Roper Technologies Inc (ROP) 2005 Q3 法說會逐字稿

Good day everyone and welcome to this Roper Industries Third Quarter 2005 Financial Results Conference Call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to Director of Investor Relations, Mr. Chris Hix, for opening remarks and introductions.

Please go ahead, sir.

Thank you all for joining us this morning for the Roper Industries Third Quarter 2005 Conference Call.

Also participating in today’s call is Brian Jellison, Chairman, President and Chief Executive Officer and Mike Towe, Chief Financial Officer.

Yesterday afternoon we issued a press release for our third quarter results which included solid contributions from internal growth, operating leverage and acquisitions.

If you have not already seen the press release, you can obtain it from our website at Roperind.com.

The press release also includes telephonic replay information for today’s meetings.

In a moment, I will turn the meeting over to Brian for his prepared remarks after which we will take questions from our telephone participants.

We have prepared slides to accompany today’s call which are available through the webcast and are viewer controlled.

You can also obtain the slides in PDF format from the Investor Information section of our website.

Please turn to slide two.

Today’s meeting includes forward-looking statements and so I refer you to our Safe Harbor Statement which is included in both the press release and the slides for today’s call.

Please also refer to our SEC Filings which indicates specific risks and uncertainties for Roper Industries.

And now if you’ll please turn to slide three, Brian will begin his prepared remarks.

Brian?

The third quarter is-- I have a lot of records in here for us - Cash flow sales; certainly orders which were, frankly, stronger than even we expected; profits; and then the diluted earnings per share of $0.45 - we liked the $.90 number that we had before the split, but we’ll take the $0.45 here - strong operating performance pretty much throughout the Company, I think, will shed some light on whether energy was soft or not by explaining some things because actually it’s doing extremely well.

We had very good organic growth in the energy area and certainly in the imaging and radio frequency areas.

Our acquisitions are really doing at least as well as we expected both TransCore and CIVCO and Inovonics; and, of course, during the quarter we were able to complete the 2-for-1 stock split and dividend.

If we look at the next slide, the cash flow in the quarter was very, very strong.

If you look at net earnings a year ago were $27 million, this quarter were $39 million so earnings were up 43%.

The operating cash flow in the third quarter last year was $36 million, this year it’s $75 million giving us this sort of outsized cash conversion ratio of 190% and EBITDA a year ago was $56 million.

It’s up 60% in the quarter to $89 million, or about a $360 million annual rendering.

If we look at the next slide, on the balance sheet we want to point you very much to the inventory situation which continues to improve and has for the last three plus years.

We had turned the corner earlier this year when we finally got below 10% and I know some people asked me if there was an opportunity to continue to get better and I’ve always said that there certainly is and we expect to continue to get better.

Here in the quarter, we’re now at 9.2% of inventory and that certainly helps frees up cash for us for other activity that you’ll see in a moment.

If we look at the quarter end, we had $79 million of cash on the balance sheet.

We had paid back a small revolver we had opened up; so we still have $400 million of capacity in the un-drawn revolver.

Our net debt divided by the net cap is below 40% at 39.5% and importantly, if you look at the debt to the expected full year EBITDA number, you can see our debt to EBITDA multiple at 2.65 which is well below the 3.5 or 3-type number that we always strive to achieve.

So this inventory performance, if we turn the slide, I want to show you the kind of continuous progress that our field guys have made here.

One of my old bosses always told me that the greatest measurement of management was the quality of their inventory because it told you so many things about how well they understood their business and how they led it.

In the third quarter of 2002, you can see that Roper needed 14.9% of sales in inventory to continue to satisfy customer needs.

A year later, in the third quarter of 2003, that ratio had dropped to 13.8% and the third quarter of 2004, last year, you see it was down to 11.4% and this year at the end of the third quarter, it’s 9.2%.

That’s a 570 basis point drop in freeing up cash on our balance sheet; and if you took the 14.9% times the annualized sales that we have today versus the 9.2% we’ve achieved, we’ve basically freed up $83 million of cash for investment which is what we’re still trying to do here.

We just always want to lower the investment and improve the cash and then I think you can really see how powerful that becomes in the balance sheet.

I can remember not long ago when Roper would only produce $60 million of free cash flow and here’s $83 million just from one aspect.

Next page.

Very strong third quarter, once again, across the line.

Sales and income from Ops up well in excess of 50% and earnings up 43.

We did have a little inventory step-up in CIVCO.

Internal growth on the order side was 7.4%.

You can see organic growth in sales was still able to be 7%, very little currency involved.

We’ll be specific about that in a moment.

Next slide.

If we look at the income statement you can see orders at $248 million a year ago and $408 million this year.

Orders were up 64%; biggest gains in orders were in imaging and in radio frequency; but certainly the energy businesses as opposed to the segment were up substantially and we’ll show you that in a moment.

Net sales increased from $240 to $365 million and a little-- really substantially less than 1% was foreign exchange driven.

So it’s really a pure organic number.

Gross profit we went back above 50% on the gross profit line picking up 80 Bps there.

Part of that was due to an improved sales mix here; but our lower cost structure in the energy segment drove some of that as well.

In income from operations, you can see we picked up 20 Bps over the year ago number and sequentially we picked up 120 Bps from 17.9% to 19.1%.

And if you exclude the acquisitions, our operating margins grow 140 Bps to 20.3%.

On the tax rate, we just want to call your attention to the fact that last year’s third quarter included a benefit to the earnings statement for a one-time R&D tax credit that we had.

So from a quality of earnings viewpoint, this year’s numbers are even stronger because, you see, we’re looking at a 33.8% tax rate in the quarter.

So net earnings then went up from $0.36 a share to $0.45 a share.

Next slide.

Once again, you see the continued progression in EBITDA growth quarter-by-quarter.

Looking at the last seven quarters starting out at 44 million in the first quarter of ’04 and a comparable quarter a year ago at 56 and this quarter at 89% and the margins have now expanded the EBITDA performance in Q3 of 24.3% which a long time ago I think I told a lot of investors that we try to look at the gross margin, pull out the R&D and capture 50% of that as world class performance and we’ve actually exceeded that.

