Roper Technologies Inc (ROP) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to the Roper Industries third quarter 2006 financial results conference call.

This call is being recorded.

At this time, I would like to turn the call over the Chief Financial Officer, Mr. John Humphrey, for opening remarks and introductions.

Please go ahead, sir.

Thank you, Cynthia, and thank you all for joining us this morning for the Roper Industries third quarter 2006 conference call.

Yesterday afternoon we issued a press release announcing record third quarter results.

You can find a copy of this press release and associated financial attachments in the news section of our website, roperind.com.

The press release includes replay information for this morning's call.

In addition, we have prepared slides to accompany this call, which are available through the webcast and on the website.

A link to the webcast and slides are available on the investor section of our website.

Now if you'll please turn to slide two, I'd like to cover our Safe Harbor statement and a reminder that today's call includes forward-looking statements which are subject to risk and uncertainty.

Please review this page and also refer to our SEC filings which indicate specific risks and uncertainties for Roper Industries.

And now if you'll please turn to slide three, I will turn the call over to Brian Jellison, Chairman and Chief Executive Officer.

After his prepared remarks we will take questions from our telephone participants.

Brian?

Thank you, John, and good morning everyone.

Well, once again the quarter resulted in record orders, sales, backlog earnings EBITDA and DEPS performance.

Our net earnings were up 30% to $51 million.

The diluted earnings per share of DEPS was $0.56 versus $0.45 in the year ago period.

However, it's $0.57 if you exclude the impact of the convertible notes.

We'll talk about that a little more later as we talk about our guidance and performance.

Our sales were up 17%, orders were up 7% and excluding the RF segment situation in the quarter, our orders were up 18%.

If you exclude acquisitions, the internal sales growth you can see we were up 11%, which included 1 point of benefit from foreign exchange.

Our EBITDA was $109 million in the quarter, and our EBITDA margins were up an additional 110 basis points to 25.4% of revenue.

Operating margins expanded in all four segments in the quarter and we'll cover those independently in a moment.

Our net working capital was reduced 110 basis points to 16.3% of annualized quarter three sales, which is substantially better than the year ago period, but still room for improvement.

In fact, we're going to talk a little bit about our cash flow performance and our expectations for the rest of the year, and some reasons why we've had a little bit of a slowness, particularly in our Compressor Control unit on receivables.

The guidance that we have will be increased for DEPS and for EBITDA and we'll cover that at the end of the discussion.

Next slide.

We've had once again substantial EBITDA growth.

You can see the year ago period was $89 million.

This quarter was $109 million, up $20 million.

If you look at our performance in the third quarter just two years ago, our trailing 12 months EBITDA was $157 million; last year $293 million, and this year $398 million.

So we continue to trek ahead on our EBITDA growth strategy.

Next page.

If we look at the third quarter performance to sort of put it in perspective, our net sales you can see were $427 million, up 17% from last year's $365 million, and just two years ago we were only $240 million.

Our operating income in the quarter grew to $88 million, up from $70 million last year, and $45 million two years ago.

And our net earnings were $51 million in the quarter, up from $39 million last year and $27 million two years ago.

Next slide.

We've had significant operating margin expansion and that's been going on for some time.

We probably haven't talked as much as we should about that.

Here you'll see a graph that shows our trailing 12-month operating margins starting in the third quarter of '05 and having consistent stair step increases in that margin as it continues to expand.

That's because we focused on higher margin growth platforms, particularly both the medical and life science imaging piece, the Radio Frequency piece, the Radio Frequency as it relates to automated meter reading and water, and some higher margins service and solution provision activities.

Our operating leverage, through the growth along with the execution disciplines from continuous improvement, are really driving this continuous margin gain.

In the third quarter, our gross margins reached 51.1%, up 50 Bps and our operating margins at the enterprise level were 20.5% which includes all the corporate costs.

If you excluded those the operating margins would have been 22.5%.

All this, as I said, is driven really by market growth and operational excellence.

It's sort of not an either or platform here.

If we look at the income statement here in the quarter, next slide, you'll see sales of $427 million, up 17%, as we said, organically that was up 11%, benefited one point by foreign exchange.

Our gross margin line, we particularly happy to be up the 50 basis points, given the sort of cost push pressure that other people are seeing on materials and what people are complaining about in pricing, which we feel is not affecting us much.

Our income from operations was up 25% to $88 million in the margin we discussed.

Interest was the same as in the prior quarter.

Our tax rate was the same as in the prior quarter, correspondingly of a year ago.

Net earnings, as we said, were up 30%.

The DEPS was $0.56.

If you exclude the CATs converts it was $0.57.

That includes eating the option and related equity expense in the quarter of $0.02, or 4%, if you added that back in you'd be up at 31%.

Next slide.

Our cash flow, last quarter we didn't really talk about our cash conversion and cash flow.

And it's probably time to sort of reinvent the reality around just what our intentions are and where we are.

If you look at the left-hand side of this slide we had said at the beginning of this year we thought we could produce operating cash flow about $277 million, and, perhaps, get as much as about $3 million in tax benefits with either NOLs or deferred tax to bring our operating cash flow in at $280 million.

Last year that was basically the number.

But the operating cash flow without tax benefits last year was $239 million.

What people may have forgotten was in the first three quarters last year our operating cash flow was 59% of that $239 million number, and in the fourth quarter last year we produced 41% of our total operating cash flow for the year.

So where we are today, we'd like to be a little better, but be don't see it as a fundamentally more difficult challenge to hit the $277 million operating cash flow number that we forecast at the beginning of the year.

It's a couple points higher in the fourth quarter but we expect our profit to be better and so forth.

There's one thing that we didn't cover when we established the $277 million at the beginning of the year and that is the windfall profit treatment on the option expense, which year-to-date is about $5 million for the full year ought to be $7 million.

That $7 million gets reported in a different place other than operating cash flow under GAAP in 2006 versus 2005.

So that adjusted $7 million would bring the $277 million down to $270 million, if guided operating cash flow performance for the year.

