Roper Technologies Inc (ROP) 2013 Q2 法說會逐字稿

The Roper second-quarter 2013 financial results conference call will now begin.

I will now turn the call 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 Rob Crisci, Director of SP&A and Investor Relations.

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

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

We have 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'll please turn to Slide 2, we begin with our Safe Harbor Statement.

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

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

Next slide.

Today we will be discussing our income statement results for the quarter primarily on an adjusted basis.

A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation, which is available on our website.

For the second quarter, the difference between GAAP and adjusted consist of these three discrete items.

First, a fair value adjustment to acquire deferred revenue at Sunquest.

For the quarter this impact was $2.4 million to revenue and operating profit.

This adjustment represents revenue that, absent our acquisition, Sunquest would have recognized.

Second, a fair value adjustment to revenue for MHA totaling $18.5 million.

Again, this represents revenue that absent our acquisition, MHA would have recognized.

Finally, we included in our press release a one-time charge related to a vendor supply component that did not meet our quality standards.

This component is used in our Hansen business.

Hansen, which provides refrigeration valves for cold storage applications.

The $9.1 million charge in the quarter is our accrual for the estimated cost of this replacement program.

Any expected recovery from our supplier will be tracked and reported in the same way as we continue throughout the year.

We believe showing our results on this adjusted basis provides additional insight into the ongoing and recurring results of the business.

Now if you'll please turn to Slide 3, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

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

Brian?

Thank you, John.

Good morning, everybody.

We'll start off with the Q2 results.

Next slide.

On the enterprise financial results for the second quarter, it was a record quarter for Roper.

We had record orders, we had record backlog, record revenue, record net earnings, and record EBITDA.

The orders for the quarter were $835 million and revenue came in at $805 million, representing a book-to-bill of 1.04.

The gross margin was up 300 basis points to 57.9%, really spectacular results.

All four of the segments expanded their gross margin, so it wasn't just the benefit of the MHA acquisition.

EBITDA in the quarter was up 21% to $259 million so we're tracking at greater than $1 billion dollars of EBITDA now.

Our EBITDA margin increased 270 basis points in the quarter to 32.2%.

I should really remind everybody that we have very little depreciation, so it's really all about intangible amortization, which is non-cash.

So our intangible amortization is now forecasted to be about $150 million for the year, all of our amortization.

Whereas depreciation is more in the low-$40s million and CapEx will be similar to that.

Our GAAP operating cash flow was up 17% to $140 million and our diluted earnings per share were up 14% to $1.31.

We really thought that was a very compelling performance in a second quarter.

Next slide.

If we look at the income statement, here you'll see that comparison of orders up $835 million against $763 last year.

On the revenue basis, the revenue was at $805 million versus $725 million, so up $80 million or 11%.

1% of that was organic and when we get to industrial, I'll comment on the fact that we still have that Neptune customer transition going on or organic would have been a little over 2% for the enterprise.

Our gross profit soared from 54.9% to 57.9%, up those 300 basis points.

Operating income reached $210 million in the quarter, so the margin for operating income went from 24.7% to 26.1%.

Of course, if you looked at that on an operating margin plus non-cash amortization, the number would be well above 30%.

That operating performance includes the cost of our MHA deal expenses which we've taken against normalized earnings.

That would have added back another $0.01 or more.

Interest expense went up in the quarter, of course, with the paying for MHA's interest costs.

We'll cover more around that on the balance sheet.

Then the tax rate increased 150 basis points.

Last year's second quarter was 29.6%, this is 31.1%, so that created a $0.03 headwind in reported earnings here.

Notwithstanding that $0.03 on tax and $0.01 on MHA, we still reported $1.31 for debts.

Next slide.

Here if we look at our EBITDA growth continuing, I want to talk a bit about leverage here.

When you look at this slide, our trailing 12 month's EBITDA ending the second quarter of 2011 was $739 million.

This year, our trailing 12 month's EBITDA is $995 million.

So in just two years, we've added $256 million of EBITDA and our margins have expanded tremendously.

Two years ago our trailing EBITDA margin was 28.1%, as you can see on the slide.

This year it's 32%, so we're up 390 basis points on our EBITDA margin.

Our gross margins, in 2011 those trailing 12 month numbers were 54%.

In 2012 they went up to 54.6%, and this year on a trailing basis our gross margin is now 57.3%.

If you look at the leverage then, we have $995 million of EBITDA against a trailing 12 month revenue number of $3.112 billion.

You compare that to the 2011 trailing 12 month revenue of $2.630 billion so our sales in that two year period are up $482 million.

