Roper Technologies Inc (ROP) 2012 Q2 法說會逐字稿

Good day everyone, and welcome to the Roper Industries second-quarter 2012 financial earnings conference call.

Today's conference is being recorded.

I would now like to turn the conference over to John Humphrey, Chief Financial Officer.

Please go ahead, sir.

Thank you, and thank you all for joining us this morning as we discuss the results of our second quarter.

Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Jason Conley, Head of Planning and Investor Relations for us.

Earlier this morning, we issued a press release announcing our financial results.

The press release also includes replay information for today's call.

We've prepared slides to accompany today's call, which are available through the webcast and also available on our website at www.roperind.com.

If you turn to slide two, we begin with our updated Safe Harbor statement.

During the course of today's call, we will be making forward-looking statements which are subject to the risks and uncertainties as described on this page and as further detailed in our filings with the Securities and Exchange Commission.

You should listen to today's call in the context of that information.

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

And after his prepared remarks, we will take questions from our telephone participants.

Brian.

Well, good morning, everybody.

Today we will go through the enterprise financial results for the quarter, talk a little bit about specific segment detail and the outlook for each of the segments, give you an overview of the Sunquest acquisition and establish our third-quarter and full-year guidance and take your questions.

I think we had indicated at our first-quarter call that we expected going into the second quarter would be our most difficult challenge for the year.

We had really an outstanding quarter compared to what we expected because we had quite a few headwinds this quarter.

Certainly had the uncertain economy and were able to blow through that.

We had very difficult comps going into Q2 because of the Gaz de France revenue last year and outsized performance in toll tag shipments last year in our Gatan technology business that we knew wouldn't be repeated.

And then of course we had currency, which became a bigger surprise than we expected.

It cost us about $0.01 a share versus our guidance and about $0.02 a share versus the prior year.

That said, let's look at what we did in Q2, next slide.

We had record results in the second quarter pretty well across the board -- highest level of orders in our history, highest level of sales in our history in the second quarter.

Biggest backlog that we've ended a second quarter with; record net earnings and record EBITDA performance for the quarter.

Our orders were up 8%, and revenue was up 4% despite those headwinds and the effect of currency.

Our book-to-bill ratio was actually quite high at 1.05.

Our gross margins reached 54.9% in the quarter.

And our operating margin was really quite spectacular; it came up 130 basis points to 24.7%.

If you look at the incremental OP and the incremental sales, our operating leverage in the quarter was 59%, and there is no smoke and mirrors in that; it is just 59%.

Our EBITDA was $214 million, and our EBITDA margin reached 29.5%.

Operating cash flow in the quarter was $119 million, slightly lower than we would expect in the second quarter, but we had a higher cash tax rate, and that won't happen again in the rest of the year.

Our first-half operating cash flow was $261 million, and we will project what we believe it will be for the full year later this morning.

Our diluted earnings per share were $1.15 versus $1.03 last year.

That $1.15 would have been a penny higher based on our guidance if it weren't for the currency scenario.

And the $1.03 is the number that we used with the re-measurement gain last year; you might remember, it was about $0.05 a share.

So on GAAP it would have been $1.08, but it was really adjusted at $1.03.

Net earnings were up 13%.

We are very happy with the performance, because we had about a $30 million headwind between our scientific camera business and Gaz de France and some European activity coming into the quarter, and we were able to really blow through that; very solid revenue throughout the world, with the exception of Europe, which was down about 18%.

Record performance really in an uncertain economic environment.

Next slide.

In the Q2 income statement, you will see orders were $763 million, up 7% organically.

Revenue, book-to-bill came in at 1.05.

Gross profit was up 100 basis points to 54.9% from 53.9% a year ago.

And our operating income was an amazing 24.7%, up 130 basis points from a year ago.

Our interest expense about flat.

Tax rate was consistent with the guidance we established for the quarter; it came in at 29.6%.

And net earnings were $115 million versus $102 million last year, up 13%.

Next slide.

We look at our EBITDA performance, our trailing 12 months EBITDA has now reached $845 million.

That is up from last year's trailing number at this time of $739 million and two years ago $540 million.

So EBITDA is up 57% over the last two years.

And our EBITDA margins continue to soar.

We were 25.2% in 2010 and 29.3% on the trailing 12 months calculation now.

And of course, this quarter at 29.5%.

Next.

If we look here at the cash flow performance, you will see Q2 cash flow at $119 million of operating cash flow and $109 million of free cash flow.

Very good performance again in working capital.

Our inventory actually improved by 30 basis points, from 7.5% to 7.2% of revenue, and our accounts receivable improved by 50 basis points from 15.6% to 15.1%.

And when you adjust that for payables and accruals, we were still below 7%.

In the first half cash flow, normally our first-half cash flow is about 40% of the full year.

This year, the second half will be even a little stronger because of the acquisition of Sunquest and how cash-accretive it really is.

So you can see that our full-year operating cash flow, we've now raised our guidance to be about $700 million for the full year.

