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Roper Industries Inc. (NYSE:ROP)

Q4 2012 Earnings Call

January 28, 2013 8:30 am ET

Executives

Brian Jellison – Chairman, President, Chief Executive Officer

John Humphrey – Executive Vice President, Chief Financial Officer

Paul Soni – Vice President, Controller

Jason Conley – Investor Relations

Analysts

Dean Dray – Citi Research

Matt Summerville – Keybanc

Mark Douglass – Longbow Research

Christopher Glynn – Oppenheimer

Richard Eastman – Robert W. Baird

Alex Blanton – Clear Harbor Asset Management

Operator

The Roper Industries Fourth Quarter 2012 Financial Results conference call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer.

John Humphrey

Thank you, and thank you all for joining us this morning as we discuss the results of our fourth quarter and full year. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller, and Jason Conley, Head of Planning and Investor Relations for us.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today’s call. 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.

If you’ll 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 further in our SEC filings. You should listen to today’s call in the context of that information.

Now if you’ll turn to Slide 3, today we’ll be discussing our income statement results for the quarter primarily on a non-GAAP basis. A full reconciliation between GAAP and non-GAAP measures is in our press release and also included as a part of this presentation on our website. To detail that, for the fourth quarter the difference between GAAP and non-GAAP is a fair value adjustment to acquired deferred revenue at Sunquest. For the quarter, this impact was $6 million to revenue and operating profit. This adjustment, to remind everyone, represents revenue that absent our acquisition Sunquest would have recognized. We believe showing our results on this basis provides additional insight into the ongoing and recurring results of the business.

For the full year, the difference between GAAP and non-GAAP is comprised of three discrete items: one, the fair value adjustment to acquired deferred revenue; second, acquisition-related costs specific to Sunquest and the debt extinguishment charge we recorded in the third quarter. We believe discussing our results excluding these items provides investors with additional insight and improves understanding of the trends of our business.

And now if you’ll please turn to Slide 4, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we’ll take questions from our telephone participants. Brian?

Brian Jellison

Thank you, John. Good morning everyone. So as we look at the Q4 enterprise financial results, it turned out to be the best quarter in our history on virtually every measurement category. Orders were at the highest level, revenue the highest, net earnings highest, EBITDA, and both operating and free cash flow were all-time records for us. Revenue was up 10% in the quarter. Organic growth was 3%, and all four segments really participated in our record fourth quarter.

We ended the year with $953 million in backlog, which is 15% higher than it was this time last year, and our gross margin was really spectacular. It came in at a remarkable 57.9% for the quarter, which really speaks to the quality of our businesses and their ability to execute. So gross margin up 300 basis points, above levels that most people never even see.

Our operating margin expanded 300 basis points to 28.3% because operating leverage in the quarter came in at about 57% on new revenue. Our operating leverage throughout the year has been above 50%, and we’ll talk more about that throughout the discussion this morning. Remember that we have a lot of non-cash amortization charges in our operating margins. If you look at them on an EBITDA basis, it would be substantially higher – another 4 points.

Our EBITDA in the quarter was 275 million. You might remember at the end of the third quarter we’d said we hoped to hit a run rate in the fourth quarter of a billion dollars or more, and we certainly achieved that. Our EBITDA margins were up 370 basis points, even higher expansion than our gross margin, and reached 33.7% in the quarter. Our GAAP operating cash flow was 212 million in the quarter, which represented 26% of revenue, another record for us. Our diluted earnings per share, even though revenue was up 10, our earnings were up 20% to $1.48, and that brought the full-year earnings to 4.96 a share versus 4.34 last year. It really was broad-based, as you’ll see this morning. Next slide?

If you look at the income statement in the quarter, our orders were up 12%. Organic was up 4. Our revenue was up 10 and organic was up 3. For the people who look at book-to-bill relationships, our book-to-bill in the fourth quarter was a little bit better than the fourth quarter of last year, and we finished the full year ’12 at a book-to-bill of 1. Our gross profit was 57.9%, up 300 basis points. I don’t think anybody would have believed Roper would have achieved a 58% gross margin at this time, but we’ve done that and we think it’s pretty sustainable. Our operating income was up 23% and our operating margin was up 300 basis points due to that 57% operating leverage in the quarter. Again, if you add non-cash amortization to that, that number would be another sort of 4 points higher.