Our EBITDA increased from $739 million to $995 million, so it's up $256 million.

Our leverage on sales to EBITDA is 53.1% in that two-year period.

So we still continue to drive outstanding leverage with every new dollar of incremental revenue.

Next slide.

If you look at the cash flow, you'll see cash flow in the first half of the year reached $311 million.

That represented 20%.

The operating cash flow was 20% of our revenue.

Cash flow in the second quarter was up $140 million on an operating cash flow basis, 17% above last year.

Our free cash flow was $129 million, up 19% over the last year.

The strength of those gross margins in our cash flow performance gives us the confidence to say we're still on track for $800 million or more of full-year operating cash flow.

Next slide.

Here, if we look at the balance sheet, you'll see cash at the end of the second quarter was $375 million.

Our undrawn revolver was all the way back up to $1.458 billion, out of the $1.5 billion that we have access to, so lots of repayment.

We also, of course, issued these $800 million notes.

But when you look at that undrawn revolver at $1.458 billion, we would want to note that we have a $500 million bond that comes due on August 15.

That will be paid out of the revolver, still leaving us well over $1 billion of investable opportunity over the next several months, or into the first part of next year.

Our trailing 12 month's EBITDA at $995 million creates these debt stats you see below.

Gross debt is $2.758 billion, of course net debt being substantially less than that.

The net debt to EBITDA is 2.4 times, so we are really positioned to do another $1 billion transaction by the first part of next year.

The pipeline continues to be very good.

We see lots of opportunities.

We remain disciplined around what we're going to deploy and when we're going to do that.

Next slide.

If we get into the very specific segment details, next slide, we'll start with Energy Systems and Controls, here on Slide 11.

Compressor Controls had another very good quarter in the second quarter.

The bolt-on acquisitions we did for them some time ago, United Controls and Trinity are starting to do a little bit better.

A downside was Zetec's nuclear business was down really significantly.

There were four nuclear plants in the quarter that announced they are not going to restart.

One of those, San Onofre, was a very significant revenue stream for us, planned for the balance of the year.

And also Kewaunee and Palisades both announced in May.

So we look at the Steam Gen portion of Zetec for the balance of the year having a really dramatic headwind, somewhere as much as, it could reach $10 million versus last year's numbers.

We also saw weakness in the European Tire Manufacturing business.

That's primarily supported by our Alpha Instrumentation Company, although strength in many other areas for them.

We had very strong margin performance due to growth in the higher margin areas of the business and cost actions that were taken early in Energy that have very quick pay-backs.

If we look at EBITDA performance here, you can see EBITDA for the quarter was 30.2%.

That was up 100 basis points over the second quarter of last year and orders were up modestly, even despite the difficulty at Zetec.

For the second half of the year, we're starting to see Compressor Control bid projects on the rise again.

We had felt those were a little softer than we would have expected coming into the year, but boy, that's no longer the case.

In fact we're very full agenda on bids.

We expect double-digit growth in the oil and gas portions of our Energy business.

That's going to get led primarily by Pax Refinery Instrumentation business and by Compressor Controls and United Controls.

We think we'll have a strong seasonal fourth quarter.

Frequently we do in these businesses and there are no signs that that's not going to occur this year.

We have the headwinds that I mentioned on the nuclear end markets that are going to impact the growth or pull-down or mask the core growth of everything else, because of the steam generation fall off.

But we do have better adoption in our industrial activity around sensors and control systems that we've developed for those markets, so we still expect a strong second half of the year in Energy.

Next slide.

In Industrial Technology, here we had orders up to $205 million.

Revenue, while it's reported down 3%, if you exclude the Neptune customer transition from the segment, the segment would have been up over 2% organically instead of showing down 3%.

We had more than a $10 million drag in Q2 for this Neptune transition, which will be largely behind us soon.

In the second half of the year we think that's only about a $5 million drag, so this was the last big quarter for that.

Material Analysis in the businesses continued to be modestly lower, but the consumables were steady, so we think we're in pretty good shape in that area.

Our Fluid Handling business continues to do exceptionally well.

We get share gains in the oil and gas industry and the new products that we have are doing very well.

We've had great margin performance.

The EBITDA in Industrial Technology was 32.9% for the quarter and the OP margin, as you can see here, is 30.2%.

So it's truly remarkable.

Book-to-bill was fine at 1.04.

But in June, later in the month, we got into a discovery around this problem at Hansen, which is really a vendor problem of what's painfully a $2 part.

The root cause of this is clearly a vendor using the wrong protective spray on this part.

To remedy it, to be really fair to all our customers, we really feel we want to replace those installs that occurred during a multi-month period.

