Roper Technologies Inc (ROP) 2014 Q3 法說會逐字稿

The Roper Industries third-quarter 2014 financial results conference call will now begin.

This call is being recorded.

I will now turn the call over to John Humphrey, Chief Financial Officer.

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

Joining me this morning is Brian Jellison, Chairman, President, and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, who heads up Planning and Investor Relations for us.

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

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

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

Next slide.

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 further detailed in our SEC filings.

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

Now if you'll please turn to Slide 3. 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 and on our website.

For the third quarter the difference between GAAP and adjusted results consists of two discrete items.

First, a purchase accounting adjustment to acquired deferred revenue, and our recent software acquisitions, FoodLink and SHP.

That totals about $950,000.

That's an adjustment to both revenue and operating profit.

As a reminder this represents revenue that, absent our acquisition, those businesses would have recognized.

In addition, we also had an inventory related step up charge for IPA for about $400,000.

And now if you'll please turn the slide, 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?

Good morning, everyone.

If we look at this first slide here on a summary of the third quarter.

At the enterprise level we had record third-quarter results in all of the categories.

All-time record on orders and backlog, revenue, net earnings, EBITDA.

One of the things that was particularly encouraging about the quarter is we really didn't have any significant headwinds in any one of our segments.

I remember last year we had difficulty with Zetec and from time to time there may be something.

This quarter really didn't have anything at the segment level.

We did have better geographic results on a broader base than we would have expected while the US was certainly up.

Every place was up except for Brazil and some portions of the Middle East.

Our revenue in total was up 6% with organic revenue up 4%, and again, kind of broad-based results, all of the segments were up.

Our gross margin was up 70 basis points on the adjusted non-GAAP number to 59.4%, a little better on a GAAP basis.

And operating margin was up 60 basis points to 27.9%.

Leverage in the quarter was 39% in keeping with our guidance of 35% or more.

Net earnings were up 10% to $156 million, represented $1.55.

Of course the GAAP basis compared to the prior year was higher than that of 13%.

Our operating cash flow was $226 million, which was a cash conversion of cash to net earnings of 145%.

So it was a terrific quarter for us pretty much across-the-board, and certainly provides a lot more assurance about us reporting our record 2014 full year.

Next slide.

If we look at the income statement in the quarter, orders were up 6% to $893 million.

Revenue was up 6%, while organic was up 4%, it will be up stronger than that in the fourth quarter.

Our gross margins were up to 59.4% as we said, up 70 basis points, operating income up.

Our earnings before tax were up 12% to $228 million.

Our tax rate was higher in the quarter from last year, instead of 30.3% it was 31.3%, which cost us $0.02 a share.

And then you can see the net earnings number at the bottom, the diluted earnings per share and we're comparing it against our non-GAAP number last year of about $0.42 (sic - see slide, "$1.42") on a GAAP basis, we were at $1.54 against $1.36 last year.

Next slide.

EBITDA growth continues and our margin expansion continues.

I know most people find that really remarkable, but we do have certainly some of the best operating people in the world, and they continue to deliver spectacular results.

In the last two years our EBITDA is up $301 million to $1.173 billion from $872 million.

And our EBITDA margins have grown by 380 basis points; they were 29.8% in 2012, and people telling me they obviously maxed out and the direction of the mean would be taking us down to the mid 20%s.

Nothing could be further from the truth.

We continue to grow our margins.

You can see they were up to 33.6%.

And our gross margins similarly have expanded; back in 2012 on a trailing 12 month basis at this point in the year, our gross margins were 55.2%, and today our trailing 12 month gross margins are 59.3%.

Next slide.

If we look at the cash flow, we had better cash flow quarter here in Q3; as you can see, the important items being 145% cash conversion on operating cash flow.

That $226 million represented 25.6% of revenue in the quarter, and our free cash flow at $217 million represented 24.5% of free cash flow to revenue in the quarter.

That brings us as you can see to $579 million on the year, and we would expect a strong fourth quarter so that our conversion factors stay well above the 130%.

If we look at the compounding nature of cash flow, which is what we get out of all of these software and medical acquisitions, we've taken cash flow up from $659 million in the trailing 12 months in 2012 to $815 million this year, and of course we'll have a stronger fourth quarter.

It will be the 17th year in a row that our free cash flow will exceed net earnings.

Next slide.

