that is just, for electronic systems and technology, when you are talking about I guess a 5%-ish or better organic growth in the second half of the year, can you give a sense as to how you expect those three to move versus the quarter, in addition to a little more color on why Electronics was weak in the quarter?

Well, Shannon, first of all, let me make certain we get the definition of electronics correct here. Are you speaking to our Dover Electronics sector or are you speaking to the electronic involvement of our Dover Technologies group?

No, I'm talking about the Electronics segment.

Okay. Well, certainly in Electronics, Vectron has started to show some improvements in orders, which I think is going to work well for them as we roll forward into the third quarter. We certainly, in the Components group, Knowles is a big contributor there. As you know, they've been fighting issues with the declines of Motorola. In fact, I think we are really quite pleased that, when you consider the amount of reduction in Motorola shipments, that our SiSonic sales have actually held up and year-to-date are up about 15% over the same period last year, predominantly driven by other cellphone manufacturers as well as digital steel cameras. So that business is still performing well despite the declines in Motorola. That has been a nice positive for us but I do think the Motorola pull-backs, if they continue at the rate they are, that will impact the business a little bit in the third quarter.

I think that Pole/Zero has been additive in our Microwave Product group, so those numbers are reflected in there. In the Commercial Equipment group, which is part of Dover Electronics, we continue to fight a tough ATM market. June was a step in the right direction there; we saw some nice improvement at our ATM business. We hope we can build on that, but they are dealing with a very price-competitive environment on the low-end retail side right now. They will be combating that with some product introductions in the second part of the year.

Okay. Just in terms of the second half, you mentioned the segments that are running sort of five to six now. When you think about the three soft spots in the quarter in electronic systems technology, are you thinking those are going to be in line with those other segments for the third quarter and the back half or --?

Well, I think Dover Electronics could continue to have some challenges because of the pullback at Knowles and the SiSonic side of the business. How much they can offset that with gains at other customers is still to be defined, so that could be an issue there. At Dover Systems, which is one of the pullback areas if I'm using your terms, we would anticipate they will recover and be positive going forward. Dover Technologies certainly has more favorable comparables going forward.

I mean, would you expect Technologies to be up year-over-year?

No, not by the end of the year. (multiple speakers) tough for comparables on the front end.

I mean in the second half?

I think the compatibilities get -- Shannon, this is Rob. I think the comparabilities in the latter half of the year get better, but I still think, for a full year, it's probably not going to be as good a year at last year. I mean, we've looked back now and we think there's been a little bit of a two-year pattern of, you know, '04 and '06 were strong years, and '05 and '07 are looking to be less so. So I think our sense of the latter half of the year is that there should be some improvement, but we don't expect a full year to exceed last year by any stretch.

I think, if we look at the [VLS] side, it's showing 90% utilization, which should be healthy for the industry, but where they are going to just trying to use higher utilization to get into their Christmas season where they are going to try to acquire new equipment, I think the jury is still a little bit out on that.

Markem certainly will help the Technology group going forward. That will be probably the biggest gain. We certainly saw a nice comeback at [Emage] during the quarter in terms of getting back to their historical norm. So those are the positive things, but I think we are obviously correct in being cautious to the second half being appreciably up.

Terry Darling, Goldman Sachs.

I just wanted to ask about the incremental margins. In the Resources group, specifically on the oil and gas side, I think you had some impact there from some capacity increases. I wonder if you could give us an update on where we are there and how we should you thinking about the second half of the year.

Well, in the Energy Products group, quite candidly, they still had a very strong quarter in the second quarter. They were impacted somewhat by an extended breakup season in Canada and slower gas drilling activity up there. That filtered through a number of our businesses that serve the Energy Products group. Their export sales did increase, which offset some of that decline. I think long-term our expectations are very high for this group. I think this, let's say setback, in Canada, it will not be a permit issue. In fact, most of the feedback we get from Canada is still bullish on the second half of the year, so we don't see any significant decline there. I think the rate of growth has been so high in the past year, certainly driven by the share gains that went on at U.S. synthetics and their diamond insert business, that that really drove a lot of the year-to-year change. I would say that they've really made nice strides in penetration of that technology in the marketplace. The rate of that change, though, will remain positive but not at the same high rate. But we continue to be very bullish there.