If you turn the page, we'll look at each of the segments.

In the energy systems, and control segment, we had sales up 16%, orders were up 12%.

If we exclude the AC controls acquisition, then the sales were up 11% and orders were up 8%.

The strength in the business really came from our petroleum analyzer business and from Zetec, which drove both the order and sales growth improvements in the business.

We also had strong performance from the oil and gas project side, at compressor controls, which partially offset the international pipeline sales decline that they still experience.

Zetec rebounded as we thought it would in the third quarter.

It had very strong order performance in this quarter as it did in the prior quarter and the steam generation delayed revenue came back strong in the quarter as we were up 70% in the steam generation side of the business from the second quarter.

And we expect pretty much a full recovery as the year gets completed.

We also launched a new product called MIZ-80 for Zetec which is doing very well and that's going to improve the sort of sales mix on a favorable basis from an operating profit basis.

Our operating margin in the group there was up 110 basis points year-over-year to 28.4%, but notably up from the sequential second quarter which was 25.1%.

A lot of that comes from cost reductions that we've driven around that pipeline business and the return to normalized performance out of Zetec.

At Compressor Controls, we continue to work through a working capital situation where historically most of their business was coming out of the pipeline activity, which would frequently be either prepaid or paid at the time of shipment, or letters of credit and things that didn't involve really receivables.

As the business has become a more normalized oil and gas business, we have more standardized receivables and we've been working this past week diligently with Paul Fisher and Tina to suggest we're going to have to find a better business model around collection and payment from customers, as our receivables in Compressor Controls are up over $10 million from the end of the year, which has created a drag that we expect to solve here in the fourth quarter.

Next slide.

The AC Controls business that was acquired in the third quarter was the fourth of our mid-year acquisitions and we weren't able to get that closed to announce prior to our second quarter conference call, so we had to just say we named the three, Lumenera, and IntelliTrans, and Sinmed and couldn't comment on the fourth, AC Controls.

This is a business that specializes in gas chromatographs, and it's a business that is somewhat different than our petroleum analyzer business which is where the two will go together.

Our PAC business is focused on fluids at refinery levels, whereas AC is focused on gas.

This is a business headquartered in Rotterdam and has a very large installed global base with a lot of recurring revenue, and we'll give them quite a bit of distribution synergy here in the United States.

These four acquisitions we mentioned last quarter, now completed with AC, should bring in excess of $70 million of revenue in '07 with double-digit growth in '07 and more than 20% EBITDA margins.

Next slide.

We turn our attention to scientific and industrial imaging.

Here you can see sales are up 27%, orders are up 26%, certainly led by the acquisitions we've made.

Gatan and Civco drove the internal sales and order growth, offsetting the softness in the industrial camera business.

If we exclude the acquisitions in Redlake's performance, you see internal sales would be up 9% and internal orders up a little over 8%.

The medical integration activity, which includes Sinmed and Medtec going into Civco, is actually tracking ahead of schedule.

We're getting a better global channel reach for products that all three businesses share, and creating a very different kind of profile as we talk to hospitals and clinics around the country was presenting ourselves with as one sort of Civco company with many solutions.

The operating margins in the segment expanded another 210 basis points in the quarter to 22.6%, largely driven by the better margins in the medical businesses and their growth rate which is at a much higher pace than the rest of imaging.

We're going to do some further consolidation at Redlake.

Most of that's been announced.

That business continues to struggle, although people do their best efforts.

The automotive side of the motion photography business is as difficult as ever.

As we go to the next slide, thank you, the Radio Frequency technology, here you'll see Inovonics, which is our wireless security provider, IntelliTrans, a new acquisition in the quarter that's based on logistics in the rail industry, and then TransCore split between sort of freight matching business and the tolling operations.

Our sales in the quarter were up 14%.

The internal growth was about 9%.

You really saw this quarter the lumpy nature of TransCore orders variability which are driven really by project wins and then follow-on project additions and change orders and product sales.

In the third quarter last year, we booked 33% of the total year orders.

So we had a very unusually difficult comp.

If you look at the segment this year, in the first half our orders are up 28% and sales are up 23% for the entire segment.

In the third quarter, orders were down 17%, while sales were up 14%.

We think for the full year our orders should be 12% or more and we expect the fourth quarter orders will be in excess of 30% increase over the corresponding lighter quarter in the fourth quarter last year where we only booked about $91 million in Q4.

We expect a significant international project award that we'll be able to announce in the near future.

This is something we've been working on for more than a year and-a-half and something that's been heavily [duked] out.

We're quite proud about the opportunity to get this award and hope to announce it as soon as possible.

Lastly, our operating margin improved 70 basis points over the third quarter of 2005 to 16.9%.

That was depressed partially because we had the expected IntelliTrans acquisition accounting and integration costs that had to be borne in the third quarter.

We think that will pop right back to this sort of 18% plus level for Radio Frequency going forward on an operating margin basis.

Next slide would be our industrial technology area.

The orders here are up 18%.

The sales are up 15%.

This one's pretty easy because they're all internal growth.

We've had the rapid adoption of Neptune's new Radio Frequency integrated automated meter reading water meters which are really drive the growth in the sector.

We've had a spectacular adoption rates in the third quarter and we're now at the point with Neptune where about two-thirds of Neptune sales are Radio Frequency enabled devices, technology and software, and you may remember when we initially acquired Neptune, that was well under 50% and most people didn't think you could possibly get it to 50/50.

Here we are today, really approaching 70% of total revenue and and that's accelerating our growth in the industrial technology segment because the AMR rate continues to grow, of course, at a much faster pace than the standardized water meter business will.

We also had very strong demand in our pump businesses, Roper, Cornell, and Abel, and in our material testing markets at Struers.

Those businesses continue to perform very well.

Operating margins were up 230 basis points in the quarter to 23.3%.

We had benefits really from growth in these higher margin product applications and also we've had cost reductions at Neptune which they've been able to put in place.

Primarily, we get the benefit of the faster growing electronics with the cost reduction that can be implied in those technologies that are helping us offset the higher cost of metal and copper that's existing in that product line.