Our interest expense was up from 15 to 21 million because we had a successful $900 million bond offering which closed on November 15 in the fourth quarter. That bond offering set records for execution in terms of spreads on our rating. There were a number of very favorable things about that bond offering, and of course it sharply reduces the rate at which our interest costs will be coming in in the future.

Our tax rate was a little higher in the fourth quarter. It was 30.1% versus last year’s 29, and that actually cost us $0.02 in the quarter. You can also think about it in terms of an amortization that if it was $0.02 in the quarter, it would have been $0.08 for the year; so a point of tax reduction for us is worth $0.08 a share, so let’s root for governmental tax reform. Net earnings, as you can see, up 21% and DEPS up 20%. Thank you, next slide.

We go to EBITDA growth. Here you’ll see we closed out the full year at 925 million of EBITDA, which is up 45% just in the last two years; and our EBITDA margins just continue to move up. You can see they’re up to 30.8% for the full year. That’s 410 basis points above where they were just two years ago. Most importantly about this slide is that while our gross margins are already at 30.8%, we’re going to tell you that in 2013 we expect them to expand still further. Next slide?

Our cash flow performance was 212 million in the fourth quarter, representing 26% of revenue and cash conversion of 147. On a free cash flow basis, you can see it was 25% of revenue and 141%. While our cash flow is already best in class, our ratios continue to improve. As you can see here on the right-hand side of the chart, our free cash flow reached 639 million, up from 471 two years ago; but if you look at the percentage at the bottom, you’ll see that in 2010 our free cash flow to revenue was 19.7% and this year it was 21.3%, up another 160 basis points in just two years. Next slide?

If you look at our asset velocity performance, there are a couple of very important things about this slide. Our inventory was actually down at the end of the year at 5.9%. Payables were about 4.3, by the way, so remember our goals were to always try to get inventory and payables to be close together so that it’s just receivables that are investment around pricing in the way we think about things. So we closed out the year with inventory plus receivables less payables and accruals at 4.8%, truly a remarkable number. What’s really interesting and encouraging to us – you can see in 2010, ’11 and ’12 we now have a sustainable level of performance that says we need less than $0.06 of working capital to create a dollar of revenue, and that’s really an exceptional result and sustainable. Next slide?

If we look at the financial position of the company and the balance sheet, you can see even though we invested over 1.4 billion in 2012, our balance sheet is still in terrific shape. Cash is slightly higher. Our undrawn revolver, of course, is much higher and our cash and undrawn revolver powder are up here at 1.771 billion versus 1.088, so after investing over 1.4 billion we’ve still got about 700 million more powder than we did last year. You can see our trailing 12 months EBITDA at 9.25, when you then do the debt ratios, gross debt to EBITDA is about 2.2 but net debt to EBITDA is only (inaudible). We’ll generate, we think, well in excess of 700 million in free cash flow in ’13 to go on top of that, so not impossible to envision us having 2.5 billion to invest soon. Next slide?

Here we’ll look individually at the various segment details – next slide. This is probably the most remarkable slide in the deck in my opinion. When you think about execution, every one of our segments is doing spectacularly well. You have four segments and you have four quarters, and you’ll see here we were a perfect 16 for 16 in execution where every segment increased its margin over the prior year in every quarter. If you look at the industrial technology, you can see revenue for the year was up 8%, operating profit up 15%, and operating margin reached 30% - was up 190 basis points. If you look at energy systems, here revenue was up 8%, operating profit up 14, and operating profit margin up 140 basis points. In medical, revenue was up 17%, operating profit up 35%, and OP margin up 380 basis points to 28.1. And then finally, while revenue was flat in our largest segment in RF, operating profit was up 10% and our operating margin was up 250 basis points.

Lastly on this slide, where you can see really we were up 8%, 8%, 17%, and then flat, the overall company came in up 7% in revenue and up 55% in operating leverage with our largest segment flat for the year, so it speaks really well of the diversity of the things we have going for us in our businesses. Next slide?

