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ROP > SEC Filings for ROP > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for ROPER INDUSTRIES INC


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Management's Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report for the year ended December 31, 2012 as filed on February 25, 2013 with the Securities and Exchange Commission ("SEC") and the notes to our Condensed Consolidated Financial Statements included elsewhere in this report.

Information About Forward-Looking Statements

This report includes "forward-looking statements" within the meaning of the federal securities laws. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the SEC or in connection with oral statements made to the press, potential investors or others. All statements that are not historical facts are "forward-looking statements." Forward-looking statements may be indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "believes" or "intends" and similar words and phrases. These statements reflect management's current beliefs and are not guarantees of future performance. They involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statement.

Examples of forward-looking statements in this report include but are not limited to statements regarding operating results, the success of our internal operating plans, our expectations regarding our ability to generate operating cash flows and reduce debt and associated interest expense, profit and cash flow expectations, the prospects for newly acquired businesses to be integrated and contribute to future growth and our expectations regarding growth through acquisitions. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, timing and success of product upgrades and new product introductions, raw materials costs, expected pricing levels, the timing and cost of expected capital expenditures, expected outcomes of pending litigation, competitive conditions, general economic conditions and expected synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to:

general economic conditions;

difficulty making acquisitions and successfully integrating acquired businesses;

any unforeseen liabilities associated with future acquisitions;

limitations on our business imposed by our indebtedness;

unfavorable changes in foreign exchange rates;

difficulties associated with exports;

risks and costs associated with our international sales and operations;

increased directors' and officers' liability and other insurance costs;

risk of rising interest rates;

product liability and insurance risks;

increased warranty exposure;

future competition;

the cyclical nature of some of our markets;

reduction of business with large customers;

risks associated with government contracts;

changes in the supply of, or price for, raw materials, parts and components;

environmental compliance costs and liabilities;

risks and costs associated with asbestos-related litigation;

potential write-offs of our substantial goodwill and other intangible assets;

our ability to successfully develop new products;

failure to protect our intellectual property;

the effect of, or change in, government regulations (including tax);

economic disruption caused by terrorist attacks, health crises or other unforeseen events; and

the factors discussed in other reports filed with the SEC.

We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update any of these statements in light of new information or future events.

Overview

Roper Industries, Inc. ("Roper," "we" or "us") is a diversified growth company that designs, manufactures and distributes radio frequency ("RF") products, services and application software, industrial technology products, energy systems and controls and medical and scientific imaging products and software. We market these products and services to a broad range of markets, including RF applications, medical, water, energy, research, education, software-as-a-service ("SaaS")-based information networks, security and other niche markets.

We pursue consistent and sustainable growth in earnings by emphasizing continuous improvement in the operating performance of our existing businesses and by acquiring other carefully selected businesses that offer high value-added services, engineered products and solutions and are capable of achieving growth and maintaining high margins. Our acquisitions have represented both financial bolt-ons and new strategic platforms. We strive for high cash and earnings returns from our investments.

Critical Accounting Policies

There were no material changes during the three or nine month periods ended September 30, 2013 to the items that we disclosed as our critical accounting policies and estimates in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2012 Annual Report on Form 10-K filed on February 25, 2013.

Recently Issued Accounting Standards

Information regarding new accounting pronouncements is included in Note 2 of the notes to Condensed Consolidated Financial Statements.

Results of Operations

General

The following tables set forth selected information for the periods indicated.
Dollar amounts are in thousands and percentages are the particular line item
shown as a percentage of net sales. Percentages may not foot due to rounding.


