道爾 (DOV) 2007 Q3 法說會逐字稿

Good morning and welcome to the third-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. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time.

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

Thank you, Jessica. Good morning and welcome to Dover's third-quarter earnings call. With me today 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 website, www.DoverCorporation.com. This call will be available for playback through 5:00 PM November 8th, and the audio portion of this call will be archived on our website for three months. The replay telephone number is 877-519-4471. When accessing the playback, you will need to supply the following reservation code, 928-7927.

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 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.

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 record quarterly results with double-digit increases in sales, earnings from continuing operations and earnings per share compared to the prior year. This has been a quarter of significant change within Dover, and this is our first quarterly report under our new four segment structure. Our new segment alignment of Industrial Products, Engineered Systems, Fluid Management and Electronic Technologies defines the true growth platforms for Dover. The new structure simplifies our strategic focus and properly aligns our companies by broad end markets and platforms such as Material Handling, Mobile Equipment, Product Identification, Engineered Products, Energy and Fluid Solutions. The new structure also provides the framework for capitalizing on potential synergies, expands the opportunities for executive management positions and significantly clarifies Dover for our investors.

Annual results for the past three years and quarterly results for 2006 and year-to-date 2007 have been restated and were included in the September 2007 new segment analysis. All of this historic financial information is posted on our website to assist your analysis of Dover.

The core values of Dover -- striving for world-class operating excellence, allowing our talented presidents to run their businesses and the relentless search for new companies that meet our disciplined acquisition criteria -- are still the foundations of our culture.

During the quarter we increased our annual dividend by 8.1%, maintaining our 52 year record of annual increases. We also reevaluated our capital allocation strategy in light of our strong cash generation and reduced acquisition spending, and we announced a $500 million share repurchase which reduces our outstanding shares by roughly 5%. We have repurchased approximately 300 million of those shares to date and should complete the balance over the next few months. We believe the increased cash dividend and share repurchases appropriately reward our shareholders for their continued support of Dover's long-term growth.

As announced this morning and shown on slides three, four and five, Dover posted quarterly earnings from continuing operations of $178 million or $0.88 per share, up 15% and 16% respectively over the prior year. Quarterly revenue was $1.84 billion, up 15% with operational earnings of $285 million up 17% over the prior year.

Each of the four segments posted revenue gains, and three generated double-digit earnings growth compared to the prior year period. Bookings were $1.8 billion during the quarter, up 11% over the prior year. Each of our four segments and all six platforms have recorded double-digit increases in their backlogs compared to the start of the year.

The product identification, energy and fluid solutions platforms posted record quarterly results with strong operating leverage both year-over-year and sequentially. Mobile Equipment generated 64% year-over-year leverage and actually posted better sequential results when adjusting for a onetime property sale recorded in the second quarter.

Electronic Technologies posted its best results of the year with six of its seven companies reporting their best quarterly earnings of the year, despite dampened market conditions. Year-to-date net earnings from continuing operations were $484 million or $2.36 per share, both up 11% over the prior year. Revenue for the year is up 15% to $5.37 billion with operation earnings of $798 million up 8% over last year. Bookings to date are $5.53 billion, up 15% over the prior year period.

As shown on slide six, Dover's global footprint allows us to take advantage of geographic market trends. The domestic US economy continues to be our largest market. However, we benefited from increased activity in Europe, Canada and Latin America to offset the softness in Asian electronic equipment markets.

Our Company presidents continue to expand their global footprint to meet the demands of their existing customers and to expand their served markets. Material price headwinds moderated during the quarter for most commodities, although high nickel alloy steels, stainless-steel in particular, continue to be challenging. The positive impact of price increases, favorable product mix and continued productivity improvements offset most of the quarterly cost increases.

As highlighted on slide seven, Dover continues to see a positive impact from its PerformanceCOUNTS program and met four of its five target metrics for the quarter. Our leaders continue to work on improving their inventory turns while keeping customer service levels, leadtimes and delivery performance best-in-class.

Dover invested approximately $56 million on two add-on acquisitions during the quarter. Rotary Lift acquired a Chinese automotive lift manufacturing company, Hanmecson, to provide a low-cost offering for its domestic market and to establish a facility to serve the increasing demands of the Asian market.

Wilden acquired Griswold Pump which will add a centrifugal ANSI pump offering to its global distribution network. The acquisition pipeline remains active, but the current effect of the subprime low concern is impacting the multibillion dollar transactions. Whether this will have a significant effect in the midmarket is still an open question. Nonetheless the current acquisition climate is moving to the advantage of well-funded strategic buyers like Dover, and we will continue to stay actively engaged.

Dover has been very disciplined in this year's high-priced acquisition market, and total spending for the year will be around $250 million. Historically Dover invests in acquisitions at about 8% to 10% of annual revenue, and we are prepared to step up our spending if significant value-creating opportunities are identified.

Commenting on our recent acquisitions, we continue to be very pleased at the significant margin improvement being produced at MARKEM, and we are highly encouraged at the potential synergies being identified within the product identification platform.

Paladin, though facing the headwinds of a challenging residential construction market, has seen only a 4% revenue decline due to the positive performance of their demolition, recycling, utility and infrastructure-related products. Their earnings have been negatively impacted by operating challenges including plant closures, product moves to Mexico and new operating system start-up costs in 16 of their 19 facilities. We believe Paladin will continue to face difficult market conditions in its heavy construction group for the next few quarters, but in time will be a strong value-creating acquisition for Dover.

Pole/Zero, a first-quarter addition to our Microwave Products group, is off to an excellent start and expand our portfolio of Defense Communications products.