Next slide.

Here if we look at our strategic growth program, we want to remind you that we’ve only announced so far two acquisitions this year – Inovonics and CIVCO – and they’re both doing well.

We’ve been very patient.

We’ve been watching on the sidelines while we think a lot of people have spent a lot of money for overpriced assets; and we’re going to stick with our discipline around this and everything we do is going to be around non-cyclical businesses.

We think people who are buying at the peak at multiples that we think are a little high because there’s a lot of stable debt around may not be making the best decisions.

So we’ll continue to look very aggressively in this medical and security and RF market area, but you can be assured what we do is going to make a lot of sense on a cash basis.

We’ve got very substantial financial capacity.

We’ve got this growing cash flow that we’ll talk more about in the balance sheet with a substantial amount of money that’s available to do whatever we want to stay ahead of the curve.

Next slide.

Recently, we’ve been talking more and more about our positioning in markets.

Here you can see radio frequency at 28% and after-market energy at 18% and water primarily in metering activity at Neptune at 16% and the research life science medical area at 14, leaving us about 24% in our small or niche businesses, most of which are really outstanding businesses; but tend to generate cash for use by us in the acquisition mode.

We’ve been able to really reduce the cyclical exposure and you see that with continued organic growth in this quarter when a lot of other people haven’t been able to report that kind of growth.

We think that we’ve got a lot of attractive growth internally inside the RF, energy, water and research medical arena and all of those, we think, are pretty scalable platforms that allow us to make tuck-in acquisitions.

And we’ve got a number of those we’re working on at the moment; and the macro economics is still good in this area.

So I think some of the early concern about slowness and softening for 2006 in the industrials isn’t going to apply to Roper as we go forward.

This acquisition program has built a series of good platforms and we’ve been reporting them out in the segments that you know around competency as opposed to end markets.

And if you turn the slide, you’ll see that that had an unintended effect in this quarter where when we reported out the energy segment, all that’s in the way we report is Compressor Controls, Metrix and ZETEC.

A very substantial – close to half of our energy end markets – are in other segments; in instrumentation and in industrial technology.

And they include petroleum analyzer at ANTEK from instrumentation and AMOT and Roper Pump from the industrial technology side.

While we don’t want to go back and redo a lot of work, we do want you to understand that those businesses that contribute to the energy market remain very strong and orders that were up for those businesses collectively, 17% in the quarter, and the sales were up 9% excluding ZETEC.

And, if you turn the slide, we’ll tell you a little bit about what happened in the segment.

Now here you’ll see that while the enterprise-wide energy market was up substantially, our segment happened to be down 7% on orders and 1% on net sales.

But that’s just Compressor Controls, Metrix and ZETEC and that is completely around an unusual level of order activity at ZETEC for a variety of reasons that have nothing to do with energy markets.

Our operating profit margin in the quarter, you can see, is up 450 Bps, 27.4% and a substantial improvement over the year ago period.

You’ve got very favorable product mix which helped drive those phenomenal profit margins in the quarter in oil and gas control systems.

And it’s a good time to remind us that we’ve taken a very substantial cost structure piece out of our compressor control activity in Des Moines and in Russia.

So we no longer have the overhead costs that we used to have when we were servicing Russia with the percentage of sales that they generated.

We’re focusing instead on higher profitability power generation customers and we’re quite selective about who we sell to under what programs; that’s had a little bit of a dampening effect in terms of revenue but has substantially improved our profitability.

Now in ZETEC, we had two odd events.

One is the steam-generator revenue for the US Navy ship repair was very soft in the quarter because of ship schedules being adjusted due to the war.

So the level of ship activity that would be in port and getting service from us is down.

It has nothing to do with energy.

It’s just a short-term phenomenon.

Secondly, we had a good deal of activity in the first part of the year, more than we understood, from customers who were well aware that we were closing the various facilities – I think it’s seven in Seattle – and moving into a new facility for ZETEC which we were doing in the third quarter.

And so we think we actually had more inventory and going into the first half of the year which is – shame on us – for not being closer to that.

So we think that ZETEC will have a record year this year.

It will do quite well but will do less well in the second half of the year than it did in the first half of the year.

The great news for us is that the plant move is largely completed.

It’s going to substantially lower our cost structure in ZETEC and give us better inventory turns and better customer intimacy which will drive better margins in ZETEC which are already pretty good in 2006.

So I hope that clears up what happened with energy.

We’re sorry about the nature of it and it has caused us to think about maybe moving some of these pieces around so it can be a little more transparent for all of you.

If we look at the next slide, RF Technology, there we see Q3 orders were really spectacular, up $133 million in the quarter pretty much across the line.

Our ITS business which does a lot of the [queuing] theory work, has the biggest backlog in its history both in terms of multiple year contracts and shippable within 12 months.

The tolling business is doing very well and tag sales are up sharply.

Our proposal activity is at an all-time high in terms of the kind of bid work that happens.

You never know when decisions are made around that; but we’re at levels that we’ve never seen previously that bode well for 2006 and 2007.

Our freight matching business has continued to gain share and it’s added literally hundreds of customers this year with some new telemarketing strategies that have been put in place.

The key product introductions that we’ve talked about for awhile since we’ve owned TransCore were actually kicked off in the quarter.

Something called a core modem which creates a much superior customer solution for tracking trailers is now available and units will be shipping and we would expect that to begin in earnest in December with a very substantial effect in 2007.

And our Generation 2 Rail Tags, you may remember that there are two tags on every rail car in the Class I system, they’re going to be going through a new generation starting next year.

Some of the [prefs] would say that that will last for 5 to 7 years; some of the [prefs] would say that that’s going to be expedited and that will happen over a three-year period.

There are hundreds of thousands of tag opportunities for us there at price points that are very meaningful.

The cost structure improvements that we’ve had since we’ve owned TransCore have continued.

You can see the margin improvement in the third quarter which is really quite substantial.

And, of course, on an EBITDA basis it’s much in line with what we thought; but on a GAAP EPS basis we’re doing better than expected.

And Inovonics is again, 1) a very substantial national retail chain contract that will be rolling out this quarter that’s going to cover 2,600 stores throughout the US, so I think they’re just as excited as all the rest of our people.