We've had discussions with the vendor, the vendor's not well-capitalized.

There are things we have to do with that vendor.

But no matter what, we have to take care of customers in this case.

It's really the time to apologize to our Hansen customers.

We really have a dominant position in the refrigeration valve business.

Hansen has been around for over 25 years.

They've been a consistent growth provider for our Fluid Handling business.

They've got a great team, but they've got a vendor who proved unreliable.

All we can do is what we're going to do, which is way beyond the warranty expectation to replace these items, which unfortunately involves labor on the part of our dealer network and we are internally thankful for the work they're doing.

In the second half of the year, as we said, the Neptune headwind goes away.

It's about a $5 million drag, so that will make everything look better.

And strength in the US homebuilding, we think will still be quite fine, which gives us more new housing starts, means more water meters.

We see broad-based fluid handling growth in the industrial and agricultural, municipal and oil and gas arenas.

We've got the Texas expansion for Roper Pump moving into a new facility that's on track.

We expect to be up and producing in the first quarter of 2014.

That's going to drive additional growth for us in 2014, with those new products we have that are used in the shale gas drilling opportunity.

But we do have this disruption in the refrigeration valve business at Hansen, which will be a little bit of a drag on Industrial Technology's reported numbers.

Next slide.

We look at the RF Technology business.

Here, year to date, this business' orders are up 10% over the prior year.

Second quarter was down a bit but that's because last year we had an extraordinary second quarter for Toll and Traffic, which booked the Houston project.

The result of that is they had nearly a third of their full-year orders hit in the second quarter last year, so it's just difficult comparison.

But first half of the year is up 10%, backlog is terrific.

We had high single-digit growth in our Software businesses that were led really by Education and Transportation end markets.

Toll and Traffic was led by the Houston project, which is well under way.

We had really terrific growth from our Wireless Sensor business, Inovonics.

Mark Jarman and his team in Boulder have done a remarkable job in getting that thing turned around and rebounding nicely.

Now they are getting the benefit, of course, of submetering for apartment buildings, they get the Senior Care growth and security products that we distribute.

That's had a very nice bounce for us.

Book-to-bill in the quarter was 1.08.

The backlog in RF Technology is now up 11% since the end of last year.

That takes us then into the second half this year with a strong opportunity.

The Toll and Traffic projects are going to drive significant revenue growth in the second half.

Texas is on track.

Virginia is starting up and on track for performing.

Our Florida tag upgrade is under way but it's ramped up much more slowly than was expected.

That's resulted in us moving some earnings into the fourth quarter that we would have originally expected in the third quarter.

In fact, some of that could slop over into 2014.

Still gives us a strong year performance on the Florida tag upgrade, but does hurt the third quarter.

Our continued subscriber base growth in the SaaS businesses continues to be at the mid to high single-digits.

We don't see any changes there.

The segment's definitely positioned for double-digit growth in the second half of the year.

Next slide.

If you look at Medical and Scientific Imaging, which of course is now our largest segment.

For the second half of the year that will really be true.

Just a lot to say about this segment.

The MHA acquisition really becomes transformational for us.

When you put MHA and Sunquest together you can look at this OP margin in the table.

The OP margin in the second quarter was 29.9%.

Now that's OP, and it includes intangible amortization, so the EBITDA is much higher.

That OP margin was up 630 basis points over the same period last year.

And revenue up 52% and OP 92%, it's just a reflection of the acquisitions.

When we look at what's happened in Medical and Scientific Imaging, a year ago was over 40% of the segment's reported revenue.

And this year it's not even reaching 30% here.

So it's just over a quarter of the revenue in the segment in the second quarter and that just becomes transformational in all of our numbers.

You see book-to-bill at 1.0 And that's nothing to be alarmed about because again, the model has changed, with Sunquest and MHA having dramatically higher book and ship.

Within any given quarter you won't see these big fluctuations on book-to-bill here that we had in the past.

Mid single-digit organic growth in Medical we would expect, and it was driven in the second quarter by Image Guided Surgery applications.

That's both our Northern Digital and CIVCO businesses and Ultrasound Consumables.

The Sunquest opportunity started finally accelerating, due to our system upgrades and new modules.

We had quite a bit of new commitments for those products.

We had the continued weakness that sort of is expected in the Imaging end markets.

We are not seeing any real improvement in the research markets.

They were down high single-digits and flattened the organic growth in the segment, which otherwise would have been mid single-digits or above.

If we look at the second half of the year, we can see sustained strength in the medical products, which will again be lead by our Image Guided Surgery applications and some new Verathon International growth, which looks quite good in the second half.