As shown on slide eight, Dover's organic revenue growth rate for the quarter was 3.3% with the Engineered Systems and Fluid Management segments posting 8% and 9% organic growth rate gains. Industrial Products' organic growth rate was impacted by slower construction and refuse markets. Electronic Technologies, which had its best quarter of the year, continues to fight tough comps in its Test Equipment businesses compared to the last year.

For the full year, we anticipate organic growth in the range of 2% versus the double-digit gains experienced over each of the past two years. We remain fully confident in our 5% to 7% organic growth targets over the long-range business cycle. Our operating companies are maintaining their high marketshare positions, and we continue to be very excited about the new product initiatives that will fuel our future growth. Dover's 15% revenue growth included 10% from acquisitions and 2% attributed to foreign currency adjustment.

Looking forward to the fourth quarter, the majority of our companies have strong backlogs and anticipate the continuation of a moderating business climate. We also expect to incur discrete integration and restructuring charges in the range of 5 to $8 million as we continue to position our companies for sustainable long-term performance. Given these factors, plus the normal effects of seasonality, we believe our fourth-quarter performance will be modestly improved over the same period last year.

The third quarter of 2007 produced many record results that were driven by the hard work and creative ideas of Dover's very talented group of global employees.

In closing, I want to sincerely thank them for their continued efforts to provide the results that reward Dover's shareholders. I'm confident that they are fully capable of meeting the challenges of maximizing Dover's future results.

With that, I will turn it over to Rob Kuhbach for an additional insight into our quarterly results prior to opening the call to your questions. Rob?

Thanks, Ron. Good morning, everyone.

Taking a closer look at the results of Dover's four segments starting with slide number nine, Industrial Products turned in a very good quarter led by the Mobile Equipment platform. Strong energy in defense markets and the acquisition of Hanmecson International in China benefited the platform's revenue and earnings comparisons for the quarter. These improvements were somewhat offset by weakness in the North American automotive service industry, short-term limited chassis availability of Heil Environmental and softness in aerospace service results.

In the Material Handling platform, revenue and earnings comparisons for the quarter were favorably impacted by the acquisition of Paladin in August 2006. The platform experienced continued strength in the military market, which was tempered by softness in the construction, automotive and Canadian oil drilling markets.

The Engineered Systems segment had the highest earnings contribution to Dover in the third quarter of 2007. The product identification platform drove the segment's revenue and earnings growth, reflecting the December 2006 acquisition of MARKEM, along with double-digit contributions from the core direct marking business.

Softness in the tabletop and portable printer markets somewhat offset these gains. The platform is moving forward on its integration plan for MARKEM and Imaje. The engineered products platform also made a positive contribution to the segment as revenue and earnings increased 16% and 17% respectively. The platform showed broad gains in the quarter and substantially all markets served. As we look to the fourth quarter, normal seasonality and slower retail food equipment orders impacted sequential bookings.

The Fluid Management segment had the second highest earnings contribution to Dover for the quarter. Earnings grew 18% as both platforms in the segment achieved 11% revenue growth in the quarter. The energy platform showed positive results from strength in US oil and gas drilling and increased power generation demand. These gains were somewhat offset by weakness in the Canadian gas markets. However, the platform's margins are benefiting from operational improvements and product mix.

The Fluid Solutions platform results reflected strong industrial markets, business mix and cost containment efforts.

The Electronic Technologies segment had a modest revenue increase, largely attributable to the February 2007 Pole/Zero acquisition, now part of the Microwave Products group. Gains in the medical and military space markets were offset by continued weakness in the semiconductor end markets when compared to a strong prior year quarter. However, on a sequential basis, the segment is benefiting from improvements in the semiconductor market. The segment continues to see positive development in the handset markets served and had double-digit growth in the hearing aid market. The segment's operating margin in the third quarter decreased slightly from last year due to higher R&D, new product rollout costs and lower revenue levels in its largest business unit.

Here are some additional corporate information. Looking at our capitalization, Dover ended the quarter with a net debt to total capitalization of 28%, up from the 2006 year-end level of 26.8%. This largely reflects increased commercial paper borrowings used to fund the accelerated share repurchase program we announced in August, partially offset by cash generated from operations.

Free cash flow generated in the third quarter of 2007 was $180 million or 9.8% of revenue, down $54 million from the prior year period, primarily due to higher discrete tax payments. For the nine-month period, free cash flow was strong at 7.6% of revenue but down from the prior year period due to higher tax incentive compensation and interest payments. We still expect full-year free cash flow to be in the range of 9% to 10% of revenue.

Our effective tax rates for the 2007 third quarter and year-to-date periods of 26.4% and 27.2% respectively were favorably impacted by a reduction in the German statutory tax rate and favorable adjustments to uncertain tax positions, offset by an increase in earnings in countries with higher tax rates.

We had two add-on acquisitions in the quarter, including one in China by Rotary Lift involving total expenditures of about $56 million, bringing year-to-date spending to approximately $175 million.

In August we purchased 6 million shares of Dover common stock under our previously announced accelerated share repurchase program, bringing the whole number of shares repurchased in the quarter to 6.1 million at a cost of about $316 million, which is subject to a final price adjustment by the end of the year.

Finally, we closed on the sale of previously discontinued business and recorded other adjustments as discontinued operations for a net after-tax loss of about $1.6 million.

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

Thanks, Rob. Jessica, please compile the questions.

(OPERATOR INSTRUCTIONS). Shannon O'Callaghan, Lehman Brothers.

I guess if I could just start off with maybe asking for a little more definition around this modest improvement comment. I guess I am assuming that it is less than the kind of EPS growth you saw this quarter, but could you maybe define that a little more closely for us?

