Roper Technologies Inc (ROP) 2002 Q3 法說會逐字稿

All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded at the request of Roper Industries. If anybody has any objections, you may disconnect at this time. I would like to introduce your host for today's call, Mr. Chris Hix, Director of Investor Relations. Sir, you may begin.

Good morning everyone and thank you for joining us for our third quarter 2002 conference call. I am Chris Hix, Director of Investor Relations. Last night, we released our third quarter earnings. If you would have not already seen the press release, you can obtain it from our website at www.roperind.com. Our call this morning is being webcasted, which you can access from the main page of our website. We have prepared slides to accompany today's remarks and these slides are available through the webcast and also in PDF format from the investor information section of our website. Replays of this conference call will be available on our website and also through September 11 by calling the replay phone number 800-937-2127 and dialing the replay code, which is 738-3787. For callers outside of North America, the replay phone number is 1-402-220-3062 and the replay code is the same. Participating in today's call are Brian Jellison, President and Chief Executive Officer, Derrick Key, Chairman of Roper Industries, and Martin Headley, Chief Financial Officer. In just a moment, I will turn the call over to Brian for his prepared remarks, after which we will open the call to your questions. In interest of fairness to our callers, we ask that you limit your questions to one with a follow up and then re-enter the queue. I would like to remind everyone of our safe harbor statement, which enumerates numerous risks and uncertainties that includes forward looking statements. Please refer to last night's press release for the complete safe harbor statement and with that I would like to turn the call over to Brian Jellison, President and Chief Executive Officer.

Thank you Chris and good morning everyone. I believe you should have slide three up on your document, which is the third quarter highlight. As you will see throughout the day, we have continued to execute and deliver growth, in spite of some very difficult market conditions that we will explain throughout the call. Our quarter three net sales were a 155 million dollars, up 12 percent from last year's number. Our quarter three earnings would have been 56 cents before the one-time charge, which we will talk about here momentarily against last year's 41-cent number. We had very unusual activity in our Redlake industrial camera motion business that we will discuss in the third quarter, that we expected, and then Gatan shortfall, that we will talk about in some detail. Our diversified portfolio, though, pulled us through. So that we were able to offset the Redlake and Gatan problem and create the earnings that you see before you. We were able to achieve gross margins of 53.5 percent in the quarter. We saw very little pricing erosion in any of our businesses. Our operational improvements continued to add to our performance. We lowered our headcount, an additional 1.3 percent in the quarter, bringing our full-year number to around six percent. And that's on top of a 10 percent reduction last year, excluding our acquisitions, of course. We have further made progress on inventory. We cut another three million out in the quarter and the concept of taking payables as a function of inventory continues to provide new cash for our operations. Our cash flow has enabled us to continue the growth through acquisition program that we have. We acquired three businesses as we have communicated in the third quarter and today; we are announcing a new acquisition of QImaging. These four businesses together will generate over 70 million dollars of annual revenue in the future. Our net debt-to-cap actually closed at 46.8 percent at the end of the third quarter, even after those acquisitions. And that's down from 49 percent at the start of the year. We were also able to recognize a lower effective tax rate of 31 percent. I will talk about that momentarily. We also benefited from a 1.4 million dollar of first half tax benefit that gets reported in the third quarter number and the lower tax rate of 31 percent will stay in effect certainly in the future, throughout 2003 and beyond. PricewaterhouseCoopers, as you may remember, took over the auditing responsibility of Roper in the second quarter of this year. They completely re-audited all of our financial statements in detail for 2001. They are up to speed on our account now. We had a very favorable transaction, I think, they did a great job and we are glad to continue with a clean bill of health with our conservative accounting policies. We had encouraging signs in the quarter in many of our businesses. In fact, I think you will be amazed when you look at how well we did, given the difficulties at Gatan and Redlake. And the problems that we had in Gatan in the third quarter won't repeat in the fourth quarter, as we have a very strong backlog going into Q4. We also have initiated a very aggressive internal growth planning process for 2003 that replaces our former budgeting process that we had in place for our divisions. We look now in the reported income statement. You can see the net sale is up 12 percent. That comes pretty much from the acquisitions of Struers, Logitech, and Media from last year, strong Oil & Gas activity, and Compressor Controls, and somewhat in PAC and Antec, offset by imaging weakness at both Gatan and the Redlake Motion business. Gross profits were also up 12.1 percent. Operating profit was up 20 percent, but of course that's largely influenced by favorable FASB 142 goodwill accounting. We had negative earning situation on a comparative basis for Gatan and Redlake, but our cost reduction benefits in Fluid Handling and Petrotech more than offset that. The result is before the one-time charge in EPS of 56 cents a share, up 37.5 percent from the prior year. The reported number is of course 47 cents, up 14.5 percent from the prior year. Our nonrecurring European debt currency loss was certainly an unusual event for us. This loss stemmed from Euro-denominated debt that was carried on our US current company's books, and had been part of our global pack structuring began in 2001. When the Euro strengthened against the Dollar in this quarter, we eliminated our US-held Euro debt of nearly 40 million dollars to avoid any future debt-related currency gains or losses. Also during the quarter we began recognizing the tax benefits available to us as a result of Roper's growing global presence. Our full year estimated effective tax rate dropped 300 basis points to 31 percent. These benefits arose with certain tax structuring activities initially begun in the fourth quarter of last year, but were not included in our results until they were confirmed as we prepared our primary 2001 tax return during this quarter. Throughout the process, these changes were reviewed by both Arthur Anderson and now our new auditors Pricewaterhouse. These changes are very meaningful and our expected to offer benefits beyond this year. Our third quarter did benefit by 1.4 million dollars of first half positive effect.

Next slide.