The key Neptune wins in the quarter were unusual in terms of the number.

We picked up Chandler, Arizona and that's a very important thing that investors might like to look at because Chandler had competitive water meter products and competitive reading devices in their facility area and decided after a very lengthy and long look at a variety of things that they would select Neptune as the best provider of those kind of technologies.

We also won Raleigh, North Carolina.

We won the Florida Keys Aqueduct Authority and all this happened after our Q2 win in Atlanta.

These projects all will carry multi-year buildout situations for us.

We'll only book the orders for those that are shippable within a year and so that will have a long-term benefit to the segment.

Next slide, here we're looking at the AMR leadership role that Neptune's playing in the North American market.

The product that you see here is the new Radio Frequency integrated automated meter reading water meter where you have everything self-contained.

Those of you who follow this business know it was sort of disaggregated parts that had to be put together and installed and didn't have some features that we enjoy today where we can detect leaks, we can see if the meter's been tampered with, if people have tried to reverse the meter to get backflow so they avoid paying meter bills and so forth.

Also it reduces the installation cost, particularly in pit applications, and we guarantee the reading accuracy.

What's happening is we're getting a much faster shift over to this technology than anyone envisioned.

It is clearly superior and we thought perhaps you'd get just the early adopters.

But instead we're getting a much broader range of people making immediate move to this technology.

Next slide.

The financial position of the Company, if we compare where we were at the end of the year to where we are today, our net debt at the end of the third quarter was $815 million, even despite some principal repayment and the acquisitions we mentioned for about $94 million.

Our shareholders equity at $1.419 billion.

We add the two together, net debt to net cap you can see is 36.5%.

Our net debt to EBITDA now with a $398 million trailing number is only 2x, and our EBITDA-to-Interest coverage is already over 9x.

So certainly investment grade statistics and give us a lot of room and capability to do acquisitions in the immediate future.

Next slide, if we look at our acquisition process, whatever might be announced next, we'll continue to follow this criteria.

It will be a business that will have light gross assets.

It will be a business that has low CapEx requirements, usually 1%, 1.5%, never more than 2% of sales.

It will be immediately cash accretive.

It will be a business that we focused on market structure, done a lot of research around and think the driving forces to whatever company we acquire is going to be favorable.

We'll lock in management, we'll have continuity of management.

We'll link their incentives to the commitments they made to us at the time of purchase.

We'll have an agreement with them that we'll preserve the core values that have made them a great company, but they'll have to do certain things to stimulate progress do better.

And we will have have had enough time with them that they will know that the governance processes that we have around operational success and integration are a large part of why we've been able to integrate these transactions over the last five years successfully.

And certainly it will be a business that we think has good growth characteristics and [bolt] on opportunities.

So those are the things that we apply as we look at our standards.

Now if we look at the 2005 full year update, I'd like to pull your attention over to the left-hand side of the slide.

In the fourth quarter last year, we closed out the year and explained to people that our DEPS for the full year was $1.74 but really $1.70.

We had the benefit of repatriating the foreign earnings on the government opportunity that was unique to the prior year last year and that benefit us by about $6.6 million in the quarter.

And then we also had to write off the deferred financing cost for CATs because it had become in the money and GAAP requirement was to write the rest of the unamortized expense off.

So the net earnings benefit in the fourth quarter was $4 million, and really brought this sort of normalized profit level from $1.74 a share to $1.70 a share, and the net earnings in the fourth quarter last year on a regular basis would have been $46 million.

We've increased our guidance this year to $2.11 to $2.15, up from $2.05 to $2.11 that we posted at the end of the third quarter, but that guidance excludes the effect of the convertible notes for whatever they are, and we have a table in the appendix, I believe, John, right?

We do have a table?

Yes.

The table in the appendix that shows you the calculation difference between the standard diluted share count and the increased share count with the CATs program that will be with us until, I think, January of '09.

That gives us something that, we can never calibrate on guidance because we don't know what the share prices will be in a quarter, but so far this year it's been $0.01 in each of the first three quarters.

Now if you look at the guidance on EBITDA on operating cash flow and net earnings in total, you'll see that we're suggesting we would make at least $188 million of net earnings for the full year.

We still would look at $270 million of operating cash flow for the year, exclusive of the tax benefits, and that gives you the conversion that's more appropriate to what you should expect from us in terms of $270 million over the $188 million being well in excess of 140%.

And then you see the EBITDA which we've increased to $413 million.

So the EBITDA of $413 million over last year's $335 million.

Next slide.

If we look here then at the summary, we think the operational execution and customer value creation that our business units provide has really kept us from dealing with this cost push inflation problem and margin pressures that we've heard so many other industrial companies talking about.

Our segments all improved their operating margins.

Quarter 3 was 20.5% and EBITDA at 25.4%.

Our markets remain strong in all of our key served areas.

We've seen very few signs of weakness in any of our businesses.

Backlog levels reached an all time record at the end of the quarter at $431 million, and why we don't disclose backlog by segment, certainly the RF segment represented the biggest portion of that backlog.

We raised our guidance because we felt the order growth and the backlog we have could sustain our performance at that level.

The recent acquisitions we've made mid-year are all off to a good start.

They will all be accretive in 2007.

We get very little out of them in 2006 because of the acquisition accounting scenario.

We do have a very active deal pipeline with lots of interesting opportunities and we're likely to be an acquirer within the fourth quarter of this calendar year.

Our business and markets are positioned for continuing growth in 2007 but for us it's a little early to establish '07 guidance.

We're likely to do that after we've completed our planning process which gets under way in earnest, really, the week after this, and will culminate with our strategic planning sessions in January.

So once again we think we've got a lot of simple ideas and the results are pretty good and we're ready to take your questions.

Today's question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS].

We will pause for just a moment to give everyone an opportunity to signal.

And we will take our first question from Mike Schneider with Robert W. Baird.

Please go ahead.

Good morning, guys.

Good morning, Mike.