I assume you're talking about the fourth-quarter comment that we made.

Right.

Well, I think what we say is, if you looked at Dover historically, we have traditionally shown a bit of a pullback from the fourth quarter. The last couple of years that has been somewhat -- I won't use the term distorted, but it has been somewhat different because of the timing of acquisitions that we brought in during the course of the year. But the underlying businesses have always showed a trend of building in the second and third quarter, a little bit of pullback in the fourth quarter.

I would say that in general if you looked sequentially at increases in sales and so forth, they have been in the single digit range sequentially for the last couple of quarters. I think we take that and couple that with the fact of the typical pullback that we see in the fourth quarter, and we are just being conservative and saying we anticipate some moderation in the fourth quarter.

I think if you look at it in terms of consequential events, we anticipate that the construction market will continue to be challenged, perhaps even deeper than it was in the third quarter. So we would see some impact from that that would impact some companies in the Material Handling group. We certainly have had wonderful results at our supermarket equipment company. It will see pullback probably in the fourth quarter because of projects of this major customer that are kind of winding down for the year and a little bit of seasonality there that typically happens just due to the fact that new store starts tend to slow in the fourth quarter.

I think we are being a little bit conservative in our Energy group, not so much that we see anything of significance other than we saw starts in Canada because of the prevailing gas prices being slower in the third quarter. There is also some potential royalty issues going on in Alberta that might moot that oilpatch over time.

Again, I'm not talking about significant pullback. Because we did not see the growth rate sustain itself there. The rest of the oilpatch companies are doing quite well, though. So I think that is where our conservatism comes.

Okay. And then I guess you know you're talking probably down from the 16% you saw this quarter, but you are still looking for double-digit EPS growth in 4Q?

Do you mean year-over-year?

Yes.

I would say we're not thinking in high -- we're not thinking in double-digit. We are thinking in high single digits more realistically. (multiple speakers). But again I think part of this, there are really three factors that we look at.

First of all, we think the effective tax rate for this -- we have increased our projection of tax rate from probably 26 to 28 now more like 27 to 28. Part of that is just the reality of how FIN 48 affects us. So to some degree, we are projecting probably a slightly higher tax rate structurally than you may have thought of in the past. And frankly, last year, the last couple of years, we have had some favorable fourth-quarter tax rate benefits from one-time events.

So tax rate is a factor. As we mentioned, the restructuring is a factor, and frankly, the conservatism that Ron referred to is the third factor. So I would say we are -- last year we had a third quarter of $0.76 and a fourth quarter of $0.75 restated. We're expecting to beat obviously last year's fourth quarter by a meaningful percentage, but it is not double-digits.

Okay. Thank you. In terms of organic growth and maybe actually since you brought up tax rate maybe that too, I mean as you're looking into next year, it looks like 4Q if you're talking about 2% for the year, maybe we have 2% or 3% organic growth next quarter, any early feel for what you are expecting in '08 for organic growth and maybe, Rob, on the tax rate too if there is any change expected there.

Well, I think from an organic growth rate standpoint, certainly some of our electronic comps get easier as we roll into '08 from '07. We will see MARKEM and Paladin become more organic. So I would anticipate we would see some improvement in what we posted this year.

I do think it is fair to say we have not completed our annual planning cycle. So we have got meetings coming up in the next -- like most of our peers -- we have got meetings in the next 30 to 60 days. So we realistically don't have a very clear picture of next year at this point. So I am not sure we can give you a whole lot of color about organic for next year. I think tax rate structurally is likely to be -- in the past we have ended up more in the 26% to 27% range in the last couple of years, and I think structurally we are probably more like 28 to 29. Part of that is the FIN 48 factor, and frankly, as our balance of business has shifted somewhat back to North America with our divestiture program in the last couple of years, our mix of higher tax jurisdictions has probably shifted to a modestly higher rate.

So while we in the past have been probably 26 to 28 in the range, we are probably going to be in the 28 to 29 or maybe even 30% range structurally. So that is going to change things a little bit for next year. But again, it is too early to tell because we do not really have an annual cycle behind us.

Okay. Just the last one from me is, in terms of the Electronic Technologies business, you mentioned that semi is improving sequentially but not year-over-year. I mean the comps get easier year-over-year in the fourth quarter. Are you expecting to sort of cross over to year-over-year improvement there in 4Q, or when do you think that might happen?

I think we will certainly be looking at something that is flat probably quarter-over-quarter would be our early estimate.

Terry Darling, Goldman Sachs.

I was wondering if you could touch a little bit on breaking out the 3Q organic growth within the Engineered Systems business. Can you help us with Product ID versus the Engineered Products piece? And then look to margins in that business were a little weaker than we perhaps were hoping and you were down a little bit sequentially. I'm wondering if you could talk about what went on there. There was some reference in the 10-Q to some of the printer markets. How long do we think some of that softness happens, and to what extent is the integration process ongoing impacting these near-term results?

I would say, Terry, in Product ID organic growth for the platform was pretty modest, but it really had two components. Frankly, you had positive organic growth in the, called the core marking business, which predominately is Imaje. And the fact of the matter is that the portable printers and the desktop printers have had some challenges in their market space. So they were probably not a positive contributor to organic.

So Product ID as a total was pretty flat, but it had two pieces to it. The core business, which is the lion's share of the revenue right now, has had a positive period as we talked about in the release.

I guess your other question was whether Engineered Products had organic growth?