Next slide.

If we look at imaging, Chris and I were joking that maybe on this slide we’d just put “Orders up 40%, Sales up 27%.” The next bullet point could be “Orders up 40%, Sales up 27%.” And then we do the old Stewart trick and we’d say “Refer to Slide .1” on any other questions.

Operating profit here is up 80 Bps to 18.8%.

The new product acceptance, particularly out of the Princeton Instruments family of products and some of the things that Tom is doing in Photometrics are driving internal growth.

Sales force synergies that we have is we really moved to kind of segregate this thing into two broad platforms of spectroscopy platform and a microscopy platform; we’re getting us better channel reach and better coverage with customers.

We’ve won some contracts that are very important in the life science OEM area.

These are contracts that are hard to achieve and once you’re in they tend to be sustaining for quite awhile.

And then in the hand-held instrument business DAP we had a very strong quarter.

We’ve just come off the 2006 planning cycle review with them and we think there’s a lot of opportunity and they are really capturing a good deal of that.

As we think of applications that are beyond the utility industry, they are gaining a wide-spread market acceptance.

So they are no longer dependent on Neptune as a primary source of hand-held computer technology.

And then CIVCO was in to the quarter for the first time for the entire quarter.

They are off to the start that we expected they’ve had and Charles Klasson and Dave Schultz and others that are working with us out there have been able to develop a lot of adjacent opportunities in the space just exactly as we thought and we have a lot of open discussions that we think will lead to synergistic opportunities for CIVCO in the near-term.

Next slide.

If we look here at Industrial Technology we point out a couple of these businesses.

AMOT-- Those of you who’ve followed the Company for a long time know it’s very much driven by energy opportunities and Roper Pump has a large piece of that business that’s associated with energy.

The overall segment was up 9% in orders and 9% in sales.

That was driven somewhat by those two sorties into the energy market but all the rest of the business was up pretty much similarly to that.

Operating margins improved 70 Bps to 23% pre-tax and that’s despite our European vacation shut-down period that affects some of these businesses and Neptune’s summer shut-down; so that performance is really quite stellar.

Neptune’s automated meter reading continues to grow substantially and as we get more and more of that it’s helping the mix of profitability within Neptune which, in turn, as the largest piece of the segment is helping our margin.

We’ve had continued strength in the quarter in the water and general and industrial markets.

We’ve talked about both the AMOT and Roper Pump benefiting from the energy end market demand.

And lastly, Cornell which we’ve put new leadership into about this time last year, has had some sales which really don’t produce a lot of revenue from the old regime which included freight pass-through charges and material bought from others that we think will kind of come to an end this quarter.

So the quality earnings at Cornell we think will continue to accelerate even though the apparent sales number may not; but the underlying core business is back to growth mode today.

Next slide.

On instrumentation, here you see orders up 6%, net sales up 5%.

We got very good leverage out of the nominal increase in sales.

Margins improved 420 Bps to 22.4%; very strong energy markets for both PAC and Antek.

These are businesses you may remember that deal directly with refineries and after-market measurement.

ACTON has been integrated at a pretty fast clip with Princeton Instruments.

We have one guy, Gene Yazbak running both ACTON and Princeton.

That’s given us a broader scale approach to markets and ACTON really - as we look at the 2006 planning - what we can see in instrumentation is the ACTON IDI piece really is quite directly related to imaging now.

The PAC and Antek pieces really are directly related to the energy segment and Struers, Logitech and Uson are increasingly related to the industrial segment.

So we’ll give some hard thinking to that as we look at how we segment report in 2006.

Next slide.

If you look at our guidance for the year, you can see we increased the operating cash flow guidance.

It was $225 million and we’ve raised that to $240 million.

And you can see the year-on-year progression in 2003 our operating cash flow was $98 million; last year $165 and this year we think we’ll exceed $240 million.

EBITDA should be in excess of $325 million.

You may know whenever we report EBITDA we have to provide a table.

It’s quite complicated; but we’re comfortable that EBITDA will be in excess of 325.

Our net earnings - $101 million last year, up 41% this year at $142 million or more.

The 142 represents the low-end of our guidance.

Next slide.

As we think about closing out the year, you’ll see our full year DEPS at $1.64 to $1.70, from a math basis I think that leaves us with a fourth quarter of 46 to 52.

The favorable impact we expect from repatriating foreign earnings under this special Act that’s available to the Company, we think will actually have a positive effect on earnings because of the conservative nature of the way we’ve accounted for that tax historically versus what some other companies have done when they’ve had to take charges to repatriate the money.

Unfortunately, it will be offset a little bit by about a $2.6 million after-tax non-cash write-off of the convertible notes.

When we issued those the expense of the issuance was amortized over the five-year period that those notes are in existence.

As the Roper share prices continued to escalate, you took the share price issuance and added 32.5% and then another 20% to it and then that would trigger the callable provision of that convertible note which it did in the third quarter.

We don’t expect that anybody would have a reason to call the notes or want to call the notes; but two things occurred.

We had to move the $230 million principal amount of that into current debt on the balance sheet and we have to recognize the unamortized portion of that as an expense even though there’s no cash involved.

Generally, we expect that between the repatriation being positive and this amortization change, we still should come out net positive for those things so that we could still achieve our DEPS guidance at $1.64 to $1.70.

We do expect in the fourth quarter, stronger sales in our energy businesses and at Struers and TransCore and we think those will offset the always risky fourth quarter for Neptune which is a seasonality driven situation.

If winter is really light, then it doesn’t affect them very much.

If you have an early winter and, in the north the ground freezes, you have less metering installation and it can have chilling effect on Neptune.

But, in any effect, we’ll have a record year with outstanding performance.

Next slide, as we start to think about 2006 and we’re about 2/3 of the way through our planning with our businesses, there’s some things we know will be in place.

In the radio frequency area, our expanding applications with the patented technology we have are going to give us leadership experiences in a wide variety of markets that we think will drive growth there.

We’ve said before we thought we ought to grow that business at 5 to 10% and certainly nothing that we see would suggest we can’t do at least that well.