We don't expect any real improvement in the Scientific Imaging end markets.

That would be certainly a bonus if it were there, but we don't see that.

Sunquest growth becomes organic in the fourth quarter, which will certainly help our organic reporting statistics.

We would expect high single-digit growth in the fourth quarter out of Sunquest, maybe a little better.

MHA will add to our growth in the second half of the year.

All of the early performance that Mike and his team are delivering out of MHA, just to add more confidence to what they will be able to achieve this year and in the future years going ahead.

Next slide.

Here we get to talk about the guidance.

It's the next slide.

The 2013 guidance, the second half will be lead by those things we talked about, it'll be growth in Medical from the acquisition itself and organic growth.

Organic growth in Toll and Traffic, Oil and Gas and Fluid Handling.

We would expect the second half sequentially to be up over $225 million over the first half, and up over 15% over the first half in revenue.

Our Q3 adjusted DEPS guidance is $1.40 to $1.46, with mid single-digit organic growth expected.

We'd like for that to be a little higher, but we just can't move it, not willing to move it up higher than that because of the Florida tags moving into the fourth quarter.

It doesn't change the full year much, so in our full year adjusted DEPS guidance we're in at $5.72 to $5.86.

So we took $0.04 off the lower end and $0.08 off the higher, $0.06 off the mid point.

Really driven by two things that we just don't see any possibility of improving, the Nuclear business which is going to cost us several cents with this revenue that's no longer going to be available that was planned, and then a lack of any turnaround in the life science research market.

Full year operating cash flow though, we still see it as being $800 million or more.

Part of the benefit of that is it's stronger organic growth, certainly well above that 6%, could be 8% or 9% in the fourth quarter.

It gives us a gross margin which continues to improve.

And those gross margins are going to expand in the second half that will help bolster earnings and cash flow.

So we remain confident with this guidance at $5.72 to $5.86.

Next slide.

If you look then at the summary of how the quarter came in for the Company, notably we achieved record results in the second quarter.

Certainly not the easiest economy to report record results in, when you're looking at all those things, orders and revenue and net earnings and EBITDA.

Our book-to-bill ratio came in well above 1.0 again.

We've got a little over a $1 billion backlog, which is up 17%.

$1 billion backlog certainly eases what we need to do in the second half to drive the guidance that we've just confirmed.

Gross margins up 300 basis points to 57.9% with expansion in all four segments.

Those gross margins are significant and more importantly, they are sustainable.

So we believe that's the kind of gross margin we'll be producing in the second half of the year, if not better.

Our EBITDA in the quarter at $259 million represented a 270 basis point improvement to 32.2%.

When you look at sustainability, remember the 12-month trailing average EBITDA is 32%.

So things are in a very good place for us.

Our free cash flow was up 19% to $129 million.

MHA is on board, it's off to a great start.

We got the $800 million bond offering completed.

That re-stoked the balance sheet so that we're able to use our revolver for acquisitions going forward.

Debts were up 14% to $1.31.

We expect a much stronger second half.

And with that, we're good for questions.

Thank you.

We will now go to our question-and-answer portion of the call.

(Operator Instructions)

We ask that callers limit their questions to one main question and one follow-up.

Matt Summerville, KeyBanc.

Morning.

Couple questions.

First, with respect to Zetec, Brian or John, can you remind us how big that business is?

What sort of cost actions you're taking, as this resets to what I assume will be a permanently lower level?

And what ultimately you think that level of revenue is?

Zetec is really a bifurcated business.

We have a business which is around sensors that uses eddy current for a variety of applications.

And then we have the business which we originally acquired, which was focused on steam generation, which is the cooling tower application for nuclear plants.

We never really given any specific numbers, but I think we've probably said it's somewhere between 12% and 15% or so, of the segment.

The reality is that we're looking at a $10 million divot in 2013 versus 2012.

Might not be quite that bad because the eddy current sensor business is growing.

So if we can get that thing to grow a little bit better, it will help offset a little bit.

But we had well over $5 million of revenue and $10 million planned.

We really did not expect the closure of San Onofre.

May be reading about it, there's a lot of people that didn't expect it and aren't happy about it.

San Diego is wondering how they're going to produce energy but that's a problem they have to deal with.

But I think, thinking about it next year, we expect the business to develop new products, get new markets and make up for those problems.

So I wouldn't reduce our model by $10 million in perpetuity because of what happened this year on that.

Maybe $5 million.

Got it and then as my follow-up, for CCC, what are you seeing that's driving the change in bidding activity?

And can you frame that up numerically at all?