Here, if we look at the balance sheet you'll see cash grew in the quarter by $104 million.

Our undrawn revolver was paid down, so despite deploying $303 million in the quarter for acquisitions, we ended the quarter with almost $2 billion in cash and undrawn revolver position.

With our trailing 12 month EBITDA at a $1.173 billion, you can see those ratios gross debt to EBITDA at 2, we would like to be higher than that.

We would expect that we would easily deploy $1 billion or more in the acquisition arena in the next 12 months, and it could be higher than that, could reach $1.5 billion or more.

Next slide.

Here if we look at the individual segments, they all performed well in the quarter.

Next slide.

The Energy Systems and Controls, we'll start with the smallest of the segments.

You can see here that Energy Systems and Controls represents about 17% of the EBITDA we get in quarter three.

Its revenue was up sharply, up 10% over the prior year.

Operating profit was up 19%, so it had very outstanding leverage, nearly 50% leverage in the quarter.

OP margin reached 28.7%, and the good thing about all of that is that in the fourth quarter we expect a very strong improvement in operating margins out of our Energy Systems segment.

Orders were up terrifically, they were up over 14% in the quarter for Energy.

The organic revenue in the quarter you can see here was 8% with that terrific leverage.

We had double-digit growth in our oil and gas products, including the safety systems that are involved in fracking operations.

The valves and sensor businesses were good.

We saw absolutely no softness in anything related to fracking activity or oil sands activity where we do a lot of dewatering of businesses that you'll see coming up when we talk about industrial.

Here it's really the shut off valves that are important.

Our Zetec business bounced back from a bad third quarter a year ago to have a much more normal quarter, so much, much improved on an easy comp basis.

And on the after market and field service for compressor controls was particularly strong, although the large project spending decisions certainly have been slow with all the geopolitical confusion you have.

But despite those geopolitical issues, compressor controls bookings in the quarter were up nearly 20%.

We had a modest decline in our pack business around refinery instrumentation projects, but nothing to be alarmed about.

In the fourth quarter, our oil and gas products continue to perform well as this oil price indicator doesn't seem to have any elasticity effect on our businesses.

Again, we're much more involved in the throughput productivity side of that than in the exploration of new well side.

Very strong compressor controls; after market field service would be expected in the fourth quarter, and this is a segment that always has strong fourth-quarter results for people that have left over MRR budgets, and we would think that would be the same this year.

Often that benefits our instrument sales.

And despite having some foreign exchange headwinds, which occurred in September and will of course continue in the fourth quarter, we still see very strong sequential operating profit growth in the fourth quarter.

Next slide.

Here if we look at Industrial Technology, you can see Industrial Technology is up to 21% of the Company's EBITDA in the quarter.

It had modest revenue growth but last year was, particularly with Neptune, an all-time record third-quarter number.

Operating profit up modestly, the margin was up 200 basis points; going forward from the way we look at it, it will be a much stronger margin.

The Roper pumps directional drilling activity continued to be just really very good, double-digit growth.

The reline activity we do in the new Houston facility that we opened last year is continuing to ramp up, passing its breakeven contribution and doing extremely well now, and it's going to continue to perform well in the fourth quarter.

Our Cornell pump business, which is the dewatering business, continues to do very well.

The rental markets are up strongly.

And the shale and oil gas production area, even though rig counts may be modest or declining in some areas, it doesn't matter for us because the productivity increases that you're seeing many of these places are up 20% productivity.

Our products are really required for the throughput side of the equation, so they're not influenced that much by the new rig count and much more by the throughput.

Our material analysis business has performed well and did better in Europe than we would have expected.

In fact, the overall Company did better in Europe than we might have feared given the headlines you see.

Neptune was down slightly in the quarter against last year's all-time record performance, still performed very well.

The five-year Toronto project is a bit ahead of schedule, and as we look and talked with them, we think that's probably on track to get completed some time next year, perhaps around the end of the first half of the year.

And we continue to develop and expand our systems capability at Neptune.

And one of the great things that the technology team has done there is backward compatibility for all these enhanced systems.

And the result of that is that people don't have to worry about a technology migration because we're really offering them an evolution that allows them to be able to use old and new technology at the same time, and we're not limited by any old networks that so many of our competitors are strangled with.

In the fourth quarter, we have mid single-digit revenue growth that we think we'll have within the segment as a whole, despite having some foreign exchange headwinds that we have to overcome.