If we look at the energy systems and control segment, you will see in the fourth quarter we were up 7% in revenue and 16% in OP, a remarkable operating profit margin of 33.1%. Organic revenue was up 6% in the fourth quarter. Our margin expansion was led primarily by the leverage on growth of the incremental sales and then the benefit of some cost actions that we took in the third quarter in anticipation of some recessionary risks that we might have seen at that time, which have dissipated.

Compressor controls growth was led again by our LNG projects around the world, and certainly an all-time record in the field service activity associated with those products and the aftermarket that they create. We had a double-digit increase in our alpha technology company, which is really an instrument-based data capturing technology that tire company and latex OEMS use for measuring; and we have very strong seasonal demand in the fourth quarter which we expected to have when we issued guidance.

In the 2013 year as we look ahead, we think compressor controls will continue to generate record levels of revenue with new applications for existing software in the installed base of operations that we’ve enjoyed with our growth recently adds substantially to the customer service profile. We also have made several bolt-on acquisitions. We don’t talk a lot about those, but this year alone we acquired a company called Cambridge Instruments which helps our PAC business with online data collection. We acquired Hao Ying in China, a small sensor company that goes in with our Dynisco product in the Shanghai area; and just on the last day of the year, we acquired another small business that relates to our diesel engine shut-off valve technology. And those go along with late 2011 acquisitions, United Controls and Trinity Software for compressor controls, so these bolt-ons coupled with organic growth should continue to give us a strong 2013 for energy. Next slide?

If we look at our industrial technology segment, here you’ll see it was actually down 1% in the fourth quarter, but operating profit was up a couple of points. We had a favorable benefit due to an accounting thing that happened in the fourth quarter, so the published margins are a little bit better than what we—we’re discounting that as a one-time event, so we’re coming in at operating profit 29.9 versus the GAAP number of 32.7.

In the fourth quarter, fluid handling continued to be very strong with our directional drillings operations at Roper Pump. Everything related to fracking and oil shale was good, except for lower demand for de-watering pumps and basically in the gas arena. Our Cornell company received a product innovation of the year award for new cutter pump technology that we introduced that breaks up debris and wastewater and reduces clogging, which we think will lead to strong growth for us in that segment. Our material test business at Struers remained exceptionally strong as it related to consumables, although some of the equipment sales were lower than they were in the prior year.

Neptune is an interesting story in that overall it was flat in the quarter, but that really belies the fact that Neptune had an all-time record year in 2012. We had very strong distributor growth in the fourth quarter of this year and a little bit of incremental growth out of the Toronto project; but as we said at the end of the third quarter, we had lost one large customer and the impact of that came in the fourth quarter, so that it negated what was actually double-digit revenue growth throughout the country. We had very exceptional margin performance at nearly 30%, and it really was broad-based throughout the segment.

As we look to next year in 2013, the fluid handling oil shale growth will continue. We have a variety of new products that we continue to add to Roper Pumps’ directional drilling technologies. We added capacity in 2012 to give us better throughput and faster turnaround at our (inaudible) operation, and in 2013 something that I think no one would have ever expected us to say is we’re actually investing in a new facility in Texas for much larger diameter staters and power sections than we have today due to the growth and prospects for market share gains which are occurring quite rapidly in this segment.

In the second half of the year, we think we’ll get better fluid handling rental market activity that ought to boost Cornell. We think throughout the year, the other businesses will have sort of low single-digit growth in their industrial end markets; and at Neptune with a little stronger work out of Toronto’s project, an improved housing start here in the U.S., better distribution sales growth should largely offset the customer loss, which will be quite significant in the first half of the year. Next slide?

In our RF technology segment, here you can see revenue for the quarter was flat but operating profit was up 8% and the OP margin was 27%, which is quite good margin for that segment. We had very solid execution in creating that margin expansion and most of that came out of better management in the toll and traffic arena. We’ve really made a number of people changes in that segment and have a new leader who’s been with the company for quite some time. He’s doing an outstanding job in building a stronger team around execution.