                                     Three months ended         Nine months ended
                                       September 30,              September 30,
                                      2013        2012         2013          2012
Net sales:
Industrial Technology              $  200,684   $ 199,008   $   580,466   $   598,088
Energy Systems & Controls             155,058     158,169       456,031       461,508
Medical & Scientific Imaging          237,338     172,475       645,739       486,207
RF Technology                         234,730     217,989       666,719       637,776
Total                              $  827,810   $ 747,641   $ 2,348,955   $ 2,183,579
Gross profit:
Industrial Technology                    50.5 %      51.5 %        51.1 %        50.8 %
Energy Systems & Controls                56.8        55.5          56.2          55.1
Medical & Scientific Imaging             70.5        64.9          68.3          64.7
RF Technology                            53.6        52.4          53.4          52.2
Total                                    58.3        55.7          57.5          55.2
Selling, general &
administrative expenses:
Industrial Technology                    20.2 %      21.1 %        22.8 %        20.7 %
Energy Systems & Controls                30.3        28.4          30.3          29.4
Medical & Scientific Imaging             40.2        38.2          40.5          38.9
RF Technology                            25.3        25.8          25.8          26.0
Total                                    29.3        27.9          30.0          28.1
Segment operating profit:
Industrial Technology                    30.3 %      30.5 %        28.3 %        30.1 %
Energy Systems & Controls                26.5        27.1          26.0          25.7
Medical & Scientific Imaging             30.3        26.8          27.8          25.8
RF Technology                            28.3        26.6          27.6          26.1
Total                                    29.0        27.8          27.5          27.1
Corporate administrative                      )           )
expenses                                 (2.5        (3.3          (2.6 )        (2.7 )
                                         26.5        24.5          24.9          24.4
Interest expense                         (3.0 )      (2.2 )        (2.9 )        (2.2 )
Other income/(expense)                      -        (0.3 )           -          (0.2 )
Earnings before income taxes             23.6        22.0          22.0          22.1
Income taxes                             (7.1 )      (6.4 )        (6.1 )        (6.5 )
Net earnings                             16.5 %      15.6 %        15.9 %        15.6 %


Three months ended September 30, 2013 compared to three months ended September 30, 2012

Net sales for the quarter ended September 30, 2013 were $827.8 million as compared to $747.6 million in the prior year quarter, an increase of 11%. The increase was the result of organic growth of 3% and an 8% increase in sales from acquisitions.

In our Industrial Technology segment, net sales were up 1% to $200.7 million in the third quarter of 2013 as compared to $199.0 million in the third quarter of 2012 due to increased sales in our fluid handling businesses. Gross margins decreased to 50.5% in the third quarter of 2013 as compared to 51.5% in the third quarter of 2012 due to product mix. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 20.2% in the third quarter of 2013, compared to 21.1% in the prior year quarter due to product mix. The resulting operating profit margins were 30.3% in the third quarter of 2013 as compared to 30.5% in the third quarter of 2012.

Net sales in our Energy Systems & Controls segment decreased by 2% to $155.1 million during the third quarter of 2013 compared to $158.2 million in the third quarter of 2012, due to decreased demand in nuclear plant inspection end markets offset in part by increased demand for control systems for oil and gas applications. Gross margins increased to 56.8% in the third quarter of 2013 compared to 55.5% in the third quarter of 2012 due to product mix. SG&A expenses as a percentage of net sales were 30.3% in the third quarter of 2013, compared to 28.4% in the prior year quarter due to negative operating leverage on lower sales volume. As a result, operating margins were 26.5% in the third quarter of 2013 as compared to 27.1% in the third quarter of 2012.

In our Medical & Scientific Imaging segment, net sales increased by 38% to $237.3 million in the third quarter of 2013 as compared to $172.5 million in the third quarter of 2012. The change was comprised of a 35% increase from acquisitions, organic growth of 3%, and a small negative impact from foreign exchange. We experienced continued growth in our medical businesses, offset in part by weakness in camera sales into research markets. Gross margins increased to 70.5% in the third quarter of 2013 from 64.9% in the third quarter of 2012 due to the higher gross margin profile of our acquired businesses. SG&A expenses as a percentage of net sales increased to 40.2% in the third quarter of 2013 as compared to 38.2% in the third quarter of 2012 due to SG&A expenses at MHA in which the corresponding revenues were not recognizable under GAAP (see Note 4 of the notes to Condensed Consolidated Financial Statements). As a result, operating margins were 30.3% in the third quarter of 2013 as compared to 26.8% in the third quarter of 2012.