Well, just looking at Engineered Systems, I mean I think we could back into the Engineered Products organic unless you want to just quickly call that out for us. The other question was centered on margins broadly for Engineered Systems. A little disappointing from -- (multiple speakers)

Let me also be just slightly additive to Rob's comment, and that is the fact that we have seen some nice gains in MARKEM that at this point in time are classified as acquisition growth. But those will become organic as we roll forward, and they have actually seen some nice improvement in their business levels.

I think the organic growth in Engineered Products was double-digit, given the overall organic growth for Engineered Systems is high single digits. I think the other thing you asked about was integration. As we commented in the release and in our comments, realistically the real start of integration of MARKEM and Imaje is really beginning now. There was some transition between the people that were initially involved in the acquisition with our restructuring. Bob Livingston is now in charge of the oversight responsibility for that process, and I think we continue to see early opportunities that we have taken some advantage of. But I think you are going to see significantly more of that process coming forth in the next year. But it is beginning this quarter, and it will continue into 2008.

I believe maybe just slightly a little bit more positive on that from the standpoint that we have seen nice margin improvement in MARKEM this year, which is really kind of capitalizing on the redundancy in some of the development programs and the actions they have taken relative to that. But I think, as we roll forward in that particular group, as we bought this company, we knew we would have to find the apparent synergies to capitalize in this business to make it the right entity. However, we wanted to make certain that those have been properly studied by both groups prior to us enacting a plan because you can come out of the gate and sometimes shoot yourself in the foot.

So we wanted to make certain we had studied the markets and the companies, the distribution channels, and I think we are now formulating plans for that go forward that will impact '08.

So in terms of how we should be thinking of Product ID margins in '08 still, it sounds like you're still expecting us to move above the 15% range for the year. Is that fair?

Yes.

Okay. And switching to HILL PHOENIX, you had mentioned some of the impact from 4Q seasonality but also the pullback in new store openings. I presume that that outlook would extend into 2008 as well?

Well, I think at this point until we know more that has to be our thinking. Certainly HILL PHOENIX had a record quarter. I mean they had a wonderful quarter. I know we all hone in on the impact of Wal-Mart, and that is appropriate because that is what is impacting the fourth quarter. It is probably the pullback of new orders relative to their stores going forward.

However, we have seen HILL PHOENIX also garner a lot of new opportunities at other customers in that marketplace. So I think they are still gaining new accounts with their new products that they have rolled out. Certainly there are sustainability initiatives. I think we're also somewhat buoyed a little bit from the standpoint we hear Wal-Mart talking about the possibility of increasing their number of remodels as we roll into '08. We don't have anything definite there. We don't know when that would take effect, but I think as they have to refresh the footprint of new stores or convert, let's say, dry goods stores into supercenters, that will create opportunities for HILL PHOENIX equipment.

So I think we probably have a fourth-quarter issue. It might impact the first quarter. We will know more as we get later into the year as to what the impact will be in '08. Again, as Rob said earlier, we have not looked at the forecast for '08 yet. We will be doing that over the next month.

Okay. And lastly, I wonder if you can calibrate us on the reorganization costs and perhaps detail what those are going for? Is that plant closings? Is it severance? So just a little detail there.

And then it does seem as if this process is at least qualitatively going to be ongoing for you. Is there a number we should think about in terms of reorganization expenses for 2008 at this point, or is that something you're still trying to firm up?

Again, I think as you try to ask questions about 2008, I think Rob has probably properly characterized it. We have not had our reviews of our companies for 2008. We do that starting around Thanksgiving into early December. So it will be awhile before we have all those numbers rolled up and in focus.

I guess we would say that certainly restructuring costs will continue as we look to integrate changes at Paladin, certainly to rightsize that Company and determine what is the right footprint globally for them to operate and serve their customers. I think also we will see the impact of change in the product identification area over time.

Why don't I just without getting into too much detail because, frankly, the nature of these expenses are in a way highly sensitive given that in some cases these are early in the discussions because we don't have firm numbers, but I would say probably more of this is, I will call, integration. More of the estimated $0.02 to $0.03 is on the integration side rather than what I will call severance costs if that makes any difference to you.

Yes, that is very helpful. Okay. Gentlemen, thank you.

Steve Tusa, JPMorgan.

I have got a question for you on Knowles just to start. What is the revenue base of that business now? Is that about $300 million?

It is in the ballpark, yes.

Okay. And then it is operating at Dover metric margins?

Absolutely, above that. (multiple speakers)

Significantly above that?

It is a nice performer. It is meaningfully higher than Dover 15%.

Okay. If we just say it is for -- just assume it is at 20%. After two years, your return on invested capital in that business would be about 9%, maybe 10%-ish on a pretax basis? Am I looking at that the right way?

That is directionally the right answer, yes.

Okay. A solid result but it is arguable that Knowles is going to get dramatically better in the near-term, and then we obviously know about Paladin. Now you're talking about the portable printer business being weak, and I would assume that refers to O'Neil, which is another acquisition you guys executed on over the last few years. We appreciate the discipline on capital allocation this year.

But looking at the developing track record here and your stock being so cheap, I mean is there any view by the board to maybe step up this share repurchase over the next couple of quarters? Maybe you guys just need to take a little bit of a break. You're obviously spending more money on restructuring with some of these businesses now on the integration side, so there's more money being poured in. Is there any view to step up the repurchase more aggressively, or is this kind of the best for now with the cost of share repo?

Steve, a couple of responses. First of all, I think these integration costs that we speak to, we talk about integration costs in a range of 5 to $8 million a quarter. That is not totally insignificant. But also compared to the size of the acquisitions that we did over the last few years, those are not overly impacting numbers.