TransCore received an important award for the Doha Airport for both access control and parking control in Doha, and we expect that will generate in the high millions, single-digit millions of dollars for us next year. TransCore also received a very prestigious award where they won what’s called the International Road Federation Global Achievement Award that was presented by the Chairman of the International Road Federation to the mayor of Riyadh in Saudi Arabia. That was for the work that we did that we don’t talk a lot about in managing New York City traffic lights and traffic systems. Our ITS project in New York this past year also won an award as the outstanding project in the year. TransCore won another award for what are called HOV lane activity supports, and that was based really in California where they got the California Transportation Foundation’s 2012 Project of the Year Award. So our innovation and technological execution continues to be very strong in all these businesses.

Our SAS-based subscriber base in the fourth quarter continued to grow and software margins then expanded as a result, which helped the segment. In CBORD, which we indicated had won a major university in the northeast, we can now tell you that that actually was Northeastern University; and as you all know, Northeastern has quite a large campus footprint and we’re going to be doing integrated security projects for them for quite some time. Our bid activity is exceptionally robust at CBORD for 2013.

As we look at next year, our backlog and project pipelines in this segment give us a lot of confidence around pretty good growth in 2013. Our technolog growth profile should return. You may remember that technolog is really what’s holding back RF technologies apparent organic growth in 2012 because we had over a $20 million project in France in 2011 which of course wouldn’t repeat into ’12 and was a headwind of more than $5 million a quarter. Our software recurring revenue base we think will continue to expand as we get an increasing number of new customers, and we think our margin improvement that you see this year will continue and strengthen in 2013. Next slide?

If you look at the medical and scientific imaging segment, pretty soon I think we can just call it the medical segment. This really became the largest segment in the company in the fourth quarter, which is hard to believe, but you had organic revenue growth of 6% in the quarter which of course was led by medical. Our Northern Digital business delivered a record quarter as their OEM system sales for minimally invasive surgical placement hit an all-time high, and then Sunquest we had the benefit of for the full quarter. Our integration is really very much on track here with Sunquest, and the data now kind of shows you just how strong a company Sunquest is and what kind of performance you get out of it. We’ll continue, I think, to demonstrate that as you see them in for a full year in 2013.

We also took a charge as we’ve made considerable changes at Verathon to drive faster product introduction and have started to discontinue some efforts around certain engineering initiatives and pare back the rate at which we roll out some of the products that were in their pipeline that we think, while they are interesting, they are not as interesting as other new opportunities we’re focused on. So we took a $4 million charge in the quarter on inventory and tooling around a product line that we think may do okay but not at the pace that we were prepared to continue to invest in.

As we look at 2013, you’ll see we’re going to get a significant benefit out of a full year of Sunquest contributions. Our margins, we think are going to continue to expand as Sunquest becomes a larger piece of the mix of this segment, and we think we’ll get operating leverage out of organic growth. Our medical businesses, we think all have favorable end markets. We’ve got a number of strategic initiatives that have been put in place under the fellows leading our segment here – Neil, we brought on in at the end of third quarter of 2011. We think we’ll finally get a little bit of modest improvement in our research markets that relate to the cameras. Camera, this year has been a terrific headwind, down about 13% over the prior year, but came in sort of flat in the fourth quarter which is finally a trend we’ve been looking for. We think it will actually have positive growth on a modest level in 2013. Next slide?

If you look at our 2013 guidance – next slide – we establish guidance for the full year at 560 to 582, so that gives you a midpoint of 571 versus 496 this year at the midpoint. We’d be up 15.1% on a net earnings basis. We’re projecting revenuer growth of 8 to 10%. We think organic ought to be up 3 to 5. We think organic in the first half of the year will be quite modest, particular stress on Q1. We think we’ll be up in the high single digits organic growth rate in the third and fourth quarter.

Foreign exchange, we’re just assuming the 12/31 rates would continue. Tax rate, a little higher next year at 31%. Diluted share count, we think will come in at about 100.5 million shares, and then if you look at our Q1 guidance we’re saying $1.19 to $1.23. Full-year operating cash flow, we think will exceed 775 million – that’s up about 100 million from what we just delivered here this past year.

I think what’s really important is that if you look at the power of our cash-on-cash return models now as they start to really compound, that 775 million for 2013, when we look out in the next three years – ’13, ’14 and ’15 – we would expect to generate over 2.5 billion in operating cash flow, and that gives us of course an incredible amount of flexibility for investing in these businesses. Next slide?