So the places where we're seeing a lot of bid activity, it's actually moved beyond.

So we have pipeline applications, particularly with some technology that the United Controls Group, so the UCG acquisition, the bolt-on we did about two years ago, some of that technology is able to be applied to some additional pipeline opportunities that we really didn't have technology for back when it was only CCC.

So the that's been helpful.

There's more activity on the upstream side.

So CCC has done quite a bit on the upstream side, particularly on offshore platforms, with control systems for compressors and those situations.

So they're seeing more activity there.

Predicting win rates is always a difficult thing, but there is sufficient bid activity there for us to see CCC as being somewhere between mid and high single-digit growth for the next few years.

Great, thanks a lot guys.

Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Brian, for the lower guidance on 2013, I think you've given a good explanation on the Zetec side, but you mentioned also the lower life science research.

Is that in the Imaging side or are there other businesses that are contributing to the lower outlook there?

Well, the research side of the business is what they had expected some improvement in Japan, some general improvement.

We're not seeing any of that, and so we just don't think we can include it in our thinking.

It could happen.

When we look at that mid-point guidance coming down $0.06, it's really half or a little more, back to two-thirds for Zetec.

And the other half is the Imaging thing.

We do have some OEM people on inventories that are not taking anything at all.

So that whole industry seems to be really tepid.

There are a few products that get shipped into people that are using the imaging technology for transportation and that business is certainly not robust, I would say.

Got it.

You've given a good explanation about the Hansen valve replacement process.

Just a couple of quick follow-ups there.

What would be the timing for, that you'd expect to complete the replacement?

Is there any provision for liabilities?

Have there been any damages other than just the replacement process?

Yes, there's two different things going on.

This is really beyond our normal warranty kind of thing, that we wouldn't really even have to do what we're doing.

But these are refrigeration valves that are supplemental point of safety applications in these plants in which they are.

And there are various things that could happen.

This is one of those things that what happened is, the vendor put on a transparent finish on these things, some of which is okay, some of which is not okay and are corroding faster.

So in our own testing and life cycle testing, we've seen some things that we didn't really like in June, and finally have gotten to the bottom of it.

In order to encourage people to make the replacement, we're covering some of their installation labor and giving them a new product if they send us back proof that they've made the change out.

That portion of that, no matter how we end up with a vendor, if we got reimbursed for the whole $9 million, it's still a charge.

We're going to incur that charge.

Our obligation, in our opinion, was to take care of the customer and the dealer network, and then secondly take the charge.

If we get all of it back or some of it back, we could exclude it from our earnings performance anyway, which is why we think it's a one-time item.

Now as far as the liability, we have deep liability protection if something were to happen.

But this doesn't come to the insurance clause, because it's really a product defect.

No one has been hurt or injured.

There's no difficulty.

If you saw this valve, it's a casting.

It's a pretty decent thing, maybe some of them the size of a bowling ball, and you got this $2 part inside it, which if you don't change it out four or five years from now, they normally do, but it might not last for four or five years.

It's something that we're just not comfortable with.

Yes, that explanation is very clear, appreciate that.

And one last quick one for me.

For MHA, what's the impact on gross margin for the segment?

And on a go-forward basis, how much is MHA contributing on the gross margin line?

Oh, boy.

It is clearly helping.

I don't have the exact contribution amount for MHA, separate from the rest of it.

Both Sunquest and MHA come in with, because of the way their business model operates as well as because of the value that they provide the customers, both of them come in at north of 75% gross margins.

Because all of the value they're providing is really on the operating expense side, with the technology and the customer support model, the contracting arm, all of the software developers in those two businesses.

On a gross margin basis they come in pretty high.

Obviously on an EBITDA margin, they are also above the Company average as well.

But, Deane, I'd have to get back to you with the specifics on how much MHA helps, but I know that even excluding MHA, we had gross margin expansion in the segment.

Great.

That's what I was looking for, thank you.

Christopher Glynn, Oppenheimer.

Wondering what the sensitivity is to the low end of the guide.

It seems like you're hedging some inopportune circumstances there, perhaps.

Chris, I've got to say I'm not quite sure I understand the question.

We always try to do our best to provide an outlook for the rest of the year that we think is balanced.

And balanced between both risks and opportunities that we see across the portfolio of businesses.

That's where we've come out with respect to taking a look at our guidance of $5.72 to $5.86.

We think it's pretty well-balanced on both plus and the minus.

Okay.

Chris, I think it was $5.76.

We took it at 5.72, so its $0.04.

And there's $0.06 or $0.07 in these two items, which were unknown at the time of the previous guidance, which would be Zetec and the situation in life science research.