I think we still are very pleased with companies like MARKEM, Pole/Zero, US Synthetic. A number of these things we have done over the last year few years have performed very, very well and have been very value creating for our investors. I think at this point in time, we're watching the acquisition market in terms of looking at quality versus the price we are having to pay. We are not just sitting on the sidelines saying we're out of the acquisition game because we are not. We're continuing to evaluate opportunities that are out there. We're just trying to be very strategic as we think of those.

I think as we commented we did our share repurchase program or announced it that we will continue to reevaluate our capital allocation strategy on an annual basis. So at this point in time, the $0.5 million purchase that we have out there that we're working on is moving forward. We don't have plans to announce another one, let's say, immediately. We will continue to reevaluate that as we roll into '08 as part of our normal review.

I would also just add a little bit in the fact that you commented on Knowles, and I think all year long we have all talked about the pullback of the major customers they served last year. But I guess I would characterize Knowles as probably being healthier today than they were last year, quite candidly.

Their number of units are going to be up over last year. Again, I'm talking about the MEMS microphone business, which again gives a lot of credibility to the level of acceptance of that technology. It also shows a much broader spread of that business among the customer base, and I think we are not as reliant on one customer as we were this time a year ago. I think the business ash a much better foundation now.

Okay. And then the last -- I appreciate the comments. And then the final question would be on, just looking out over the next couple of years, you talk about this PerformanceCOUNTS, all these metrics, and one of them is 10% earnings growth. And with all your experience in the industrial economy, there is a lot of nervousness out there around various end markets and where they are moving. I'm not quite sure if your comments reflect caution on the longer-term outlook and given that tech is a 3% drag on earnings growth this year, when we look out to the next couple of years, you will have that hopefully going for you if it is just flat relative to this year, and you're going to do probably 10% growth this year.

So is there anything out there that makes you really nervous with regard to any of these markets other than construction maybe really falling off a cliff and making you miss that kind of what we consider probably the most important PerformanceCOUNTS metric over the next couple of years?

Well, earnings growth certainly has been something we always focus on, and it has certainly rewarded an incentive system for our Company presidents also. I think we are very pleased with our long-term track record of earnings growth. I think that we will exceed the 10% this year. As we roll out '08, we will have a better response to your answer. But I'm not seeing doom and gloom that causes me great angst about that number right now. We certainly have a fourth quarter that we have said is moderating, but I'm not seeing underlying significant issues yet across Dover that cause me to have concern. I'm still yet very keenly excited about the future going forward.

Nigel Coe, Deutsche Bank.

Could you just dig into the tax rate question, the tax rate issue? You've mentioned I think 27 and 28%. Is that a comment on the 4Q number, or is that the full-year number?

That is the full-year number. The 27 to 28 would be the full-year number.

Okay. So you're talking here about a potential 4Q range of between 27 and 30 potentially?

Yes, that is right.

Okay. Great. And also, actually on the Technology segment, can you just maybe provide a bit more information on organic growth and the margin trends between the semi cap and the Microwave Products please?

Well, your question was, if I interpreted correctly, was the margins in technologies, and you happened to mention Microwave specifically. I would say that again as we reported our Industrial Technologies margins were just slightly under the Dover metric but are still holding very well for the level of business going on in that group. And I would say Microwave Products is pretty much in that same range. So they are not a drag at all. In fact, they are pretty much right on par with the earnings of the whole group.

In fact, we really are very pleased especially with the new Pole/Zero add that we have put into Microwave Products. We think it really rounds that business out quite nicely. In fact, Microwave would be slightly positive to the group.

Okay. And organic growth between semi cap and Microwave?

Well, Microwave is a relatively small part of the total of Dover Electronic Technologies. I would say the organic growth rate, frankly, at Everett Charles is obviously down. So I would say that the total of the group -- the total of the Electronic group was overall negative, largely because semi compared to prior years is still down. It has made progress all year. As Ron alluded to, the sequential rate is coming up. But the reality is that it is still compared to the prior year, which was a very good year, is still behind.

Okay.

And most of that is due to the test business. Quite candidly, DEK has had a very good year. Knowles is having a nice year. So I think that -- it has pretty much been the change in activity levels in the Test arena. And that is where you really need to have I think new customer programs that are driving change that require new testing parameters.

Okay. And then just a question on restructuring charges. I mean at the moment it looks like these have led to past acquisitions. But going forward with the new structure and I'm trying to drive -- maybe try to finish it between the subsidiaries, do you envision discrete restructuring charges associated with the new structure?

I would say in general the synergy effort that we are looking forward to implementing will probably be just absorbed in what I will call normal operating activity. Things that we would be considering in terms of using common office locations, common factory locations opportunistically, common product development. Things of that sort would just become part of the normal cultural activity. We are not going to make a big effort to try to separately identify those, except where they are significant. But the ones that we have talked about today really -- Ron mentioned MARKEM and Imaje is a fairly significant activity. Part of that, frankly, will end up in purchase accounting and part of it is not. So I mean the ones that are a big -- of a significant consequence we might identify, but the reality is -- and Paladin is another one that has got some significant integration and opportunities that we are going to probably talk a little bit about given their size.

But I would say a lot of the other opportunities we are looking at some things in our pump company area. Those are kinds of things we're just simply not going to get into the detail. It is part of the ordinary course of business as far as we are concerned.

Okay. And the $0.02 to $0.03 you talk about for Q4, these will be absorbed as well within the segment's results?

Correct.

Right. And then just finally on Paladin, obviously performance has not been quite what you expected there. I think the story there was it (inaudible) market, so it could be a (inaudible) acquisition. At the moment, how do you do with that market? I mean do you want to double down this market, or right now you're just focused on just trying to improve the performance of Paladin?