If you look at the summary then for 2012, you can see that we achieved really all-time record results. Total revenue was up 7% for the year even though our largest segment had no revenue increase; organic revenue up 4%, our gross margin up 180 basis points to 56% for the year, operating margin was up 220 basis points to 25.8% on operating leverage that exceeded 50% on the next dollar of revenue. Our non-cash amortization for 2012 was $117 million, which really understates the quality of our operating earnings; so if you add the non-cash amortization back into the operating margin or the interest before tax, if you will, you get an EBITDA ratio of 29.6%.

Our EBITDA was 125 million up over the prior year, and our EBITDA margins for the full-year were at 30.8%. We’ve already told you we expect those to expand in 2013. Our CAPEX for the year was 38 million, which is exactly the same as depreciation; and when we talk about EBITDA, we really need to get Roper to distinguish the awareness around other people’s EBITDA has a lot of D and a lot of CAPEX it needs to offset it. Ours simply doesn’t. This is really all EBIT-A with just 38 million of D and 38 million of offsetting CAPEX.

Operating cash flow for the full-year at 678 million represented 23% of revenue, and we hope to add over 100 million to that for this year. We invested over a 1.4 billion in acquisitions. Our deal pipeline now is as exciting as ever. We expect to capture additional opportunities in 2013 and we’ve already got over 1.5 billion of powder before we add another 700 million to that as the year progresses.

So with that, we’d like to open it up to questions.

Question and Answer Session

Operator

Thank you. We will now go to our question and answer portion of the call. [Operator instructions]

We’ll take our first question from Dean Dray with Citi Research.

Dean Dray – Citi Research

Thank you. Good morning everyone. On the medical side, you were flat on organic revenue growth. Did you see any pull-in from some of the year-end business getting pulled in, maybe related to the pending tax increase or any budget flush?

Brian Jellison

No, we really didn’t see that at all, and most of our stuff is kind of going direct so it’s not a like a distributor pull-in with standard products that some other people might have.

Dean Dray – Citi Research

And then Brian, when you talk about the acquisition capacity approaching 2.5 billion, for the medical side are you more apt to pursue adjacencies, new products, new platforms in SAS like you’ve done in Sunquest, or would you be looking more in the device side like Verathon, Northern Digital, where you can drop a product line into your sales force?

Brian Jellison

Well, we would and are doing both. You just never know what you’re able to negotiate in terms of what’s the best use of funds. So we’re always really looking at the asset velocity of things, so the software businesses have an easier hurdle because they always have less assets. If their product businesses are such that we think they’re well positioned and have great defense mechanisms, we’re not opposed to adding to that.

As a general rule, there certainly are some product transactions we’re looking at now, but most of the things we’re looking at are related to software and service opportunities.

Dean Dray – Citi Research

Great, that’s helpful. Just one last one if I could – on the Neptune customer loss, give us some perspective, was this on pricing? Is it a market share shift? You said that there would be some impact in the next couple quarters.

Brian Jellison

Yeah, it’s a very large customer who has decided that they want to go to take the risk associated with the composite meters. We don’t think it says anything other than they’re going to try something else. We had a long-term contract with them that—and they had a change in management, and we’ll see how it works out. It will have an effect on the first half of this year from a revenue viewpoint. I don’t think it’s indicative of anything; in fact, we were up nearly 20% in (inaudible) sales in the fourth quarter, so you can’t see it. We wound up being flat because you got one large customer that’s down.

John, I don’t know if you want to add anything to Dean’s question around the customer situation? I think it’s a one-off thing that—

John Humphrey

Yeah, I’d agree with that.

Brian Jellison

It sort of supply chain people making the decision instead of operating people. I know the operating people aren’t happy about it.

John Humphrey

And it’s one of those things that—I mean, it’s important in terms of Neptune, but once it gets to the Roper level, it really gets not as material, for sure. It will be an impact for the first quarter and the first half.

Dean Dray – Citi Research Dean Dray – Citi Research

Great, thank you.

Operator

We’ll take our next question from Matt Summerville with Keybanc.

Matt Summerville – Keybanc

Morning. Just a couple questions. Brian, can you talk a little bit about later in the fourth quarter and into the first quarter, the kind of order dynamics you’re seeing in your shorter cycle businesses like Dynisco, and you mentioned Struer equipment sales down. Has that trend changed?