If you look at our Gas Equipment group, really as we start to see slowdowns in the drilling side, typically that turns into more repair business on the compressor side. That plays very well to our compression services companies and in the Gas Equipment group. Each of those had some nice sales and margin improvements as a result of that. We would expect that to probably continue to escalate going forward.

I was just trying to get a better feel for the incremental margins. You know, clearly, it's a great topline environment and you are performing well in that context, but I think mid teens incrementals versus 30% to 40% more broadly across that sector, that's really the disconnect I'm trying to reconcile, and you pointed out you've been adding some capacity. I'm trying to figure out. Are we getting past the start-up costs (inaudible) synthetic, where we ought to be able to look to 30% to 40% incrementals in the back half of the year in that business, or are we still bumping up against some competitive pressures?

Well, I think some of the capacity build-out will continue in that area because we are still bullish on that sector long-term. We do have some projects underway currently.

I don't think we have competitive pressures that are really bringing a lot to bear there. We've been able to raise our prices in that group. Certainly as a nickel prices have gone up, that has impacted our sucker rod business returns a little bit, even though they're quite strong, but that has been a little bit of headwind for those people. But I think this group really performs in very nice margins, certainly above Dover metric. They serve their customers well. They're high-share customers. They are getting all of the business that's out there and available to them. I think they've done nice with their export business. So I think we are pleased there, and I think the level of margin is as a good level that we can maintain. I don't think we're going to anticipate significant positive change in it in the third quarter.

I think, Terry, just to be more pointed, I think the relative leveraging is probably at the lower end of the range you described than the higher end of the range.

Okay, that is helpful. Just sort of a housekeeping item -- can you tell us what the FX impact on the operating income line was in the quarter?

Why don't we try to get back to you? I think it was 2%.

Okay. Then I guess I get confused on exactly what the message is on A&M for the second half of the year. You said it won't be as good as the first half of '06; that was clear. In terms of the second half, are you looking for the second half to be up versus the first half, kind of the run-rate on average there, or are you saying you're going to be closer to what you did in the second half of last year, not quite but close?

I would say not quite but close. I think we anticipate some continued improvement in the third quarter. The fourth quarter is a little fuzzy for us right now. It's really going to depend on whether we see capital spending pick up at the served market, so I think that's out caution there. But in general, the third quarter should be some sequential improvement overall think about equivalent to last year to slightly below it.

Okay. Then lastly, Ron, I wonder if you could talk a little bit about what you are trying to achieve internally with the simplification of the organizational structure. Clearly, all of us out here will appreciate that and look forward to it. But what is really going to change internally from a Dover perspective?

Okay, let me also just kind of go back. I got a point I meant to make about A&M is just again keep that in focus (technical difficulty) a number of questions on that. Year-to-date, it's about 8.5% of Dover's overall sales. I just want to make certain you had that perspective.

I think, as we talk about the change we're going to make in the organizational structure in Dover going forward, we aren't prepared to announce that on today's call but you'll hear from us in the near future.

I think, now that we have gleaned our portfolio, it has given us the opportunity to really kind of look at what are the true platforms at Dover? What businesses do we have and what markets? Are they in the right segments? Are they in the right operating groups? Are there synergy opportunities available? I mean, in this global world today, we have to make certain we're bringing all of the profit opportunities forward. I think it allows us to -- by regrouping and analyzing it, it allows us to better define Dover. I think to those of you that try to follow Dover, I think we can make the message much simpler, really identify the business in buckets that will make it very apparent where our strategic priorities are. I think I will save the rest of it until we get ready to release that information. But I think you'll find it to internally have no impact on the operating companies. Again, they continue to do their jobs on a day-in/day-out basis. The fact that they may work for a different person to them is not negative because I think we have good equal leadership in each of our subsidiaries.

I think that we really aren't changing the premise of how you operate in Dover, but I think we're looking at where do we get gains from having groups of companies that serve similar markets or similar customer bases being able to focus their energies and their attention on potential synergy opportunities or learnings that they can apply in their businesses. So I think that's kind of where we are headed. I think you'll also find that it will certainly enhance the understandable markets of Dover and improve our transparency. It will allow us to put a little more supply chain focus in each of our groups also, I believe.