Well, the Paladin issue is really more related to their heavy construction side. Again, I think we have shared with a number of people we have met with. But if you think of the construction market being down double-digits, 15 to 20%, the top-line of Paladin is only down 4%. They are seeing strong business in their demolition recycling area. The utility business has held up very well. Light construction is probably on par with last year.

So all of the downside has been in their heavy construction area. And I think quite candidly the bottom line is not very reflective of that top line right now because of the integration costs that we have taken on that I identified in my talk relative to implementing 16 new business systems, closing facilities and taking the costs of that, moving products and people to Mexico. Those are things that have been upfront cost, and I think we will get the payoff going forward into '08.

So I think at this point in time I don't know that I'm ready to call and say that we have hit the bottom of construction because I don't have enough information to say that. But I guess I would say that I think we're going to get some of these significant cost things more behind us probably between the fourth quarter and the first quarter of '08, and then we ought to see more of the fruit of that.

Okay. And can you just remind me how much within the (inaudible) how much is heavy construction versus other?

About a third I believe.

John Inch, Merrill Lynch.

Just as a comment, by the way, I really do appreciate the intent of the reclassification. I still find your Company complicated, but I do appreciate the intent.

If it is of any consolation, I don't know how you guys have gone through your evaluation. But I can certainly tell you that from our standpoint, to evaluate it into four buckets adds a lot of clarity for us, and certainly we see it over time probably allowing us to talk more discreetly with, say, our investor public because I think it is much more clear now.

Okay, Ron. So if I look at bookings and backlog, it looks like things, the growth rate across the Company with the exception of Electronic Technologies materially decelerated. Can you confirm that on an organic basis? I don't have the organic numbers, but would that be the trend?

And sort of the sub-part of that question is, you have taken the midpoint of the organic growth rate for the year from 3 to 5 down 2, so it is down by 2 percentage points. What has actually gotten worse than in the fourth quarter to have brought that growth rate lower?

Well, I think we really had a nice third quarter. As we fall off into the fourth quarter, certainly we have commented about HILL PHOENIX and the impact of Wal-Mart. HILL PHOENIX will probably be above last year's numbers, but they had such a nice quarter that I think that is a big swing.

I think you also have to look at it and say, the quarter over quarter change from third quarter to second quarter, again top-line was about 2%. That certainly is a deceleration from the 5% comparison sequentially the quarter before. So I think that is a little bit of a concern. I think also if we look at bookings, probably the organic rate of bookings was 1%.

What about energy? I'm just curious because you sort of characterize the Canadian situation with respect to this royalty dynamic in Alberta as something that will sort of be incremental. I was sort of under the impression that it could be a lot more significant. Is that just because the base in Canada is down, or why could not energy if this goes through face an outlook that is much more severe?

I think you have still got a situation where energy is still going to be an issue of cost and of depletion rates. Quite candidly, right now we have high storage rates of natural gas when natural gas prices are down. Canada is a big area for natural gas wells. So, as a consequence of that, we have seen Canada slow as part of that. And then I think you have this ominous concern about, if they change the royalty rates in Alberta, which looks like that could happen -- and it is not completed yet -- that that that might spur some drillers to look at the economics of their well activity in Canada.

We don't know how that will play through, but I think those are the realities that we have to think about. Quite candidly though, if you look at many of our companies -- again, we talk about companies like our sucker rod companies, which are doing more internationally than they have historically. US Synthetic, which makes the diamond impregnated drill bit tips, continues to see share gains using diamonds over other techniques in that marketplace. So I think they have grown very, very solidly. We don't see them being totally negative impacted by effects in Canada.

I think if you look at the buildout that we have done in our gas equipment group, as well in some of our support groups in the oilpatch, has been to play off that big spurt that happened in Canada.

So I guess I'm saying that we see a tempering right now. I think it is gas price driven more than anything. I think we get a number of coal days in Canada or, excuse me, in the United States that use gas, and we're going to see Canada come back from an activity level.

I would say that in general -- I don't have the actual number in front of us -- but the lion's share of our business is outside of Canada. So I don't want you to think the whole business spurs on Canada. We're just being honest and saying that we see a trend in Canada that is decelerating. The rest of the oilpatch we're not seeing that trend.

And, Ron, do you think energy without acquisitions can sustain a double-digit top line growth rate or close to it just based on those comments?

You know, I would have to say it certainly has for the last couple of years. The acquisitions we have done in that arena have been very small technology acquisitions, again going back to -- taking USS out of that conversation. But the rest of the adds in that group have been where we have taken advantage of technology that we thought allowed us to serve our customers better, and we posted very strong double-digit growth for the last couple of years. I don't right now see anything that would cause me to think they are going be less than double-digit growth. But again, it is very early, and we will wait unto we see our '08 rollup.

No, I understand. Ron, the 4% to 6% earnings benefit from the reclass that you guys had discussed, does that begin to kick in more towards the second half of '08, or should we be looking for some kind of improvement earlier than that?

No, John, I think you're thinking correctly. I think we have said by the time we get the organization structure intact and you determine where these current synergies can come from, we certainly have ideas. We have some game plans around that, but I think it will take time, and it will -- it is going to be more second-half related than first half. I think you're thinking about it properly.

Okay. One more from me. Just going back to the point about your share price and the valuation and sort of this whole trade-off between acquisitions versus share repurchase, it strikes me that your Technologies business, particularly given it has been a significant drag for now for a little while, Dover is just not really getting the benefit of that business as reflected in the multiple. Why not -- I mean you did a great job of sort of selling the much more cyclical pieces of it, but why not just move out the rest? You would have pure play companies that would probably be interested in acquiring those properties, and respectively the rest of Dover could benefit from a valuation rerating. Why not think about selling the rest of Technologies?