Now for some detail on Gatan and Redlake. What's happened here, excuse me, is that we have record semiconductor shipments from Gatan in the third quarter. Those of you who follow us closely would know that we would routinely talk about Gatan having perhaps a 25 percent of total exposure to Semicon, but in the third quarter last year, we had all time record shipments in that category. In the third quarter this year, virtually no shipments in that space. This wasn't a surprise to us and we hoped it would have offset by other businesses. In Redlake, as we have indicated before our Motion Imaging business is going through a complete transformation. We have new technologies that were rapidly integrating and as a result, we are not shipping any product or very little product in the Motion Imaging area. We also have been making faster progress in our R&D, completed tasks and as we do that, we actually incur more expense, because we're expensing all that R&D rather than writing it off at this time. So, those programs created a very unusual effect on our income statement. If we now look, what did Roper do excluding Redlake and Gatan in the quarter? I think you can see why we said earlier we were very encouraged by the quarter. Our revenues for all the other businesses and by the way they account for 90 percent of our total revenue, those revenues were up 21 percent from last year's third quarter. Our operating profit grew a 27 percent above last year's third quarter and this excludes any effect of goodwill amortization for both years. If we added the benefit of the goodwill amortization, the number would be almost embarrassing in that 55 percent range. Operating margins expanded from 19.3 to 20.2 percent again excluding the goodwill amortization. The 2001 acquisitions that we made Struers, Media, Logitech came in with strong results in the third quarter, and our existing businesses performed very well. In fact, many of them were up substantially. And Gatan is positioned for a very strong fourth quarter as we have significant backlog.

Turning our attention to Analytical Instrumentation, you can see here net sales increased 22.3 percent. We've broken out here our non-imaging instrumentation, sales were actually up 5 percent on a pro forma basis. Gatan and Redlake sales were down 28 percent in the quarter. This of course created some adverse leverage in imaging, and when we look at the operating profit you can see it was up only 11.4 percent. The non-imaging operating income ratio, though was at 19.2 percent versus the segment total of 14.8. And we had higher SG&A expense, which I'm sure you'll notice if you look at our detail and that came really from three primary areas, plus our volume variance. We had higher SG&A reported expense, which is the Redlake R&D in Q3, a higher medical cost in Instrumentation and those businesses are more employee-concentrated than some of our other segments. And then higher SG&A at Struers and Logitech and Media, because of the nature of those businesses and the fact that it's their first year with us, since we continue to work on opportunities for improvements in their SG&A, and the rest of the variance is related to a lower volume. The Imaging business update orders at Gatan as I have said were quite strong in the quarter. We saw significant growth in the electron microscopy applications in the biological science area. The backlog supports a fourth quarter for us. We were quite concerned at the beginning of the quarter that life science research funding seemed to be stalled and yet in July and now again in August, we have seen a substantial increase in orders at Roper Scientific. So, we feel somewhat encouraged by those signs. We've had lower industrial camera revenues. We knew this would happen in the transformation of the product, but still it is a painful reality. We have gone through a strategic review using both internal and external resources in all of our imaging businesses and just to remind us of what's in that segment, we have Roper Scientific and

, a sort of in the scientific platform arena and then we have now QImaging and Redlake's MASD business in total metrics if you will, all those things down in the alignment strategy and media cybernetics. Investments here, Redlake's product developments are on schedule, actually ahead of schedule. We will have lower expenses in the fourth quarter than we did in the third quarter in that business. The Duncan Technologies acquisition is completed and we will talk more about that in a moment and then QImaging has been acquired.

Moving to Industrial controls, you can see net sales here were up 7.7 percent, driven by a strong Compressor Controlbusiness and an outstanding performance from our hands in the refrigeration business. Gross profits were up 12 percent. Those were driven by the revenue gains from the leverage associated with that, the restructuring of the Petrotech business last year and the cost reductions we have made this year. Margins in the business were spectacular. You can see that we are up 40.5 percent from last year in the business, 250 basis points out of that 620 is goodwill accounting. The rest is real-life improvement in operating performance. Orders in the segment were up 13 percent in the quarter. We have gained a considerable market share at the expense of other people in our commercial refrigeration business, and we have acquired Zetec, which we will talk more about in a moment.

In Fluid Handling, you can see our net sales were down 2.9 percent, gross profit was down 5.5, and the operating profit appears to be up. Of course, we all know that is the benefit of goodwill accounting. The headcount in Fluid Handling though was down nine percent from last year. If we look at what is happened in fluids sequentially, in the first quarter fluid handling was down 29.2 percent in our sales from the prior year. And in the second quarter they were down 22.2 percent. In the third quarter, they are only down 2.9 percent, and we project them to be up over prior year in the fourth quarter. Sequentially the segment sales increased to 11 percent in the third quarter from the second. Most of the businesses, in fact all of the business but one posted gains against the prior year. We will also be having easier semiconductor comparisons beginning in the fourth quarter and that business had a sharp upturn but offer an extremely modest base in the second quarter. Our cost reduction focus at fluid handling is still alive and well.

Inventory Progress: This would be for the enterprise as a whole. You might remember we said one of the new metrics, we wanted to focus our business leaders on, was payables as a function of inventory, and inventory as a function of sales. If you look here, you will see in the third quarter of last year our inventory, as a function of sales was 15.1 percent. We have improved that by a 130 basis points. It's now only 13.8. And our payables as a function of sales was 4.6 in the corresponding quarter of last year. It's now 5.5. So, the net supply chain cash investment on inventory has come down from 10.5 percent of sales to 8.3 percent of sales in just this year. That 2.2 we apply that to our run rate in the quarter, 155 million times four would get you 620 million of revenue. At 2.2 percent, that's over 13.5 million of cash that we can use for other investment opportunities. And there is a good deal or more to come in working capital on total.

If we will focus on acquisitions for a moment; our four completed acquisitions should produce over 70 million of annualized revenues. Ai Qualitek is basically a company that provides us geographic distribution synergies with our Uson leak business, leak test business in the UK and Europe. There are in some new applications that Uson hasn't previously mastered and we see margin improvement opportunities in Qualitek as we roperize that business.