We expect to have particular strength in the storage material analysis segment, and Roper pump is going to continue to gain as their production continues to improve quickly, and we think we'll have stronger operating margins in the fourth quarter along with much stronger revenue growth.

Next slide.

If we look at the Radio Frequency Technology segment, it had substantial order growth in our toll and traffic businesses.

Last quarter, we talked to you about very important wins in the Henry Hudson Bridge in the San Francisco Bay area projects, and this quarter we've added to those with the Houston Grand Parkway and the Pennsylvania Turnpike upgrades and Florida I-95 Express Lanes, all three of those will be in excess of $50 million in total, so all that bodes well for the future in 2015.

We had increased tag shipments that helped our margins.

You can see the margins were up 80 basis points to 29.1% really led by improvements in the tag shipment business.

Our SaaS businesses continued to grow, but the important thing about them is if, even though they may only have mid-single digit growth, they compound that cash flow growth on a constant basis that allows us a lot of money for reinvestment as they need very little for their own internal business development.

And our seaboard and horizon business had strong operating profit as recurring and maintenance revenue grew despite having lower revenue in the fewer security projects that you're seeing at the university and K through 12 level.

If we look to the fourth quarter, you can see that we think we'll have kind of low single-digit growth compared to last year's record fourth quarter, but still better than last year.

We've got substantial opportunities in growth in the intelligent transportation systems solution area.

We've got quite a lot of bids out.

We've got some significant progress we've been making on process quotes and discussions that look like it should well position us for certainly 2015.

The iTrade business has been benefited by the FoodLink acquisition that we did in the third quarter.

Normally, our integration process is pretty simple, and the iTrade area that was not; we had to take some costs out and to do some other things which are several months ahead of schedule, so we feel particularly good about how that's performing.

And as you can see, the Radio Frequency segment in the quarter represents a 26% of our total EBITDA.

Next slide.

Here as we look at our largest segment, the Medical segment, which increasingly really is around healthcare.

If we look at organic growth we were up 6% in the quarter.

The device side of the business was sort of low single-digit growth led really by our Northern Digital, Ascension, image guided products and some consumables at CIVCO.

We had great performance, just great performance in both Sunquest and MHA.

Sunquest continues to drive execution around the meaningful use implementations and upgrade, which is finally getting us out of some of the backlog that we had experienced last year with Sunquest, so productivity is up sharply here.

And at MHA we've got a favorable trend in basically the spending arena around long-term care pharmacies and assisted living and skilled nursing facilities, so MHA is having, of course, really both Sunquest and MHA have spectacular all-time record years.

We acquired Strategic Healthcare, SHP in the quarter.

It's a really phenomenal business with a high-growth profile.

It's a SaaS provider of data analytics for the post acute healthcare organizations, these are things like home health and hospice care.

It's very complementary to what we do at MHA.

And we also acquired another company, IPA Innovative Products, which is the leading provider of automated surgical scrub dispensing systems for hospitals.

Pretty good timeline given everything people worry about today on disease protection, and they provide a lot of productivity for the surgical suite because people oftentimes can't find their uniforms, they don't have the right size, people have to wait while people bring it, and these automated dispensing criterias just facilitate that and reduce expenses almost immediately for the hospital.

If we look at the fourth quarter, we've got Sunquest and MHA will continue their double-digit growth and medical devices probably going to be in the mid single-digit arena.

But the overall segment, even with the imaging activity, is expected to have double-digit segment growth in the fourth quarter.

So not only do we get that, we think we'll continue to have some margin expansion.

And you can see that medical healthcare represented 36% of the Company's EBITDA.

Next slide.

So if we update the guidance, we're increasing our full-year guidance from $6.27 to $6.37 to $6.32 to $6.38.

We started out the year with $6.05, so we're quite pleased with how the year has come online.

Our full-year guidance would be to have revenue growth around 8% to 9% with organic growth around 6% to 7%.

We're going to bounce back with organic growth in the fourth quarter at 6% to 7%.

Overall revenue growth in the fourth quarter expected to be 7% to 8%, fortunately tax is probably going to be 32%.

And then these guidance numbers include the September 30 foreign exchange rates.

They don't forecast anything beyond that.

Exchange hurt us a bit in September, but didn't do much for the quarter as a whole but it's a bit of a drag going into Q4.