That will put our operating cash flow at a very high percentage of revenue.

It could reach 23% of revenue, in fact.

It is really driven by expanded margins.

It's driven by the Sunquest acquisition that we expect to close in the last four months of the year, and some cash tax benefits that we are acquiring in the Sunquest transaction.

It does exclude the deal costs and refinancing charges associated with the new credit facility we put in place effective this past Friday.

And you can see here that free cash -- or operating cash flow goes up to $700 million, our estimate this year up, from $602 million last year and $500 million the year before.

So that would be a 40% increase in cash flow over the last two years.

Next slide.

On Friday, we closed a new credit facility, a $1.5 billion revolver.

So if we look at our normal credit stats here, a year ago on 6/30/11, you can see that we had $196 million in cash and $595 million in an undrawn revolver, which gave us acquisition powder and investment powder of about $791 million.

When we closed out the quarter on June 30, our cash had increased to $519 million and our undrawn revolver was at its capacity at $750 million, giving us $1.269 billion.

As of Friday, with the new $1.5 billion revolver and the cash from the end of the quarter, we now have capacity in excess of $2 billion.

Our gross debt on the other hand, is only $1,069 billion.

Our gross debt to capitalization is at 23.8%, but if you look at the net debt to EBITDA, you will see it is actually been cut in half from a year ago; it was 1.4, and at the end of the quarter, it was 0.7.

Even with the financing of the Sunquest acquisition at $1.4 billion, we will have ample capacity to pursue other opportunities in the near term and have a pipeline that remains very, very exciting.

If we look next slide here at the Sunquest details -- or sorry -- the segment details, we will start with the RF Technology slide.

Next.

So on RF Technology, really very, very outstanding orders in the quarter; they were up 18%.

So those orders, and the execution really in the toll and traffic business kind of got us up to the high end of our range despite the European pressures and helped us deliver.

You can see the OP margin was amazing at 27%, up 290 basis points.

And if you want to look at leverage, revenue was down 2% and operating profit was up 10%, so that would speak strongly to the execution that is occurring in those businesses.

The software business has continued to help us on the margin expansion as they grow.

We got a very significant win again in Houston.

We are going to upgrade the entire lane hardware in the Houston area with our United Toll Systems technology, which is really an advancement over what was in place in the past.

We think that contract ought to produce about $65 million in revenue, between maintenance and change-out.

Our CBORD cashless system business continued to grow.

It had a record quarter in the second quarter for it, for any time.

And that involved both university and food management wins in both higher education and health care.

And we had of course this difficult headwind for our Technolog business, Gaz de France, which had that sort of one-time large install last year, and that held us back by about $5 million in the quarter.

In the second half, we will have the continued difficult comp with the Gaz de France, because it went throughout the year last year.

But our increased toll project and maintenance activity that will be led by these Texas wins will easily offset any challenges we have in the rest of those types of activities in the segment.

And then the software businesses and software as a service activity is continuing to increase.

And both iTrade and Freight Matching continue to roll along with sort of nominal organic growth but outstanding cash growth.

Next slide.

If we look at the Industrial Technology segment, gee, it -- just, again, spectacular performance.

Revenue was up 11%.

The operating profit margins reached 30.4%.

That is an all-time record for this segment.

The highest previous we ever had was at 29.2% in the fourth quarter last year.

This 30.4%, to just add some perspective around how amazing it is, the S&P 500 Industrials gross margins as a group are 30.8%.

Roper's operating profit for Industrial is 30.4%.

So we got an all-time record here in OP margin.

Again, leverage off the growth, terrific execution everywhere.

Fluid handling continues to grow in both agriculture, food and the shale activity.

Our general industrial markets have performed well.

We are not seeing any early indicators of any softness in any of those businesses.

The material test business, which is primarily a European business, actually had a record second quarter.

Very strong North American/Asia sales offset any weakness that we had in Europe.

The Neptune business continued to grow, driven by the Toronto project and some higher shipments in the US.

In the second half of the year, we would expect that the shale activity growth would moderate; not stall, but certainly moderate, with the gas activity on shale being down, but the oil activity on shale being up.

The industrial end markets, again, no signs of any fall-off.

The outstanding margins we expect to continue throughout the second half of the year.

And just a personal note to all our people in Industrial, we just couldn't be more proud of these teams as we watch them execute in a very tough market.

Next slide.

If we look at our Energy Systems and Controls business, here, you can see revenue was up 6%, OP up 7%.

Margin at 26% was up 200 basis points from the first quarter margin in Energy.

Organic growth in the quarter was 5%.

Compressor controls continues to do very well on LNG projects, and the field service activity that we do drove double-digit growth for them.

The bolt-on acquisitions that we did in the last year are very small -- United Controls Group, Trinity and Cambridge all have non-cash amortization charges in them.

They are actually putting a little bit of drag on the OP margins, even though at 26%, it is hard to see a drag.

But they actually would have been about 120 basis points higher in OP without all that amortization drag and integration on those three businesses.

