Roper Industries CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.26.10 | About: Roper Technologies, (ROP)

Roper Industries (NYSE:ROP)

Q3 2010 Earnings Call

October 25, 2010 8:30 am ET

Executives

B. Jellison - Chairman of the Board, Chief Executive Officer, President and Member of Executive Committee

John Humphrey - Chief Financial Officer and Vice President

Analysts

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

Alexander Blanton - Ingalls & Snyder

Terry Darling - Goldman Sachs Group Inc.

Jeffrey Sprague - Citigroup

D. Mark Douglass - Longbow Research LLC

Christopher Glynn - Oppenheimer & Co. Inc.

Deane Dray - Citigroup Inc

Operator

Good day, and welcome to the Roper's Third Quarter Financial Results Conference Call. [Operator Instructions] I will now like to turn the call over to John Humphrey, Chief Financial Officer. Please go ahead, sir.

John Humphrey

Thank you, Coreen, and thank you all for joining us this morning as we discuss the results of our third quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; and Paul Soni, Vice President and Controller.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We've prepared slides to accompany today's call, which are available through the webcast and also are available on our website at www.roperind.com.

Now if you'll please turn to Slide 2. We'll begin with our Safe Harbor statement. During the course of today's call, we'll be making forward-looking statements, which are subject to the 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.

And 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 prepared remarks, we'll be taking questions from the participants. Brian?

B. Jellison

Thanks, John, and good morning, everybody. So we'll start off with the enterprise overview and then an individual talk through the four segments. I'll talk about updating guidance with the huge increase we've taken in free cash flow in the fourth quarter and the summary in Q&A period. So next slide.

On the enterprise overview, you'll see the third quarter was an all-time record for us for any quarter in the history of the company. That included record levels of orders, of sales, the ending backlog, net earnings, EBITDA, cash flow and a whole lot of other metrics as well. Orders were up 31% to $654 million, with organic growth of 20% in orders. RF, we'll talk about a little bit, it was actually down one point organically. If you look at the excluded RF, we were up 32% organically on orders.

Sales were up 25% to $605 million. Organic growth there was 14%, again because of some unusual comps in Q3 at RF. It was basically flat, so it would've been up about 22% organically in revenue.

Our net earnings were up 49% to $84 million, and our EBITDA was $163 million on that $605 million of sales. So EBITDA finished the quarter at 27%.

Free cash flow was up 65% to $133 million, and probably the most startling statistic I can recall seeing free cash flow is now 22% of revenue. That's 158% of cash conversion. So all of these generally are all-time records.

Next slide. On the income statement, you can see bookings were up from $499 million a year ago to $654 million, 31%. Our net sales as we said before, up 25%. Gross margins expanded substantially from 50.6% in the third quarter of last year to 53.2% this year, 260 basis points higher.

Our income from ops were up 40%. Our operating margin was up from 18.9% to 21.2% in the third quarter, a gain of 230 basis points. And that includes the intangible amortization, that of course is added in from our latest acquisition.

Interest expense was up modestly. Other income there, you can see was up $3 million, which is this foreign FX remeasurement benefit that sometimes is positive and sometimes negative. Our tax rate was a little lower than the third quarter last year. It is turning out that Q3, because of the FIN 48 process, is generally going to have the lowest tax rate in the quarter as your prior year rolls off with the filing. We were down 1.4% from the year before, which is not really the FIN 48 portion at all. It's really some improved tax planning that we've been doing over the last several years.

So on a FIN 48 basis, the numbers were quite similar. Our net earnings, as you can see, up $84 million versus $56 million, 49%, and of course, the DEPS at $0.87.

Next slide. Here in our asset velocity is the same way we've been showing this for several years now, and the improvement continues. Inventory dropped in the third quarter to 7.7% of revenue, down from 9% a year ago. And when you look at the inventory plus receivables, less payables and accruals, you can see we're down to 6.9% when just three years ago, that same math was 12.1% of revenue. So we picked up 520 basis points of sales that we can redeploy in cash.

Next slide. Here, the record cash performance is really worth noting and thinking about. Our free cash flow at 22% of sales is certainly an unprecedented number. Our operating cash flow was 23%, meaning we had CapEx of 1% of sales.

In the last four years, in 2007, we had free cash flow of $314 million, and in 2008, we had $404 million, in 2009, $342 million. And we've now forecast $435 million to $455 million of free cash flow this year. You put those four years together, and you have free cash flow of over $1.5 billion.

I think, also, remarkably, in the quality of our cash flow, if you look at 2008 here, you'll see that year-to-date, free cash flow was 16% of sales. We went through this very difficult economy in 2009 and only dropped down 1 point to 15% free cash flow to sales. And here we are this year with increased growth, and we're already up year-to-date at 19% free cash flow to sales and yet finished the third quarter at 22% free cash flow to sales. As a result, we've raised our guidance by nearly $40 million for cash flow, and we have less than 100 million shares. So you can do the math on how much we've raised our guidance on a free cash flow to share basis.