In the water area with Neptune, we think their leadership position around automated meter reading continues to grow.

We don’t see any reason that we’re going to back off in any way from the growth in the automated meter reading and we think that the underlying water meter market continues to be pretty strong.

We always suggested that if you modeled that at 4 to 8%, we think that continues at least at those levels.

In the research area around imaging, operating improvements that you can see starting to come to fruition here in the third quarter, we think will continue and expand in the fourth quarter along with a much better customer market focus around channels.

It means a stronger year in ’06 for imaging than they’ve had recently.

In the medical area, we know CIVCO gives us a great new patient-care platform that allows a lot of tuck-in acquisitions to be made.

And based on the work we’ve done already, we’re pretty confident that we’re going to latch onto some things that will be quite meaningful for CIVCO.

In the energy arena, we see general demand creation not softening in any way around our after-market stuff.

Remember it’s mostly driven by regulatory compliance or productivity and certainly there’s no reason to think that that’s going to back up in any way.

In terms of existing businesses, the ones that are a little more directly associated with typical industrial activity, they may be GDP type growers next year; but in any event, they’ll throw off a lot of cash that we think we can use for acquisitions.

So we think going into 2006 that we’re the best positioned we’ve been in the last five years.

Next slide.

In terms of a summary of where we are, our acquisition integration is certainly ahead of schedule.

Our operating focus is driving leverage both from a pre-tax EBIT margin basis and an EBITDA basis.

Our EBITDA nominal dollars are up substantially and our ratios continue to improve.

Our cash flow and our DEPS guidance were increased in the fourth quarter for the full year.

We’ve got a very active deal pipeline.

We think the opportunities we have are very exciting things for us and things that are easily integrated and managed.

And we’re positioned for growth in 2006 and not really dependent on these cyclical drivers that I think a lot of other people are faced with and as we finish our planning process and enter next year, we’ll provide guidance around ’06; but we certainly enter from a position of strength.

And with that, we’ll open it up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We’ll go first to Wendy Caplan with Wachovia Securities.

Some order and backlog questions.

You achieved record orders in the quarter, was there anything unusually large or extremely profitable in that mix of orders?

We have one very substantial order for TransCore around a win in the ITS area.

We had a conference call with the TransCore folks yesterday morning and we have this sort of awkward situation and I don’t know how we get through it ever in that we know about what we won and we can’t really talk about it until the municipal authority chooses to talk about it.

So we can’t tell you where it is; but there was at least a $20 million piece of the 133 bookings level in Q3 that was a substantial situation that will have some long-term benefit and that’s somewhere in the Midwest.

Okay.

And that backlog, can you address the margin in the RF backlog versus the margin that was posted in the quarter?

I would say generally that what happens is the-- I think the Q3 margins are reflective of the improvements we’ve made - and really the TransCore people have made on our behalf, but with our help – around efficiency and reduction.

So we’re getting everything we expected out of EBITDA performance on maybe a little lower sales than they thought they’d have.

We’re pretty tough on looking at what it is we need to do with customers.

They tend to have low margin initial bid work to win contracts and then their customer service over time results in a lot of pull-through sales and activity; those tend to be at higher margins.

So you’d almost have to look at the one or two-year performance criteria around the contracts they win to get a blended value of backlog.

But I can say that we look at all of the proposals and we look at the projected win rates and there’s no deterioration in either their historical or current levels around the work they’re getting.

And we’ll go next to Alex Blanton with Ingalls Snyder.

On the TransCore margins, they were 16.2% in the quarter versus 12.6% in the second quarter.

That’s a big improvement.

Could you just elaborate on that?

And, also, how sustainable is that and how high can they go?

I mean, there’s still a ways from the 20% or better margins that you typically get?

Two things there.

One, some of it we’ll take credit for.

Some of it is that the inventory step-up that we were faced with in the first and second quartet at TransCore is gone.

So we didn’t have any of that in the third quarter which helped the margins a little bit.

Secondly, the tag sales were better and the tag sales generally come at substantially higher margins, so I think we’ll always have quarter-to-quarter mixed variances; but most importantly, TransCore has done a pretty good job in lowering its overhead.

One of the things that they’ve done a good job in thinking about is, “So what really are the different product line categories we have, and what’s the cost structure associated with those, and how do we allocate costs from overhead, and what do we really need to have at the overhead level?” And TransCore has taken out quite a few people during the course of the year and so as we get longer into the year we’re seeing some payback from that.

So I think the margins we have at TransCore, I think, similar to what Mr. Worthington would think are not going to be backing down any time soon.

Are you looking at ABC costing there and getting rid of businesses that don’t measure up in terms of profit?

Or what are you saying?

No.

It’s not that.

It’s that generally they’ve always looked at gross margin from businesses and if you look at gross margin and you don’t look at allocated overhead, sometimes you’re not as careful about the net effect on a seed to flower basis of what you’re doing and we’ve tried to push them to be a little more aggressive in looking at that and I think they’ve done a great job in achieving it.

So they’ve taken out overhead that, frankly, wasn’t necessarily required for the level of activity that they had because it’s clear exactly which lines are making what money.

Is there any leverage there?

Can you get to 20% or intrinsically are we looking at margins staying in the current range?

You have to look at return on investments as well as margins.

Maybe it’s really good?

There is an opportunity for that and what happens is that if the mix trends to project work initially, then that’s not going to carry 20% margins with it.

But it also doesn’t carry much in the way of assets.

When the mix gets more to the product side of what we do, then the margins improve substantially and we’ve got a lot of capacity in Albuquerque to crank through whatever customers need.

So we definitely get incremental leverage from a dollar that’s coming out of any of the product areas.

On the service areas, it’s harder to get incremental leverage on the dollar so that’s more about the cost structures that support it.

I think what will continue to happen with TransCore is we’ll get more and more product revenue from new applications and new markets and so over time I think you’ll see continuously improving margins.

The second question on the acquisition front, you said you only made two acquisitions.

Is that literally true, or have you made some so-called “tuck-in” acquisitions?

We did a really small thing called Optical Insights which will be disclosed that we did in Q2; but no, we pretty much, Alex, we disclose everything we do as opposed to saying, “Well, there were these eight things; each of which was $8 million.” No.

