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ROP > SEC Filings for ROP > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for ROPER INDUSTRIES INC


2-May-2014

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, 2013 as filed on February 21, 2014 with the 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 U.S. Securities and Exchange Commission ("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 quarter ended March 31, 2014 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 2013 Annual Report on Form 10-K filed on February 21, 2014.

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 table sets 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  March 31,
                                                     2014               2013
  Net sales:
  Industrial Technology                         $       197,001    $       182,239
  Energy Systems & Controls                             155,171            145,642
  Medical & Scientific Imaging                          256,199            200,444
  RF Technology                                         225,681            208,810
  Total                                         $       834,052    $       737,135
  Gross profit:
  Industrial Technology                                    50.0 %             51.2 %
  Energy Systems & Controls                                55.4               55.6 %
  Medical & Scientific Imaging                             72.2               67.3 %
  RF Technology                                            53.0               53.9 %
  Total                                                    58.6               57.2 %
  Selling, general & administrative expenses:
  Industrial Technology                                    21.5 %             22.2 %
  Energy Systems & Controls                                31.5               31.0
  Medical & Scientific Imaging                             37.1               37.4
  RF Technology                                            25.3               26.8
  Total                                                    29.2               29.4
  Segment operating profit:
  Industrial Technology                                    28.5 %             29.1 %
  Energy Systems & Controls                                23.9               24.5
  Medical & Scientific Imaging                             35.0               29.9
  RF Technology                                            27.7               27.1
  Total                                                    29.4               27.8
  Corporate administrative expenses                        (2.6 )             (2.7 )
                                                           26.8               25.1
  Interest expense                                         (2.4 )             (2.8 )
  Other income/(expense)                                    0.2               (0.3 )
  Earnings before income taxes                             24.6               22.0
  Income taxes                                             (6.9 )             (5.0 )
  Net earnings                                             17.7 %             16.9 %

Three months ended March 31, 2014 compared to three months ended March 31, 2013

Net sales for the quarter ended March 31, 2014 increased by 13% as compared to the first quarter of 2013. The increase was the result of organic growth of 8% and sales related to 2013 acquisitions of 5%.

In our Industrial Technology segment, net sales increased by 8% to $197 million in the first quarter of 2014 as compared to $182 million in the first quarter of 2013, due primarily to increased sales in our water meter and materials testing businesses. Gross margin decreased to 50.0% for the first quarter of 2014 as compared to 51.2% for the first quarter of 2013 due to product mix. Selling, general and administrative ("SG&A") expenses as a percentage of net sales decreased to 21.5% in the current year quarter from 22.2% in the prior year quarter due to operating leverage on higher sales volume. The resulting operating margin was 28.5% in the first quarter of 2014 as compared to 29.1% in the first quarter of 2013.

Net sales in our Energy Systems & Controls segment increased by 7% to $155 million during the first quarter of 2014 compared to $146 million in the first quarter of 2013. Organic sales increased by 5% and acquisitions added 2%. The increase in organic sales was due to sales of new instruments for refinery applications. Gross margin was relatively unchanged at 55.4% in the first quarter of 2014, as compared to 55.6% in the first quarter of 2013. SG&A expenses as a percentage of net sales were 31.5% compared to 31.0% in the prior year quarter due to integration expenses related to our latest acquisition. As a result, operating margin was 23.9% in the first quarter of 2014 as compared to 24.5% in the first quarter of 2013.

Our Medical & Scientific Imaging segment net sales increased by 28% to $256 million in the first quarter of 2014 as compared to $200 million in the first quarter of 2013. Organic sales increased by 9% and acquisitions completed in 2013 added 19%. The increase in organic sales was due to increased sales in our medical businesses. Gross margin increased to 72.2% in the first quarter of 2014 from 67.3% in the first quarter of 2013 due primarily to additional sales from medical products and software which have a higher gross margin. SG&A expenses as a percentage of net sales were 37.1% in the first quarter of 2014 as compared to 37.4% in the first quarter of 2013 due to leverage on higher sales volume, offset in part by a higher SG&A expense structure related to the 2013 acquisition. As a result, operating margin was 35.0% in the first quarter of 2014 as compared to 29.9% in the first quarter of 2013.

In our RF Technology segment, net sales were $226 million in the first quarter of 2014 as compared to $209 million in the first quarter of 2013, an increase of 8%. The increase was due primarily to growth in our toll and traffic businesses. Gross margin decreased to 53.0% as compared to 53.9% in the prior year quarter due to product mix in our toll and traffic businesses. SG&A expenses as a percentage of net sales in the first quarter of 2014 decreased to 25.3% as compared to 26.8% in the prior year due to operating leverage on higher sales volume. The resulting operating margin was 27.7% in 2014 as compared to 27.1% in 2013.

Corporate expenses were $22.0 million, or 2.6% of sales, in the first quarter of 2014 as compared to $20.0 million, or 2.7% of sales, in the first quarter of 2013. The increase was due to higher compensation costs, including increased stock-based compensation costs (see Note 4 of the Notes to Condensed Consolidated Financial Statements for details of stock-based compensation costs).

Interest expense was $20 million for the first quarter of 2014 as compared to $21 million for the first quarter of 2013. The decrease was due to lower average interest rates on higher average outstanding debt balances.

Other income was $1.4 million in the first quarter of 2014, as compared to other expense of $2.5 million in the first quarter of 2013 due to foreign exchange gains and losses at our non-U.S. based subsidiaries.