Next slide.

Here if we look at the summary of the quarter, once again we achieved records in pretty much every category you can think of.

The revenue up 6% with organic 4%, but we're going to have a stronger 6% to 7% Q4 organic in the fourth quarter.

Gross margins at 59.4% are pretty spectacular.

Operating margins at 27.9%, but the reality is we have a lot of non-cash intangible amortization, and if you look at the EBITDA performance you'll see it's even stronger.

We got 39% operating leverage out of the third quarter, which is quite remarkable, and EBITDA almost at a $300 million clip at a third of the revenue.

We deployed $300 million in attractive acquisitions, we expect to continue the capital deployment and we've got a favorable pipeline and there are quite a few things that we're working diligently on as we speak.

I don't know if any of those would close within the quarter, but they are likely to close some time sooner rather than later.

We've got very good year-to-date performance through the first nine months.

Certainly record levels of growth and record margins and cash flow.

We've raised our full-year guidance again, and we're confirming the strong cash conversion that we talked about well above 130%.

We expect a record year.

And with that, we should open it up to questions, John.

Okay, Kayla, if you can start the Q&A portion of our call this morning we would appreciate that.

(Operator Instructions)

We'll go first to Richard Eastman with Robert W. Baird.

Yes, good morning, Brian, John and Rob.

Good morning.

Just for starters, could we just maybe talk a little bit to Brian about the geographic growth?

You kind of touched on it in the materials analysis business, but just kind of suggested that maybe, overall, Europe was stronger than expected.

Just maybe comment on what businesses in Europe surprised you positively?

Well, we had pretty deep growth everywhere in the quarter.

Nothing spectacular, but the only places we were down was Brazil, where we expected to be, and some of the things in the Middle East, which are really slow just because of the political environment and decision-making, but our positions are good and solid.

Everywhere else grew.

So, Asia was up double digits; Europe was up 3%; Canada, despite some last-minute currency pressure was still up in the low-single digits; and the US was up a little over 5%.

So, about 65% of revenue is still domestic, if you will, and about 35% outside North America -- it used to be closer to 40%, but as Sunquest and MHA are essentially US businesses.

So, that affects the thing.

But the core or underlying businesses are doing well globally -- really, other than Japan, don't have any softness anywhere in Asia.

Europe's industrial activity was where we were pleasantly surprised.

[Earth] did particularly well in Germany, and given the things that you're seeing about Germany, that was -- we felt good about that, and orders were strong there.

And then, medical did particularly well in Europe against its normal outcome.

Just from the M&A pipeline, in the M&A pipeline, are you seeing a lot of opportunities that are non-medical -- the scientific?

Well, we see a lot and pursue a lot of things that are SaaS-based or licensed software that we look at, and those fall into very different categories.

One of the things we're doing now would look more like an extension of Inovonics, which is a security business that has some very unique technology over the pendants, if you look at the -- I've fallen and can't get up pendant lines of activities that we have that we don't talk a lot about.

So, there are some times things in that arena that we look at.

In the industrial arena, we still haven't really seen anything that would fit our cash-return-on-investment methodology.

We're getting very strong GAAP-based EPS performance out of fluid handling.

But when we look at other people's stuff, we just don't see people that have our margins.

Our EBITDA margins in that segment are above 30%, and most of the stuff we see comes in with gross margins at 30% and EBITDA margins at 16%, and it depends on other people increasing demand to create any real leverage in the business.

I see, okay, very good.

Well, thank you and congrats.

Nice quarter.

Thank you.

We'll take our next question from Christopher Glynn with Oppenheimer.

Thanks, good morning.

As we look into next year, it seems like you have some nice momentum carrying through with tolling projects and the medical SaaS businesses.

Then there's some concern out there of oil and gas markets -- idea that the spending might be hitting a plateau.

You gave some color there, Brian, but maybe you could just give a deeper diagnosis of that market?

Yes, I think the thing that was encouraging about the third quarter is -- CCC was basically up 20% in orders, and that's an area that you would be concerned about two factors.

One, geopolitical risk, with Russian sanctions and anybody serving anything going into those markets.

And then price elasticity around Brent and WTI crude, or are you worried then about rig counts being less growth even than they were?

Well, it turns out all of our stuff is productivity related, so it's after-market activity or it's improving throughput.

We had a very strong Cornell pump business growth with de-watering pumps.