Duncan Technology, this is a company that had better color technology that we enjoyed in our Industrial Imaging business. It is going to accelerate our product development as we roll out Redlake's new offerings. And Zetec and QImaging, we will talk about here in the next slide. The Zetec was found in 1968 in Issaquah, Washington just outside Seattle. It is a leading global supplier of Eddy Current Inspection Solutions and Consumables. We very much like the business in the sense of recurring revenue where we have a strong internal focus on working more and more of that. Even though their margins are good, we see a substantial opportunity for improvement. We paid about 5.6 times projected first year EBITDA for this business. We see real synergistic opportunities in the marketplace with Compressor Controls in Russia and Europe and Asia we see, product synergistic opportunities, manufacturing opportunities with Metrics in Houston and our Uson leak test business as well. The Zetec is primarily a business-driven off of their application expertise. They have a broad range of products and software that provides customer solutions at the end-customer level and half of the business comes from recurring revenue. QImaging, the acquisition we're announcing today, was founded in 1999. So I would tell you something about how quickly the technology can change in these businesses. Business came out of Vancouver, British Columbia with some very customer-focused people. They went from absolutely nothing to a business that we think will do over 10 million of revenue next year. They design and manufacture high performance cameras, about half the FireWire Technology that allows for easier end-use connectivity. Their global network of dealers and systems integrators is very attractive to us and complimentary to our businesses. We expect as we said, over 10 million of revenue, we paid 12 million in cash for QImaging. QImaging also provide solutions that frankly we are not providing at Roper Scientific and Redlake today. If you have shopped recently for a television as I have and you have looked at high quality, high-definition TV, you shall see the FireWire capability of Mitsubishi is a very customer friendly thing. Now I happened to choose something I thought had a better picture. I know that'll make our Roper Scientific people feel good, because QImaging isn't going to compete at the high level with Roper Scientific, but they are going to compete in the OEM market and they are going to compete in the connectivity and solution market in a very favorable way. And their customer focus management team is already bringing benefits to our synergistic planning process. Q4 guidance; we expect to achieve the low-end of current analyst estimates. We would like to say that we could do more. We just don't yet see any real improvement in the economic area. It has been less than we hopefor in terms of macro markets. Even despite terrific quarter three comparisons for last year, we aren't seeing massive increases in bookings in any of our business. Activity and interest is high. Sequential improvements in Semicon; what that really means is that we see a substantial improvement in Gatan's performance in Q4 and Research Imaging is our code for Roper Scientific where we think that funding process; it has already benefited last month and this month. We will continue in Q4. We will have lower Redlake R&D expenses that will drag in this quarter and in Q4 and most of the business see a modest improvement in Q4.

For 2003, our planning and preview; we have initiated this new planning process. It gets our business leaders to focus on end customers and look at how we can have a better organic strategy for the future than we've seen in the last several years in these tough markets. And it is given us an opportunity to align our businesses and meetings across segment, so that people that really have common customer focuses or common synergies around sourcing and applications can be together. Upside for 2003; we know that we have got our 2002 cost reductions that will provide incremental earnings improvement. We would expect some general economic recovery, but it is very hard to know when that occurs. Acquisitions of course, that we have already made these four all accretive and led earnings to us in 2003. We believe additional acquisitions are likely, you know, having started the process, and we have told you the 5.4 remains very

and we will have interest savings next year from debt repayment as our cash flow continues at very high levels. Also next year, we'll be benefited by Gazprom repaying the 20 million dollar special financing that was put in place in 2001. I might just comment on our Q4 guidance; remember last year, we benefited from a very high level of sales into Gazprom in the fourth quarter of 2001. It is not likely to assume that that could recur this year. But notwithstanding that, we remain comfortable with our Q4 guidance.

In summary then, we are continuing to execute in difficult markets. We see a lot of encouraging signs in many of our businesses. We think the Gatan and Redlake performance issues in Q4 will repeat in, I am sorry, in Q3 will repeat in Q4. The accretive acquisitions that are going to benefit us in 2003 are very real. We have a very active deal pipeline. Our inventory improvements that have already added to our cash flow are going to continue. And frankly, there are opportunities in our accounts receivable, which are higher that we'd like. But in some ways, we have to view this year as investments to maintain the business activity. Roper's positioned for strong gains as the economy improves. If you look at our company and you exclude Gatan and Redlake and say, 'my goodness, these people were up 20.5 percent in revenue and up 26.6 percent in operating income and then they produced over 20 percent O/I ratio, think what it'll be if we have any real economic gains. So, our growth in Q4 in 2003 we feel very good about. And with that, we open it for questions.

Thank You. At this time we are ready to begin the formal question and answer session. If you'd like ask a question, please press *1. You'll be announced prior to asking your question. To withdraw your questions, please press *2. Once again to ask a question, please press *1. Our first question comes from

. Your line is open.

I'm sorry, Good Morning.

Good Morning.

All right. Couldn't hear the name there. Brian with the planning process changing this year, a year ago the focus was placed on working capital improvement and obviously you guys have made a dramatic improvement and appeared to be well on your way to making improvements on what's already a strong balance sheet. But could you go into a little more detail of what brought about the planning process and is this something we should look for, going forward?

Well, we're about to; the effect of the planning process is the lack of organic growth. We look at each one of the businesses and we have a quarterly review process in place that's quite granular. And as we go through and we listen to people answering questions, what we try to teach and talk about here is it's not either/or. We don't want to have somebody that says; well I can get cash flow but not growth. You got to get both. We want to preserve the core things we do exceedingly well. But we want to stimulate progress in these areas where there are clear opportunities and most of our guys have not looked at the adjacencies that they have in the marketplace. Many of the people sell through representatives who probably represent us well, but maybe don't get us as close to the end-user as we need to be. I think when we see some of the other business acquisitions we look at, and we see how maybe they've grown in the space that we thought we could have done well and it's kind of a wakeup call about exactly how are we focused. And we put in place a very disciplined concept around where the derived markets are and a very disciplined concept around what our market shares are and whether we need a product expansion or we need channel concentration or we need pricing power or whatever. And those, it's going to be two full weeks, starting next week with businesses that we think have opportunities together. And after that's done, we'll have a better sense of where we are. Now, I think a process like this, you don't get immediate improvement, you know, what you get is some low-hanging fruit, but you get a much more disciplined concept around recognizing that, in addition to operational excellence, you got to grow in our company. And that's what people are recognizing and beginning to deal with.

Okay. And with that, will there be a change in the

comp model next year to incorporate this? Last year's plan, if I remember correctly, was based purely on working capital improvement. Have you looked at next year's model?

Yeah, but two things. First of all, last year was based on cash flow in total, not just working capital.

Okay.