We would always disclose anything of any size.

And one more thing, I noticed a comment in the press release said that you earned 40% on every incremental internal growth seller.

That’s quite astounding.

We see that as continuously available to us, frankly; because all of our businesses are measured on a break-even basis and the variable contribution margin and you always pick up a little bit in material efficiency and a little bit in direct labor efficiency and you pick up a whole lot on manufacturing overhead and a little bit on SG&A.

So getting 30 to 40 or more percent on an incremental dollar is expected of our people and they deliver it routinely.

And we’ll go next to Michael Schneider with Robert W. Baird.

Maybe we can first talk about CIVCO and TransCore and what growth you actually experience year-over-year in those businesses.

We can’t see the comps, obviously, pre-the-acquisition.

Just wondering what those businesses are growing at?

In the case of CIVCO and really with all the businesses, we’re obviously reticent to get into business unit data sharing, but in the case of CIVCO, we represented the debt to business at sort of high single-digit and basically low double-digit growth prospects in front of it and I don’t think we want to back off of that commitment that we made or the comments that we made on that at the time of acquisition.

And, obviously, we’re always going to be looking at that on a year-to-year basis and you’ll have quarters that might fluctuate a little bit but we stand by that commitment.

In the case of TransCore, we represented that the business is going to grow over the cycle in sort of 5 to 10%.

It does have some particular projects that if they materialize could drive the growth rate even higher.

We talk a lot about the electronic vehicle compliance which leverages the leadership and the tags for tolling into new applications and so if those come about, we could end up with growth rates that, in fact, exceeds the 5 to 10% range; but we’re very comfortable with this being in a 5 to 10% growth over the cycle.

Let’s debate the 5 to 10% target; because if you look at orders year-to-date are running at 317 million.

So that’s a nine month number.

Last year, total sales were 340.

The annualized year-to-date sales which should smooth - I’m sorry, year-to-date orders – which should smooth some of the lumpiness, you’re talking about 17% growth in orders versus sales over last year.

Is that the type of run rate you’re expecting at least near-term given some of the big project wins, high-teens growth?

We’d be happy with that; but no.

We’re not expecting that.

I think you-- just like the quarter for Radio Frequency was terrific at 133 million compared to what it would normally look at.

The bookings that we report are bookings that are shippable within a 12 month period on a rolling basis.

And so you’ll have some periods where maybe you have a larger order that you hope to get and it slips into a preceding quarter and then if you normalized what you’ve seen at a year-to-date period sometimes it will look great; other times a little weaker.

And then you’ve got to make sure that in that math you did you included in Inovonics in the base.

True.

I’m treating the two of them together; but, again--

But, again, if you give pro forma, then you’ve got to give some credit to Inovonics in your base number.

Even if I back off somewhat for Inovonics, orders today suggest strong double-digit growth--

There is no question that orders are very strong and backlog is very strong.

No question about that.

I think what Chris is trying to say that, “Look, we think 5 to 10% growth over the cycle is right.” And maybe it will be better than that; but that’s what we expect of ourselves.

It’s what we model internally.

It’s what we plan for but we’re pretty nimble and if the order opportunities are there, we’re prepared to sell more.

Just a final point on this, you also mentioned that quotation activity is as strong as ever.

Is it a case where there is similar quarters with 100-plus million in orders coming?

We never know the answer to that.

We do have inside the proposal a category - we would put some algebra around that - for a likely percentage of wins and then likely percentage of length of contracts.

Are they going to be three-year agreements, five-year agreements and the like.

Then at the current time, their proposal activity is at an all-time record but includes a couple of very substantial jobs and it’s not clear to us when the decision is going to be made around those.

If we were to get those jobs in our order rate, we’d hike up our expectation for work rate.

And then just on the issues at energy and the Navy orders being shifted out, I guess I’m curious when you would expect those to ship based on the new ship schedules if it is, indeed--?

It’s service work.

It’s when they are in port we go in and do a lot of testing and they’re not in port.

So it’s not product that’s going to be shipped to some place.

It’s ZETEC going in and using the [eddy] current testing technology to see what’s happening on board.

I guess poor use of terms.

I’m talking when the units themselves or the boats themselves are in dock, when would you expect that service work to occur now if it didn’t occur in the third quarter?

We have no idea.

So it’s just a case where the boats weren’t in dock when you expected them to be?

It’s not--?

Yes.

We would have expected in excess of a million dollars of activity in the quarter that we didn’t get there.

And we’re not carping about it; it’s just that it’s not-- It has nothing to do with energy.

Okay.

And then on ZETEC, I guess I’m still just somewhat confused, Brian, on the impact of moving or consolidating seven facilities in Washington.

Is it just a case where it was disruptive during the quarter and--?

No.

It really wasn’t, Mike.

I think what happened to us is that more activity pulled forward into the first half of the year than any of us realized because we felt the business was-- It is doing very well.

And I think customers were probably a little smarter than we were about their behavior; because everybody knew what we were doing and you can’t sort of stock up much on inventory in ZETEC but you can, certainly, buy probes for consumption.

And also in Asia we have substantial new-- a customer in the last couple of years in Korea and they did more work in the first half of the year and appear to be doing less work in the second half of the year.

And then couple that with the management team out there’s been trying to get that business to be, “Wow” in the first and third quarter and then frustrating in the, say second and fourth or whatever, so we’ve been pushing them hard to normalize things and I think they’ve been trying to do that.

And then they just got caught up in some situations here in Q3 where they had soft orders.

And then final question just on the imaging segment.

First, congratulations on turning the corner there substantially.

Orders, if I back out zip code, looked like they were still up 21%; so the core business is doing extremely well.

Chris, do you happen to have the organic growth rate for imaging and sales?

Yes.

I think we would characterize the organic sales growth as being in the sort of high single-digit, low double-digit range and on the order side being in the high double-digit range not far from the number you threw out, Mike.

And our next question comes from Curt Woodworth with JP Morgan.

I just want to talk a little bit more about the energy segment.