Next slide. Strong financial position, the balance sheet remains quite good. Our cash and undrawn revolver at the end of the quarter stood at $593 million. Net debt was $1.226 billion. Our share holder equity, you can see net-debt-to-cap was at 31.7%. Our net-debt-to-EBITDA, we still have -- it's only at 2.1x and of course, is rapidly improving as the trailing EBITDA continues to come up quickly. And that doesn't even count the performing EBITDA from our acquisitions. And the EBITDA-to-interest coverage, you can see, is over 9x. So we have quite a desirable balance sheet despite the fact that we have now invested just under $900 million in the last 12 months in transactions.

Next slide. Here we'll start to take you through the individual segments. Next slide. First thing you notice, this slide allows you to see how the book-to-bill went for each one of the businesses and how FX affected us. You can see on a book-to-bill basis, the company was at 1.08. Scientific Imaging & Medical was at 1.13 being the highest, and Industrial Technology at 1.05 being the lowest, of course it has the fastest through put.

On order growth versus the prior year, our Medical and Imaging businesses were up 81%. 25% is organic. So you see the powerful impact of Verathon coming in there. Our Energy Systems & Controls were up 32% organically, and the reason the 29% is in there is we have negative FX pulling it down to 29%.

RF Technology was up 7%. But on an organic basis, down 1%. Really, based primarily on toll and traffic comps and the fact that in the third quarter of last year, we had booked the Houston business and the Gaz de France business for the year ahead. So the comps were sort of unrealistic to measure against organically. Industrial Technology, you can see was up 36%, lost a point due to FX.

Next slide. Here we'll look at the segment performance from a margin basis, for each one of them. RF came in with gross margins of 49% and EBITDA margins at 28%, Industrial was 51% with 32% gross margins. I think the EBITDA margin at 32% for Industrial was quite a remarkable number, the more you think about that and you listen to other calls from industrial companies.

Our Energy segment was up 53% on gross margins, 27% on EBITDA, and Medical and Imaging had 61% gross margin number with 28% EBITDA as we've put a lot more money into R&D in that segment as a function of revenue than in the other businesses. But across the board, it's quite an exceptional margin performance.

Next slide. On the RF segment, here we're looking at a business that was order and sales, both up 7%. In the third quarter last year, we booked this Houston Toll project, which actually has had almost no revenue generated over the first 12 months of this activity, which is different than what they had forecasted for us. But the booking took place last year, so that made a tough comp. And in addition to that, we booked a significant portion of initial order from France for our Technolog business. Both those were in the base when we compared the organic numbers. We enjoyed double-digit order growth in our Campus businesses with CBORD and Horizon, which were very helpful. Of course, that rolls over at a high incremental margin.

From a sales basis, acquisitions added 8.8% to the number. Organic growth was down 1.1% and FX, 30 bps. Pretty much all of that was driven from lower tag and hardware sales and tolling, and the continued very soft business around Wireless Security, which is, while not large, a very big -B.

Tolling project activity in the quarter though was up very sharply and is really quite a good indicator for us around what will happen in 2011. And once again, these are projects we can't articulate because they're either with international customers or domestic people that won't allow us to talk about them. But nonetheless, they were quite encouraged about incremental opportunity for us next year, off of the work we're doing right now with these people.

In the fourth quarter, we'll start to see the benefit of the Houston METRO toll project as sales accelerate. We had a nonmaterial amount of revenue in Q3 and expect to pay a pretty substantial increase here in Q4. And then that will roll out through next year.

Our Gaz de France AMR installations are well underway and are currently in the fourth quarter. They're going to be running at the normalized rate of the next couple of years. We actually, recently had a board meeting in Paris, and we're party to the initial installation in a big ceremony, and we're quite bullish about where that's going to take us over the next several years.

Our CBORD and Horizon growth will continue in the fourth quarter. They were up only modestly last year and that should return to more normal growth profile now. And we'll get the benefit of the entire fourth quarter for iTradeNetwork, which came in really on July 27. So it didn't add as much in Q3 as it will in Q4 and next year.

Next slide. Industrial Technology had just absolutely spectacular performance. You can see the orders were up 35%. So that's all organic. Sales were up 23% and EBITDA margins were up 370 basis points over the reported number of a year ago. The operating margin in the year was 27.9%, and the EBITDA margin, the 31.6%, that's equal to or greater than many of the businesses that report gross margins. So I just can't say enough about the quality of the leadership teams we have in these businesses.