We've actually increased the low end net of those two negatives.

I don't see the point, frankly.

Okay, and then wondering what the pro forma leverage is and if there's room to negotiate a more liberal covenant, given the scale of the business now.

Well, so our covenants on our credit facility on a leveraged basis debt to EBITDA is 3.5 times.

Given our commitment to and desire to stay an investment-grade Company, I don't see that 3.5 times as being a constraint for us at this point.

We're comfortable where we are.

We would be comfortable going up to 3 times.

Based upon the quality of whatever acquisition, we would probably be able to spike above that without touching or getting close to the covenant items.

This is a credit facility that, at $1.5 billion, has provided us with an awful lot of liquidity and allows us to have conversations, to never have a financing contingency, and those things.

It's a real powerful tool for us and frankly, it's not one that we're looking to redo.

When it comes due in another three or four years we'll talk a fresh look at that.

Thank you.

Jeff Sprague, Vertical Research Partners.

Good morning guys.

it's actually Ryan sitting in for Jeff this morning.

Good morning.

Just a quick question, maybe a follow-up to a comment made during, Brian, during your pitch.

You mentioned being positioned for another $1 billion worth of deals by early '14, I believe is what you said.

Can you flesh that out a little bit more and talk about whether it's one large one, a couple smaller ones, maybe just a little more detail there?

We always prefer one large deal.

One is easier than two.

Two are easier than three.

And if we had our druthers, we would do one billion-dollar deal a year, or $1 billion and another one for $200 million or $300 million.

It's an easy thing for us to do.

There are a lot of opportunities that are in that space.

We perform at such high gross margins and EBITDA performance, things we buy are always worth a lot of money.

They don't carry massive revenue or massive fixed assets that other people buy.

But we like the idea of a larger transaction.

I think when you get a Sunquest or an MHA, just like years ago when we acquired TransCore and Neptune, you get exceptional high quality management.

They are career-oriented people.

They've got lots of succession people lined up.

They are just far less risky than guys that are buying -- if you said let's by ten $100 million bolt-ons that I could save a turn of EBITDA, I'll leave other people with that strategy.

That's not our strategy.

We want to buy and help people grow, and use our tools to drive down their assets and reallocate their investment strategies.

And that's what they do so well, so nothing is changing in that respect.

Okay, I guess what I was getting at was, is there anything in the pipeline as you see it now that we should think about one way versus the other?

I don't think so because there are certainly things in the pipeline.

I mean you'd have a rare month here where we weren't actively engaged in a transaction with somebody.

Okay, and as a follow-up, wondering if you could give us a little bit more color about a couple businesses.

Mainly, what else is going on outside of the Florida tag slowdown in RF?

And then a little bit more color on the Neptune business in general?

Well, I mean, the Toll and Traffic business continues to do very well for us.

They have a very strong backlog with a couple of key project wins in Houston, and also Harris County which is also like Houston, so replacing and upgrading an awful lot of their in-lane equipment.

That's a project that we won earlier this year that we'll probably roll out over the next three or four years.

Then the Florida tag upgrade project, which is important not only because of what we're able to do for Florida, but it also once again demonstrates the ability that TransCore has in almost a unique fashion, to be able to have customers migrate from older technology to a newer technology in a very seamless way.

We have multiple protocols as technology has evolved and so the, if you will, the language that those tags and readers speak has improved over time.

We have the unique ability to have a multi-protocol reader, which allows them to have older hard case tags as well as the newer sticker tags and a couple other versions of those in one single seamless operating environment.

That's an important thing not only for Florida, but also for other areas that might look to be able to move up the technology curve as well.

Those things are going extremely well.

The Virginia ITS project is underway, and will start to help out in the second half as well as into the first half next year.

We see a lot of positive things that are on the horizon for the Toll and Traffic business.

Okay, great, thank you.

Mark Douglass, Longbow Research.

Looking at Neptune, you note that the housing starts are a gain there.

I assume those replacement of the install base is usually a much bigger component versus new housing starts.

Where you are at right now with Neptune?

What are the expectations as far as the replacement cycle?

Neptune is doing really well.

You can't give us any forgiveness for losing one customer, but without that Neptune was up over 10% in the second quarter.

We're tracking to very, very, very solid performance at Neptune.

We expect that they are going to perform well in the second half of the year once we get rid of this measurement transition with that customer.

So I think that's fine.

Housing starts, we have such a big share of water meters in North America and if you have 30%, 40% share and you have (technical difficulty) housing starts, where are those starts?

Most of them are not in Bergen County.

Most of these housing starts are in the South and the Southeast, or the far West and we are very important.