In our RF Technology segment, net sales were $234.7 million in the third quarter of 2013 as compared to $218.0 million in the third quarter of 2012, an increase of 8%. The increase was due primarily to growth in our toll and traffic and university card systems businesses. Gross margins increased to 53.6% in the third quarter of 2013, as compared to 52.4% in the prior year quarter due to a more favorable mix between products and software in the current year quarter. SG&A expenses as a percentage of net sales in the third quarter of 2013 were 25.3% as compared to 25.8% in the prior year. As a result, operating profit margins were 28.3% in the third quarter of 2013 as compared to 26.6% in the third quarter of 2012.

Corporate expenses were $20.9 million, or 2.5% of net sales, in the third quarter of 2013 as compared to $24.5 million, or 3.3% of net sales, in the third quarter of 2012. The decrease was due to $6.3 million of acquisition expense related to the Sunquest acquisition in the prior year quarter, offset in part by higher equity compensation (as a result of higher stock prices) and other compensation related costs in the current year quarter.

Interest expense in the third quarter of 2013 was $24.7 million as compared to $16.5 million in the third quarter of 2012, due to higher average debt balances related to acquisitions, offset in part by lower average interest rates.

Other income in the third quarter of 2013 was $0.4 million as compared to other expense of $1.4 million in the third quarter of 2012. Other income and expense in both 2013 and 2012 were due primarily to foreign exchange losses and gains at our non-U.S. based companies.

Our third quarter effective income tax rate was 30.1% as compared to the prior year rate of 29.0%. The increase is due to increased revenues and resulting pretax income in higher tax jurisdictions, primarily the United States.

At September 30, 2013, the functional currencies of our European subsidiaries were stronger and the Canadian dollar was weaker against the U.S. dollar compared to currency exchange rates at June 30, 2013. The currency changes resulted in a pre-tax increase of $33.7 million in the foreign exchange component of comprehensive earnings for the current year quarter. Approximately $17 million of the total adjustment is related to goodwill and does not directly affect our expected future cash flows. During the quarter ended September 30, 2013 the Canadian dollar and British pound were weaker, and the functional currencies of our other European subsidiaries were stronger against the U.S. dollar as compared to the quarter ended September 30, 2012. The difference between the operating profits for these companies for the third quarter of 2013 compared to the prior year quarter, translated into U.S. dollars, was approximately 1%.

Net orders were $838.3 million for the third quarter of 2013, $118.5 million higher than the third quarter 2012 net order intake of $719.7 million. Organic growth contributed 7%, and acquisitions contributed 10% to the current quarter orders. Overall, our order backlog at September 30, 2013 was up 7% as compared to September 30, 2012.

                                   Net orders booked for the
                                       three months ended            Order backlog as of September
                                         September 30,                            30,
                                     2013              2012             2013              2012
Industrial Technology            $     197,549     $     191,955     $   131,768     $       143,808
Energy Systems & Controls              148,922           147,304         120,415             118,510
Medical & Scientific Imaging           262,320           177,528         276,926             243,749
RF Technology                          229,484           202,959         515,683             472,342
                                 $     838,275     $     719,746     $ 1,044,792     $       978,409

Nine months ended September 30, 2013 compared to nine months ended September 30, 2012

Net sales for the nine months ended September 30, 2013 were $2.3 billion as compared to $2.2 billion in the prior year nine month period, an increase of 8%.
The increase was due primarily to acquisitions, offset in part by a small negative impact from foreign currency.

In our Industrial Technology segment, net sales decreased by 3% to $580.5 million in the first nine months of 2013 as compared to $598.1 million in the first nine months of 2012. The decrease was due primarily to the loss of a customer at our water metering business and lower sales at our materials testing business. Gross margins were 51.1% for the first nine months of 2013 as compared to 50.8% in the first nine months of 2012 due primarily to product mix.
SG&A expenses as a percentage of net sales were 22.8%, as compared to 20.7% in the prior year nine month period, due primarily to a $9.1 million pretax charge for warranty expense at one of our subsidiaries, Hansen Technologies, to provide its customers with replacements for refrigeration valves that included a vendor-supplied component that did not meet Roper quality standards. The resulting operating profit margins were 28.3% in the first nine months of 2013 as compared to 30.1% in the first nine months of 2012.