Every one of them really did an outstanding job. It's a record margin performance for the family. And Neptune had an all-time record in orders in the third quarter for its history, and they were up well in excess of 35%.

Our Material Test business continued to rebound nicely with a big improvement in consumables for our Cutting Technology businesses. And the Fluid Handling businesses had an extraordinary quarter, and we expect that to continue as we've launched a new line of drill products called DuraTorque, which is opening up new gas exploration opportunities for us. We just celebrated a large situation out in Aberdeen, Scotland, and we see a lot of forward growth in that particular business.

And then in our Water businesses, the pumps for rental markets are up substantially, and we picked up one of the more important rental companies and changed to our products. In the fourth quarter, you'll see we think we'll have favorable trends, that should continue. But we don't really see any slacking off in these nominal numbers, we think they'll incrementally be higher. And performance ought to remain at these high margin levels in the fourth quarter. Perhaps the most encouraging for us is that there is still really room for these businesses to grow. None of them are back to either the 2007 or 2008 peaks they enjoyed, and so we think they'll continue to do well as we move into 2011.

Next slide. Here if we look at Energy Systems, you'll see that, again, across-the-board order strength throughout all of these different businesses. Orders were up 29%. Of course all organic again and sales up 20%. We continue to enjoy a rebound in our Dynisco businesses when analytical instruments and in sensors, we had pretty decent gains in all of the oil and gas end markets particularly the protective technology issues with diesel engines. And then our longer-term oil patterns with longer lead times were really quite good, and our Compressor Control business, in terms of delivery to LNG plants with large orders in Asia for 2011 delivery.

Fourth quarter, we expect to have double-digit growth again. We look forward to strong seasonal Q4 demand. We saw a return of that last year and every indication would be, it would be strong again this year. And we think we'll have continued growth with operational execution giving us even better margins in the fourth quarter than we enjoyed here where our EBITDA margin was 26.9%.

Next slide. Next slide will be the Medical & Imaging arena. This is up 81% with organic orders up 25%. Organic revenue, sales up 16%. Terrific quarter for Verathon. We're really getting a lot of traction from increasing the sales force and focusing on international opportunities. We had a large order for Saudi, which is the kind of things that we're able to do with the business that are harder for smaller businesses to do on their own and turned at reaching out to more diverse markets.

Our Medical Consumables business did quite well. Double digit growth in the third quarter. We expect more of the same, and we have a dosage delivery, Medical Pump business, but we don't talk a lot about which had a spectacular third quarter as its kidney dialysis products are coming online at a fast rate.

Our Life Science and Physical Science businesses grew the way we thought they would in the third quarter. We think they'll do okay once again in the fourth quarter.

We have an important product line coming out of our MEDTEC Radiation Oncology business, which is a couch top that goes on with other MRI equipment. It's going to be featured next week, literally at the American Society for Radiation Oncology, Astro Tradeshow. It's a very important product for us that we hope will drive much better growth in that business in 2011. And Medical, we expect will continue to grow in double digits led by Verathon in the fourth quarter.

Next slide. Here we'll kind of update the scenario around guidance. Next Slide. We've increased the DEPS guidance, it was $3.05 to $3.15, so we've taken that up $0.17 at the low-end of $3.22, and $0.11 at the high-end of $3.26. That gives us Q4 guidance of $0.96 to $1. Despite earning $0.87 in the third quarter, some of which of course was improved tax, we still think we can make -- have the possibility to make a dollar. We wouldn't have thought -- our guidance for Q3 was $0.75 to $0.80 as I recall. So we're quite comfortable with the concept of $3.22 to $3.26. It's certainly much higher than we would've ever expected at the beginning of the year. Last year, as reported, was $0.77. So that's a 25% to 30% increase over the prior year.

But much more importantly than the earnings guidance in our view is the cash flow guidance where we've made a huge increase in our cash flow. We've raised our prior guidance of $425 million of operating cash flow to $450 million. We're now saying operating cash flow will be $465 million to $485 million or more. And we would expect CapEx will come in at less than $30 million for the year. So when we look at a $40 million increase in what effectively is free cash flow with less than 100 million shares of stock outstanding, I would ask you to think hard about just how much we've increased our guidance on a cash flow per share basis.

Next slide. In Q3 summary, this is the kind of slide you'd like to kind of put up and then put it up again and put it up a third time. It's the best quarter in the history of the company bar none. Orders, $654 million, up 31%, sales $605 million up 25%, net earnings up 49%, free cash flow, $133 million in the quarter. I think last year it was $80 million. So it's up 65%. Organic growth up 20%, and orders in 14% and sales with a lumpy flat quarter in RF. Book to bill of 1.08, backlog at $770 million. Those of you who have followed us for a long time, we didn't even use to have sales that high. Gross margin, 53%, EBITDA 27%, and free cash flow to sales is 22%. iTradeNetwork is doing really well. We've got very setting things going on internationally already with iTrade, and the integration's well underway. We were able to close the books in a timely manner, which is always a wonderful beginning. And despite the fact that we've invested $900 million, we're sitting with a very strong balance sheet and building cash at a very fast pace.