Great performance, first of all.

My question, I guess, first starts on RF tech.

If you look at your commentary about where full year orders will come in at about 12%, can you give us a sense of is that what you believe now could be the sustainable growth rate of this division, say for the intermediate term, because when you did the deal you were talking 5% to 10% but those numbers look awfully low, especially given the activity in the industry.

Yes, I think that's right.

We said when we did Neptune we expected it to be 4% to 8% and it's been certainly more like a 10% kind of a deal.

Here we said 5% to 10% and part of that is the sort of lumpiness concern, but I do think that we should expect the RF segment, particularly driven now with the IntelliTrans acquisition and Inovonics, that it's more likely to be certainly a high single digit to lower double-digit number.

So all the folks at IntelliTrans and Inovonics are bought into that and certainly the transfer guys increasingly realize we need to be a double-digit growth revenue company.

Was mix an issue for margins in RF tech this quarter?

It was beneficial last quarter.

In Radio Frequency it was.

We said, I believe, in the second quarter call we had a very strong product mix with a lot of tags, particularly into Florida and Texas.

This quarter we had a higher propensity for service contracts and initial starting up of projects so that was an issue.

But the real fall-off from 19% to 18% was bringing IntelliTrans in where it doesn't have any initial earnings, add sales and you get a little bit of margin erosion as a result of that.

And just focus on international opportunities for a minute.

Maybe, one, could you give us a sense of what the domestic and international mix is today at RF and then, I presume it's really small.

Why hasn't the business really been more global and has there been some new change in thinking, I guess, broadly speaking, on an international basis regarding tolling that might drive this international project that we've heard rumored about?

Yes, I think what happens, it's a great question, I think that we have a wonderful management team at TransCore, but when their inside private equity, they have difficult issues with bonding and public contract transactions that add a lot of cost to their proposals.

And they get much more complicated when you get into an international arena.

By associating themselves with us, we've got a much broader access to how those concepts get done and customers are much more willing to negotiate a very different kind of arrangement with us because of the scale of the company than they would with a private equity-owned smaller individual company.

So that's number one.

Two, they actually have a pretty, some installed base.

They have the rail tags in two of the largest provinces in China on all of what they would call the wagons over there and that's an ongoing business.

They have activity at the Hong Kong airport.

And they have the London underground transportation system with a good deal of activity there.

And some surveillance activity.

Then we have Puerto Rico pretty much exclusively as a country, so with the success of the eGo tags and some of the technology we've been able to show people, we can get in and make calls on international people who would have been perhaps reluctant to take a private equity-owned North American supplier, and we see some substantial growth opportunities over the next 10 years internationally.

Okay.

Thank you.

I'll get back in line.

We will take our next question from Shannon O'Callaghan with Lehman Brothers.

Please go ahead.

Good morning, guys.

You know, just to follow on, I guess, a couple of the points about Neptune and RF kind of running to the high end of what you thought, I mean, you know, broadening that out a little bit, you guys have talked about Roper overall being kind of a 1.5 to 2 times GDP grower.

Those two pieces are sort of tracking to the high end.

How about other pieces?

In the aggregate do you feel like you're working toward the high end of that range?

Meaning two times GDP?

We'd love to see that over a long cycle.

I think you've got our niche businesses in industrial and energy, many of those are not going to be high growth businesses, but as you get Neptune and Radio Frequency businesses and the medical business growing at a faster rate, becoming a bigger part of the total Company, then increasingly you get an opportunity to have a higher organic growth rate than we would have talked about three years ago.

Okay.

Certainly doing a lot better than that right now.

And then in terms of the RF margins, can you just say what they were, if you excluded the IntelliTrans impact in the quarter?

Well, I don't know we really need to do that, but it was well over 110 basis points just for the IntelliTrans transaction and we finished at 16.9%, so that would have been 18% and then the rest, really, was mix related to projects versus tags and hardware.

Okay.

And then just on the -- on the acquisition pipeline, you mentioned the activity.

Give us a sense of maybe what parts of the firm things look most active?

Well, I don't think -- it's very hard for us to ever just zero in and say what's the most active.

We're certainly going to look at things in the Radio Frequency area and have and are.

We came really close on a pretty large security transaction recently, which we finally walked away of over price.

We like sensor technology areas as it relates to energy and sort of global expansion.

Those things are interesting.

Just a lot of things basically that still have to do with measurement.

We like the concept that we're going to create revenue for other people or improve their efficiency.

Things where the value concept of the customer clear so you don't have any commoditization and we still like things that have a lot of recurring revenue, and fundamentally we need good management teams because we remain with less than 30 people at the corporate headquarters and we like to help people.

But they've got to get the job done within our governance process.

So all those things are filters.

I think we would expect, as I said, with nine, 10 weeks to go, that we would hope to get some things done before the end of the year.

Okay.

Great.

Thanks a lot, guys.

We will take our next question from Wendy Caplan with Wachovia Securities.

Please go ahead.

Thank you.

Good morning.

Good morning.

The margins just continue across the board to astound.

Can you comment, Brian, on whether we should keep expecting margin expansion across the board here?

You know, Wendy, when I first came the first question that people would ask me was, gosh, you know, how much erosion do you think you're going to have in those margins?

I mean, nobody has margins like that.

Gosh, you're like 49% gross margins and you're getting 20%, you know and I can remember coming back to the board and saying after my first sort of trip around it, it was interesting because that's not how I would look at it.

I would look at it and say, wow, you got 50% gross margins, I don't know why you can't get half of that to the EBITDA line.

And so I think some of it's how we approach the business and how we look at it.

And then the acquisitions that we've made are higher margin businesses inherently.

We're closer to customers today so we have a little more pricing power than a lot of people have.

We're really an application engineering-oriented Company as opposed to a standard product company.

Very little commodities and all those things help.

Now, I don't think you can kind of model in, you know, consistently a lot more what in my world from seeing a lot of different businesses over the years, I always thought that a business ought to be able to capture at least 50% of the gross margin unless it's R&D costs.