Well, if your productivity -- and if you read almost anything, you'll see that things like Eagle Ford, their productivity is up 20%.

Well, that measures throughput, and they need our de-watering activity for that throughput increase.

So, it's less dependent on new rig counts and more dependent on throughput.

Price elasticity -- again, it's really about usually other people's consumption of energy and their production process.

So, they are still interested in that going down.

So, we really haven't seen any early indicators, either in an industrial or an energy platform that would cause us to be concerned at this point about 2015.

I think, particularly with Europe up somewhat in the quarter, we just don't see an area of softness.

That sounds good.

And then just another area of the portfolio, since you had the new investment there for iTrade, can you update us on what you're seeing for adoption and penetration trends -- market share for that platform?

iTrade continues to perform really well, particularly in the US and their order management system.

That's been the -- that was really the main reason that we acquired iTrade was because of what we thought were favorable trends in order management and being able to more seamlessly connect the supply chain for fresh and perishable goods in the grocery chain, and that is continuing to prove out to be the case.

We've really refocused that business more on the US market.

They kind of started to go outside the US, but I think got a little over their skis in terms of capability to deliver while they still had quite a bit of addressable market here in the US.

So, they are growing very nicely here in the US; outside the US, not quite as much.

And we really think that the FoodLink acquisition and the capabilities beyond the supplier side, all the way back to the farm and the organic farmer side, will really help extend the offerings that iTrade is going to be able to have.

So, we're encouraged by the progress there.

Thanks, John.

We'll go next to Jeff Sprague with Vertical Research Partners.

Thank you, good morning, gentlemen.

Good morning.

Just on the deals that you closed in the third quarter, could you just give us a little bit more color on the acquired revenues or the acquired EBITDA, and how to think about the multiple, how to think about kind of an accretion profile into 2015?

Sure.

So, we invested about $300 million in these three acquisitions between FoodLink, IPA, and SHP.

And in total, we expect them to deliver in the high-$20-million range in our first year of ownership.

So, we paid about 11 times -- a little bit less than 11 times first-year EBITDA.

And given the profile for these types of businesses, extremely asset light, high amount of recurring revenue, software type of margin profile, we think that we paid a fair price, but a very good price.

So, we're encouraged about that.

In terms of revenue, these are going to have, I think, after the amortization charges, it will probably be similar to the Roper margin profile.

So, I think you're looking at somewhere in the $75-million range for first-year revenue.

Okay, great, thank you.

And we also have a cash tax benefit that accretes to us.

Yes, there's a modest cash tax benefit included in that $300 million; maybe $10 million or so.

Okay, great.

And on the other side, Brian, this has been raised on prior calls and you've got some really good assets and selling incomes with dilution and things like that, but I've heard a little bit of chatter.

I don't know how real it is, but maybe on the pump side you guys might be looking to shed something there.

How should we think about the other side of managing the portfolio?

And to your point, some of the stuff is going for high multiples, and it's not maybe great assets.

You've got some very good assets that perhaps will catch up -- a very solid multiple in this consolidating environment that we're seeing.

Pretty much all the businesses are pretty good, as you say.

I mean, we have only just a few product lines that are things that we wish were not part of the portfolio, but there are only a few of those.

I think we do get bids from time to time from people about certain assets every once in a while.

We pursue them, as a rule.

It's hard to ever see those divestitures come to fruition because the after-tax contribution is not a shareholder-friendly result.

So, if we were going to divest anything, we would want to assure ourselves that the cash from the disposition had an immediate and great home.

I'm sure that there are some assets we own that would perform as well as they do with us in another place, or if you have an asset that has maybe growth characteristics but it's in a very dilutive cash-return profile, and somebody else wants to invest in it and has a lot of synergies with it, and we can get a fair price for it, then we're certainly not above disposing of some of those kind of things.

And I think a lot of people -- acquisition activity is just very intense, and pricing is pretty high.

So, there are people who call us about possible divestitures who wouldn't have called in the past, as they're finding how much these things are really worth, and they can't find anything else, and ours are so much better.

So, it's certainly possible that you could see some portfolio adjustment next year.

Thank you.

I was wondering if I could just slip one more in?

Could you elaborate on what you said about security projects, and I think you said K through 12 and colleges.

Are you seeing some cyclical let-up there, or is it just kind of the programmatic nature of some of those projects -- just the state of those markets?