And then of course we increased our guidance, as you see, to $3.22 to $3.26 with the operating cash flow of $465 million to $485 million, and free cash flow on the high-end, maybe at $455 million or $454 million. We now know that 2010 should be the best year in the history of the company. And frankly, we think we'll have an improvement over this year in 2011 as we start to prepare for next year.

So with that, we should open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc.

John, wondering if maybe you can just help us with this bridge on the change in operating cash flow guidance, be a midpoint of EPS range, about $0.14 or $14 million. You talked about CapEx below $30 million but I don't think that's a change. I'm just trying to understand what's happening at the working capital level or other issues to help drive that better cash flow guidance?

John Humphrey

Well, I think it really comes down to, a, the improvement in the earnings but also, we continue to work and get better at receivables collections and inventory performance, both of which are improved in the quarter versus where we were last year. And as you know, as you get closer to the end, you get more confidence over how the cash is actually going to roll in. And a change in just a few days here and there could have a large impact with the amount of cash that we receive and disburse on a regular basis. So as we look at our cash collections so far during this month as well as the performance that we've seen on the receivables side, it makes us feel comfortable with the new guidance range.

Terry Darling - Goldman Sachs Group Inc.

And Brian, as you pointed out, working capital of sales, pretty stunningly low number. I'm wondering what your thoughts are on how that moves as big as the cycle continues to recover. Supply chains, maybe get a little bit more complex. How do you want us to think about this 7% working capital to sales as the cycle moves along?

B. Jellison

Well, I would say that of all of the component parts of that networking capital calculation, even though inventory's at 7.7% of sales, we think that that's the one that's most easily improved. But we still think that our core legacy businesses do a good job but could do a better job on inventory turns. We got pretty high gross margins, right? So, I think we do a great job on balance, but some of our businesses are world-class and not all of them yet have caught up to that. I don't see a negative trend. I mean, we're not going to need to bring in more inventory and carry it for a longer time or have longer lead times and suppliers that would increase our inventories as a function of sales.

Terry Darling - Goldman Sachs Group Inc.

And then shifting to, Brian, your thoughts on organic growth for 2011. You've talked through a couple of points on the segments and obviously, the first quarter is still a pretty easy comp that presumably you'll stay in the double digits with. But how do you feel about, as you move into the back half of the year on organic across the portfolio for next year, I'm trying to map together what you're seeing from a macro perspective and from the bottom's up perspective that I'm sure you're still working on at this point?

B. Jellison

Well, in a way, we've had kind of a benefit as we head into 2011, and that we've got a couple of projects here that have very been slow to roll out. I mean, good heavens, we've booked a significant portion of this Houston project in the third quarter a year ago, and so that's going to start to be sold here in Q4 next year. I mean, we know that for a fact. It's not a iffy thing. So I think we don't have headwinds going into organic growth in 2011. Certainly, the first quarter, we just finished the first halves of our Industrial group's strategic planning, and came away feeling like "Man, you were back to the Q4 2008 before the devastating recession hit in terms of how individual inertia is strong, and they've got a lot of product innovations." So they feel pretty bullish. But I have to reserve our overall enterprise until we finish the rest of the segments. But I think, certainly, 2011, we expect would be better than this year's actual numbers, and we got quite a few favorable things. We've got exceptionally high margin acquisition in there. We've got baseline growth in some things we're doing internationally. We've had a lot of things that have been postponed that we don't think would be postponed forever. So it's a little early for guidance, but we certainly feel as good going into 2011 as we did going into 2010.

Terry Darling - Goldman Sachs Group Inc.

And then just last quick modeling, John, what are you assuming for 4Q tax rate in the guidance? I heard Brian make a comment about some sustainable, kind of structural improvement. Any thoughts on '11 as well would be helpful?

John Humphrey

Sure. As far as the fourth quarter is concerned, it'll be somewhere in the 29% range, is what we're expecting for the fourth quarter. And that really brings our full year to kind of in the 28% to 29% range. Now of course -- and we do always have some upward pressure, particularly as we fell more in the U.S. where tax rates are some of the highest in the world. So we'll be fighting that type of headwind, that as we start to look forward into 2011, it will probably be somewhere in the 30% to 31% range. And then we'll just have to see if we can have any other good tax planning ideas in order to bring that down a little bit. So we'll have to wait until we get to guidance on anything more specific than that.