That said, they are performing well.

They are all on plan from an integration viewpoint and they will add to growth in the second half of the year.

Our European markets weakened.

In fact, in Energy, they were down about 18%.

But our US was up by about 18%, so the US business being larger, that was a benefit.

And the rest of the world was quite strong, in the Middle East and Asia/Australia; Brazil not quite as strong.

Targeted cost actions are underway for the second half on a very selected basis, where people are executing some contingency plans in those things that relate to any softness that they see.

We think Europe will continue to be soft, but we will have continued growth in both North America and Middle East and Asia to offset that.

With the exception of our Petrochem business, which is down about 20%,and that is a worldwide shortfall; we are not seeing any strength anywhere in that business.

Very solid backlog, though, at compressor controls gives us confidence about growth in the second half.

And then we would expect the normal very strong Q4 seasonal activity in Energy would be repeated this year.

Next slide.

So here we will look at Medical & Scientific Imaging.

This is one of those things where it looks like nothing happened, but there is great variability throughout the different businesses here.

And while revenue was flat and operating margin was up 20 basis points, what really was going on is that Europe and the North American Academic Research Funding softness impacted our camera portion of the Photonics businesses.

Cameras are not a big part of Roper, but they do come in around $125 million to $140 million worth of total revenue.

And they were down as much as 20% in some cases.

And we don't see any real turnaround as it relates to those research markets for the camera technology businesses.

And while they perform relatively well, they certainly are a drag on short-term growth.

Our medical businesses continue to grow organically.

The channel expansion we've been able to provide them in Asia is offsetting any weakness that they have in Europe.

And the Northern Digital business performed very well, expanding its offerings to OEM customers.

And also, we were able to do a bolt-on acquisition in the quarter called Ascension Technology Corporation, which is in upstate Vermont.

And Ascension does 3D tracking for minimally invasive surgery, which you probably all know is a rapidly-growing aspect in surgical applications.

We paid about $18 million for Ascension.

We expect it ought to deliver $3 million plus in EBITDA over the next 12 months.

In the second half, we expect to have continued weakness in this academic research area, which will affect our Photonics businesses.

Fortunately, the medical expansion is going to continue, markets remain pretty favorable.

Ascension will give us a little bit of growth spurt for Northern Digital.

The Gatan business has a substantial backlog, which we expect to be able to ship during the second half of the year, which will add to our growth.

And then we have this transformational Sunquest acquisition, which will add a substantial amount of revenue and EBITDA to our medical platform.

We would expect it ought to add somewhere in the neighborhood of $75 million of revenue in the last four months of the year.

It is going to add well over 35% to the Medical & Scientific segment for the next year, and revenue that is going to add quite a substantial amount to Roper's overall revenue base for 2013.

Next slide.

So as we look at the Sunquest acquisition, I will talk a bit about the transaction, and John will talk a little more in depth about the specific business.

Next slide.

So if we look at the Sunquest acquisition, you can see that it meets all of our acquisition criteria.

It is really an amazing fit, where we are able to take our software platforms inside RF and the medical platforms inside Medical & Scientific Imaging and hook them up in a very creative way with the Sunquest business, which is truly a software business, but it is also a medical business.

If you look at our criteria we talk about all the time -- asset light, low CapEx, absolutely it is almost no CapEx and exceptionally light asset business.

Focusing on the market structures and driving forces at work, we've done probably more marketplace diligence on this business because we actually looked at it in 2010 and have maintained an interest in the business forever, and really felt that based on the work that we had done and the things that we thought they could and should be looking at and then seeing how they've done, our diligence revealed a lot of strategic competitive advantages that Sunquest enjoys.

And they have a lot of whitespace opportunities for growth that are beyond their core traditional business.

They've done a great job in transforming their business.

It was acquired by Vista in 2007 and certainly was high-margin business, but could be better.

And to the Sunquest leadership team's efforts, they've done an incredible job in making that a transformational business that we are acquiring now compared to what it was in 2007.

The incentive is always our link to the commitments that the leadership teams made, and those are in place.

It has technology advantages that are clear and easily measured against competition and it has very deep application expertise.

It really is a niche business in the lab market.

Management continuity is always valued and everybody on that team has agreed to stay in place.

The communication for the Sunquest employees is taking place this morning, in Tucson.

We've asked them, as always, to preserve what has made them a very good company and core values but stimulate progress.

And this area of the progress is going to come in the form of even more investment in the sales and marketing arena, and some faster execution in the development area.

This is a business that when we talk about growing what you buy, my goodness, this business has higher margins than we do.

It has twice the EBITDA margins that Roper enjoys.

And when you look at those kind of margins and you recognize the incredible strength of the company -- it has -- two thirds of its revenue comes on a recurring basis.

98% of its customers sign up annually for the software programs that it has.

It has negative working capital and very low CapEx.

And we expect in 2013 that it will generate $140 million or more EBITDA for us.