Brian, you mentioned in your prepared remarks that you referred to that as an after-market business and I just want to help understand of this 18% exposure, how much of it is true after-market versus more discretionary.

We seem to be in the midst of a multi-year up-cycle here and spending for energy.

Can you just give us a kind of broad view of the sustainability of these trends and what you’re seeing in the market?

If you look at the Company’s energy exposure, it is mostly after-market and I think what we mean by that is it’s not contingent on new capacity being built into the system; whether it’s refineries or additional trains for L&G plants or petrochemical facilities, etc.

It’s really based on serving existing customers with either solutions that help them save energy improved through-put or to better analyze the content of the fuels that are moving through the plant or through a pipeline, etc.

And so largely what we’re servicing in that area through our PAC and Antek business through pressure controls, through Metrix and AMOT and Roper Pump, etc., those are primarily after-market application.

And then in terms of the RF segment, you talked about record high bidding activity.

Could you provide any more color on what the opportunities are?

Are there any leap-frog new technologies you’re looking at either in vehicle compliance, open-road tolling or is it more of the same kind of ETC type business?

I’m sorry, Curt.

The nature of your question is the application of the technology into new--?

The composition of the bidding activity in terms of the opportunities you are seeing in the market.

Can you talk about, is it open-road tolling applications, vehicle compliance?

It’s primarily in the Company’s tolling operations which include some elements of open-road tolling.

And it also is the Intelligent Traffic Systems, ITS business.

So in other words, I would characterize it, it’s more of the same and then where I would push back on that is it does include the Company’s new [Super Ego] Tags which have only recently hit the market and are now expanding.

There was a major announcement of the Texas Department of Transportation adopting the Super Ego Tags as its standard and so that is something that is new.

So when we first--

You might mention the core motive and explain why that would drive through.

Yes.

The core mode essentially is the next advanced technology for satellite communication and in essence it enables you to take a much smaller foot print device that requires much less battery and can communicate much more accurately and place that on, for example, trailers so that the location of the trailer can be tracked quickly and accurately and, frankly, at a very competitive cost for customers; so this is a very compelling cost benefit relationship there.

And these are all really extensions and continuations of what TransCore’s been all about; but continuously pushing for new applications or into new technologies.

So I guess we’d say more of the same but more of the same means these continual advances and continuous improvement.

We will go now to Robert McCarthy with CIVC World Markets.

Just a couple questions.

Obviously, Brian, you’ve kind of hammered into our heads that you guys have a great collection of non-cyclical businesses here and you won’t have to worry about any kind of cyclical overturn; but I just want to kind of breakdown into what do you think was the effect of the hurricanes in the quarter for you because you do have some after-market exposure there.

There is some slow business there for you.

I don’t know how we can quantify that, Rob.

But I do think that there was a little bit of effect in-- it seemed to us there’s a little bit of effect in the instrumentation side of things we do with refineries.

We don’t really know if the large guys, if you go to ExxonMobil and BP and what have you, I certainly don’t think they put a freeze on but I do think everybody has had to look at other things than what their normal activity would be while they’re getting everything up and I think that produced a little bit of slowness in orders; but not anything that’s long-lived and we expect strong fourth quarter; so I don’t think there’s much.

We actually probably would have shipped a little more in the quarter, but we have several businesses in Houston, Petroleum Analyzer and Antek and Uson and those businesses were hurt because the normal supply chain of delivery into the facility – it occurred in the last week of the quarter – hurt us a little bit.

But we were blessed to not really have a problem.

We used to own a business called [Pepper Jack] that was in New Orleans.

So that was spun off a couple of years ago and we’ve actually tried to help them and let those guys relocate and work out of our Uson office in Houston to make up what, for them, has been a devastating problem.

So you would almost characterize the hurricane situation as a neutral to negative effect on shipments and revenues as opposed to any kind of positive effect on the quarter?

It didn’t have a positive effect.

It was too late in the quarter to really have an effect on anybody, honestly.

I think it might have slowed incoming order rates because people that are normally doing that kind of stuff are dedicated to other things.

And what you’re saying is you have more long-cyclical businesses and really any kind of benefit people got was probably from more emergency-type activity which you’re really not leveraged for?

Well, we probably benefited a little bit and we’ll continue to benefit a little bit.

Cornell makes some wastewater pumps that go in conjunction with other people’s activity that could go on platforms for pumping.

And there’s a little bit of that that probably helped us a tad in the third quarter; will help us a little more in the fourth quarter.

But none of it’s material in terms of the overall Company effect.

And then switching to RFID, is there any way we could get some sense of what the historical backlog was for third quarter of ’04?

Are you going to comment on that?

I don’t think we’re really going to talk about it.

One thing we don’t like to do is to put the backlog numbers out because people, for most of them backlog is not a great measurement; but most the businesses come into a situation where they got to book and ship at least half the business in the quarter.

What happens with TransCore is they do have these longer term contracts; but we only allow for the measurement of backlog and orders to be things that are shippable within 12 months.

Gosh, if we looked at their total backlog, their total backlog would exceed a year’s sales.

We will now go to Scott Brown with Bear Stearns.

Just a couple of questions for you.

One easy one and one a little tougher one.

The Scientific Industrial Imaging business as Michael pointed out, looks like it’s turned the corner.

Admittedly, a couple of easy comps on sales and margins; but, hey, up is up.

And in that business I think we’ll take that.

I guess my question is, Brian, what would you point to specifically that might give us the confidence that that is a sustainable trend?

I think the two biggest things are really a lot of new product launches in first quarter of this year and the second quarter of this year.

Faster time to market activity out of product development in general because of a strong focus around that.

Thirdly, better reach to end use customers instead of relying on intermediaries to create demand for product.

And then really taking our – what were independent businesses at Princeton Instruments and Acton and Redlake – and creating and consolidated sales team with some strong sales effectiveness tools put in place to drive demand.

And over on the microscopy side taking the Photometrics business and the QImaging business and more consolidating those into one microscopy business and driving it also into the higher technology applications that’s at hand; those things which are leadership stuff, sort of product management things in a time to turn around new products.

A lot of our products there can cycle through in a year and one-half, some even less.

So all those things go together to give us better belief about long-term sales growth.