And if we've got sort of enterprise R&D around 5% at 50% gross margins it gives you a half of 45 is 22.5 and we're already 10% above it.

So we want to continue to grow revenue and we want to continue to grow customer relationships and pricing has some effect for that.

So nobody here thinks that it's okay for their margins to decline.

We got a little work to do to get some of our friendly older companies back to remember that cash is king here.

But we're going to be doing that and that's my best answer to your question.

Okay.

And talking about some of your friendly older companies, have we -- are we still consistently looking at the portfolio of businesses that we currently own, and are there -- I know there have been some problematic businesses over time.

Is it conceivable that we would see some of the businesses, some divestitures in your portfolio today?

I think it is.

I think that there are other people looking at our portfolio more aggressively than we are in the sense of eyeing it.

We've never had as many calls as we've had from very fine companies, asking about certain assets.

We look at the portfolio on a continuing quarterly basis in terms of the value creation of each of the businesses and we measure their sort of cash flows as a function of their gross investment and talk to them about it all the time.

The difficulty generally for us has been that the older businesses are in a low tax base, and you've got to get quite a substantial multiple to clear enough cash for reinvesting in something that's attractive.

We have said we wouldn't mind trading assets with somebody, would be a wonderful thing to be able to do, but that's been difficult and I know more and more of you write about things that we might do including industrial imaging and maybe the pump businesses and they're fine businesses, they're very well run in most cases and there's a lot of companies out there that approach us.

We just haven't been approached by the right company with the right strategy for us to give up any of those jewels.

But we're always willing to listen.

Okay and one more before I let someone else jump on.

Can you talk a little bit about IntelliTrans, kind of give us an update, where they're going relative to projects, new products, et cetera?

You know, Intellitrans, I have to confess, the TransCore guys were in with IntelliTrans the week before last and we have a meeting with them next week, and I'm really -- I know we're off to good start there at IntelliTrans, Rich Gerstein who runs the business is very excited about it.

I think in the short term they've got the focus issues, they've got to get on the TransCore business system and that kind of stuff.

They've had a number of meetings with the large rail people.

I think they feel really confident about that.

They were able to tie directly to the generation tags that we have on the railcars at TransCore with the sort of system integrity and trust that the rail industry has in IntelliTrans.

So the synergies we think are pretty real and we expect quite substantial performance out of that in '07.

You know, just how they feel they're doing in terms of Q4 deliveries, it won't be material to us in the fourth quarter so I can't give you a better answer than that.

Okay.

Thank you very much.

You're welcome.

We will take our next question from Jack Kelly with Goldman Sachs.

Please go ahead.

Good morning.

Good morning, Jack.

Brian, can you just give us an idea if we look at the RF segment, looking out over the next year or so, what important technologies you think you need to either develop in-house or acquire to kind of complete your vision of what that should be?

Well, I think you maybe look at it in a bifurcated way.

You have what TransCore continues to be interested in.

We have a very successful freight matching business which sells air time and those are high contribution margins.

We're looking at a lot of things that touch that space.

Have spent some time frankly in the last quarter on that, in that area but just haven't quite found the right thing, but it's an area of focus.

Secondly, you have the TransCore people very locked in to thinking about logistics and tolling and collecting money for other people and we're encouraging them to spend time outside of the country and look globally.

I think we'll be looking at possible acquisitions outside the country that would give us some scale.

Then you have the other side of all that is where we'd like to be in Radio Frequency is really around commercial applications with two-way communication where there's value created in not any of the commoditization side of the bar code reading replacements with one way communication, and we continue to talk with people about assets in that space.

I don't think that will come from internal development at TransCore.

That will come from additional acquisitions.

On the two-way communication, could you just give us an example of that?

Obviously, not something you're interested in acquiring.

I'm trying to understand what two-way communications means.

If you come up and just read a tag and you don't impart any information or change any information around that, you just say look this SKU has arrived, I put it on the shelf and the computer says that it's in Bin 23, that's a more commodotized side of the equation, and mass production of those tags drives the cost down.

What we want to do is application specific things with a customer where we're designing something that they can use that's going to lock us in to recurring revenue with the customer at a very different price point.

Our tolling tags, for instance, could go anywhere from, depending on the type of tag, $10 to $30 or more, rail tags could be well in excess of that.

Commuter tags for subway systems, again, totally different price points.

Computer modems where you're reading and communicating information that are applied to track and trace opportunities with rail or with bus or with trailers, much different price points.

So that's what I'm trying to communicate.

Okay.

So the tag would tell what you the temperature was in the railcar or in the truck?

Well, it could.

I mean, generally speaking, we're locating things today and we're charging people for access.

And then effectively handling the administrative process of billing and collecting money from people and selling information to others.

Okay.

Part of Neptune's kind of accelerated growth versus what would you have thought is this conversion which you said is kind of running ahead of your expectations.

Is there still enough head room there, just focusing on that factor, that we still would have another year or two of above-par growth for Neptune, putting aside other things that they're doing?

Does conversion allow you to kind of grow it something close to double digits over the next year or so?

Oh, yes.

I think it's much longer than a year, Jack.

I think we just had a large trade show in Nashville on Monday and had some investors during the trade show and had a side bar sort of hour with the Neptune people and what you see is the early adopters, the technology continues to improve like the product we were showing today.

And those early adopters will probably be replacing technology in another five or seven years.

The residential meter business used to have maybe a 25-year life cycle.

But because of the electronics and the opportunity for a whole lot of new information to become available, the replacement cycle will speed up.

The people who were slow to adopt or fearful of adoption, now know there's a large installed base approaching 30% of the installed water meters with some kind of automated meter reading concept around them so it's no longer a question of whether you might consider it.

It's really a question of when are you going to do it and are you going to do it with market leader here in Neptune, or are you going to do it in some other kind of utility application.

And since most of the water meters are controlled by municipal water districts we think our chances are good.

So we expect that business to continue to grow for much more than one year.

I mean, we'll have certainly five years of growth at rates similar to what we enjoy today.