The fourth-quarter run rate, which was just completed, their fiscal Company May 31 and just had their audit and signed up prior to our closing actually, supports our expectations for 2013 nicely.

It is really a business, when John talks about it, you want to kind of think about what do they do and where are they located and why do they win.

Because it is a phenomenal management team and an outstanding group of employees that have really done things in this space that no one can really replicate.

So with that, we will turn to the next slide and John Humphrey.

So just talking a little bit more about kind of what Sunquest is and what it is able to provide for its customers.

They're the global market leader for providing the underlying software and information solution for laboratories in hospitals and large academic medical centers.

With a headquarter in Tucson, Arizona, locations both in the UK and a development center in Bangalore, they have a global footprint that allows them to serve that customer base.

Really their customer base are those folks for whom the effectiveness and efficiency of the lab is of critical importance.

The lab ends up with, in many cases, hundreds of thousands of tests being done each month to support the diagnostic decisions that are made in a hospital.

And they rely upon the Sunquest information and the quality and safety associated with that to help drive those decisions.

The Comprehensive Solutions is about improving the productivity with workflow automation tools.

You see on the right-hand side, both the Sunquest laboratory 7.0 and the CoPath solution.

Both of those are about workflow automation, to make sure that the right test is done on the right patient at the right time, leading to the right diagnosis.

So those things also reach beyond just the lab and also go out to the collection manager, which is one of the modules that Sunquest has.

So that nurse as a point of collection tool that integrates back with the lab, so you have a full connectivity between both of those parts of the hospital.

It's a very large customer base, very high retention rates; over 98% retention each year continue to utilize and depend upon the software set of solutions.

And it is really supported by a 30-year history.

These are very long-term relationships, relationships that are supported by the decades of application expertise that Sunquest has developed about what the hospital lab needs and their unique set of needs that Sunquest is going to be able to meet.

And as Brian talked about, it is a proven team, it is a great culture.

Everything that we learned during the diligence process continues to support the fact that their culture of excellence and of execution is really phenomenal, and I think they are going to be a great addition to the team.

And I think the company is very well-positioned to capture the growth opportunities that they've identified over the coming years.

So with that, I will turn about to Brian to talk a little bit about guidance and the summary for the quarter.

Okay, so after we get the title sheet on guidance, we move to the guidance slide.

We've raised our full-year guidance to $4.84 to $5.00.

That reflects about a $0.04 reduction due to currency.

We had started out at $4.75 and $4.91, you might remember.

If $0.04 comes off the bottom, you're at $4.71; at $0.05 off the top, you're $4.86.

And we are adding back $0.12 to $0.14 on a GAAP accretion for Sunquest, excluding any of the deal costs.

And then in addition, of course, we've got other things that we are absorbing and other things that are good.

So $4.84 to $5.00 on full-year guidance.

And the quarter comes in at $1.19 to $1.25 in the third quarter.

Most importantly really is that we now expect our full-year operating cash flow to be approximately $700 million.

And just a couple footnotes you will notice there.

The acquisition of the Sunquest, we expect to close at the end of August.

We will have the HSR filing and since there is no competitive issues, it should move along quickly.

We have some deferred revenue that is unusual, and Sunquest, similar to some other businesses when you acquire them, there are some GAAP issues around that.

And so we will have to -- we will kind of reveal that to you each quarter as we report out.

And this does exclude whatever costs we will have that will be registered in the third quarter that will be related to the acquisition and removal of the remaining amortization in the old revolver.

Next slide.

So looking at the summary of the second quarter, we go back to the top point being that it is, again, an all-time record for a second quarter in our history, highest level of orders, revenue, backlog and earnings and EBITDA.

Organic order growth at 7% was really a pleasant benefit for the quarter.

The operating margins at 24.7, EBITDA at 29.5% and gross margins at 54.9%, really terrific.

Leverage is kind of breathtaking at 59%.

We used to talk about 30% to 35% leverage, and it is hard to see how our leverage isn't going to be above 40% for a long time.

Doing a new revolver, big help, $1.5 billion.

The old revolver was put in place in July of 2008 and would have had to be replaced in July of 2013.

So this removes any refinancing risk around that for next year.

It gives us twice as much capacity to write checks against as we had previously.

And $1.5 billion is a pretty sizable revolver for Roper.

That was completed last Friday in a timely completion, we might add, relative to the deal closing on Saturday.

Sunquest, just an exceptional financial profile.

Higher gross margins than we have, but twice the EBITDA margins.

Terrific fit.

You couldn't find a business that sort of married what we are doing in software and what we are doing in medical that would benefit both so much as Sunquest.

It's got great development people.

Our software people spent last week in Bangalore, visiting and talking with people.

We've done tremendous diligence around the robustness of the software platforms in place for Sunquest and how they can be used.

All of this then creates an opportunity for us to be positioned again in 2012 for an all-time record year, $700 million in operating cash flow.

And, perhaps most importantly, the transformation process that we are doing here continues as we get more and more technology.

You think about where we are now.