Any time you're digging water meter pits, we have a very high share of that market.

And that's what new construction looks like in most of the world when you're ar or below the cost line.

It doesn't take much in the way of those to help a lot.

Now another thing that happens, is if you have an increase in housing starts, the normalized activity for replacement sometimes, because of labor shortages in the municipal water facilities, gets postponed a little bit while they are doing the activity around the new starts.

So the two, not necessarily one is unrelated to the other a little bit, but net-net, if you were to ask us if we'd open up 10% Neptune excluding the customer loss in the second quarter, we would have probably said, well that would be difficult, but we achieved it.

And you're still expecting a strong tail wind in the back half, obviously?

Absolutely.

Okay, and then moving on to your Oil and Gas exposure, is most of that share gains or can you discuss that a little bit?

It seemed to be doing better than underlying of other component suppliers in Oil and Gas.

There's a couple things.

Our Roper Pump business which actually reports in Industrial and not in Energy, that's become largely an Energy business, frankly.

That business has directional drilling products, which are a best-of-class in certain kinds of applications.

We're starting a new facility in Texas to take advantage of larger diameter drilling mechanisms that we've developed.

We have a special heat-resistant operation, which is unique.

Really, vendors are anxious to get us up and moving so they can shift over to those products.

That's driven a good deal of growth in Roper Pump, but the rest of Oil and Gas is really the refinery businesses, which are back making instrumentation acquisitions.

Then our Compressor Control business, which is at the heart of pipeline technology for feeds and speeds around turbine compressor.

That business is doing well and continues to do well.

There's no negatives for us in the Oil and Gas arena.

We consider Zetec and our other sensor businesses in Energy to be really industrial or more industrial.

And by the way, just as an additional thing, Matt, you had asked about Zetec.

We cut 21 people which was 8% of the workforce here this month.

Okay, thanks.

Richard Eastman, Robert W. Baird.

Brian, could you talk for a second or two about Sunquest, maybe what the core growth looked like there?

I know it's not included yet, but what the core growth looked like there?

You commented that by the fourth quarter it should accelerate somewhat meaningfully.

I was wondering what an update would be on their ability to deliver next gen software.

So it's not just next gen software.

It's really upgrades and additional applications to the installed base.

So that's what is happening.

Particularly as hospitals look to utilize the software in the lab in order to be able to comply with meaningful use regulations, the existing set of customers have been able to meet the first level of meaningful use with the existing Sunquest software suite.

And then there are additional applications that are necessary to demonstrate meaningful use into 2014.

It's those upgrades that have created a sizeable, a very nice backlog of activity for Sunquest.

They are ramping up their delivery capability against what's a much larger set of net new orders or additional applications than what they've ever experienced in the past.

From a revenue basis, it's always a little bit questionable to compare against pre-acquisition times, because you're never quite sure everything that was in there even with the amount of diligence that we've done.

It's not subject to SEC reporting and all the other things associated with that.

But we see the revenue on a pro forma basis up in the low to mid single-digits, but we expect that to be better in the fourth quarter as they continue to execute against a sizeable backlog.

It's not until the fourth quarter when Sunquest will turn organic from a reporting standpoint, because we do wait until we have a full quarter to compare against under our ownership.

Okay, and then a second question or follow-up.

On the M&A pipeline, Brian, is the pipeline still heavily slanted towards software-type businesses?

And also is that again slanted towards the Medical side of the business?

Or are there opportunities in the other platforms that are equally as attractive?

Well, we've looked at a number of things this year that we thought were pretty attractive that are in the Energy arena.

And they, for the most part, either have a high degree of embedded software or firmware in the product.

Or they, in fact, are software companies.

And there's two that we've had recent discussions with that we liked, but we don't think they're are really quite right in their development life, if you will.

We think they've got some work they need to complete and if they get that done well we would be really happy to circle back with them.

So those are things that might happen.

There are a large number of people that tend to be in the, I remember that was a cash register world we live in around CBORD and Horizon and some other people that are collecting information that people use for invoicing and processing.

So there are businesses like that that we look at and talk about frequently.

Certainly MHA has opened up an opportunity to look at some other businesses that are complementary to those businesses in senior care and a number of different things that are going on there.

People know that we've just invested nearly $2.5 billion in Sunquest and MHA.

The Investment Banking community tends to deluge you with things that are similar to that, and they certainly have done that.

We haven't found any of those yet to be very compelling.

We have other conversations that we like that are more directly related to our existing businesses around bolt-ons.

We have the luxury of generating cash in a hurry and we're always going to do a great thing as opposed to just doing something to have activity.