Brian Jellison

Well, what’s important about the fourth quarter – it’s a great question, Matt – is we have three businesses: Dynisco, which is always supplying things which frequently have to do with capacity utilization; Struer, which is somewhat similar to that in terms of their consumables; and then our core AMOT business. Those three were leading indicators for us in Q4 of 2008 when you went into the ’09 downturn, so we’re looking at those things weekly.

In the fourth quarter, they did better than the concern level you would have had, so we haven’t really seen anything in those businesses yet that would indicate that there’s any forward indicator; and in fact, December shipments were stronger for the businesses than October and November, which resulted in us having a little bit more receivables at the end of the year than we would have liked to have had, but you know, it’s the year-end stuff that happens frequently.

So I don’t think there’s anything that makes us nervous, and in the case of the equipment it wasn’t core equipment that we provide out of Struers for cutting technology. We have a line of hardness testers that we sell, and they were off in the fourth quarter. Fortunately they’re lower margin products, so it wasn’t overly material, but it’s something we’re keeping our eye on.

Matt Summerville – Keybanc

And then just one follow-up – can you just talk about what you’re seeing out of Sunquest in terms of pro forma organic revenue growth versus your expectation going into the deal?

John Humphrey

Sure. I mean, they continue to do extremely well. We’re seeing high single digit organic growth out of that business, and we would expect to see that continue into 2013 also.

Matt Summerville – Keybanc

Thanks Brian. Thanks John.

Operator

We’ll take our next question from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good morning gentlemen. Looking at your expectations of expanded EBITDA margins in 2013, can you help break down a little bit how much you expect in gross margin improvement versus operating expense growth? It seems like a lot of—I think certainly some of it is going to come from Sunquest, but if you can break that down, it’d be helpful.

John Humphrey

You know, I’m going to need to follow up with you on that. We do expect to see gross margin expansion along with operating margin expansion, both because our faster growing businesses are also our higher margin businesses on the software side as well as on medical and the impact from Sunquest. So probably not quite as much on gross margin as we’re expecting on EBITDA margin, but both of them we expect to be up in ’13.

Mark Douglass – Longbow Research

Okay. And then on Neptune again, Brian, it’s still been a pretty strong couple of years. Is there any ramp-down in sales and projects outside of the one that you lost, and what are expectations for the industry, and then with Neptune relative to the industry in 2013? And do you expect more people to go—maybe even shift to the composite?

Brian Jellison

Well, I think as far as the situation is, you’re going to get—we would get a disproportionate amount of new meters associated with housing starts, so as housing starts are picking up, so are our sales through distribution in the U.S. water market. So we expect pretty decent growth there, certainly high single digits, maybe more; and so other people who have lower shares than we do are likely to get some corresponding benefit in their business. I think it’s a generally favorable or more favorable market than it has been for replacement water meters and for just installs for (inaudible). When it comes to the rest of the world, that’s an entirely different story and our products really don’t play in anything other than the high pressure water market.

Composite meters, nobody’s had great success with those over time. We don’t see any shifts to that at all except in people who come in who don’t know the industry, don’t know the products, and think everything is uniform because they’re SAP people. They can do things that will be proven to be a mistake later, and so we’re not really bothered by that. It’s not the first time we’ve lost a customer only to get them back a little bit later when they realize that value is more important than price.

Mark Douglass – Longbow Research

Okay, thank you.

Operator

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

Christopher Glynn – Oppenheimer

Thanks, good morning. Brian, just apparent liquidity notwithstanding, wondering how you’re looking at the short to long-term acquisition pipeline, how you’re thinking about the range of scale and breadth, and if you see any scenario where a modest share issuance would be appropriate or warranted.

Brian Jellison

Well, I think we’re pretty reluctant to want to issue any equity. I really just don’t see the need for that. The reason that we do acquisitions is because we have great free cash flow, and when you lever that at, say, three times debt to EBITDA the acquired company, you can really make a material difference in your growth rate and kind of in the perpetuity growth rate of the enterprise, and that’s what we do. We just think that’s the best way to create shareholder value.