Okay, that's helpful. Thanks much.

(OPERATOR INSTRUCTIONS). Nigel Coe, Deutsche Bank.

Good morning. Yes, so I guess (inaudible) that implies second-half versus, you know, between 5% to 9%. Can you just give us some sense on how that shakes out between Q3 and Q4? Would you expect 3Q to be within that range?

I think, Nigel, we would think of the second -- the third quarter as the stronger of the two quarters. You know, I would say it's probably -- you said 5 to 9. I think we would think more of 5% to 7% in that quarter, and then you see a slowdown in the fourth quarter relative to the full year. You know, our target organic growth rate is now in the 3% to 5% range, so we do expect a pickup predominantly more in the third quarter than the fourth quarter.

Okay, so does --.

That's very traditional with how Dover business has been done year-over-year. We always feel their pullback in the fourth quarter.

Okay, just to clarify that point, is that a year-on-year comment or was that just a Q-on-Q comment? Because I understand there's a seasonal tip in Q4 but the actual year-on-year growth you expect to be stronger in 3Q versus 4Q.

Yes.

Okay, great. The tax rate, you've lowered the tax guidance for the full year. I mean, does this reflect any sense of the mix between international and U.S. earnings? Will you expect the tax rate to be sustainable at this rate going into next year perhaps?

I think we're going to have to be more cautious about how far out we can project any particular tax rate. It is a mix issue to some degree. I mean, there are things always going on. For example, there's a German tax-rate cut that comes into effect in the latter half of the year which will have some positive impact. I think it is a mix issue between domestic and international earnings, but it's also the fact that, within 48, frankly most public companies, including Dover, have a much more timely mark-to-market phenomenon in terms of when we take tax benefits and resolving our affairs with the IRS and the foreign taxing authorities. So we've lowered our effective tax rate expectations for this year to the 26% to 28% rate to reflect the fact that we are a pretty current taxpayer and we are, frankly, actively working with our taxing authorities to resolve issues on a timely basis.

Okay. Just finally on the A&M business, you highlighted that (inaudible) 5% of revenue year-to-date but it's probably about 35% of [receptions]. Are you surprised at the variability that's coming through with this business? Do you still -- is the variability in this business still the kind of business that Dover wants to be in longer-term?

Well, I think we certainly would like not to have the degrees of variability but we're very pleased with the performance of the companies that serve that market. We believe the companies that we own are very well-established leaders in their industry; they are capable of providing Dover-like margins over a business cycle. There's a nice uptick to that market that we all appreciate when we get that. Certainly, we don't like the downside. We would like to see the volatility be less, but I think, compared to the portfolio we had a year ago, we've certainly brought those in line. We are not producing the losses in our Technology group that we did at a point in time. So we still enjoy the business that we own there.

Great, thanks a lot.

Alex Blanton, Ingalls & Snyder.

Good morning. Just a comment on your reorganization, once you've done that. Are you going to give us the historical data going back for how long?

Alex, you will receive historical back at least three years. We are working on that now. Once we get all that together and finish our dialogue, we will be back and announce that change.

Great. Now, I want to go back to Knowles for a minute. You mentioned -- it actually is in the slide but apparently you're referring to it when you talk about micro-acoustic products.

Yes.

So you had positive operating leverage there, so despite the effect of Motorola, you did have higher margins. Is that what you are saying?

Well, we had more hearing aid sales, which certainly helps the business, and that's kind of been the long-term legacy of the business. They do quite well in the hearing aid market and we saw contributions pick up in that area. In fact, the hearing-aid side of the business is probably up 6% to 8% I think for the year. So, that's been the majority of the contribution, but quite candidly, I think we're pleased with how well the SiSonic sales have held up despite some challenging market conditions.

Well, is that the microphone part?

Yes, it is.

So was that down or did that also contribute to higher earnings?

Well, it was basically -- if you look at it for the quarter, it was relatively flat in terms of number of units for the quarter, but again, at the leverage rate they are at, it performed very well I think. So in total, it performed well and I think probably the driver of the positive leverage would be the impact of the hearing aid business increasing.

Okay. Flat year-over-year or flat quarter-over-quarter?