Operator

Moving on to Mark Douglass with Longbow Research.

D. Mark Douglass - Longbow Research LLC

Can you discuss a little bit more on iTrade, give an update of how the integration is going? I mean, are you still looking at like $0.01 in EPS in fiscal '10? And then what kind of revenues are you expecting on a quarterly basis?

B. Jellison

Well, John can give you a better idea about earnings increase, and then we'll talk a little bit more, Mark.

John Humphrey

Sure. Actually, as far as earnings accretion is concerned, we had already assumed kind of when we announced this back in July that they would add $0.02 or $0.03 to the full year. And we're right on track for that, so we're expecting it to add a couple of pennies in the fourth quarter. And then as we look forward into 2011, consistent with what we had said back in July at the announcement times, so this is going to deliver at least $55 million of EBITDA, of course, in 2011. This is a high margin business. So this is something that's going to add somewhere in the $90 million to $100 million of revenue in 2011. And other than that, I'll turn it over to Brian for the integration activity.

B. Jellison

Well, I think, integration in iTrade, this was a -- it's a very solid group of people. And there have been some consideration about taking them public, because these businesses have such high multiples. But as we were explaining to them, it's a little hard to do that, once you're using QuickBooks. So we've had to do a whole lot of accounting support. We have one of our best people who's been working with them to get them to be able to bring in their worldwide numbers. Because even though it's not an enormous business in revenue, it's got a global reach. And we're also doing a lot in terms of international development with them, and we have quite a few M&A things we're running the ground with them in terms of small bolt-ons to the business. So we spend a disproportioned amount of time in the last third quarter, let's call it, doing things. But all of the people aspects are going very well, and all of the administrative integration is going well. And I think Roper lending adds credibility to what's a relatively small company has helped them out a lot with these very large chains particularly in Europe, and we expect to be announcing some International business in the not-too-distant future here. So we're quite happy with it.

D. Mark Douglass - Longbow Research LLC

And then finally, no pun intended, but can you drill down into Energy Systems & Controls a bit more? Is it more upstream or downstream that you're seeing some good growth? And then your Sensors and Analytical Instruments business, what's the relative size and what kind of growth have you been seeing there? By single or low double-digits? What have you being seeing there?

B. Jellison

All those businesses you can see are -- some of them are strong bounce back stories. They're up closer to 30% than high single digits. If there's two different things going on here, our Industrial business, not in Energy, we have Roper pump, which is traditionally an oil and gas play. But it's a pretty well vertically integrated manufacturing operation. They've developed a new line of products called DuraTorque, which are fundamentally going to change some of the ability to do drilling, used to be more focused on med pumps. The DuraTorque product line is something that gives us proprietary technology that has kind of been starting somewhat in the third quarter, gaining great momentum as people see how effective it is compared to the competition. So that's certainly going to grow at a pretty fast rate in a relatively small-market. On the Energy Systems side, those businesses are really more around the throughput of activity and making things better on an efficiency basis. So they're not very easily tied to rig count. So we are tied to upstream and downstream type of activity. And all of those are universally up. The one business we have in there that's been spotty, which did well in the third quarter is our Petroleum Analyzer Instrumentation business, which primarily goes into refining, and refining is still not doing as well as the rest of the end markets.

Operator

Moving on to the Citi Investment Research from Deane Dray.

Deane Dray - Citigroup Inc

I was hoping we could drill down a bit into the RF business. This last quarter, if I recall, had a book-to-bill of 1.11 with flat revenues. And this quarter again, we came up a little short on the revenue side. So is this all tied to the Houston project? Just would've thought, based upon that bookings last quarter, we would've start seeing some of the revenues coming through. But what else might be at play here?

B. Jellison

It's mostly just that simple. I mean, it's quite a large project and it's been -- deployment on it has been slow. But we also have this Wireless Sensor business, it's an OEM business that sells to big security companies and it's been affected negatively of course because of commercial construction activity around the world. And while it isn't a very big business, it gives us -Bs to overcome. Looking at the book-to-bill isn't necessarily -- you almost need to look at it over a 12-month trailing basis to get an idea that bookings, what happens is that CBORD and Horizon and some of the software businesses are doing really well. So it looks like the thing's flat but you got some stuff up sharply and other stuff down.

Deane Dray - Citigroup Inc

And what's the policy in terms of what constitutes an order to be booked? Is that shipments within 12 months? And would you ever de-book?

John Humphrey

So along those lines, the short answer is yes. Whatever is shipped within 12 months. And we have had the bookings in the past. If a project is canceled, if an order is completely canceled, we have absolutely had situations where we've had to de-book something. It doesn't happen very often. And what has happened vertically with the Houston METRO, where we did go ahead and book a roughly the first year's worth of that last year in the third quarter. The timing associated with that continue to slip a little bit each quarter, always staying within the 12-month window. We do feel very confident. We're already doing work, so this will be delivering revenue in the fourth quarter. So I hope that answers your question.