Income taxes were 28.2% of pretax earnings in the first quarter of 2014, higher than the 22.8% rate experienced in the first quarter of 2013. The current year rate was impacted by a $6 million reduction in the liability for unrecognized tax benefits due to the lapse of applicable statute of limitations. The prior year quarter was lower 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 correction of an out of period adjustment of tax balances which were immaterial to any covered period. We expect the effective tax rate for 2014 to be approximately 31%.

At March 31, 2014, 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 December 31, 2013. The currency changes resulted in a pretax decrease of $14 million in the foreign exchange component of comprehensive earnings for the current year quarter, $8 million of which is related to goodwill and does not directly affect our expected future cash flows. During the quarter ended March 31, 2014, the functional currencies of our European subsidiaries were stronger and the Canadian dollar was weaker against the U.S. dollar as compared to the quarter ended March 31, 2013. The difference in operating profit related to foreign exchange, translated into U.S. dollars, was less than 1% for these companies in the first quarter of 2014 compared to the first quarter of 2013.

Net orders were $846 million in the first quarter of 2014, 7% higher than the first quarter 2013 net order intake of $794 million. Our order backlog at March 31, 2014 was 7% higher as compared to March 31, 2013. Acquisitions completed in 2013 contributed 5% to the current quarter orders.

                                   Net orders booked for the
                                       three months ended
                                           March 31,                   Order backlog as of March 31,
                                     2014              2013               2014                2013
                                                            (in thousands)
Industrial Technology           $      204,881    $      179,807    $         128,113    $      126,993
Energy Systems & Controls              150,915           157,537              127,445           120,921
Medical & Scientific Imaging           256,340           216,121              290,402           247,959
RF Technology                          234,345           240,118              517,736           501,065
Total                           $      846,481    $      793,583    $       1,063,696    $      996,938

Financial Condition, Liquidity and Capital Resources

Selected cash flows for the three months ended March 31, 2014 and 2013 were as
follows (in millions):

                                                  2014        2013
                  Cash provided by/(used in):
                  Operating activities          $  212.6     $ 171.3
                  Investing activities             (12.5 )     (13.2 )
                  Financing activities            (154.6 )     (88.8 )

Operating activities - Net cash provided by operating activities increased by 24% to $213 million in the first quarter of 2014 as compared to $171 million in the first quarter of 2013 due to increased earnings net of intangible amortization related to acquisitions, improved receivables collection and lower incentive compensation payments.

Investing activities - Cash used in investing activities during the quarters ended March 31, 2014 and 2013 was primarily for capital expenditures.

Financing activities - Cash used in financing activities was primarily for debt principal repayments and dividends in the quarter ended March 31, 2014 and primarily for debt principal repayments in the quarter ended March 31, 2013. Cash provided by financing activities in the first quarters of 2014 and 2013 was primarily from stock option proceeds. Net debt payments were $150 million in the three months ended March 31, 2014 as compared to $100 million in the three months ended March 31, 2013.

Total debt at March 31, 2014 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       7,910
                Revolving Facility                        100,000
                Other                                       7,156
                Total debt                              2,315,066
                Less current portion                       10,923
                Long-term debt                        $ 2,304,143

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 March 31, 2014, there were $100 million of outstanding borrowings under the facility. At March 31, 2014, we had $7.2 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 $41 million of outstanding letters of credit.

Cash and short-term investments at our foreign subsidiaries at March 31, 2014 totaled $386 million. Repatriation of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes. We consider this cash to be permanently reinvested. 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 quarter ended March 31, 2014.

Net working capital (total current assets, excluding cash, less total current liabilities, excluding debt) was $272 million at March 31, 2014 compared to $282 million at December 31, 2013, reflecting decreases in working capital due primarily to the timing of income tax payments. Total debt was $2.32 billion at March 31, 2014 as compared to $2.46 billion at December 31, 2013, due to the use of operating cash flows to reduce outstanding debt. Our leverage is shown in the following table:

                                            March 31,         December 31,
                                              2014                2013
            Total Debt                     $ 2,315,066       $    2,464,852
            Cash                              (502,885 )           (459,720 )
            Net Debt                         1,812,181            2,005,132
            Stockholders' Equity             4,357,245            4,213,050
            Total Net Capital              $ 6,169,426       $    6,218,182

            Net Debt / Total Net Capital          29.4 %               32.3 %

At March 31, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Capital expenditures of $10 million and $11 million were incurred during the first quarters of 2014 and 2013, respectively. We expect capital expenditures for the balance of the year to be comparable to prior years as a percentage of sales.

There have been no significant changes to our contractual obligations from those disclosed in our 2013 Annual Report on Form 10-K filed on February 21, 2014.

Outlook

Current geopolitical uncertainties could adversely affect our business prospects. A significant terrorist attack or other global conflict could cause changes in world economies that would adversely affect us. It is impossible to isolate each of these factor's effects on current economic conditions. It is also impossible to predict with any reasonable degree of certainty what or when any additional events may occur that also would similarly disrupt the economy.

We maintain an active acquisition program; however, future acquisitions will be dependent on numerous factors and it is not feasible to reasonably estimate if or when any such acquisitions will occur and what the impact will be on our business, financial condition and results of operations. Such acquisitions may be financed by the use of existing credit lines, future cash flows from operations, the proceeds from the issuance of new debt or equity securities or some combination of these methods.

We anticipate that our recently acquired companies as well as our other companies will generate positive cash flows from operating activities, and that these cash flows will permit the reduction of currently outstanding debt. However, the rate at which we can reduce our debt during 2014 (and reduce the associated interest expense) will be affected by, among other things, the financing and operating requirements of any new acquisitions and the financial performance of our existing companies; and none of these factors can be predicted with certainty.

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