If we wanted to increase—I mean, I don’t know why we’d issue equity unless it was just the most incredible, spectacular thing of all time, and we did that in December of 2003 when we acquired Neptune and didn’t have really a high quality public company balance sheet. We did it again in December of 2004 when we acquired Neptune. Those acquisitions represented four times trailing EBITDA of the company, for heaven’s sakes, in terms of what we had to do. You know, with trailing EBITDA with a run rate well in excess of a billion, we’re not planning on a $4 billion deal tomorrow at noon. So I think we can be quite satisfied with 1.5 billion-plus a year in acquisition growth, so I don’t think we would issue equity.

Christopher Glynn – Oppenheimer

Thanks. And then the other one would be let’s go a little bit more into the bridge from the current orders rates to the EPS target for next year – very strong, but had some backlog runoff in the second half. We’ve gotten some color, but if we could just dive into any more qualitative around that.

John Humphrey

Sure. I think as we went through our—not only the planning activity that we always do but also the fourth quarter operating reviews that we go through with each of our businesses, we look not only at what they actually did in the fourth quarter but their projections for the first quarter and the rest of the year, and what’s in their backlog, what’s in their pipeline of opportunities. As we went through that, we saw a number of things, both on the new product introduction side but also on the projects that are currently being bid and currently in front of us, not yet in backlog, that give us confidence that the second half of the year we’ll see a higher organic growth rate than what we’re going to see in the first half of the year. But I think that that’s going to be weighted more toward—well, probably RF will be a little bit stronger than industrial for the full year basis, but overall we expect to see full-year organic growth in all four of our segments.

Christopher Glynn – Oppenheimer

Great. Thanks a lot.

Operator

We’ll take our next question from Richard Eastman with Robert W. Baird.

Richard Eastman – Robert W. Baird

Yes. Brian, just a couple questions. In the energy systems business, the book-to-bill in the fourth quarter was maybe a little bit softer than we typically see seasonally. Has anything, again, maybe slowed there or is that just a comparison issue? And then within that, the compressor controls, the acquisitions you made, the smaller ones, it sounds like they’re bringing software into compressor controls. Is that the right way to think about that? I mean, are these companies bringing customers or are they bringing code? What are these small acquisitions—how do they expand the business?

Brian Jellison

Well, I’ll take the latter and then we’ll shift back to the nature of the orders. Each one of them is a little different, but United Controls brought with it a very significant engine manufacturer that we were not doing business with, and so that gave us a customer benefit. It also gave us some application engineering capability with that business that supports what we do, so that was good. It also gave us some improved regional activity in some parts of the world.

Trinity Software was an entirely different concept where it had some breakthrough code, to use your term. It really has breakthrough technology that’s in its infancy. It’s going to be in maybe high single digit millions, but it’s the kind of thing that can move up quite dramatically over the next three years, so we’re investing a lot of time in bringing our business processes to that group of people.

Cambridge is not in compressor controls. It’s in petroleum analyzer, and we have some, if not the best equipment in the world in analyzing different things for refineries, but we don’t have a lot of online capability and Cambridge brings us an opportunity to have online capability in software. So that’s an important growth venue for us.

Now on the order flow and seasonality of fourth quarter, John, why don’t you take that?

John Humphrey

Yeah, sure. In terms of the fourth quarter orders for energy, they were actually in line with what we had expected. What we’re seeing, of course, is with many of the projects that compressor controls has already completed and now it’s moving into field service, it changes the timing of those orders. It’s more of a book-and-ship, or a book and then maybe ship two or three months later when you recognize the revenue associated with field service, as opposed to their larger projects which oftentimes would—distort is probably not the right word, but would affect the book-to-bill ratio in fourth quarters of prior years. The other areas that we normally look for and did see seasonal benefits, both on the instrument side for Alpha Technologies and also on our petroleum analyzer business – once again, providing software algorithms and testing solutions for refineries – we did see a seasonal uptick in the fourth quarter, but that was both on revenue and orders so that seasonal uptick really didn’t change the book-to-bill ratio very much.

Richard Eastman – Robert W. Baird

Okay, I understand. And then just a last question – in the RF tech business, we talked about some pretty nice wins on the tolling and CBORD side. This RF tech is always a little difficult to model out given the timing and the size of these projects, but when you think about ’13 and project out ’13 in your forecast, can RF tech have a double-digit growth year for ’13?