We've continued this; we have more technology content, we have higher margins, higher cash returns, more recurring revenue.

And it just a much different company than what you would have looked at in 2002.

And then the next five years, we added Neptune and TransCore.

And then if you look at 2007 and you look at the forward five years here to 2012, you've picked up CBORD and Horizon and iTrade and Technolog and now Sunquest.

So the technology content gets better, margins get better, cash return gets better, and the available forward acquisition powder for growth will be better than it ever has been in the past.

And with that, I think we are ready for questions.

(Operator Instructions) Matt Summerville, KeyBanc.

I just wanted to clarify something, Brian, on Sunquest.

That $0.12 to $0.14, is that a GAAP number that will have under GAAP rules the deferred revenue adjustments?

I just want to make sure I have that right.

That is a non-GAAP number.

So as you are probably aware, like an awful lot of software companies, Sunquest has deferred revenue for the annual maintenance, where they get paid in advance for that.

And the accounting rules upon acquisition will require us to take a write-down of that, so to basically move that deferred revenue to fair value.

And then over the next 12 months, as those renewals happen, that deferred revenue will get built back up.

So the $0.12 to $0.14 is a non-GAAP number.

And as we are able to estimate exactly what that deferred revenue fair value adjustment is, then we will be able to provide that for you.

We won't be able to do that until after we close the business.

But we will be providing that insight each quarter so you are able to reconcile between the GAAP numbers and then the non-GAAP numbers that we think provide better visibility and understanding of the operations of the company.

Perfect, and --

The great news, though, is the cash is the cash.

Absolutely.

Brian, could you maybe spend a minute talking about more broadly for Roper, as you move through Q2, how would you characterize the overall demand environment for your businesses?

And then how are orders so far in July from what you've seen?

I think really, the quarter, from an organic -- we wouldn't have given ourselves much of a shot at having 7% organic orders in the quarter.

That was a pleasant surprise.

But we got really strong pull -- activity that we -- we knew would eventually come in the year, wouldn't have necessarily seen it in the quarter.

So that helped.

I think we entered the quarter with more concern than turned out to be justified.

So those -- any early indicators of things that would make us nervous that would be in Energy or Industrial, we really haven't seen that.

There is just a little bit of activity, mostly in petrochem and oil and gas that we are going to do some very modest internal retrenchment on.

But on balance, it is pretty good.

We never really talk about a quarter in which we are in, but I would say things remain pretty decent.

We are going to expect -- organic growth actually kind of picked up in the second quarter, and we would expect it to continue to be mid-single digits really for the rest of the year.

So it is really kind of better than we expect because there is more European headwinds than we would have originally forecast.

How much was your European business down in the quarter?

It was down 18% for us in total.

About half of that is just due to currency, though.

So maybe 8% or 9% on an organic basis.

Great.

Thanks a lot, guys.

One thing to remember on that, Matt, is that does include the headwind associated with Gaz de France.

So that has got a $5 million -- but even once you take that out, we saw a decline in Europe that was definitely mid-single digits.

Got it.

Thanks, John.

Mark Douglass, Longbow Research.

On Sunquest, Brian, you talked about there is a lot of white space.

Can you talk about what that would look like?

I mean, is it market share shift?

Is it just underpenetrated as far as the clinics and hospitals or is it geographies?

Well, I think we don't want to tip off other people to things that we think are available to us.

But it would be safe to say that we think that they can continue to grow share at the expense of other people.

We think people have been paying a lot of attention to electronic health records and companies that are in the EHR space.

Here again, we've picked out a niche that we think is unrelated to that activity, and this niche has got an opportunity.

Very high return for people investing in this in the hospital space and in the clinic space and in private care space.

Basically, lab work is critical to every aspect of people diagnosing folks, and it happens in a variety of different places.

We think we have the preeminent technology to do that, and we think we can make people more productive and more efficient in what they do when they do it.

It has been hard, I think, the last couple of years to get the attention of hospitals that have had these mandates to do a variety of things around health records.

Now they get a chance to make an investment in things like this business, so it will give them an actual return.

So we think it has got pretty exciting growth.

And these guys, they've brought in a new sales executive, a woman who we have great confidence in, that we think is going to drive better focus on organic growth.

It has been a very high cash contributor.

And it is same old situation -- private equity has done, in this case, a really amazing job in this business versus what they acquired in '07.

But it can grow more and it has -- it does have opportunities for share gain and expansion around the world.

This business, it doesn't do much in certain portions of the world, and we do a lot in other portions of the world than they do.

It has also got an incredible development team in Bangalore, and that is very, very bullish for us.

Okay.

And then not want to give too much away on them, I suppose.

What are the -- for the industry, at least, typical growth rates?

What kind of returns are you assuming as you model it out over the next three to five years?

For a Sunquest kind of thing?

Yes.

I think it ought to -- it will grow its cash and EBITDA double digits.

Revenue -- current year forward revenue is probably going to go up about 10%.

We would think over time that it grows revenue -- remember, it's got this massive recurring business, right?