I know a lot of that could come from it. And we've gotten the low-hanging fruit on payables. We've gotten some real progress on inventory. We haven't made much progress in accounts receivable. And we'd like to have even more earnings. It's another nice way to get it right. So, what we'll work on is a more balanced approach, where some of it will be earnings from organic growth and some of it will be working capital asset, velocity, and some of it will be executing strategy. We haven't communicated that to our people. We want to get through and see what this planning process proves in the next couple of weeks, but we've talked to our board, in fact, we just completed a board meeting, a planning board meeting, we went through the fact, we'll be having a more holistic incentive system.

Okay, thanks a lot.

Thank you Jim.

Fred

, you may ask your question.

Good morning.

Good morning.

You said it on a couple of other earnings calls that from an acquisition standpoint that there was a larger than typical evaluation disconnect between seller's expectations versus those of buyer's, and see that you have come through with four acquisitions in the last few months. Is that changing?

No. I don't think so. In fact, once earlier this year we had a couple of substantially larger acquisitions that we considered and we walked away from both of them.

was acquired by a European company who paid a little over 8.5 times projected EBITDA that in our due diligence we felt that it might be paying a lot more and then we walked on that deal. It's just, you know, deals that are in, you know up to 7 times EBITDA are very attractive for us and you start to get above that, you know, we have got a lot of work to do. I think that GE has bought a couple of relatively small companies lately at just incredulous premiums and we have seen some other people do that. You know, we have just got enough in our pipeline and we just don't have to do that and haven't done it. But I do think that sellers are still you know expect a pretty high EBITDA multiple. So, you can see the kind of deals we have done are quite similar to our historic transactions and the ones that were closed to today, I think, still fall in that category. We had a lot of opportunity early in a, sort of, Fortune 500 kind of companies, talking to us about things they would like to sell. But, I think, their expectations as a strategic buyer about what we pay were unrealistic then and still are today.

Just from a preference standpoint, all things being equal, is the preference to make larger acquisitions?

No the preference is to make good acquisitions

. The ones that we have made at $70 million, it's kind of a, you know, 10 percent revenue opportunity for us next year and it is quite nice. You know, we can continue to do that from the cash flow we generate in the company. So, you know, we are comfortable with that now. Having said that, if there was a larger opportunity that fit perfectly or got us in a business that we thought had high growth or something, you know, we would look at it.

Okay, great, thanks very much.

Welcome.

Alex

, your line is open.

Thank you, Good morning. Before I start, just a comment. I was watching the slides on the website and they were about 30 seconds behind what was coming over the telephone and the audio was as well. So, we got about 30 seconds of comment on slide 5 while we were still looking at slide 4. So, you might want to think about fixing that or putting the slides up separately so we don't have to mute the audio.

Alex, this is Chris. I might point out that the slides are available separately on our website for people to get.

I couldn't find them.

Yeah, they are in the investor information section....

They should be clearly labeled, and easy to find. So you might want to think about it.

Well thank you.

We agree. We will see what that was about because it is... I am glad, I wasn't having a look at the slides because then I would have been 30 seconds

.

All right. Okay. On your fourth quarter guidance, given the situation you explained

in the third quarter was Redlake and Gatan. And also given the May 23rd guidance, which was for year earnings of $2.25 to $2.31, mid-50 to 55 cents for the third quarter and 73 cents for the fourth quarter is what you would have had to get there. If and that was out of 34 percent tax rate. Now we are looking at, let's say something around 60 or 62 cents for the fourth quarter at a 31 percent tax rate, and using a say, 62 cents which is towards the low-end of the analyst's range, which is 60 to 69. Using that, it's about a 19 percent pre-tax shortfall from your May 23rd guidance, which I assume had some of these Redlake and Gatan problems already in it. And the, looking at third quarter, that shortfall figured the same way from the pre-tax level that you had expected in May 23, it was only about 10 percent. So there's a bigger shortfall in your expectation for the fourth quarter than you just realized for the third quarter, and I'm wondering why that is if some of these problems with Gatan and Redlake are going away in the fourth quarter?

Alex, I'm probably 30 seconds behind that question

. Yeah, I can't follow it all, but here is kind of what, how we try to respond. I think, you know, in any quarter you have things that have unusually had some very strong performance in the third quarter, you know, up 21 and until almost 27 on

. I don't know that we could expect that momentum in every one of those businesses to carry into the fourth quarter. When we were talking earlier in the year, we would have expected in our second half of the year, Q3 and Q4, that there would have been some by general industrial recovery not a lot, but we were thinking 2 or 3 percent. That's about 5 million more revenue in the third and fourth quarter each quarter than what we are getting. If we had had 10 million more revenue, that gets converted at least 40 or 50 percent of contribution to pre-tax earnings. And that's something we are around 8 to 10 cents a share that we would have gotten from a modest up tick in a recovery that just didn't happen. We also thought that we get some little bit of improvement out of semiconductor, but that hasn't happened. And one of our important customers for Gatan has recently been acquired and that may have you know, had a little short-term effect. So that's happened. We had a slow response in Roper Scientific with this funding, which somebody here used the term hiccup, because it always seems to be in June and May, and somebody rightfully said we're working every quarter. You guys seem to close the quarter with a strong month, but August has been pretty good. So all those things are in there. We've got to continue to make these investments. I think the rate at which we made the investment in the Motion businesses, you know, higher than we expected, probably at the time of that discussion. What we have finally gotten good at, I think, is our 90 days out guidance has been good throughout the year. You know, we struggled, as you all know, going to last August and talking about what we might be able to earn, and in all of our shortfalls just the core business not performing as well on revenue as it did in the prior year, and that's kind of turned around in Q3 and we would hope that it will continue in Q4. Now also, I think I slipped in there in Q4 last year, we earned 54 cents a share. We benefited very strongly from that special Gazprom order. That added you know quite a bit of income probably in the neighborhood of 8 cents there, and the goodwill is around 9 cents a quarter. So if you took the $0.54 and $0.19, that's $0.63 and if you subtracted 8 cents, you'd be down to $0.55 again and the low-end of the analyst numbers I think is 60 cents. So we're you know we are still talking about improvement in Q3 actual above Q4, I'm sorry, an improvement in Q4 actually above Q4 last year.

This is Gazprom business and it won't be there this year?

No, it was a special level of business that was due to that financing that was done through Gazprom, a substantial increase in the number of systems they had available to call from.