Regarding the energy questions, acknowledging of course that ZETEC was a bit of a problem child this quarter, I guess I’m wondering if ZETEC’s exposure to the Marine and ships, I just guess I wouldn’t have expected it combined with maybe some lumpiness in the orders to have had the impact on this segment’s growth which has been phenomenal in the 20 to 30% range to flatten that out all in one quarter because I also want to point out that on the instrumentation side, which is also heavily skewed toward petroleum, the growth in that business looked like it was more muted as well.

Maybe you can marry these two?

Maybe they shouldn’t be married?

Maybe you could shed a little bit more light on why some of your energy businesses – more than just ZETEC – were not performing as, I guess, the markets would have suggested that they would have.

It would be hard for us to say that there is non-performance when we look at energy segment that did over 27% EBITDA.

We have a strong focus around that around customer profitability; and we love all our customers but we prefer to sell to ones who will pay the value proposition we create for them.

So looking at top line sales growth from people who focus only on revenue generation and not on margin and profitability of customers, won’t get a high return to shareholders.

So that’s fact one.

Fact two, I think we said all those businesses that are related directly to refinery activity, particularly in the after-market, those become very secondary in the short-term while all of the resources are marshaled by those big people on things that are much more important in the short-term and that will cycle back so that you’ll have normal through-put.

We expect, as we said before, strong Q4 sequential improvement over Q3 out of those energy businesses.

So I think that will kind of demonstrate that that was probably a phenomenon.

And then lastly, ZETEC will do better in the fourth quarter than it did in the third which will drive a little bit of revenue for us in Q4.

So I think that instrumentation just has PAC and Antek in it, that’s not the biggest piece of instrumentation.

The biggest piece of instrumentation is Struers and USON and Logitech.

We will go now to Darryl Pardi with Merrill Lynch

Brian, just so I’m clear-- so when you get a multi-year service contract at TransCore, the orders that you report just reflect the next 12 months from that contract?

Absolutely.

So the majority of the $20 million ITS or--

All of that shippable within 12 months.

The actual commitment is larger than that but we’ll only treat the booking as the portion that is shippable in that 12 months and, of course, we have to do that for lots of reasons.

Sometimes, though, then people will pull stuff forward not through any pushing we do and then that can give you a faster order recognition.

And most of that $20 million relates to the inflation and [inaudible] of the system as opposed to-- because you presumably won’t be generating revenues off of it for some time.

Darryl, you cut out-- It related to what?

I’m sorry.

The installation and the set-up of the systems?

As opposed to--

Well, that’s generally true.

There is more dollars collected at the beginning around the design and the installation and then later you get the through-put dollars of the tags and service revenue and maybe expansion or changes of lanes covered.

That’s true.

This contract that we’ve won isn’t different than any other agreement.

I haven’t looked at the detail to see how much is cards and readers and how much is design and essentially product versus service; that I don’t really know off the top of my head.

The Inovonics order, retailing order?

Was that incremental or is that a new customer--?

Yes.

That was brand new.

New customer, brand new and it’s teamed up with another publicly traded, large supplier of things which bodes well for us in the future.

You’ve added some significant-- You’ve added new people to the corporate office and some new positions.

The corporate expenses have grown actually a little faster than sales year-to-date.

What resource do you think you’ll need to devote over the next few years to the Corporate office as you continue to grow Roper?

I think you’ll see that the Corporate expense as a function of sales won’t increase.

And I think you’ll see nominal dollars won’t be as high in perpetuity.

It’s an awful lot of Sarb-Ox expense.

Probably the biggest surprise of the year for us is how much continuing expense we have to incur with a lot of NIT activity per out of station around Sarbanes-Oxley; and remember that in this year we have to take TransCore completely through Sarb-Ox which is quite expensive and we didn’t have it in last year’s base line number.

And pretty much everything in TransCore is a tier I level of activity so we are spending a lot of money on Sarbanes-Oxley; could be at least $4 million this year that we’re likely to shell out.

We’ve beefed up-- We’ve got a terrific leader of audit and we’ve tried to beef up his staff to do more internal work.

It’s not the Corporate number of employees that has any impact on any of this.

Believe me.

All of us here would like to double our cost burden on the enterprise, but we’re a big form of leverage.

There’s less than 30 of us and we’re a rounding error on the income statement.

Our next question comes from Matt Summerville with Keybanc.

Couple of questions on Neptune.

Can you talk about when you bought the business what your market share was on the AMR side of things and then the actual metering side of things and where you think it is today?

We gained share in the commercial water meter market.

We gained share in the residential water meter market by a couple points and then we’ve gained substantial share in the automated meter reading market; but I’ll let Chris take a swag at the number.

Sure.

Matt, on the meter side, the very stable competitive base there with three principal players controlling the majority of the market and they tend to trade market share like Coke and Pepsi.

I think in the latest analysis for 2004, our business having gained a point or two so they’re in the mid to high-30s in terms of the market share on the residential side.

On the commercial side, I don’t have the data here in front of me; but in 2004, we also gained a little bit of shares.

It was a good year.

In the case of AMR, that’s been a steady progression since Neptune entered the market in the late 90s and since we bought the business it’s continued to progress from the low-teens market share into around 20% in 2004.

And that’s a steady track.

What we represent to investors is we see a natural progression just giving you [inaudible] from meter side being in the mid to high-30s and that there ought to be a natural matching of the AMR market share up against that.

So we continue to see opportunity to grow the market share in AMR.

Can you also, then, talk about a follow-up question?

What the relative mix of business looks like between metering and AMR for Neptune today?

AMR has grown faster than metering.

It’s becoming an ever greater portion of the business and with the higher profitability that’s a good dynamic change to have.

And at this point, we may have as much as half the business being related to the AMR business or AMR activity and encoders.

Right.

And then lastly just on Neptune, you talked about some wins you had with your RF business.

Were there any new big wins to report here?

Any major activities that you can talk about in the third quarter?

There’s a lot of smaller projects that we get every quarter that are typically 30 or 50,000 points or less.