So that's where it is.

Okay, great, thank you.

Steve Tusa, JP Morgan.

What was the organic orders rate?

I think it was the revenues, it was about 10% contribution from deals, what was that in the orders number?

So on an orders basis, organic orders in the second quarter were down 2%.

Okay, and then what's the third quarter organic?

What should we expect for the third quarter organic growth?

What's embedded in that EPS assumption?

Understand the second quarter, that idea that they are down 2%, when a third of TransCore came in the second quarter last year is not a normalized number.

Okay, so ex that what would it have been?

It must have been flat.

Okay, and then for the third quarter what should we expect from an organic perspective?

I'm just trying to understand the sequencing of the second half.

Well I think we said that we expect revenue to be in the 5% to 6% in Q3 and somewhere between 6% and 9% in Q4 on an organic -- (multiple speakers)

And then one last question, just a housekeeping item, on the deferred revenue is up nicely sequentially.

How much was MHA, how much did that contribute?

MHA did not actually have very much deferred revenue at all.

So most of the deferred, in fact, the deferred revenue growth that you see in the second quarter, is annual renewals at our CBORD and Horizon businesses, as well as additions at Sunquest.

It really does not apply with MHA.

So that's a pretty positive move there, right?

It is.

So A, it's a positive move and it's also a little seasonal with respect to when the renewal periods happen for college and university customers.

Those renewals generally happen in the second quarter, due to their fiscal year and the way they roll out new projects.

Even without that, though, it's still a nice increase for us.

Great.

That's terrific color.

Just one last question.

The segment that I just want a little more detail on would be Energy.

Compressor Controls are obviously going to be up.

Your orders were up low single-digits.

There's a headwind from Zetec, looks like around 3% there or $10 million year over year.

In the second half we're talking about growth there obviously.

Is that low single-digit just below the average of the Company for the second half in Energy?

I would say that for the segment in total it will be about similar to what the total Company will be in the second half from an organic basis.

True, the drag on Zetec will hurt that, but the Oil and Gas portion of that segment is actually growing faster than the Company.

So net-net it's in line.

As we look across the four segments for the second half, we see more of the organic side coming from RF, less of the organic coming from Industrial because we do still have a little bit of the headwind.

Although it does go away by the time we get to the fourth quarter, with that customer loss.

And then the rest of it in the range.

Great color.

Thanks for the detail, appreciate it.

John Quealy, Canaccord Genuity.

Hello, good morning.

Can you talk about, on Industrial Technology, the impact to margins on the Neptune headwind either Q2 or rest of year?

From a margin perspective, it's de minimis.

They are all about the same type of margin profile.

The only time when we have a little bit of margin movement, if you will, is when, for example, on our Toronto project, where we're not only providing the meters and technology, but also doing the installation services.

So that's something unique to the Neptune business in Canada.

The installation services, which is the labor force and temporary labor we're able to bring on board in order to do the installs themselves, that labor portion doesn't have the same type of technology and other things that we have embedded in the meter.

So it comes in at a slightly lower margin.

Other than that, all the meters are generally similar in terms of margin profile.

Okay great.

In terms of my follow-up, Tolls and Traffic, you talked about good visibility with Houston and the Florida migration now, Q4 into next year, but can you talk about refilling the backlog in terms of the pipeline of projects?

How do you characterize that environment?

Thanks, guys.

Well, those things, and when you get orders, are always really very, very lumpy.

We're involved in a number of big projects.

We've got a good deal of new activity that we're looking at in Dubai.

We have new activity in some other portions of the Emirates.

We have additional activity we're working on in Puerto Rico.

And then we have substantial activity here in the US that we're working on.

We've really beefed up our regional sales organization so that we're getting much more direct customer focus than we, frankly, have had in the past.

We've got considerable amount of management talent.

Those guys are very, very bullish about what they think will happen in 2014 and 2015, so they would expect record performance off of these various projects.

And then the profitability circles around what the mix of the business is, because the reader technology and the tags of course, are higher margin than the service business.

But the service business is higher total revenue.

While I wouldn't establish guidance yet for 2014, we would expect for our ITS and Amtech businesses to have growth that could well be above the Company projection for 2014.

And I think, John, with that, we're not going to --

That is correct.

We've actually reached the end of our allotted time, so I think that we're all set at this point.

Kyle can you wrap us up?

That will end our question-and-answer session for this call.

We now return it back to John Humphrey for any closing remarks.

Okay, so once again thank you all for joining us and we look forward to talking to you again in three months as we complete our third quarter.

This does conclude today's conference call.

Thank you all for your participation.