Deane Dray - Citigroup Inc

It does. And just a last question for me on this RF side is related to the College and University business with CBORD and Horizon. I have a sense that during the summer months when the schools try to do all their infrastructure type of investments. But how about on the systems basis like CBORD, is there any seasonality to how these institutions make their decisions?

John Humphrey

Yes, there is. And in fact, you'll see the booking's always a little bit higher for CBORD and Horizon in the summer months, sometimes it's Q2, sometimes it's in Q3 depending on when the customers are making their decisions there. However, from a revenue recognition standpoint, we spread that revenue throughout the 12-month period that we're delivering the service. So there's a small component, maybe 20% or 30% of their revenue, which is associated with new installations of hardware. So that might be new security applications, new point-of-sale devices, et cetera. The vast majority of their revenue is software-related, and that's the part that is spread throughout the 12 months. It also is a component of our deferred revenue balance as we get paid in advance for that activity. It's a great cash flow generator for us.

Operator

Alex Blanton of Ingalls & Snyder has our next question.

Alexander Blanton - Ingalls & Snyder

You made a nice acquisition in the third quarter. What is the acquisition outlook going forward? Can you comment in general on pricing and the acquisition arena and what you might be doing there?

B. Jellison

Well, there's a frenzy for people to try to get stuff in between now and the end of the year. There's an awful lot of things happening with a lot of things that are for sale. We have an enormous pipeline. I would say that as the diligence medals threw on them, that we're finding -- it's a good thing that we have good diligence. There's a lot of stuff for sale, not all of which is wonderful. People trying to get close before the end of the year, and there's all kinds of issues with private equity with lots of money on the sidelines, and they need to get it invested or will perhaps, not be able to have their capital calls on people. There's just a lot going. Pricewise, I would say that pricing is not as far apart as it was a year ago because it's a little easier for the buyer and the seller to have a better understanding around what the trailing numbers are and what the first year numbers look like. I would say that for the first part of this year, it would -- generally, private equity transactions were at least as high as public market transactions which is kind of ridiculous and not the norm. I think that's kind of come into a more stable area. So generally, we find it a bit outspread now. It may be one or two or 2.5x EBITDA, and then you got to find whether you could narrow that gap or not. So since we really buy things to grow them, we're really focused on the things that we can buy and add value to through channel management and market reach and better end-user value pricing and things like that, and maybe some supply chain stuff. There's no end to the kind of things we can look at, at the moment. If you were looking at a number of things outside the U.S., which is unusual, that's because those at the moment are the most attractive. I don't think we'll do anything, close anything between now and the end of the calendar year here with nine weeks to go or something. But I don't think we'll be pulling back on our run rate of $500 million to $600 million of acquisitions or more annually.

Alexander Blanton - Ingalls & Snyder

And the reason for the frenzy, is it more than normal? Is it legislative risk, or what is it?

B. Jellison

Yes, there are several different things. One is you got the risk of carried interest being taxed as ordinary income. So there's a desire to get a lot of transactions done under the wire on that. And if you got something that is, you think you can really sell at a decent price, it's a good time to dispose of it for that reason. Secondly, the debt markets are just -- it's unbelievable. We're seeing 6x, 6.5x debt staples on everything now. So it's just quite easy for things to get refinanced. We had a transaction that we have been working on for a while where we finally passed because the guy can do it, he can basically refinance his debt at 6.5x his trailing EBITDA number, pay himself a big dividend and sell it again next year. There's a lot of that going.

Alexander Blanton - Ingalls & Snyder

And finally, could you comment on what you're doing in China? I mean lots of companies are looking at growing faster over there. What are your opportunities in China?

B. Jellison

Well, we are growing faster in China than in the rest of the portfolio as a whole. We just don't have a huge base. We have one fiscal operation in Malu, which we've expanded and in fact, relocated from one factory facility last year to a newer larger facility recently. That's primarily around the Energy Systems products for the most part. We've got a common series of systems in selling and legal entities around that, that gives us a pretty good reach for products as they come online. Our Energy Systems business, a lot of its growth this year is in Asia. Now some of that is in Australia and Malaysia, Indonesia. But China has had an important part as well. When you look at medical products, frankly, growth in Europe and the Middle East and the U.S. is better. Price points in China for those kind of products that are really not very interesting and when you look at a good, better, best, they'll take something that's maybe not even good. So that's not us. And when you think then about the sort of Software businesses we have, I mean you can't walk our Freight Matching or CBORD into China with much effectiveness. So it's really around the Industrial & Energy businesses. And as you can see, those guys were up 35% and 30% respectively, and the Asian growth is higher than that base number.