So no major projects to announce but lots of good small to medium-sized projects which is really the bread and butter of the industry; an industry that has 50,000 customers you’d expect most projects to be small to mid-size customers and that’s where Neptune does the lion’s share of its work.

And then one last question.

Brian, as we start to look out to the fourth quarter, obviously a very tough organic revenue growth comparisons on most of your business; how do you feel about--?

Or how should we view a realistic organic growth rate for [inaudible] Q4 given the head wind you have off the base business from last year?

I think sort of an unknown for us is that you have to go back a little bit in history and remember that it used to be a fiscal year-end company on October 31st and we changed that to a calendar year-end company because we felt that we would get excess sort of MRO budget money available for a lot of businesses if we put our people in concert with their customers - year-end close on 12/31.

And last year our people went into the quarter with pretty conservative forecasts and performed incredibly in Q4.

And we’re seeing the same level of conservative projections internally from the guys.

This will be the second year.

I’ve never worked anywhere-- Whenever the year-end quarter is – whether it’s June or August or December – mystically it always seems to produce pretty favorable results.

Our guys would collectively are not showing us a lot of organic growth in the fourth quarter and our projections in here don’t include a lot of organic growth.

Our year-to-date organic growth is probably between 8 and 10%.

It’s certainly over 8.

You would not think you could sustain that in Q4; but you would think you-- You used to say we thought we could grow at about 1½ to 2 times GDP and I think our ’06 projections will be at least that high.

And our full year performance for this year will be at least that high.

But I think raising expectations around Q4 revenue wouldn’t be prudent.

We’ll go now to David Smith with Citigroup.

One thing that is kind of sticking out in terms of the organic growth in the quarter, you put up 7% organic growth but last quarter you put up 15% organic order growth.

Just wondering if you would maybe circle back?

Was there any storm impact or is some of that pushing into the fourth quarter?

Just how should we view that metric?

Well, I think Q2 was incredibly high.

So I don’t think we ever felt that the Company was a double digit organic growth machine.

If you looked at Q2 and Q3 together, it would be a 22% divided by 2 would be 11.

With year-to-dates running between 8 and 9, I think.

And as Matt pointed out, Q4 will be a tough comp for Roper because of just spectacular prior year baseline data.

If there is some slowness that related to the hurricane and stuff, you guys may be hearing that from other people more than we do.

We’re not hearing it a lot but there certainly are businesses that are related to that that haven’t driven internal growth as much as they were in the immediate past.

So maybe we are conservative on that and we’ll get a little better internal growth than the guys are forecasting.

I really don’t know.

I’m looking, Brian, at the 15% organic growth in orders through in the 2nd quarter.

Wouldn’t that reasonably translate into something stronger this quarter?

In terms of sales?

Yes.

No.

Not necessarily, because remember those orders would be anything that is good for the next 12 months; so you’d have to look at how that created backlog that was shippable within three months and shippable within six and shippable within 12.

So I do think maybe one dynamic as we have some different businesses than we used to have is that you could have orders with longer order fulfillment associated with them.

It used to be about 50% of what the orders were would get booked and shipped within a month, or within the quarter.

And you’d enter the quarter with probably half of known backlog.

I think, today, we’ve got longer lead times in the bigger pieces of the enterprise than we used to have.

Not that we can’t fulfill faster, but we get orders because they are more engineered content.

On the imaging business-- You talked a bit about that so far but can you maybe just delve into the orders on the industrial side and the scientific side?

Is there support to believe that the industrial side has turned?

Well, I actually give the imaging guys some credit around Redlake in that they’re trying to focus on markets that maybe have some better growth characteristics.

Historically, Redlake has been motion photography for the auto industry and there are many other applications for the motion cameras that we have at Redlake and by basically adopting the sales force at Princeton Instruments to drive some of that along with the existing Redlake guys, I think we have some better application opportunities for growth than we’ve enjoyed.

But the industrial side of imaging is still much more cyclical than the life science side of imaging and has more dependence on finding good OEMs for continuing ongoing business.

The part of imaging that still remains difficult is that you don’t have a lot of after market sales and customer service contracts and parts and pull-though activities; so you’re always looking for a new sale.

And while it’s performed well in the quarter and we think we’ve turned the quarter and it’s going to continue to perform pretty well, it’s still a tough business.

On TransCore, you talked last quarter about some international opportunities.

How is that moving along?

Well, it’s moving along.

We’re excited and disappointed at the pace of decision making outside of North America.

But our relationships with the people we are working with get stronger all the time and a good deal of the proposal activity that’s at record highs has to do with opportunities we see outside of North America.

And that’s good news; but no one is holding our breath for when we’re able to announce a major piece of activity outside the US.

But I think it will be sooner rather than later but it doesn’t appear it will be this week.

So the growth really that’s come in this quarter is coming in from North America?

Absolutely.

It’s all application driven opportunity for these things that we’ve said ever since we bought the business; that customer’s have so much pull-though opportunity for design engineering out of TransCore that they’re going to pull them forward into markets that they haven’t served as well as they are now.

And then a lot of [company] that talks about costs and materials resins and energy and all that.

Is there anything we should be aware of in this quarter or next?

That was a focus feature of our third quarter reviews about resins and chip costs; that primarily affects our RF people and Neptune people.

There’s quite a lot of engineered composites in the encoder business and we got Chuck and Hank out there working really hard to make up for any metal cost increases and the resin cost increases and now they’ve got the added burden of the energy cost increase for running the foundry operations; but thank goodness we’ve continued to make progress with vendors and productivity improvements there.

So we’re still ahead of the curve but there is some pressure on it.

But as you can see in the quarter, it certainly-- There was no negative material effect and the leverage got out incremental revenues more than offsetting the cost push inflation inside the material.

Just last thing.

Correct me if I’m wrong, but did you say a $2.6 million charge in the fourth quarter?

Yes.

And is that included in the guidance?

Yes.

Because we think it will be offset by the repatriated cash.

And that does conclude today’s question and answer session.

I would now like to turn the call back over to Chris Hix for any closing remarks.

We just want to thank investors for their attention to Roper Industries and for joining us on our call today.

Thank you very much.

And that does conclude today’s call.

We thank you for your participation.

You may disconnect at this time.