I was just comparing with what you said on May 23rd about the third and fourth quarter, when you were using a 34 percent tax rate and what you are saying now about the third and fourth quarter using the lower tax rate. Observing that you are 10 percent short on the third quarter and 12 percent short on the fourth quarter from what you said on May 23rd.

Yeah, I am Alex basically, this is

. We had in our fourth quarter progression and improvement in both the general economy and the semiconductor. And We are seeing that being flatter best in the third quarter and it is our projection that it will continue in light mode for the fourth quarter, so there's a bigger impact in the fourth quarter because our initial projections had a further improvement in the fourth quarter.

Okay.

Actually what I thought Martin was going to tell you was that we would have expected the tax benefit to be there, you know. The tax benefit is not a total shock to us. This isn't something that came out of the blue, it is , something that we've been planning for a long time.

No, but I was told the guidance originally did not include that.

Okay.

Okay. Now one other thing and then I'll get off. The SG&A was up 4 percent quarter over quarter on a half percent increase in sales, and that really took away 5 cents a share, 4.5 cents a share. If it had been the same percentage of sales as it was in the second quarter, you would have been 4.5 cents more. So why was SG&A up and I wonder what' s going to happen in the fourth quarter.

Well I'll give you sort of 2 answers to that one. The one is on a year-over-year basis, SG&A in Analytical Instrumentation was 35.9 percent in the third quarter last year, this year it's 39.6%, and what that is in 2.4 percent of Instrumentation sales where the product development investment at Redlake and then we got little higher S&A cost in Struers and Logitech and Media than we do in the other businesses. And then we had higher medical costs that were up and those two things. The higher medical and Struers, Logitech, unfavorable ratios to our core were another 1.3. So that's what refers to the...

I'm talking sequential.

Okay, sequential the situation is a little bit, but on sequential, the Redlake product development costs were 2 percent higher than the 35.3 we had. Then we had volume leverage was a negative 1.1 in the quarter for us, and products mix was about 80 basis points and the higher medical was 6. So these four things together take you from 35.3 to 39.6. The two points of product development will come down quite a bit, the adverse volume leverage shouldn't be very high in the fourth quarter, because Gatan will do well, and we shouldn't have that product mix

medicals probably continuing up.

Okay, thank you.

You're welcome.

Wendy Caplan, your line is open.

Thank you. Brian, could you walk through for us, turning to the control segment for a minute. Can you walk through for us the major end markets there, specifically the oil and gas, the refrigeration market; you mentioned some share gains offset by, again those slower industrial markets. What your expectations are, going forward and whether we should expect that kind of mid-twenty, twenty-six plus percent operating margin is sustainable, going forward?

You know, I think the margin, you know, we did have

volumes. So the margin is pretty high. But the Hansen business is certainly on a roll. We have made our real investment. I am thinking about

slowing down in any way. The Gazprom business, you know, going through kind of discussions around that. You know, we don't yet know exactly what level of business we will have next year. That certainly highly leveraged kind of business we

a follow up, would have some deterioration there in margins. The power generation business has been very weak this year that, you know, that affects our

US business in a direct way. If you look at their sales in the say so or

and

and people like that, that's been pretty weak. If that came back at all, that business would be benefited on the upside. The general industrial activity in those businesses is not, you know, really high. So, it's plainly not a great answer to your question, but, you know, we don't think it was an aberration, kind of everything work perfectly, doesn't always work perfectly. So the margins will probably be more normalized but, you know, certainly somewhere between 22 and 24. I would be really disappointed if they got lower than that and I haven't heard what people have to say out, 'no more next week'.

So the key here would be Gazprom business?

No it's a easy key for us always. I mean I think Hansen is growing nicely and that's pretty good. Compressor Controls is focusing on non-Gazprom order intake and if that were better it would be good. Some of the business we have taken in compressor control or share larger projects, carry with them lower margins, but they have, you know, prepayment stuff. So the asset lost is really high. So I can probably give you a better answer when we get around to really talking about 2003, I wouldn't be so evasive as I am now.

Okay and to continue on that seam of end markets, I am still not sure I understand why we should expect the two semiconductor and research end markets to improve, going forward. Can you walk through that one more time for me please?

Yeah. I don't know that they will in the fourth quarter. It's a comparison to our third quarter activity, I mean, we already got substantial backlog at Gatan and we've got known shipments we are going to make in that space in the fourth quarter. And the business in IDI, for instance, it was finally changed is; in first quarter, I think we were down 84 percent, forgot the second quarter was in the 70s. This quarter, we are down 38 percent in the small business. But operating profits were only down the same things. So they are no longer are negatively affecting us. Actually I made a little bit of money in the quarter. There the bookings were, you know, through the roof, but on no base. So, I don't want anybody to get excited about that. So the

clearly arrived to that business, it will actually make a little money. So that makes the comparisons on semicon and fluid easy. In Gatan, there will be easy comparisons in the fourth quarter and going forward, I think, before we have done in that business. So, we really are only looking at the research funded things that might have been going in the semicon, that would have affected our other

businesses in a negative way. So, we feel pretty good. Now, unfortunately the semicon piece of IDI is going to be a late cycle recovery. So, it's going to take a, you know, quite bit of activity and then we are also seeing this big spurt in government funding. We had a quote around here yesterday from what both the nationals to the health and the other government agents, they have done with funding and it's very substantial. So, we don't know whether July and August is really picking up on that, but I know the funding from NIH is up 15 percent for next year.

Thank you.

Welcome.

Hank

, your line is open.

Yeah, Hi Martin. Can you give us the balance sheet impact of the acquisitions in the quarter, especially on inventory and receivables?

It's probably about. It's about a million and half, that’s included at the moment as you will have noted, we have one line with Zetec acquisition, because it was made on the last day of the quarter, and we haven't at this time finished going through all of our intangible

to do a proper fair market study, a proper fair market evaluation. That will be done in the relatively near future, so after talking with our auditors it was determined appropriate, to just one line the Zetec number, so those numbers are still to be finalized.

Okay, but for the acquisitions that did close, because you talked about inventory coming down 3 million sequentially?

Yeah, that was about

million dollars.