So its new business won't look like a high number.

So if you got a couple hundred million of constant business, it could grow its net new business by 20%, and it wouldn't look like a big number on the core business.

So it's not like looking at a cyclical company that is up and down and looking at various trends.

This just -- it starts with its Q4 and then each quarter gets better all the time.

Okay.

Thank you.

Deane Dray, Citi Research.

Brian, I would be interested in hearing what the lessons you learned from iTrade and how that played into both the negotiation for Sunquest, but also integration, managing a software company and so forth.

We have a big advantage today versus when we first took on iTrade in that we have recently hired a chief architect for our technology businesses who is working in our software arena.

We also have a software executive full-time that is looking over our various software companies.

And we have a medical executive, which we didn't have before, looking over the medical scenarios.

So between the two new executives, one that is a domain expert in medical, one that is a domain expert in software, and the architectural person, the quality of our diligence that we are able to do on our own was a dramatic improvement.

We have a much deeper understanding about source code and the ways in which development programs need to be done and measured.

And we've got a deeper understanding about cost structures around development activity.

And all those things are good.

I think we also have come to recognize that slightly lower organic growth rates in the software businesses really aren't a problem because of the recurring revenue that they have inside them and the quality of the cash that they generate.

To look at a company, I think most people would look at us and say this is best-of-breed EBITDA margins, and yet, here, we are acquiring one that has twice the margins that we enjoy.

So they are fundamentally different and our executive leadership capability around them is better than ever.

Just to clarify on the deferred revenues, you said that it refers to the maintenance side of it.

Is that two years?

It's pretty typical that you see two years of maintenance fees.

And are any of the licensing fees included in that deferred revenues or is it just maintenance?

The short answer is nothing on the license fees.

And the maintenance contracts and the deferred revenue are two slightly different things.

So the maintenance agreements range anywhere from one year, three years, five years, some of them even seven-year agreements, because, of course, the customer would like to make sure that they have kind of the long-term commitment with Sunquest, and Sunquest likes having the long-term contract.

But they don't pay for all seven years or all five years upfront.

So it is a one-year payment and that is what goes into the deferred revenue.

So we would expect to see that deferred revenue built back up after the fair value adjustment after 12 months to be back to normal steady-state.

Great.

Last one from me.

On the $25 million in cash tax benefits, what is the duration of that asset?

Will it be used up first year, or are you restricted in how much you can draw down?

We will be utilizing that in 2012.

Great.

Thank you, and congratulations.

Terry Darling, Goldman Sachs.

Congratulations on Sunquest.

Thank you.

So a couple follow-ups there.

In terms of thinking about accretion for 2013, any reason not to -- on a non-GAAP basis as you are presenting it here, $0.13 for four months, 10% plus revenue growth profile -- anything outside the scope of that as we annualize those numbers that we ought to be aware of?

No, I don't believe so.

Just remember on the growth profile that you want to be careful -- on the revenue growth profile, you are going to have that massive baseline, so it is just the net new that grows.

So we will have a double-digit organic growth on the nonrecurring revenue side, and we will have double-digit EBITDA growth.

Okay.

That is helpful.

And then the interest rate on the new revolver, John, do you have that?

Yes, we do.

It is basically the same as what we have now gone.

On a drawn basis, it is L plus 125.

The facility fee is 15 basis points.

So the undrawn portion is 15 basis points.

Okay, and then in terms of the changes in the outlook for 2012 on the base business, Brian, you had called out that there were some minuses offset by some pluses, and all that kind of rounded to where you were before.

But I'm wondering if you can just kind of go through the list here on both the plus and the minus side.

You've been very clear on the Energy piece with the petrochem and oil and gas component.

The RF margins look a little stronger.

Perhaps that is a plus up.

The industrial margins, perhaps that is a plus up.

The RF Europe, on the [Technolog] side, you called out as a negative.

Am I missing any of the other pieces within that context?

I would say probably the only one that you might have missed is that the camera businesses specifically that are serving the academic research markets, probably a little bit worse than even what we had handicapped three months ago.

So seeing them down kind of in the high teens in the second quarter, and frankly not a lot of encouraging signs in their end market as we look forward to the third quarter.

There is probably a little bit of an incremental headwind, but once again, offset by some of the pluses that we have seen in RF and some of the better margin performance.

Okay.

In terms of the second-half organic growth in the mid-single digits, you have much tougher comp obviously in the third quarter than in the fourth quarter.

Do you expect mid-singles for both quarters or would that comp profile suggest a little tougher 3Q?

(multiple speakers) throughout the second half.

Okay, great.

And then just lastly, can you help us with what iTrade organic was in the quarter.

Presumably with the Europe comment, that might've been down.

But can you just clarify on that for us?

No, iTrade was up organically in the quarter.

Okay, great.

Thanks very much.

Christopher Glynn, Oppenheimer.

On the RF orders, they were pretty striking.

I think you called up some new strength in toll and traffic.