Yes.

It's really at Seaboard and Horizon where -- in Seaboard, in particular, we had the [one-cart] technology that does everything on the campus or healthcare environment.

And they've had some particularly big transactions.

The last large one I think was Northeastern University up there.

That's sort of cycling out.

And the university and healthcare campus activity -- decisions are really slow.

So, quotations are there.

And what happens on the projects is there is some throughput of other people's security hardware, in addition to our systems.

And so, if you don't get that, which we didn't have in the third quarter much of, it brings down the revenue.

But actually we had better operating results because the software portion and the license maintenance activity is at much higher margins.

So, what we were just trying to reflect is: It didn't look like revenue was really strong, but actually the OP was quite strong.

Okay, thank you.

At the end of the day -- just to elaborate on that a little bit -- at the end of the day, Seaboard is a software business.

We do sell through hardware in order to facilitate some of the security applications.

But fundamentally, we look at the software and the maintenance revenue and the new license revenue out of that business as the ongoing health and growth of that business.

And you have the lumpy projects around security that we'll add on top of that.

And as Brian said, we're very encouraged by the nice growth in the maintenance revenue, which is really their installed base, and the annuity that comes along with everything that they are providing for those customers.

Great, thanks.

We'll go next to Joe Ritchie with Goldman Sachs.

Hi, good morning, everyone, and nice quarter.

Thank you.

Good morning, Joe.

My first question is: I'm trying to square your comments on energy.

Our energy team today came out with a price deck -- a WTI price deck of sub-$80 for next year.

And, Brian, you mentioned in your prepared comments that large projects continue to get deferred, but the bookings were really strong in compressor controls and, frankly, across the rest of your Business.

So, I'm just trying to better understand the resiliency of compressor controls, Roper Pump, Cornell.

And perhaps maybe if you could set the context -- how much of your Business is after market versus OE-related, that would be helpful.

Well, let me address the second one first, and I'm basically going to address it by saying we're going to have to get back to you.

We don't really think of it as OE and after market, as much as looking at our total exposure to oil and gas, knowing that most of our applications are around throughput and efficiency and quality, whether it be in the refinery side for instrumentation that are measuring quality, or throughput and efficiency like our compressor controls business.

We would have a few modest applications that are more on the upstream side, but they are on the upstream production side -- things like diesel engine, shut-off valves, and de-watering pumps, because there's quite a bit of water that's used, even on the production side, in addition to the exploration side.

Very little of what we have -- just kind of thinking through it -- very little goes to OEMs, per se, other than, of course, knowing you have drilling -- people who are doing drilling applications or production applications that I guess could be qualified as an OEM, but it's not really an OEM the way I think of it, in terms of larger automotive-type markets.

It doesn't feel like that to me as we go through all of our businesses.

And then, as far as the outlook on crude oil prices -- I mean, we really don't see an awful lot of that.

Most of the areas where we have seen delays, or at least slower decision-making for some of those large projects, I think they are more geopolitical in nature rather than price of oil in nature.

Brazil has been slower to make decisions around some of those things.

Some areas of the Middle East not quite as fast on making some investments as what we might have expected.

But it doesn't change the fact that energy is still doing extremely well.

Our total oil-and-gas-related businesses -- I don't have it at my fingertips, but they were clearly up in the quarter and up on a year-to-date basis, despite seeing the oil price start to come down.

So, it's something that we're keeping an eye on.

We definitely benefit by having very lean, very nimble organizations that can act quickly.

But at this point, we still see more opportunities than we see on the risk side.

Okay, that's helpful color, John.

Maybe one follow-up: Brian, you mentioned earlier -- you talked about $1 billion to $1.5 billion in deals over the next 12 months.

Clearly, interest rates have moved lower again; valuations look more reasonable.

Are you seeing any greater competition at this point?

And maybe you could just try to compare it versus what you've seen over the last 6 to 12 months?

I don't see that.

Interest rates for the M&A market haven't had any material change.

I mean, if there's anything, it would be a little bit of people yelling at the banks that their 7 and 8 times debt stables are a little out of control, and maybe some of the European banks that have been doing that routinely should think about it.

But the reality is we still see ridiculous amounts of debt financing on every transaction.

We never see anything that's less than 7 times stable debt.

Despite what other people are saying it shouldn't be above 5 or 6; well, it is.