Okay, and how about on the receivables side? Is there anything there from the acquisitions that just closed?

Yes. I don't have that at hand, but it's a relatively small number.

Okay, and just to refresh my memories, the Gazprom in the fourth quarter last year, what was the dollar number of the revenues?

The dollar number was about 8.5 million dollar of revenue last year.

Okay, and you are running up against that same problem in, when you get to the first quarter, wasn't that a little over 11 million?

It was within

another 11.5 million, so that's a 20 million dollar total. So that if you look at our building our account receivable from October 2001 to July 2002, 15 million of that is the Gazprom financing. So..

Okay, When is that going to be paid off?

The interest part of it is received in the middle of this month. And then the principle is in full equal amounts that occur on the quarter days thereafter, so December, March, June and next September.

Okay, thanks very much.

Hughes, your line is open.

My name is Scott

on his behalf. I had a question and pardon me if I missed something on prior release, I was just wondering if you guys could fill us on the FAS-142 impairment test? You guys put out an estimate range or taking a charge?

Yeah, we will be doing that shortly that the, we just have a meeting to finalize all that activity. We are going to get over that with Pricewaterhouse and, you know, our audit committee in the board that we, we had said earlier that we expected the FASB charge would be less than 10 percent of our total goodwill, which is about $424 million, so we are going to cap it at less than 42 and often what we have seen so far is less than that.

Okay. Thanks a lot.

Karl Mergenthaler, your line is open.

Hi, two questions. I wanted to follow up on end market, could you talk about power generation being weak specifically at

but power generation is a big end market apparently for Zetec. So, could you elaborate on whether the weakness in that end market is currently an issue and specifically what areas of power generation are we talking about if, you could name some customers, possibly?

Well, the thing around power generation now is, that was more, you know, power generator type business that we have in our Amot company in Richmond, you know, it's a relatively small company to begin with and we are talking about a variance in an end market, there that I was answering Wendy's question about. At Zetec its, there is no effect whatsoever, Zetec has got it, they had installed base that it is working on and new industrial application. So, Zetec is really insulated from any CAPEX issues around power generation or any really any seasonal issues, it's a recurring-revenue oriented. It's a software driven kind of decision, people need to get the same information from Zetec that they have been getting for some time and all we see is the channel or expansion opportunity for us outside of the North America. So they are really on

, Karl and power generation, we are just not seeing, Roper pumps got a little bit of business that goes in the power generation, it's not good, Amot's business in that category is not good. We don't have too much exposure, into powergen other than that. So, we are probably not great authorities to help you with that.

But your year-one projection for EBITDA at Zetec, did that assume that, no change in that end market?

That's correct, Karl. This is Mart. The year-one projection assumed that the end-market will be the same and for the applications that those products have been used on, which is essentially a maintenance mode that would, that still appears to be a totally reasonable expectation.

And then just quickly, on capital expenditures, do you, at the beginning of the year, you were talking about 10 to 12 million dollars for 2002, what's the current projection and have your capital expenditure requirements for 2002 changed based on lower volumes and your acquisitions completed?

They help slightly as we reflect some capitalized expenses, capitalized developments

these well as the acquisitions. We would imagine that the full year CAPEX will be around about 10 million dollars and that the full year estimates of depreciation and amortization at probably about 11.5 and 4 million dollars respectively.

Okay. Thank you.

Stephen Colbert, your line is open.

Good morning Brian.

Good morning.

Do you think that the

on your thinking right now, on the company's financial strategy in view of the equity issue being withdrawn from the market?

That is financial strategy, I am not sure exactly what that means, but in terms of our balance sheet where you could say we have got net debt of the CAP at about 46.8 right now after these deals. We’ve got some considerable borrowing capability inside our revolvers. We have got an opportunity to bring in better working capital performances since we started to do. If we look at the deal flow that we are working out today, you know, we feel pretty comfortable. We, kind of modeled here and taught people that if you get, you know, EBITDA performance with the way our debt covenant works, we get a pro forma three times that and so, if we didn't use at all, you can, kind of, grow EBITDA 1.65 at a model and see what it generates and so we have ongoing over a 100 million dollars of firepower for acquisitions in there, plus what ever we get out of working capital, plus expanding our debt on revolver. So, we are fairly comfortable with where we are at the moment.

Okay. And just follow up on the somewhat different topic in which before that the IDI there is a

was stronger of a very deeper space. Are you seeing that kind of pick up or do you anticipate that type of pick up somewhat broader in your, semiconductor businesses going forward and in the next quarter too?

Not really, the two of our top guys are over in Japan as we speak today talking with people the, what we are seeing in pick up are doing some panel building for people in that business, we are getting rebuilds in our cyber business we acquired a while ago, but you have got to withstand it next to nothing.

You are right.

So, you are going to have a double effect and really talking several 100,000 dollars. So, its not very material, but it did make money in the third quarter again less than last year, and it is the first quarter where the income variance to the prior year didn't add to a penny. So you know, we feel pretty good about that. It's, you know, high margin business cautioned, if we got any uptick in that business, it would be really great, but we are not building in to our fourth quarter thinking or 2003 concept yet.

Thank you very much.

Welcome.

Gary

, your line is open.

Hi. I think I am on. I am on calling in for Gary

Well.

Yes, you are on.

Okay. Actually, I was wondering if you could talk about Redlake MASD, specifically, what was the R&D expense for the current quarter and with more normalized level and then what do you expect, you know, in fourth quarter and through 2003, in terms of, you know leveraging that new product that is going to roll out, what does it mean, in terms of margins going forward for Redlake and, you know, for the whole Ai segment, in general?

Yeah. I think we have got a very big planning process under way in all of these spaces for imaging and we are going to wait to see what that looks like. In the quarter, you know, we got to have some protection for Redlakes and the customers. These are great guys in the motion business. So, you know, since we are not really excited about getting too much more information you had out there, but, if we would have had similar revenues to the prior year Redlake and we hadn't have made in R&D investment, our earnings would have been substantially higher in the third quarter this year, at least a

higher than they were. Those opportunities got to reappear in the second half of the next year are, or the

technologies already behind us and were done and got a workable chip and our Alpha cameras are going to be ready in the first part of the calendar year and our Beta cameras are going to out in February and so we should start shipping by April next year and we think there is

up demand for these products. So, we would expect a strong second half of calendar 2003 for Redlake that would give us obviously very favorable comparisons of the second half of next year to the second half of this existing fiscal year.