Operator

Moving on to Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer & Co. Inc.

Question on the Imaging. We had Verathon for a few quarters now and it's still quite an impressive sequential ramp. Just wondering if you're seeing some of the Japan wins really hit orders? If there's a re-stocking, or it's been more of a built to a run rate given all the market efforts?

John Humphrey

Well, I'm not sure I understood the Japan portion but as a rule, whenever we have any type of Japanese funding plus or minus, that's going to affect our camera companies, more so than our Medical businesses. Verathon is really an organic growth story, building in the infrastructure and investments in the sales force. And those folks are really doing a very good job of managing their ramp rates, their learning curve and really hitting the ground and continuing to expand with the product lines that they have. And then also, they've won some very nice orders with Saudi Arabia, as well as with the military. And so all of those things should continue the double-digit growth that Verathon had before we acquired them and they continue that and maybe even a little bit better post-acquisition.

Christopher Glynn - Oppenheimer & Co. Inc.

And on the tolling project bid activity up sharply, just wondering what you're kind of anticipating as the conversion cycle compared to sort up the trend that Houston established with a lot of bureaucracy to work through?

B. Jellison

Well, unfortunately, there's always a lot of bureaucracy to work through in all these business. So the conversion cycles, we have learned are unpredictable. The ones that we're talking about now though, we think are relatively fast. So we think we're out in front, showing people the opportunity to convert some of our installed base to our United Toll System technology that we're delivering. We've got some very important trials underway and installations that are happening that are going to add organic growth for us certainly next year. And then we have some international transactions that we can't talk about that we're quite confident will be converted in 2011. So I don't think we're going to have another Houston situation where we're waiting almost for a year to get our first billing. I don't think that's the case.

Operator

Vertical Research Partners, next question comes from Jeff Sprague.

Jeffrey Sprague - Citigroup

First on cash flow, not to diminish the cash flow because it's fantastic. But I'm wondering, Brian, can you give us a sense of how much of it's mix related as you grow CBORD and businesses like that versus organic improvement in the operating or the ongoing companies?

B. Jellison

Well, of course, we've owned CBORD for a while, so we would consider that to be organic as it grows. And certainly, it does point out that the way that we've been developing Roper over the last nine years is to get these asset-light businesses that throw off a lot more cash. We talk about EBITDA and we report operating margins. What people should really focus on are our EBITA margins. If you look at our EBITA margins, for instance, in Industrial in the quarter, they were 29.9%. In Energy, they were 25.4%, and Medical Imaging, they were at 26.8%. In RF, they were 26.6%. People focusing on a 20% of the P [ph] in RF, the reality is a 26.6% on a cash basis. So the more we grow our Software businesses and the more we grow our asset-light businesses, the more cash as a function of revenue we'll generate. So it really helps. But right now, you've got stellar performance in all of our Industrial Energy businesses around cash generation because they don't need to add any CapEx, and they've don't need to add much in the way of resources to capture all the margin associated with their revenue. And the gross margins in all these businesses are basically 50% or higher. So if you look this year, EPS is up the most of any of the components when we think about that. So that's really helpful on the guidance raise, is driven the least by acquisitions, the most by net earnings growth and then somewhat by better visibility around what's going to happen on all of the respective balance sheets.

Jeffrey Sprague - Citigroup

And then kind of taking that kind of to the next step, if you look at the M&A that you've done, obviously, you've done some really attractive deals in RF and MEDTEC. Does your bias toward asset-light kind of lead you away from Industrial & Energy over time? You've got some nice asset-light businesses in those portfolios. But I'm wondering just in terms of kind of the target, the potential target companies that would fit your MO, if they're really out there, or there's too much competition for them regardless?

B. Jellison

Well, I don't think there's too much competition for them. I mean, we don't see that. I think, although, we are surprised sometimes at people paying, buying other public companies with control premiums is not something you'd likely see us do. And we do look at Industrial transactions. In order for us to get excited about it, we wouldn't want to see a lot of depreciation and replacement CapEx that's required in those businesses. So to the degree that there's nothing wrong with Industrial markets at all, but we don't want to have deeply vertically integrated factories. So we're still looking at assets in that arena. I mean, we're looking at a company in Europe as we speak. They do tend to get crowded out by the higher cash return businesses that are available to us in RF and Medical. So there's no real -- we don't have a bias against anything. We're absolutely just all about the cash return. If we can get the cash return to look right, and it fits any of our leadership capabilities, then we're all for it. But our number one filter on businesses is whether we think they can grow and have the right leadership component. And our number two filter is whether they hit the kind of cash returns that we're going to demand of them going forward. And if they do that, then we'll focus third on the market that they're in.