It's a lot above it.

And there's a lot of private money available that's still happy to go in at sort of 5% kind of interest rates.

There's still a lot of PIK, so prices are as high as they've ever been.

There's a huge amount of stuff for sale.

I mean, we have gone through more conversations this year with people than we've ever done in our history, and still there's just a huge amount of them.

We'll be out tomorrow on one, we'll be out Wednesday on two more where management presentations are very robust.

I don't think private equity has pulled back by one penny.

I think some of the strategics have sort of given up.

But the kind of things that we are looking at investing in are things that really want to be part of our Company because of the nature in which we manage it, and the governance process and the freedom that entrepreneurial people have to survive here.

So, we're not seeing any problem with the pipeline.

We would like to have made a larger acquisition than we have, but there is certainly no shortage of $200-million, $300-million, $400-million, $500-million transactions in front of us.

And the larger ones -- still such a frothy ability to issue equity that all the sellers who continue to talk to us haven't decided what they're going to do.

But I think it's going to be easy for us to deploy quite a bit of capital here in the next 12 months in very attractive businesses.

Helpful, Brian.

Thanks for taking my questions.

I'll get back in queue.

We'll go next to Steve Tusa with JPMorgan.

Hi, good morning.

Good morning, Steve.

Just fourth-quarter free cash flow and kind of the year number -- what do you expect there for free cash flow percentage of net income?

Well, I think -- I don't know, for the full year it should be 130%.

I guess I'd have to [see that] for the fourth quarter.

Fourth quarter should be in the range of $250 million of operating cash flow.

And take $10 million off for CapEx.

So, and that's all we spend on a per-quarter basis.

So, we'll spend $40 million of CapEx roughly this year.

So, that, I think, keeps our full-year operating cash flow conversion well above 130%.

Okay.

And then just for next year, these deals you did, I think you answered this in Jeff's question maybe.

But it would be -- the accretion for next year -- is like $0.10 to $0.15 the right kind of number for those deals you've closed recently that you have kind of booked and locked in for next year?

Just think about the way we think about it, right?

We think about cash accretion.

So, these are very high-margin businesses, and they're growing rapidly, and they're going to contribute a good deal of cash in 2015.

Okay.

On what some GAAP-based EPS number is -- is far less critical than whether the quality of the earnings and the cash that they generate is pretty good.

John's talking about them being in the high-$20-million-plus of EBITDA, and so you can figure that out.

If you care about a GAAP-based EPS number, you can do the math, but we care about their compounding cash growth, and they're going to contribute well in excess of $25 million of EBITDA in 2015.

So, the $0.10 to $0.15 converts at a higher rate, or the normal 130% rate?

On a GAAP EPS base, it's going to have a lot of -- (multiple speakers)

Yes, free cash flow, right.

It will be in that same range.

The nature of this, of course, we have non-cash amortization charges.

You always need to add those, and tax-effect those, but then add those back as that gives us the natural increase in our operating cash flow, well above the net earning contribution.

Right.

Okay, perfect, thanks.

We'll go next to John Quealy with Canaccord Genuity

Hi, good morning.

First question in the industrial business, you talked about Neptune down from tough comps.

Can you talk about mix of business generally?

I know there's more of a technology, high-margin spend in this space now with flow meters and a lot of the [RFs] going to slightly different permutations.

So, if you could just comment a little bit on Neptune mix, that would be great.

Sure.

The general trend in the industry clearly is to purchase meters along with the technology embedded in that.

So, it's not two completely different streams.

And oftentimes you have [WAMI] utilities that will decide to upgrade a project, and so you'll have collectors as well as devices to be able to collect that information.

So, you'll have the collectors that will gather the readings and send them back to the central office, and also mobile communication devices.

But as a rule, most of the revenue for Neptune is going to be the meter technology, plus the radio and embedded encoder technology, so you can gather all of that information and be able to send it back to someone.

And usually those are not purchased separately.

And so, having to split -- still, over two-thirds -- in fact, it's probably closer to 75% of the new shipments for Neptune, the new revenue, is the integrated meter or some integrated technology, rather than just a meter that goes out that's still being direct read.

And so, that's where we see the market continuing to trend with the total systems purchase rather than the individual pieces.

Yes, let me just make it clear that I wouldn't accept the premise that Neptune's down.