And can you quantify the R&D spent this year and what do you expect your

going forward?

I don't want to encourage other people to do what we have done and you know, I think the level of the expenditures, I think we have got enough public information out there. I just don't feel compelled to go deeper than that.

Okay. Then can I ask a question about semiconductors?

Sure.

I know you are expecting an increase for Gatan in fourth quarter, what about 2003, I mean the..?

Okay, let me just remind everybody, you know Gatan business is at least 75 percent and this year it is more, not in the semiconductor space. Gatan is not primarily a semiconductor player. Last year, in the third quarter, it had a very unusual product launch for a particular customer that had very high revenues and nice margins associated with it they weren't replicated in the third quarter of this year. We see Gatan continues to grow, generally people under estimate, how much Gatan has been growing and over estimate how big Redlakes MASD business is. Gatan, we expect a very fine fourth quarter, it will earn more than it has earned in any other year expect last year and we would expect the growth out of Gatan in 2003.

In terms of semiconductor in general in 2003?

No in terms of its overall business, I mean, you know semiconductor has one application for Gatan, we think it will be electron microscopy business is going to grow nicely at Gatan. Gatan really is very much involved in material analysis work and specimen preparation. In addition to that, it is not, it would be wrong for somebody to model Gatan as primarily a semiconductor play.

I was wondering whether what your view is of the semiconductor end market in general and ..?

It is atrocious.

Okay, Thanks.

Thanks.

Matt

your line is open.

Hey good morning guys.

Good morning.

I just have one actual quick follow-up question, my others have been answered. Did you guys, I believe in the past, you have quantified what you expect annual revenues to

from to be, do you have that expectation for the number for the fiscal year 2002?

Yeah. I think it is around 50 to 55 million.

Okay and that compares, that's up what about 10 percent year-over-year?

Yeah.

And is there anything else that you can say about, I don't really think you talked about the initiatives that you're undertaking with CCC and the other oil & gas related business and the CIS in Indochina? Can you sort of provide us with the progress update there Brian?

Yes, the Chinese market is, it's a very large market. The unique thing about the Russian technology is that after World War 2, a major portion of the installed base in China is really Russian turbine technology. There are a lot of people, well-capitalized people who if tried and decided to buy all new equipment, would be able to do that. We don't think that's likely to occur in a lot of their applications. So, there's a very large installed base of Russian turbine technology in Chinese pipelines that we think if the Russians get themselves increasingly in good economic order, that they're going to have a substantial increase in their Chinese business. And if that occurs, we think we're very well positioned with Gazprom and the Russian turbine manufacturers to participate in that. We don't like to hype it much in that, because it's a very slow developing sort of process. It might occur three years from now, might occur two years from now, maybe there'll be a breakthrough and some people will do some stuff now. But it's a slow-developing market that will position better than anybody to take advantage of the turbine software technology that we work so closely with the Russians to develop.

And is the story the same then for the CIS region as China?

No,

so, the CIS region is more around getting their financing in place, I mean we are not going to be a bank for any of those companies. We expect everything to be a letter of credit and we stand by ready to serve, but we could have a dramatic increase in our business level, if we wanted to take imprudent risks in accounts receivable and we are not willing to do that. So we hope some of these CIS places will come up with better funding and then you know, we will have an increase in our revenue.

And is there anything else that you can add as to the outlook with respect to Gazprom in 2003?

No, we just went through a quite an in-depth discussion with the Gazprom people and we are currently working with them on 2003 calendar year shipment and revenue projections.

Okay.

We will soon, but right now, we are in the middle of sort of contract negotiations if you will.

Okay thank you.

Okay you are welcome.

Scott

, your line is open.

Hi guys. I guess, just a follow-up for the CAPEX question. You had mentioned like 10 million this year. Do you have any thoughts for next year on CAPEX?

I don't see any reason for our CAPEX to go up at all, I mean we will have you know, we don't have lot of plans. We got substantial capacity of replacement that we have. It's in the planning process, people brought us some ideas that required physical plant and equipment, we will probably give them some ideas about where you can get that done by other people. But we are open to that. I just can't see it. I don't see CAPEX going up at all here unless it was in areas of R&D for software development where you capitalize in a short schedule or something.

And as far as the CAPEX at 10 million, I mean you spent below depreciation and for a growth company like yourselves, that's usually and on the low side.

If you look at what's much more important, what we're spending on R&D and R&D, we are spending in a normalized somewhere around 8 to 11 percent in instrumentation right now or even more and we are spending over 4.5 percent in industrial control. That's where the growth comes from. That's, capital equipment is not required for us to generate our growth

Okay and does

matter what you make on acquisitions, your CAPEX level could stay the same, how about your R&D?

I can't imagine us acquiring very many things and have a lot of factories with a lot of depreciated assets.

And how about on the R&D side. Do you have some possibility there as you make more acquisitions to maybe not need to spend as much on the R&D?

No I don't see, I think you know R&D is the life-blood of our continuing growth and we haven't had enough organic growth as it is and R&D will be critical component of us getting more customer focused and less product focused and I wouldn't model us at less R&D expenditure.

Okay Thanks.

You are welcome.

Michael Schneider, your line is open.

Good morning.

Good morning

Wanted are the big end to the in letter for Instrumentation segment a little more. First I guess, in terms of the life sciences segment and what were scientific in particular, I am trying to determine specifically if in the fourth quarter, you are actually expecting a sequential improvement in that market or if it's just a level holding activity that has actually improved which will hold well for fiscal 2003?

I think it does hold well for 2003 Mike and kindly bear with us and what ....

I think Mike, we are expecting that we would see some top line benefits from life sciences in the fourth quarter. That seem to that projection or that guidance we've given earlier on this morning.

So have you been able to determine why the little portion of this year was so weak in that market, some of your compertitors have given this mixed signals.