I don't know if that was mainly related to Houston.

But any signs you are entering a new era of growth for that business and broad interest on road conversion?

You will have to define new era.

The lumpy area is alive and well for those activities.

There are a lot of initiatives.

There are a number of things that will come out for bid.

I think the longer we go with people learning more and more about our United Toll Systems technology, the more and more people recognize that it is dramatically superior to what other people have done for a long period of time, including ourselves.

So the leadtime for getting agencies to understand and see and test and kick tires around that is kind of long.

But in terms of long-term growth vehicle, nobody has got a better mousetrap than us, and I don't think anybody is going to get one.

So we like the long-term nature of the business and we certainly like the second quarter, and we think the rest of the year will be fine.

Just to put a little more color around that, Chris, for instance, the win in Harris County is not a conversion from a non-toll to a toll lane or a new road that is being constructed.

It is really an upgrade of the technology, and so it is a technology insertion and maintenance for the equipment that is already on those roads.

So it is really just building out our maintenance and support capabilities with the teams that we have rather than net new, if you will.

Understood.

And on Neptune, I'm wondering if you're starting to see an impact on new resi, and how you think about the opportunity for residential recovery on the Neptune business, if you could contextualize that a little bit.

If it happens, it would be great.

Getting 700,000 housing starts is better than 400,000, and it's not as good as getting 1.4 million.

So we are hopeful.

I wouldn't say much if anything is baked into our guidance around a stronger housing start.

But if it happens, that will definitely -- we would think that's certainly a benefit to us in 2013.

Great.

Thanks.

Richard Eastman, Robert W. Baird.

Brian, could you just speak for a minute or two about the RF segment EBIT?

Significant jump in the quarter on the growth rate that was slightly negative.

Is that -- first of all, is that mix, or secondly, is that -- and maybe also was that sustainable at that level as we move forward?

It is very sustainable.

One of the things, Richard, you might -- if you want to get in trouble at Roper, you come in from operations and you say, well, we had a mix variance.

So we know exactly where it came from in every one of the businesses.

And certainly we have tightened up our execution in the TransCore toll business, and have better margins as a result of that activity, which is a shout-out to terrific work that has been done really by George McGraw in our Amtech business and some work that has been going in IPS business.

That said, software tends to grow at a faster clip than our friends do in the rest of the product measure of RF.

And as it grows, it carries with it extraordinary margins compared to the product businesses.

So again, given where we booked backlog, if it is partly Houston and it has been on the tolling side, we can expand that business in the second half off of this 27% EBIT margin?

I think that -- I wouldn't do that if I were in your shoes; I'll put it that way.

Put yourself in my shoes.

So that is not a good assumption?

No, I don't believe so.

Clearly, IPS has improved their operating performance in the margins, but we haven't changed the underlying economics of the fact that maintenance of toll and road services doesn't carry the same type of margin profile as our software businesses or as hardware for toll applications.

So as we continue to do more on the tolling, maintenance and service aside, we will have a -- I won't say mix because Brian will kick me, but we will have a variance associated with the relative growth rates of those businesses.

Okay, and then on the industrial tech side, just given that much of the leverage came at the SG&A line to get the EBIT leverage that you delivered, is it fair to assume that Toronto was finally a significant contributor in the quarter?

Toronto has been a nice contributor in each of the quarters.

Okay.

(multiple speakers) Was there any cost takeout visible on the SG&A line there?

Again, in this space you did comment about Europe weakness on the materials analysis side and some other things, but I'm just again a little bit curious as to where the SG&A leverage came from.

Is that cost takeout or is that --?

(multiple speakers) in the SG&A to drive revenue growth.

And so when you are largely selling direct and you've got the best technologies of anybody and you've got solid gross margins, you get the leverage on incremental revenue.

So we got some incremental revenue, we get the leverage.

Okay, thank you.

Jeff Sprague, Vertical Research Partners.

Just a couple things.

Brian, it sounded like the pipeline is fairly active despite biting off this nice big chunk here.

Should we expect more before the year-end?

I don't really know, Jeff.

It's possible.

I sure wouldn't rule against it.

I know what we are willing to do.

You never know what other people are willing to do.

And there's usually a bid-ask spread all the time when we are doing work.

This transaction with Sunquest demonstrates kind of how we act.

We started talking to these people in 2010.

And I will tell you, sometimes we will give people ideas or whatever, we wonder about what they are going to do.

I think these people have done just a spectacular job of taking advantage of some momentum that we thought could be available to them, and they've done that.

So we have some transactions that are similar to this that we have been talking to people off and on about for several years.

I think that depending on who owns the asset and what people think is going to happen between now and the end of the year around the tax structures.

Going into next year, you have higher levels of seller activity -- if they believe nothing is going to change and they don't have a capital gains that they are worried about, they may hold on.

If, on the other hand, they think that getting a high percentage of something is better than a lower percentage of something else, we may close the valuation gap.

I don't know.

I think it is possible that we would do another transaction, probably not quite as large as $1.4 billion, however.