Okay, and just finally, acquisitions you mentioned that ones you did this year would not contribute.

What what's your guess on what they would contribute next year, so '06 acquisitions?

We thought we would do in excess of $70 million in sales and that they would generate in excess of 20% EBITDA, and that they would grow in excess of double digits, and we'll probably refine that when we issue '07 guidance.

But those are numbers we're comfortable with for '07.

Okay.

Good, thanks.

We will take our next question from Scott Graham with Bear, Stearns.

Please go ahead.

Yes.

Good morning.

Nice quarter, Brian.

Thank you.

The question I have, you've heard me say this before and it's kind of a feedback onto prior questions.

I know we've made some acquisitions in scientific industrial imaging and that's certainly boosted the margins and eased out the performance of this unit, but clearly I know Gatan had a good quarter but their results have also been uneven over time, and Redlake seems to rear its ugly head every six quarters or so.

Is there something more definitive you guys are thinking about, maybe you could share with us in terms of what to do with these businesses?

Consolidating Redlake operations.

We've done this before.

Can you give us an idea of maybe what the bigger picture looks like here?

Is this really -- these imaging businesses, are these really core to the Company?

If you sort -- you couldn't have a bigger polar extreme than Redlake on one hand with its industrial cameras and motion photography, and Gatan on the other, which is really enabling lots of physics applications and lots -- but really now both life science applications and nanotechnology applications.

Gatan is having a spectacular year, had quite a good year last year.

Its forecasts are particularly good.

Gatan is so strong, it could stand alone as an independent company and carry a big value.

When you look at companies out there like Cognex and Veeco and FEI and folks like that, I can tell you Gatan's performance metrics are just outstanding.

It's a company we're very proud of.

Now, Redlake is in a space that's just difficult for anybody to be successful.

So when we think of our industrial space, we really think about Princeton and Acton and Redlake, which internally, we refer to as par, and from time to time they've been sub par, and they're businesses that we don't -- we just don't have as much scale and certainly they're businesses -- they're better than most other people's businesses, Scott.

When we talk about a business that's struggling here, it's probably making 15% to 20% EBITDA, it's just that it's not growing a lot and it's, from time to time has a quarter of disappointment, or we don't like it because it's got too much inventory because of expensive sensors.

But they're still pretty good businesses.

So if somebody wants to come along and talk to us about some of those assets, we're certainly going to listen to them.

Okay.

I wasn't aware that had had such a good last year, as well.

Spectacular.

Remembered something different.

We were very worried about a situation at Gatan a little over two years ago, but that's come and gone and passed and we spent a lot of time and energy in developing a brighter future for Gatan around new products and we've made a very big investment in R&D in Gatan.

We have some of the world's best experts in that arena and there are a lot of things we can do with Gatan which I know people close to the markets are beginning to recognize.

Okay.

Was that business with that segment, with Redlake essentially up modestly in organic?

Like somewhere between zero and five type of thing?

Maybe at the high end of that.

Okay.

All right.

Very good.

On to RF, could you talk a little bit about some of the projects that you're pursuing right now, what the margin profile looks like on some of those projects and given the bump up in orders that you're expecting for next quarter, will that mean also a bump up in sales to double-digit?

Oh, I don't know.

We just don't generally get that granular in talking about it.

But you would have to assume that sales are going to be fine in RF in Quarter 4.

It really depends what the mix of product is in terms of what the margins look like.

When you're first rolling out a project in polling, you're going to have very slim margins around projects and people in the trade would know that those margins are going to be modest, and then as the hardware sales and the consumables come through, those will have much better margins.

And the other businesses, though, IntelliTrans and Inovonics, those are going to carry higher margins and so when they have outsize quarters, that helps us.

I wouldn't really talk about a margin breakout because I just think that's inappropriate relative to customers' understandings and knowledge.

Most of the things TransCore bids on projects would become public record so people have a pretty good sense about where the pricing is and less good understanding of costing.

But our money is not coming from revenue matching projects and intelligent traffic design.

It's coming from consumable products and our reader technology and our two-way communication capability and our freight matching and logistics business.

Okay.

Last question, thank you for that.

The acquisition pipeline you mentioned it briefly in the summary and elsewhere.

The acquisition pipeline, you mentioned it briefly in the summary, and elsewhere, are there -- would you be able to get a little bit more specific?

Is there an area that, or a couple of segments that you think are kind of ripe here this fourth quarter acquisition activity that you're referring to?

Well, there's always a question about whether it would be in one of the existing segments or it might be something slightly different.

But whatever it is, it's going to meet that acquisition criteria that we spelled out in depth, and one of the things we didn't say is we've been looking very hard at how we can get some scale in Asia, and if we could find the right kind of thing in an Asian country that we thought was stable and supportive of business activity, that would be attractive.

So that's probably the biggest clue I could tell you, if we can -- in one of the areas we're looking, the rest of them are things that fit more clearly inside an existing structure.

Very good.

Thanks very much.

We will take our next question from David Smith with F.F.B.

Please go ahead.

Good morning, guys.

Good morning, David.

When we look to divestitures, how important, Brian, is it right now to get rid of maybe some of these older line businesses, or your description a minute ago sounded pretty favorable in terms of being kind of gems within Roper.

You talked in the past about the need to get rid of them.

I would think right now be an opportune time.

Is it something that's on your radar screen?

It's on several people's radar screens that call us, that's for sure.

I think you would have to believe it's a good time, depending on what thing you're talking about.

But industrial assets are carrying with them pretty lofty valuations.

You've got to remember these are pretty small businesses, probably better with a strategic person than with private equity because do they really have the scale to give a person something that they can build out and drive, so it's just -- it's very hard to predict when something would happen, David.

We're not in an active selling process of any of those things.

People call.

We talk with them about it.

Our management teams in some of those businesses know that there is always the possibility that a situation that would be beneficial to them could come along and if it did, we would probably follow it up because it's tough in that industrial imaging business.

We're not going to want to invest a lot in the space in terms of acquiring companies that are just narrowly focused there and a few of the industrial assets that we have are similar to that.