No. We had a conference call yesterday morning about this and no, the answer is just flat out 'No'. There seem to be a real stalk through July in the funding and suddenly, we have just broken loose and there was already demand as soon as people got their funding. The thing we here, I now think it's fairly validative, we know, what is true is that this is still kind of people reassessing where they were going to make their investments in the research area and now people are looking at, you know, if I don't them pretty quickly, then I'll loose my budget for 2002 and they're rapidly releasing these to make their purchasers and I mean, that sounds logical, it sounds indubitably correct, though we don't know for certain.

And am I correct that most of these businesses are run either on academic calendars or on the NIH calendar which I think is an October year?

That's why we're having this in depth planning meeting Mike. I mean, what we hear is what of course that influence us. But I don't know.

Okay. Then I guess, sorry to beat this, the growth you are expecting then in the fourth quarter or be at modest is just driven by the year-end releases by these research

?

The orders we really have and we've got substantial increase in July and August orders, so yes.

Okay. And then switching to Redlake, we've clearly seen a stall in orders in front of the new technology in the next generation of these cameras. When would you expect to see a meaningful impact from the new cameras, is it in the second quarter?

Second calendar quarter of 2003.

Okay. But in front of that, you continued to see orders stall as people wait for the new technology?

We only lost one order.

Okay.

And that was about a million and a half dollars.

Okay. And then looking at Fiscal 2003, I know you haven't given any guidance but what you have done in the past is given us some sort of a sensitivity analysis and knowing what you have in the poll today for acquisitions, may be you could break out what accretion you expect in fiscal 2003 from the acquisitions you've done. I think the number of, somewhere in your 8 cents a share incremental and then secondly given x percent of revenue growth, what you believe the bottom line impact would be?

I think we could do that. We want to get through those planning process with everybody before we really nail that down. I think it's certainly right to believe that there's no reason we couldn't get at least 8 cents of EPS performance out of those deals. We certainly will be disappointed if we don't do atleast that. I think when we are finally ready confirm what we see for 2003, you know, we'll be able to be quite specific about that.

Okay and I guess, just working at the numbers out there for next year, the guidance this year, you've given imply something around 2.16 a share, the consensus for next year is 2.56, if you back out 8 cents for the acquisition, that means you are going to have organic growth contributing about 32 cents a share next year. Are you atleast comfortable looking at the status of US economy and the status of order patterns and that's a realistic achievement?

Well, what we've said and I would, sorry just to remind people of re-modeling and thinking about next year. If you look at a one percent increase in sales on 600 million dollar base, it's 6 million bucks, you can safely model of at least a 40 percent contribution and it might in many of the business, if you take 40 percent on six million, you get, you know 2.4 million that's a nickel a share. If you want to model, sort of sensitivity analysis, you would think were Roper could make at least a nickel a share for every 1 percent increase in the general economy that brought a corresponding sale increase to our business. Although it is not ready to put a number to that for 2003 in terms of what you think is up 3 percent is 5 now. The good news is that, you know, we've had a real struggle on some of the core businesses this year being down as much as 5 or 6 percent over the prior year, you know, if they only return to the level of the prior year, you have a nice uptake. But till we get through the planning process, it would be wrong, one of the questions on our charge, as we were working through yesterday getting ready for the call is well, we are agreeing to accept the lower end of analyst range in fourth quarter when we comment on 2003 analyst ranges, our answer was 'no'. So that was a good answer yesterday and so a good answer this morning. But the guidance, I am sorry not the guidance, the consensus numbers would imply 5 to 6 percent internal growth next year,based on your sensitivity numbers.

Well, you know, honestly I haven't really read all of them. I think we have got cost reductions that are coming through. We got lower interest cost that would benefit that. So, I am not sure I can agree with that but I will be glad to look at it. Like, you know, we can talk it through and then you got to remember we got Q Imaging that we have just added in to the mix here. It is going to do over 10 million dollars in revenue and it is a profitable business.

Okay, and final question. You make the comment on one of your slides that excluding Redlake and Gatan, revenue was up 21 percent year-over-year.

Yes.

By now back of the envelope numbers that imply something in the order of six percent organic growth, excluding those two businesses, I don't know if you have those types of particulars, but actually what that number was organically, if you back up these two businesses?

We take out our acquisitions, you mean.

Yeah.

If you eliminated Stuers and Media, and Logitech?

Right.

If you looked at the quarter, they are up about 2.5 percent in sales and they were up about 10.5 percent on operating profit, exclusively goodwill change.

Okay, great thank you.

Yeah, you are welcome.

Alex

, your line is open.

Just a couple of house keeping type questions; Martin do you have the after tax amount of the Euro charge? That was not footnoted in the release?

I think we are going 90 percent of the four million and one.

But do you have the number?

The earnings, you mean like the EPS but that is nominal.

The net effect of it, you gave us a pretax effect in the income statement, but you didn't footnote the net effect.

It's two million and six sixty Alex.

Two million and six-sixty?

Yeah, which is 65 percent of the 4.092 million, which is the exact number. And that goes with the US transaction.

So, there is a 35 percent tax rate on that?

Yeah,

to the US banks.

Okay. And why was investment in Zetec listed as another asset in the balance sheet?

Well Alex, as I kind of answered another question on this subject earlier. The reason was the transaction closed on the last day of the quarter and in the evaluation of the intangibles necessary to put it on the balance sheet is not being completed at this stage. And we are not in a position to properly allocate across the balance sheet, so in conjunction with our auditors, it was felt more appropriate to one line at this stage until we had a proper fair market evaluation.

Okay, have we talked about the sales level expected in the fourth quarter? I don't remember that coming up.

No, no we didn't.

What is that, roughly?

We won't be giving any guidance on that affair, Alex.

Not on the sales number or for the year as a whole?

No.

Okay. And one other thing. Did someone mention that Gazprom for the year is expected to be 55 million? Is that the figure?

That's right, yes. 50 to 55, I think.

Okay, Thank you.

At this time there are no further questions.

Well, let me just thank everybody for your questions and your interest today. To conclude, our operating performance is strong and the benefits from our actions over this past year, we believe, will be even more apparent in an improved economic environment. In the meanwhile, we are focused on developing our existing businesses to deliver improved organic growth and continue to improve our working capital performance. There are many investment opportunities available to us and our discipline ensures that our investments will be executed to increase shareholder value. I thank you for your continued support and interest in Roper Industries.

Thank you very much.