Quarter compared to last year.

Last year. Finally, on that subject, it sounded like you have -- your Motorola business is larger as a percent of the total than it is in the industry. Is that correct? I mean, what about Nokia and Sony Ericsson? I mean, they are picking up share and Motorola is losing. I mean, can't you offset the loss on Motorola by gains on those two?

Mathematically, that would certainly work, Alex. However, we have to win those applications in the marketplace and we're working hard to do that. We do have applications with Sony Ericsson. That has been part of the growth. We have applications at other cellphone manufacturers that have been growing, that have been offsetting the losses at Motorola. So, I think, in total, that's been how we have been able to maintain our units.

Well, and one more thing on this -- are there any alternatives they have to this? I mean, what are they doing to provide the same benefits to their customers that you do with your microphone in terms of the cost element of assembling and so on?

Well, I think there's a number of technologies for people to select from out there, and I think that those people that have been adopters of wanting high-end sound quality have adopted the SiSonic microphone from Knowles quite well. Certainly, we are the leader in that product development and in the applications that we garner, but I do have other alternatives being the ECM mics that would be used more at Nokia and also at Samsung. I think, over time, hopefully we will be successful in garnering more of those applications, but I know that we are engaged in a lot of dialogue with a lot of manufacturers that we choose not to talk further on today, but I think we are encouraged by the market penetration that has occurred for our SiSonic microphone.

There's also been some push towards lower-end phones just from the standpoint the price curve has been pushed, so there's -- a few of the manufacturers have stepped back to lower-end phones that use let's say lesser technology at a different price point.

Wendy Caplan, Wachovia.

Just a quick question about your performance metrics -- can you help us understand sort of how many -- you've helped us in the past talk about how many companies have met some of the metrics and obviously we're getting closer to expecting that the metrics will tighten for the companies. Can you address those two, please?

Well, I think we've got about 34 of our 40 reporting companies that are able to meet a number of our metrics. Those that are five for five certainly are in the four to five range. We've certainly seen an overall trend up in the number of companies attaining metrics over time.

I think you are referring to our inventory turn metric and operating margin metric. Our inventory, I think, this particular time, Wendy, I don't have the number in front of me. We would be happy to get it and share it but I'm not certain I have the right number in front of me at the moment. But our inventory turn has improved sequentially and certainly, we've seen the improvement in margins. So I think the metrics, again, continue to be driving a real change in the focus of our operational performance inside of Dover.

I think that we still are confident that we will find our way to 8 inventory turns. We are running at about 6.5-ish right now. We have a number of companies, as we mentioned, that have found their way to 8; others are progressing. The amount of progress in that I think is part of what's helping our cash generation because it's reducing our working capital. So I think maybe your question related to what percent of our revenue is at metrics margins (inaudible) inventory turn, and I'm sorry, I just didn't bring that number in.

Okay, I will check with you later. Finally, as you think about acquisitions, you know, you spoke of the reorganization plan and sort of helping companies that are more alike in different ways to be part of the same group. When you think about acquisitions, does this reorganization plan speak to that as well in terms of the characteristics of businesses that you'd like to focus on for acquisition?

I think the characteristics may be unchanged, Wendy, but I think it will show kind of the concentration of what companies we have, what markets we like to focus on. So I think it may add some clarity to the strategic thinking that we have around acquisitions long term. So, I think that might be some additional clarity that you will get from the new organization structure.

I wouldn't want anybody to assume that there's doom and gloom in the acquisition environment because we didn't announce any in the second quarter. We've had periods before where we didn't announce an acquisition, but quite candidly, we are engaged in a number of processes and it's likely we will further announcements through the course of the year.

Great, that's very helpful. Thanks.

Thank you. I would now like to turn the call back over to Mr. Hoffman for any closing remarks.

Well, again, thank you very much for your interest and questions today. I am very pleased at the performance that Dover posted in the second quarter. Our record earnings quarter is one that we're proud to have displayed in this arena. We're hopeful of continuing to build on that as we roll towards the third quarter. So again, thank you for your questions and comments. I'm sure Paul can help you if you have further need for information.

Thanks a lot. This concludes our conference call. We thank you for your continued interest in Dover and look forward to speaking to you again next quarter.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.