We just said they had an all-time record quarter in the third quarter of last year.

So, might be down $1 million or $1.5 million compared to the prior period.

But they're going to have likely a record year this year, and they are having a very strong first nine months of the year, and they're going to do okay in the fourth quarter.

So, let's be careful about how we phrase that compared to the competitive marketplace out there, with other people who have old technology and have pretty mediocre revenue.

Yes, no, that's fair.

I'm just going off slide 12.

So, lastly, on the Medical and Scientific Imaging, I'm sorry if you mentioned this -- geographic splits there -- is that primarily North America or anything else internationally?

Thank you.

Sure.

For this segment in total, it's not at all very dissimilar.

What you have is our medical products and medical software businesses, Sunquest and MHA, as well as our Verathon and other businesses, those are probably a little bit more skewed to the United States.

But our imaging businesses are more global in nature.

So, when you look at the segment in total, it's about 70% US, 30% outside the US.

But the differentiation there is that our outside-the-US portion is more imaging and our camera businesses rather than our medical businesses.

And we're growing very nicely in medical, even with US focus, and still see the international opportunities still ahead of us.

Thank you.

We'll go next to Alex Blanton with Clear Harbor Asset Management.

Good morning.

Good morning.

Can you hear me?

Yes.

I wanted to go back to this question of the $1 billion to $1.5 billion that you hope to spend in the next 12 months.

How much have you spent this year?

Do we have that total?

$303 million, I think.

That's it for this year, so far?

Yes, we didn't [spend anything] in the first half of the year, and then we did the $303 million in the third quarter.

So, that really explains why -- when you're looking at the growth for the year, you've got 6% to 7% forecast organic, and 8% to 9% total.

So, you really haven't added all that much revenue this year to the total.

When we talk about next year, do you have any idea of the timing of that spend, whether it's in the beginning of the year or the end of the year?

In other words, what's it going to add to revenue?

We really never know the timing, Alex.

We had -- the diligence that we do is very time consuming, and everybody that's been through our process understands.

So, while we can process a lot of stuff simultaneously, we're almost always looking at, at least four things at any point in time, and you just never know whether they get to the finish line.

We don't have a budget for acquisitions, and we always want to do the best thing as opposed to just doing something.

So, when you get to acquire something like IPA and SHP -- we have one of the thought leaders in the world with [Harbor] running SHP, it's a phenomenal business.

Very, very, very exciting for us to do that, and we could have done a couple of other things that would have had larger revenue, but don't have the compound cash growth that we like.

So, it's very important for the acquired management team to be able to fit into our culture.

People have a good deal of freedom, but by the same token, they've got to have a thorough understanding of cash return and where we want to exploit multiple channels of distribution and how we think pricing should go and how you should invest in R&D, and candidly, most people don't have those values.

They just wait for cyclical markets to change.

But our people have to really evolve markets, and they've got to have a long-term view of what it is they're doing because they are the ones that are driving the applications in the marketplace.

You alluded to the fact that you are looking at companies who really want to join Roper as opposed to some big industrial conglomerate or whatever.

But if they are owned by private equity investors, do they really have the say in who they want to be bought by?

Well, some do, some don't.

When the private equity guys own the business, if the management team will not convey to a new private equity owner, then the private equity guys have to behave very differently.

Sometimes the management people have a desire to go through a five-year situation where they can't invest for the future, and hope for an exit that will be okay.

But the kind of people that want to work here don't think that way.

They've been inside private equity for a while.

They want to invest to grow their business over the long term, and we're a great home for people who want to invest and grow over the long term.

One more follow-up: Roper Pump is ramping up in Houston.

What's the capacity utilization now?

In other words, how much further can you ramp it?

Oh, we could double, certainly, from where it is today.

It has some sophisticated process equipment that's running three shifts, but most of the activity is only on a one or a shift-and-a-half basis.

And the people that we're providing product to are releasing more and more of their content.

And a lot of what they are doing in Houston is called re-lining of these drill bits.

And so, it's not really on the exploration side that has to drive their growth.

As long as they're continuing to operate, these things have got to come back to be re-lined because they wear, and the Houston thing is a big re-lining operation.

Okay, thank you.

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

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

Thank you, Kayla, and thank you all for joining us.

We look forward to talking to you in late January when we release our fourth-quarter numbers.

This concludes today's conference.

Thank you for your participation.