We've got one great company comes to mind, but it's just not synergistic with anything we do, and one of the questions we ask ourselves and the board talks about in our strategic planning model, are are we adding any real value to this asset.

Would it be better owned by somebody else who would add more value.

I think you could see some portfolio adjustments in the next 12 to 15 months.

Okay.

You've talked in the RF business on how the orders are going to look in Q4.

Is there something that was booked since the end of the quarter that gives us more assurance that that order is in for Q4?

I think that we're not very worried about what's going to happen in Q4 relative to our guidance in terms of being up 30%.

We only -- our orders in RF were only $91 million in the fourth quarter last year, so to beat that by 30% would put you at $117 million or $118 million and annualized that's $472 million.

So I don't think it's -- it's just an easy comp for us, whereas the third quarter was a really ridiculously hard comp off the $133 million we booked in the third quarter a year ago.

Okay, got it.

On the margins in the imaging business, with an increased focus on the healthcare side and looking at the deals that have been done, Civco, Medtech, and then Sinmed -- should we assume directionally that this is obviously a better mix in terms of business mixes, but or businesses there, should we assume this progression is going to --

I would assume that.

We put a lot of time and energy in one transaction this year that was largely around medical consumable's, and we really like the business but it was being sold by private equity.

We just couldn't quite bridge the valuation gap, frankly and let it pass and then it went to auction.

A lot of the things that we do, basically, are done with private equity where we'll have an initial conversation so that they can avoid an auction.

If we can get there, fine, if we can't then they're going to go out and test the market.

In this case we let them test the market.

I think similar kinds of opportunities will arise certainly over the next couple of months.

We've been seeing on a year-over-year basis about 200 basis points plus increase on margins in that segment.

Is that what we should directionally be thinking on the Q4 number?

I think what happens is that you get -- it's not that we're making imaging a whole lot better.

But the medical businesses as they come online have higher inherent margins and they're growing faster and that's given us the leverage improvement inside imaging.

There's a modest amount of internal improvement in life science and spectroscopy, so it's more of a mixed thing and I think that will continue.

But I don't have the data in front of me that would say what sort of Q4 projections would look like.

Okay.

So just as far as the prices go, just on a straight selling basis, you're obviously talking about a better margin than the industrial piece of the business?

You mean customer pricing?

Yes.

Yes, absolutely.

Okay.

Can you talk maybe on the three, four deals that were done, what the integration costs were in the third quarter?

Boy, they're not very material.

I don't have that, you know, in front of you us.

There wasn't a big inventory step-up because those things have few assets.

Was IntelliTrans the biggest one in terms of cost?

Well, in terms of ongoing integration cost it probably was because because it's such a close [bolt on] so it needs to be integrated very quickly into the existing TransCore business.

When you look at all four of the businesses all up, all in, they were neutral to slightly negative in terms of the total impact on earnings in the quarter including, of course, the interest costs associated with those.

Okay, and any impact on the fourth quarter from these deals?

No, it's pretty neutral.

No, it should be neutral again.

It was a very, very small amount.

Less than $0.01 in the third quarter and we would expect it to be about neutral in the fourth.

Okay.

And then on IntelliTrans, just over on that subject, do they have any international operations today?

None that I'm aware of.

Okay.

It's all U.S. based?

Pretty much all the class ones.

They've got activity in the UK at Intellitrans but that's the only thing that I can recall from my meetings and discussions with them.

Okay, and then just the last thing on Neptune, it seems to me like you got to be gaining some good market share here on Neptune.

It is coming from mainly the product you talked about, that new product, the integrated meter and AMR piece, is that sort of the way that you're seeing the market move today and how's your competitive response been on this?

Our, actually our residential meter business has been gaining share for the last sort of year and-a-half at the expense of several people.

Our commercial meter business, we've asked Neptune to put a lot of time and energy in and we've invested some capital.

A lot of our CapEx in the last year and-a-half, frankly, has gone to Neptune.

They have just terrific manufacturing engineering people and wonderful operating people and we're doing great projects.

We have a [loss phone] project at the foundry right now that's spectacular.

It's going to reduce waste very substantially.

Pay for itself quickly.

So that's good.

But we are gaining share a lot in the automated meter reading space and then people generally prefer to have an integrated product like ours.

So not too long ago we had no share of the automated meter reading market and today most people would put us in mid to high 20s in market share and growing rapidly, and other people maybe don't talk about losing share because their sales are flat.

But the market's growing so rapidly at double-digit levels that we're getting a lot of the growth in the market.

Do you need pretty much to have a meter in this market?

Is this as compared to --

We always think that everybody in the world should have a Neptune water meter.

There is no finer product available in the water meter industry.

Well, do you -- what I'm getting as is do you get companies that don't have a meter, are they coming to you to team up on deals?

That could happen.

It could happen with -- we have an arrangement with ESCO, with Hexagram where in a fixed network situation that somebody may want to have, fixed network communication for water which is not the standard.

Hexagram's got a technology that we understand, have worked with, and it's an easy integration with Neptune, and we actually are the primary distributor for Hexagram in North America so we would put their product together with our meter.

We could sell meters through our dealer network to people who were integrating with somebody else but it's not likely they would do that.

Is that Hexagram relationship really driven, did that come about mainly due to the fixed bay station?

It came about solely for that reason, Hexagram is focused on the gas space, I believe, and certainly have done some water fix network communication, and we think ESCO's successfully had some great success out in California in the water and gas arena and Hexagram was acquired by ESCO.

So we saw that as an opportunity to get them a much better distribution channel in the water industry than they would able to get on their own, and that's why we were able to put together the distribution agreement that we have launched this year.

Okay.

Great.

Thank you.

You're welcome.

We will take our next question from Chris Kotowicz with A.G. Edwards.

Please go ahead.

Good morning, and good quarter.

Thank you, Chris.

Just wanted to touch base on end markets.

It sounds like other than that automotive imaging piece of the business it doesn't sound like you're really seeing any weakness anywhere?