Well, there's a lots of alternatives I guess. I guess I would also say that where we have many people that want to ask a question such as you just did, I think I would also draw your eye to the fact that some of our peer group are actually trying to enter that space. So I guess I'm a little surprised that some people see that as an opportunity. We already own a play in that area, and it seems to, as you have connotated being negative from the viewpoint of Dover's portfolio, but I think we see some of our peers actually looking at that space for a growth opportunity.

Scott Davis, Morgan Stanley.

I am obviously new to your story, but I'm a little confused with guidance. I don't want to beat a dead horse. But if your backlog is up 17%, you're getting a couple cent tailwind from share buybacks. You're going to have the beginning stages of reorg benefits. You have got easier comps I think in the Tech businesses. I just don't really get why 4Q would be any off really the 3Q trend. Even given the color that you're providing, it does not really -- it does not add up.

So I guess my question is, how are you balancing the conservativeness with maybe the reality of some of the issues I'm bringing up here? How much of this is just that you have a strong backlog and the reorg benefits and everything else really gets pushed to '08, and we should think of '08 as really being substantially better as opposed to 4Q '07?

I think the whole issues we can summarize as kind of a top-line issue. It is really the revenues being forecast from the fourth quarter from our Companies. It is not necessarily a performance-related issue below that revenue line.

I think some of the backlog as you commented on, certainly it is a valid backlog. We're not seeing the backlog being canceled or anything of that type. Some of the backlog is long-term in nature. Some of it is defense-related projects that extend out into '08 and in some cases maybe even beyond '08. But again, we're trying to be reflective of what we feel the incoming order rate has been in the quarter to quarter let's say progress and change from period to period.

So right now I would have to say there's not any underlying performance issue that concerns us. It is a top-line issue that was rolled up from our companies. I would like to think that they have been conservative. They typically are early in the month, but we will see how it rolls out.

But I think we don't see any underlying structural issues other than the changes that we commented on that relate to HILL PHOENIX, a little bit further deterioration perhaps with Paladin in the heavy construction area. We mentioned the drilling issue in Canada. That is about the only thing that we can put our finger on that are of any substance. So unfortunately that is just the way the number rolls up from what we have right now.

Okay. Can you talk to the incentive plans then for your guys running these businesses? I have a couple of comments I guess.

One would be that if you come in around 10% earnings growth for 2007, that will be I believe the single lowest earnings growth of any major industrial company in the S&P 500, at least the 20 or 30 so that we track. When I look at your page seven of the slides, you are clearly -- you are beating four of the five metrics. But I would argue that having -- some of these metrics are pretty easy to be. I mean earnings growth of 10% in an upcycle, operating margins of 15%. You have been there for awhile. I'm just not seeing anything inspiring here.

So I'm guessing does the incentive plan need to adjust to be a little bit more aggressive, particularly given you talk about through the cycle, but most cycles are kind of five good years, two bad, five good, two bad. I mean are you really putting a little bit too much emphasis on the two bad and allowing everybody a bit of a free pass on the five good?

I don't know what you mean by free pass. I think I would say as you have articulated and I think as Steve Tusa articulated a little earlier, earnings growth is paramount in the incentive program that these gentlemen work to. They have an earnings growth over ROI LTIP multi opportunity that is really their significant wealth creation. So earnings growth is the thing they strive for the most.

I think from a Dover standpoint, I think if you look at the great growth we have posted over the last couple of years in earnings growth, I think some of it was acquisition driven. I think we've stepped back this year on acquisitions. That has some impact also because we don't have the recurring nature of those earnings hitting the stream. But I think we're going to be above 10% slightly for the year. But again, that is almost what I would call almost not an acquisition aided year for us compared to some years.

I think you have got to remember that page seven is total Dover, and there is a big factor in that achieving earnings growth that has a lot to do with the acquisition program. If you look at our mix of where we are generating earnings growth, there are individual businesses that are able to achieve that. But realistically a significant amount of the corporate total is driven on acquisitions, not individual businesses necessarily consistently achieving a real earnings growth of 10% over a cycle.

Their comp program, by the way just to keep it simple, is a three-year average performance metric. So that tends to work to moderate the amount of what you call the free ride. I mean for a number of our, what I will call mature industrial businesses achieving 10% earnings growth on average over three years is not as easy as it sounds.

I mean sure, but it certainly depends on which three -- I mean I would argue the last three years achieving 10% earnings growth, I'm not so sure there is any company -- there's probably not many outside the financial services industry that have not achieved 10% earnings growth in the last three years. So I will take the under on that.

But that is for sake of argument. I guess my point would be if we are going to argue that your stock is undervalued under $50, but you're going to achieve below peer results, I'm not so sure how that argues for a rerating of the stock.

So my question for you guys is, what needs to change? Do you need to get more aggressive on acquisitions kind of like at Danaher, for example, which has certainly been quite aggressive, and we have seen other companies too that have been successful in finding deals recently. Do you need to apply a little bit more pressure on your teams to maybe drive market share gains and drive operating leverage? Do you need to get more aggressive with our capital structure and buy back more stock? I'm trying -- thinking in terms of a shareholder right now what are the reasons why somebody would want to go out and buy your stock today?