Net sales in our Energy Systems & Controls segment decreased by 1% to $456.0 million during the first nine months of 2013 compared to $461.5 million in the first nine months of 2012, due to lower sales of pressure sensors for industrial applications and non-destructive testing systems for nuclear plants which was offset in part by increased demand for control systems for oil and gas applications. Gross margins were 56.2% in the first nine months of 2013, compared to 55.1% in the first nine months of 2012, due to product mix. SG&A expenses as a percentage of net sales were 30.3% as compared to 29.4% in the prior year nine month period due to product mix. Operating margins were 26.0% in the first nine months of 2013 as compared to 25.7% in first nine months of 2012.

In our Medical & Scientific Imaging segment, net sales increased 33% to $645.7 million in the first nine months of 2013 as compared to $486.2 million in the first nine months of 2012. The change was comprised of a 35% increase from acquisitions, negative organic growth of 2%, and a small negative foreign exchange impact. We experienced continued growth in our medical businesses, which was more than offset by weakness in camera sales into research markets.
Gross margins increased to 68.3% in the first nine months of 2013 from 64.7% in the first nine months of 2012, due to the higher gross margin profile of our acquired businesses. SG&A expenses as a percentage of net sales were 40.5% in the nine month period ended September 30, 2013 as compared to 38.9% in the nine month period ended September 30, 2012 due to SG&A expenses at MHA in which the corresponding revenues were not recognizable under GAAP (see Note 4 of the notes to Condensed Consolidated Financial Statements). Operating margins were 27.8% in the first nine months of 2013 as compared to 25.8% in the first nine months of 2012.

In our RF Technology segment, net sales were $666.7 million in the first nine months of 2013 compared to $637.8 million in the first nine months of 2012, an increase of 5%. The increase was due primarily to growth in our toll and traffic, university card systems and security solutions businesses. Gross margins in the first nine months of 2013 were 53.4% as compared to 52.2% in the prior year nine month period due to product mix. SG&A expenses as a percentage of net sales in the first nine months of 2013 were 25.8% as compared to 26.0% in the first nine months of 2012. Operating profit margins were 27.6% in 2013 as compared to 26.1% in 2012.

Corporate expenses increased by $3.3 million to $61.7 million, or 2.6% of net sales, in the first nine months of 2013 as compared to $58.4 million, or 2.7% of net sales, in the first nine months of 2012. The increase was due to higher equity compensation (as a result of higher stock prices) offset in part by decreased acquisition costs over the prior year nine month period.

Interest expense was $67.9 million for the first nine months of 2013 as compared to $47.0 million for the first nine months of 2012, due to higher average debt balances related to acquisitions, offset in part by lower average interest rates.

Other income in the nine months ended September 30, 2013 was $0.4 million, due primarily to a one-time pretax gain related to a legal settlement offset by foreign exchange losses at our non-U.S. based companies, as compared to other expense of $2.4 million in the nine months ended September 30, 2012, due primarily to foreign exchange losses at our non-U.S. based companies.

Income taxes were 27.9% of pretax earnings in the first nine months of 2013 as compared to 29.5% of pretax earnings in the first nine months of 2012. The reduction was due to $6 million in discrete tax benefits related to the enactment of the American Taxpayer Relief Act of 2012 ("ATRA"), as well as a $6 million benefit from the adjustment of tax balances which were immaterial to any covered period, offset in part by increased revenues and resulting pretax income in higher tax jurisdictions, primarily the United States.

At September 30, 2013, the Canadian dollar and British pound were weaker, and the functional currencies of our other European subsidiaries were stronger against the U.S. dollar as compared to currency exchange rates at December 31, 2012. The currency changes resulted in a pretax decrease of $11 million in the foreign exchange component of comprehensive earnings for the nine months ended September 30, 2013, $7 million of which was related to goodwill. Goodwill changes from currency exchange rate changes do not directly affect our reported earnings or cash flows. During the nine months ended September 30, 2013 the Canadian dollar and British pound were weaker, and the functional currencies of our other European subsidiaries were stronger against the U.S. dollar as compared to the nine months ended September 30, 2012. The difference between the operating profits for these companies for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, translated into U.S. dollars, was approximately 1%.