John Humphrey

It can. I don’t think that that’s embedded in our guidance, though.

Richard Eastman – Robert W. Baird

Okay, can but we shouldn’t time this out to the point where we’ll get a—

John Humphrey

Yeah, our expectation with respect to 3 to 5% organic growth for the year, like I said, it’s a little bit more heavily weighted. RF may be above that, but we’re not ready to say that’s going to be double-digit yet.

Richard Eastman – Robert W. Baird

Okay, fair enough. Thank you.

Brian Jellison

Although for our internal people listening, we expect you to move along those lines!

Richard Eastman – Robert W. Baird

With better margin, huh? Great, thank you.

Operator

We’ll take our next question from Alex Blanton with Clear Harbor Asset Management.

Alex Blanton – Clear Harbor Asset Management

Good morning. I’d like to address the guidance that you announced as you set a 15.1% increase over last year, and if you adjust for the higher tax rate, it’s about 17.5% increase. But that’s less than the company’s long-term average growth, the 20%. I don’t want to seem ungrateful – 17.5% is still pretty good. It seems that some of that is in the first quarter because that guidance is only up 11% from last year. Are you being too conservative here on looking at a weak economy? Just exactly what are the assumptions behind the guidance, because it isn’t as strong as, for example, you did in 2012. Is it possible that you’re getting so big or your margins are getting so high that you can’t get the same percentage increase in margins relative to the increase in sales that you’ve gotten in the past? Could you address all that?

John Humphrey

Alex, I think one of the factors when you’re looking at our previous years’ growth rates, of course those always include not only what we do on an organic basis but also the effect of acquisitions; and our guidance for 2013, as it always does, excludes any acquisitions that we have not yet completed. So I think that is probably going to be one of the differences you see between our guidance and the actuals as they roll in, Sunquest being an example of that – of course, that added both accretive earnings but more importantly accretive cash flow to us for 2012. We would expect future acquisitions, although they’re never in our guidance, to be accretive from a cash basis also. Whether they are accretive on an earnings basis is always going to be dependent upon the accounting ramifications of amortization and other things.

Alex Blanton – Clear Harbor Asset Management

Right. Well yes, and when they come in the year.

John Humphrey

That’s also true.

Alex Blanton – Clear Harbor Asset Management

It’s possible you could have accretive acquisitions that really wouldn’t add to 2013 if they came late in the year.

John Humphrey

That is true.

Alex Blanton – Clear Harbor Asset Management

But could you address your economic assumptions and why the first quarter is only up 11%? Because that would not include—I mean, that wouldn’t be because you haven’t added in acquisitions to the first quarter guidance, because you don’t have time to—

John Humphrey

That is correct. That is correct, so kind of as we talked about a little bit earlier, we do expect the organic sales growth to be higher in the second half based upon what we’re seeing from a project pipeline and execution of our existing backlog relative to the first quarter. We also have in the first half a little bit of headwind associated with the Neptune customer that decided not to renew with us. So those are some of the things that we’re seeing – a little bit tougher comp against last year where we had 8% organic growth in the first quarter of last year. It’s a little bit of a tougher comp versus what we see for Q2, Q3 and Q4 as we go forward.

Alex Blanton – Clear Harbor Asset Management

Okay. Then a follow-up – why is the tax rate up?

John Humphrey

Well, Sunquest as a U.S.-based company generates most of their earnings in the United States, which is the highest tax rate in the world, and so those earnings come in at a marginal tax rate of probably 38 to 39%. And then just other normal tax planning activities, which is probably the—which is definitely the smaller portion of the increase that we expect for ’13.

Alex Blanton – Clear Harbor Asset Management

Yeah, we definitely need corporate tax reform. Thanks.

John Humphrey

I wouldn’t say protection; I’d just say a level playing field.

Alex Blanton – Clear Harbor Asset Management

Thank you.

Operator

And that does conclude today’s question and answer session for this call. I will now turn the call back to John Humphrey for any closing remarks.

John Humphrey

Okay. Thank you all for joining us and we look forward to talking to you as we finish our first quarter.

Operator

That concludes today’s conference. We appreciate your participation. You may now disconnect.

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