I would bet not.

But that brings up another topic.

What are you thinking about on the divestiture side -- not naming names, of course, but clearly the portfolio is changing.

There is maybe some pieces of it that is not as core as they used to be.

It's an interesting juncture.

Your returns are so high, anything you divest is dilutive.

But at a time when you've got maybe such accretive acquisition activity going on, perhaps there is an opportunity to mold the portfolio a little bit differently.

Are you thinking that way at all?

Is there any prospect for something leaving the portfolio the next 6, 12 months?

Our core businesses deliver a tremendous amount of cash.

They've gotten dramatically better.

Their cash returns are more than 50% better than they were five years ago.

They give us tremendous EPS performance because they don't have the non-GAAP amortization charges that lay against them.

There is certainly an increasing inflection point where you look at this and say, what about this situation.

We are in a marvelous place where since we've maintained the autonomy of each one of these businesses, we can always decouple business and not have any problem doing that.

It's not like some other strategic that's got everything so embedded that one factory is making five items and one information system can't go with the business.

So all our businesses are total isolated and independent and anyone could be spun off to another party.

I think people largely have some ideas about which things might become available.

It's kind of like the trade deadline for Tuesday.

So it depends who is willing to pay what.

But we are not an active seller, but we have some assets that are probably more valuable to others than they are to us.

One final one for John.

Just on the EBITDA for Sunquest, does that $140 million include the associated DA that comes with the acquisition accounting, or is that the organic number?

Well, since the EBITDA excludes the effect of amortization, I don't think it really impacts that.

Having said that, the accretion number for the back half this year, the $0.12 to $0.14 that we expect, that does include the new amortization that we are estimating that we will absorb and then start to record post-acquisition.

So on the EPS side, it definitely does include that, of course, course always with the caveat it does not include the impact of the deferred revenue fair value accounting treatment.

Could you just then clarify for us how much EBIT is in that $140 million EBITDA number next year?

Well, here's the deal.

We have to finalize (multiple speakers)

35.

(multiple speakers) our amortization.

So let's say amortization comes in at $35 million to $40 million, that would get you $100 million of (multiple speakers).

Roughly $35 million.

Thank you, gentlemen.

Good luck.

Ann, I think we -- one more question.

Alex Blanton, Clear Harbor Asset Management.

First, I wanted to ask you about the Industrial Technology business and the pump business specifically.

Another company recently recorded a substantial decline in orders.

It was Gardner Denver, in the petroleum and industrial pump business.

And that particular business of theirs, orders were down 36% in the quarter.

And in another division, they had a pressure pumping order decline of 17%.

And you haven't seen anything like that, according to what you said.

Do you compete with them, or are you taking market share, or just what is going on here?

Because the two results are dramatically different.

I think the markets we are focused on are totally different, for the most part, than Gardner Denver.

We do have dewatering pumps that Cornell makes, and those have certainly been used in the shale activity.

Those have had strong growth.

That growth is moderating, but it is not totally negative at all.

That is pretty small part of the overall enterprise, and our Roper pump business continues to grow quite substantially.

So I think -- gosh, I'm not really at all close to Gardner Denver, but I think they are building a lot of stuff that maybe is going into rental and platforms and that stuff.

We have some rental business with Cornell, but it is not the core component of what we do.

So we are still making pumps for wastewater activity, agricultural irrigation and those kind of things.

Okay, thank you.

And second question is on the orders for RF Technology, TransCore on July 19 said they were awarded the Texas Department of Transportation statewide toll system integration and maintenance contract, replacing one of your competitors, and you get to replace all of their systems plus add your own to new systems that come on board.

So you didn't mention this, I don't believe.

It seems to be a different project than the one you talked about at RF Technology.

Could you talk about this new TransCore business that was announced July 19?

Sure, Alex, and you are correct.

It is not the same one.

The HCTRA business, or the Harris County, is the one that we talked about.

What you're referring to is the TxDOT, which operates a different set of toll lanes across the state of Texas.

And you're right, we will be providing them with software and maintenance activity, more of -- it's an indefinite quantity, indefinite timing.

So it is an IDIQ type of contract, and so it doesn't have the same immediate booking that the more definite execution for the Harris County does.

So we expect the Texas contract, sorry -- the TxDOT contract to add maybe $30 million over the next three years, but at a timing that may be a little bit lumpy as they decide on when to update and when to upgrade their specific lanes.

(multiple speakers) it just validates the strength of our technology.

I think people just -- I'm not sure everybody understands the strength of our technology compared to others, and increasingly, they are going to learn that.

Okay, thank you very much.

And congratulations on the Sunquest.

It looks great.

Thank you very much, Alex.

Thanks, Alex.

That ends our question-and-answer session for this call.

We would now like to turn the conference back over to Mr. John Humphrey for any additional or closing remarks.

Thank you, and thank you all for joining us this morning.

We look forward to talking to you after we complete our third quarter.

That concludes today's conference.

Thank you for your participation.