Scott, I think that some of the things you have commented on perhaps we need to clarify a little bit. Also keep in mind we did reevaluate capital allocation strategy. We did increase dividend. We did increase our share buyback as a way of sharing back to our shareholders. I think if you look at what is going on inside our Companies, I think our people are striving very hard to continue to improve every metric they have whether it be margins, whether it be earnings growth, inventory turns. All of those things continue to get a lot of attention and a lot of work and a lot of activity.

So I think there's more success stories than non-success stories in Dover. Would we like to dial-up our acquisition spending as it relates to growth? Certainly. But we're not going to do that to a fault. We're going to make certain we find acquisitions that we feel very comfortable fit the platforms that we have, have the growth potentials we have, and that we can buy at a price that we can articulate into good value for our shareholders. I think we exhibited over the last couple of years with the strong acquisition spending that we did.

I think our resting this year is not one of wanting to sit back and rest. It has been one of we just have not been overly excited about the quality level we saw in the pipeline relative to price. That is not a change in strategy of how Dover is going to look to their acquisition program. We have maintained our add-on acquisition program this year appropriately.

So I don't think we have lost our compass. I think it's just the -- I guess I would put it down as just the fact that this was not a great year of acquisition growth for us. I believe all of our people are striving very hard to produce all the results they can. They are developing new products. They are getting accepted well. I would disagree with our comment about lack of growth going forward. I think your people are getting a little concerned about maybe the quarter to quarter performance we have seen this year.

But I think, Scott, there is great opportunity for Dover going forward. This is a well-performing company with some nice underlying results, and I don't think we're going to apologize for that.

Yes, no, I'm not trying to bust your chops per se. It just seems like when you said targets that allows management to achieve -- to receive bonuses when the stockholders are looking at a stock that is down 3% the last 12 months, I think it sends the wrong message.

I think, Scott, you also have to recognize the message is to motivate the people to continue to do it. And when you are posting record quarterly EPS numbers as we have done in the last two in a row, there is a lot to celebrate also. The stock price certainly is one we would like to see an improvement on, and we agree. That is our job to get the stock price up. But I think the results of our presidents, our Company is producing these record EPS numbers, they are certainly doing that.

Okay. I appreciate it. Thank you.

Alex Blanton, Ingalls & Snyder.

Just on the last point that was made by the previous questioner, it seems to me that one thing that is different about Dover from most of these big multinationals is the tremendous market share and market position you have in most of the companies. So your acquisition program, does it not target dominate companies? So isn't it more difficult for you to get market share gains in a market like this? Doesn't that explain some of the differences? But over time you generate tremendous cash.

Well, we do generate tremendous cash, Alex. But I think also some of acquisitions that we have done again, even though Paladin has not been able to perform, there is a lot of outside growth for that opportunity over time. I think the Product Identification arena is one that we feel has great upside growth opportunities over time. If you look at Knowles, I mean what great upside growth we have seen there and market penetration of -- (multiple speakers)

This is true. In Knowles that is true.

And I think if you look at US Synthetic and we put in the oilpatch, most people say, my god, you bought into oilpatch at a time that prices were high and gee, you have got high share. My goodness, look how we have grown that area. So I think there are some nice success stories to celebrate. Sometimes we get to focusing in on those that are still challenged.

Yes, I believe you have grown about 15% a year since 1960. I challenge anyone to come up with a record like that over a long period of time. Also, you do not buy turnarounds. So there is --

We don't as a rule. However, I would say that as we bought Paladin, as we bought MARKEM, we certainly saw turnaround opportunities as well as growth opportunities there, and that has certainly come forward in the MARKEM acquisitions. Their margins are significantly improved since we bought the Company from what they were previous. So there are a little bit of both.

You are right. We don't target turnarounds, but those that we have bought we have been successful in improving.

Okay. I want to get into this further, but just quickly I wanted to make sure that we find out whether or not you had similar restructuring charges in last year's quarter in the fourth quarter.

No, we did not.

So this is not apples-to-apples when you take out the $0.02 to $0.03.

Alex, this is Paul. We have run over our allotted time.

Can I have one more minute? I want to ask about Europe because no one has asked about that. And that has been a big factor in some of these large companies, industrial companies, that were referred to before. That has been a big factor in their earnings growth this year. You have about 32% of your sales there.

So what has been happening in Europe in your business? And what do you think will happen over the next year? Is there going to be a slowdown there?

Alex, let me correct your math just a moment if I might. Europe is 21% of our sales, but the growth rate of Europe is 32% for us this year -- (multiple speakers). We have leveraged our business in Europe, and it is reflected in our top line and in our earnings. Europe has been off and on a bright spot for us over the year. But, in general, it is our highest growth sector. As we look at Dover's 15% growth rate and spread it out, that has been one of the areas that has grown.

I think what we have done in Europe is we have tried to kind of move away from our traditional Western Europe footprint. We put more investment into Eastern Europe to improve the cost base. And I think we're pretty well postured in Europe with again very broad engagement of a number of businesses. So we are taking advantage of that global footprint.

We had a significant uptick in organic growth for the full year well over 10%. Acquisitions contributed almost 15%, and FX was positive. So overall, for all those three reasons, Europe was a very strong part of our business this year.

Thank you. That concludes our question and answer session. I will now turn the floor over to Mr. Paul Goldberg for any closing remarks.

Thank you very much for your participation in this conference call. We appreciate your active engagement, and I certainly welcome you to give me a call to follow-up with any questions. And I just want to remind everybody in the audience that we have our Annual Investor Day on November 9 at the St. Regis Hotel. So if you have not received an invitation, certainly contact me, and we will make sure we get you on the list.

Thanks again for your participation. Bye-bye.

Thank you. This concludes today's Dover Corporation conference call. You may now disconnect.