Jeffrey Sprague - Citigroup

Just switching gears, on the tolling stuff that you're alluding to bidding on, I'm just wondering if you can give us some update on kind of the state of the customer at the type for kind of the unique or more technologically advanced. Other words, kind of plain vanilla tolling versus maybe doing something with realtime pricing, or creative use of HOV lanes or different things like that. Are you seeing more of that more kind of uptake in interest in the space?

B. Jellison

I would say, we have more discussions than any real reality around realtime pricing. The politics on realtime pricing are pretty overwhelming. As a general rule, realtime pricing is going to be driven by a green orientation, and might get defeated by the politics of people who don't want to have to pay to enter the city. When you go to the technology, people have a big trade-off on the quality of the tag they use and what the read of that tag is and what happens. It's very important around accuracy. So we believe we have far and away the most accurate products and the best family of products for people to choose from. So you can use a wide variety of things we can deploy. Those people who look at well, what if I did a lower cost technology, sometimes we'll bid it that way, but when it's finished, they don't go that way. There are more people who have talked to us about really low-cost tags which wouldn't get you the same accuracy or read and would rely more on video tolling to be something buried up to it. I wouldn't say we're not -- we hear people talking about them. We don't see any real activity in the space.

Operator

We'll move on to Wendy Caplan with SunTrust.

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

As we look at the RF segment, over time, the Software business has become a greater part. We talked in the past about someone running that business. Can you give us an update on the management of that sector of RF? And then I have another question about margin.

B. Jellison

Well, I can assure you that Rob Bonavito runs iTrade and Tim Tighe runs CBORD and Horizon, and Tim Bickmore is running our Freight Matching businesses and Claude Yonnet and the company running Technolog, and the number of people in Neptune that are focused on software development, all feel they're doing a great job. And we agree with them. So I think the management we have in these phases is really world-class. Now at the sectoral level, if and when we break that off to its own independent family of businesses, we don't have a sectoral leader over that family of businesses. It's certainly possible in the future, we'll do that. It's interesting, we just brought in a new Vice President of HR for the business. And this is a guy whose career while his early upbringing was at Pepsi [ph], he was the HR guy for Compaq when HP bought it and of course was involved in the integration activity around HP and then became the HR guy for Dave over at Nielsen. So he's a guy who understands those kind of businesses and can help us in the selection process around people to staff these businesses going forward. But we're very happy with the quality of the people we have now.

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

And in terms of hiring, what are we seeing at this point in terms of adding feed on the street for sales, or engineering talent? Where are we in that process?

B. Jellison

I think we're where we want to be. We've added a lot of people in our Medical business at the first part of this year and in the last part of last year. So I would say that in terms of feed in the street, our businesses are at full employment and very happy. We're still adding some additional people in our CIVCO business around certain things. But for the most part, we're where we want to be on people.

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

And just a quick one on Freight Matching, it wasn't really discussed fully. Can you talk about how it's doing?

B. Jellison

It was pretty much flat in the quarter, but flat for them is world-class.

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

And finally, you did mention that you saw the margin in Industrial, specifically, was not at its peak level. Overall margin for the company, operating margin, isn't back to the kind of 30% level. Is there any reason in your mind why that shouldn't be?

B. Jellison

I certainly would not have meant to imply that Industrial margins weren't spectacular. They're beyond that at 31.6% EBITDA. I think what I was trying to say was that the revenue for the Industrial businesses was not back to 2007 and '08 levels, which is a cause for optimism for us as we look at 2011. And of course, those businesses, just as you see the EBITDA and operating profit margin was up quite a bit in them, on a comparative basis in the quarter as they generate more growth, that comes in with very nice positive leverage. And that will continue to allow the margins to go up if they grow.

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

And my question about operating margin getting back to prior peak, is there any reason why we shouldn't expect that?

John Humphrey

Well, actually, Wendy, from a standpoint of, I think, the prior peak for us, the operating margin in 2008 was right at 21.1%. And I believe on a year-to-date basis, we're probably at about 20.9% of that, do the math. That's just eyeballing it, I think that's about where we are. I mean kind of as Brian said, we don't think of prior peak, meaning the future peak. We always think about the next dollar revenues is going to deliver somewhere in the $0.30 to $0.35 range and we'll continue to get margin expansion as we continue to grow.

Operator

Ladies and gentlemen, that will end our question-and-answer session for this call. We'll now return back to John Humphrey for any closing remarks.

John Humphrey

Thank you, Coreen, and thank you all for joining us this morning. I know that there were a couple of folks who are still in the queue, but we did have to close this off. So I'll be following up with you individually. Otherwise, I look forward to talking to you again in about three months.

Operator

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a wonderful day.

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