Financial Condition, Liquidity and Capital Resources

Selected cash flows for the three and nine month periods ended September 30,
2013 and 2012 were as follows (in millions):

                                           Three months ended September 30,         Nine months ended September 30,
                                                2013               2012               2013                   2012
Cash provided by/(used in):
Operating activities                       $        255.8       $     205.4     $          566.8       $          466.2
Investing activities                                (18.6 )        (1,417.3 )           (1,046.7 )             (1,474.1 )
Financing activities                               (161.4 )         1,039.6                569.5                1,020.0

Operating activities - Net cash provided by operating activities in the third quarter of 2013 was $50.3 million higher than the third quarter of 2012, due primarily to improved receivables collection and increased earnings net of intangible amortization related to acquisitions. In the nine month period ending September 30, 2013, operating cash flow increased $100.6 million over the prior year nine month period due to improved receivables collection and increased earnings net of intangible amortization related to acquisitions.

Investing activities - Cash used in investing activities during the three and nine month periods ended September 30, 2013 and 2012 was primarily for business acquisitions and capital expenditures.

Financing activities - Cash used in financing activities in the third quarter of 2013 was for the repayment of our $500 million of senior notes which matured on August 15, 2013, offset in part by revolver borrowings used to repay the notes.
Cash provided by financing activities in the third quarter of 2012 was for revolver borrowings offset partially by dividends and principal debt payments.

Cash provided by financing activities in the nine month period ended September 30, 2013 was primarily for principal debt borrowings for acquisitions, offset in part by principal debt payments and dividends. Cash provided by financing activities in the nine month period ended September 30, 2012 was from revolver borrowings offset partially by dividends and principal debt payments.

Total debt at September 30, 2013 consisted of the following (amounts in thousands):

               $400 million senior notes due 2017      $   400,000
               $800 million senior notes due 2018          800,000
               $500 million senior notes due 2019          500,000
               $500 million senior notes due 2022          500,000
               Senior Subordinated Convertible Notes         9,770
               Revolving Facility                          390,000
               Other                                         6,087
               Total debt                                2,605,857
               Less current portion                         12,250
               Long-term debt                          $ 2,593,607

The interest rate on borrowings under our $1.5 billion credit facility is calculated based upon various recognized indices plus a margin as defined in the credit agreement. At September 30, 2013, there were $390 million of outstanding borrowings under the facility. At September 30, 2013, we had $6.1 million of other debt in the form of capital leases, several smaller facilities that allow for borrowings or the issuance of letters of credit in various foreign locations to support our non-U.S. businesses and $40 million of outstanding letters of credit.

On June 6, 2013, we completed a public offering of $800 million aggregate principal amount of 2.05% senior unsecured notes due 2018. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the notes.

The cash and short-term investments at our foreign subsidiaries at September 30, 2013 totaled $357 million. Repatriation of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes.
We expect existing cash and cash equivalents, cash generated by our U.S. operations, our unsecured credit facility, as well as our expected ability to access the capital markets, will be sufficient to fund operating requirements in the U.S. for the foreseeable future.

We were in compliance with all debt covenants related to our credit facilities throughout the nine months ended September 30, 2013.

Net working capital (total current assets, excluding cash, less total current liabilities, excluding debt) was $307.3 million at September 30, 2013 compared to $307.8 million at December 31, 2012, reflecting decreased working capital due primarily to increases in deferred revenue and MHA revenue-share obligations offset in part by increases in deferred tax assets related primarily to the MHA acquisition.


Total debt was $2.61 billion at September 30, 2013 compared to $2.02 billion at December 31, 2012 due to borrowings to fund acquisitions offset in part by the use of operating cash flows to reduce outstanding debt. Our leverage is shown in the following table (in thousands):

                                          September 30,       December 31,
                                              2013                2012
. . .
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