You know, it's very little weakness.

We aren't really seeing that.

We're not seeing much cost push inflation, really.

We hedged a lot of the copper risk early in the year and are feeling pretty good about that.

And we think we're sort of generally ahead of the curve on the cost push side of things.

Where are you looking for -- because, obviously, at some point all markets have their ups and downs, where are you looking for the first signals that you'd see of a broader industrial U.S. kind of slowdown?

What do you focus on?

Well, we really are not a good barometer for that because if you think about areas, automobile production and commercial construction or residential new home starts, or just almost any kind of thing that's out there, it doesn't have much effect on us.

Because we're basically doing solution applications for customers, a lot of OEM people, where we're providing the value for them to be successful in the marketplace.

And because we're doing that, they're not interested in blowing us off of the assignment.

We get a lot of recurring revenue.

The recurring revenues come to next to nothing to well in excess of a third of our total revenue now.

So that's pretty helpful.

We have one company, Roper Pump, which is relatively small portion of the total company that we kind of do six-month rig count progression and tells us a little something.

But most of the income from that business comes from a huge installed base and a lot of parts and revenue with that.

So you kind of got to go to other industrials I think that are in more cyclical markets than us to get those reads.

Okay.

Maybe we'll switch over to deals.

You said you walked away from a medical deal.

Have you seen -- maybe we ask this every quarter.

But have you seen a change in the, I guess, the environment as far as competing for deals?

Is it better?

Worse?

The same, I mean it's always tough and there's a lot of easy money out there, I guess but is it any different today?

I think that in our situation what we have to offer managements who are in situations where they need to exit their private equity partner is they got a choice of trying to do an IPO.

They probably don't have the scale to do it.

They got a choice of re-upping with another private equity group and they know exactly what that means, or they can come here an and instead of a bunch of people flocking in to tell them here's exactly what you they do to do to work at our company, they come in and they instead get a governance process, and they get a leadership team that wants them to be successful.

So we have a lot to sell to a potential company that needs to have an exit strategy.

And that's really what saves us.

If we were out there just competing in auction after auction with people, we would be very discouraged because we're not going to pay 10 and 12 times the numbers that are going out today with so much private equity money chasing these transactions.

You're still small enough that this approach is going to work I think for quite a while.

Do you have a feeling for how big you'd have to be before that would become a more challenging process to follow?

You know, I think that as long as we remain willing to be eclectic about the segments that we have and we think we've got multiple growth platforms to pursue, we really don't have any difficulty.

If we got ourselves to say, oh, the only thing we're going to do in the universe is Radio Frequency you'd have a narrow group of people to pursue and that would make the challenge more difficult.

Okay.

We'll shift gears over to partnering.

You mentioned the Hexagram relationship.

You know, that seems like another nice way to really accelerate your growth without actually having to buy another company.

Are there more meaningful opportunities out there to kind of increase your addressable and market opportunities via partnering, whether it's in the water piece of your business, which I imagine that's not one of them now with the relationship you have, but maybe in some of the other segments?

I think there's some opportunities there and we do that.

We do some partnering today in our energy space.

We do some partnering today in imaging and would like to do more partnering in imaging, frankly.

Okay.

A housekeeping question and I'll turn it over.

Can you give us the FX impact by segment?

Just have the enterprise was one point.

The FX would be more in energy because of how much of that is international and I think we thought FX and energy was about two points.

It was about two points.

It was about two points for energy and the rest of them were all in the one point.

Actually, it was also two points in scientific and industrial imaging.

We have a number of business that are outside the U.S. there.

Okay, and the other ones are, obviously, going to be closer to zero?

Well it's a point in industrial and negligible in the RF world.

Fair enough.

Thanks, guys.

Good quarter.

Thank you.

We will take our next question from Matt Summerville with KeyBanc.

Please go ahead.

My question's been answered.

Thank you.

We will take our next question from Christopher Glynn with CIBC World Markets.

Please go ahead.

Good morning.

Thanks for the chart on the cash flow.

That was very lucid.

On the RF, you talked about growing ahead of the initial plan for a little while.

I was just wondering if the new deal, the international deal that you'll announce soon, is that something that fundamentally changes the complexion and brings you over the initial targeted 5% to 10% range, just like the EZ Pass deal would?

It won't hurt.

That's for sure.

Okay.

And in Neptune, you announced three deals.

And last time you just had one.

Can you talk about the relative scope of those deals compared to Atlanta?

They're smaller than Atlanta which has tens and thousands of meters, you know, versus Raleigh or Chandler, Arizona or the Florida Keys.

I think what's really a watershed event around that is the Chandler could have selected any vendor in the world because they had one person's water meter and another person's reading device on top of the water meter, and they made a conscious decision to look at every particular provider and look at whether they were better unbundled or better bundled or whatever they wanted to do, and after an exhaustive study they decided to go with Neptune solution.

I think that's an endorsement that is just a very obvious to a fraternity of water municipality people that is just very valuable.

And then I think Atlanta, which certainly went through a rigorous process, which is one of the jewels for somebody to win, when people see Neptune win a couple of situations like that, that are so competitive, that's pretty compelling for somebody in another town to say, boy, I ought to make sure I give Neptune a last look.

They must have something going for themselves.

So I think you've got some people who maybe have waited, have make decisions to go ahead and do the AMR piece of their technology, and we were talking on the show floor Monday that today instead of people talking about if they're going to convert over the next several years, it's really when and how they're going to do the conversion.

So I think you'll see adoption rates continue to be double digits for quite a long period of time.

Ladies and gentlemen, that does conclude today's question-and-answer session.

I will now turn the call over to Mr. Humphrey for any closing remarks.

Thank you, Cynthia, and thank you all for joining us this morning for our third quarter conference call.

I will be available later on this morning and this afternoon to field more questions that we weren't able to get to in the time that was allotted.

So with that, thank you all very much.

Ladies and gentlemen, this will conclude today's presentation.

We do thank you for your participation and you may disconnect at this time.