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Roper Industries Inc. (NYSE:ROP)

Q4 2012 Earnings Call

February 2, 2012 8:30 am ET

Executives

Brian Jellison – Chairman, President, Chief Executive Officer

John Humphrey – Executive Vice President, Chief Financial Officer

Analysts

Matt Summerville – Keybanc

Mark Douglass – Longbow Research

Deane Dray – Citigroup

Alex Blanton – Clear Harbor Asset Management

Terry Darling – Goldman Sachs

Christopher Glynn – Oppenheimer

Richard Eastman – Robert W. Baird

Operator

The Roper Industries Fourth Quarter 2011 Financial Results call will now begin. As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to Mr. John Humphrey, Chief Financial Officer.

John Humphrey

Thank you, Alan, and thank you all for joining us this morning as we discuss the results of the fourth quarter and full-year 2011. 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 have prepared slides to accompany today’s call which are available through the webcast and also available on our website at www.roperind.com.

If you could please turn to Slide 2, we begin with our Safe Harbor statement. During the course of today’s call, we will be making forward-looking statements were 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, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Brian Jellison

Thanks, John. Good morning everybody. So we’ll walk you through briefly how the fourth quarter looked, what our full-year enterprise results for 2011 were, and what some of those implications are for positioning ourselves in 2012. We’ll go through the segment detail in terms of how we see 2012 by segment, talk about our guidance for the coming year, and then open it up for Q&A.

So next slide here would be an overview of the fourth quarter. It was an all-time record quarter for us for any quarter in the history of the Company, and we had the most revenue, most net earnings, EBITDA, EBITDA margin, operating and free cash flow. Total sales were up 9%, organic sales were up 7 – frankly, better organic sales growth than we would have expected back six or seven months ago, so things still look pretty favorable in that arena. Gross margins were up to 54.9%, demonstrating that we’re certainly not under a lot of price pressure in the marketplace and that everything we’re doing continues to work exceptionally well.

EBITDA was 222 million in the quarter, which is beyond a spectacular number in our opinion. EBITDA margins were 30.1% and certainly a milestone for Roper and speaks to the quality of the businesses that we have.

Our earnings in the quarter were $1.23 - we talk about that in the income statement here - up from $1.10. Last year fourth quarter, operating cash flow was another sort of spectacular $193 million in the quarter. That represented 158% of net earnings on a conversion basis and represented 26% of sales. Free cash flow was 181 million. Same story – 149% of net earnings here for conversion, so it was quite a strong finish in the fourth quarter to what was an historic year for us.

Next slide – here if we look at the fourth quarter income statement, you’ll see bookings were basically flat. There are a couple reasons for that. The fourth quarter last year, our orders were up 23% over the prior year, so it was an exceptionally unusual and difficult comp, and we had three things happen that we detailed last year. We had quite a substantial Mexican order for Neptune - that tends to be a non-recurring type of item when those happen; some unique shipments in the camera arena around some specific CAPEX that was going on in China; and then we had a Gaz de France project largely booked and that was completed in the fourth quarter this year. So those were unusual headwinds that exceeded $30 million.

The backlog is up though, as you can see, by 5.5%, so backlog was at $828 million which is an all-time record for a year-ending backlog number for us. Net sales were up 9%, 7% organic. Gross profit, as we covered, was up 20 BPs. Operating income at 187 million was up 13%, and operating margin was above 25%, up 80 BPs in the quarter. You can see the tax rate was actually a little bit of a negative headwind in the quarter compared to last year. We had a particularly favorable tax rate in Q4 last year – 27.7 for us, and the fourth quarter this year was 29%, so that cost us $0.02 a share. Nonetheless, we still are in at $1.23 on DEPS.

Next slide – if you look at fourth quarter cash flow, it’s for us kind of just a breathtaking accomplishment – 193 million of operating cash flow in the quarter, and that’s up dramatically. Last year, our record year was 155 million, and if you look at fourth quarter 2009 it was 120 million; so we just continue to pile up the cash. If you look at the variances, it’s up 24% as you can see on this slide from the fourth quarter a year ago, and 61% from 2009.

Next slide – here we’ll start to look at the full-year enterprise results. Next slide – we again achieved a record result on an annual basis as well as a quarter. On an annual basis, it just again includes everything and the kitchen sink here – historic levels of orders, backlog, sales, net earnings, EBITDA, operating and free cash flow. Sales for the year were up 17%, organic growth for 2011 was 13%. Remember, when we established guidance at the beginning of the year, we thought organic growth might be 9 to 11, so it came in substantially stronger than we had expected.

Gross margin was up 80 BPs to 54.2%, operating margin up 200 BPs to 23.6, which is really an incredible achievement for all of our 28 P&Ls around the world that are so terrifically focused on margin and cash and growth. Our EBITDA for the year was up 164 million to 802 million. By the way, we had a re-measurement gain in the second quarter and we’re excluding that from this 802 million number; otherwise, it would have been 809, but that’s a non-recurring item. The EBITDA margin expanded to 28.7% for the full year and operating cash flow for the full year was 602 million or 22% of revenue. Free cash flow at 561 million was 20% of sales, so another terrific year for the Roper family of businesses.

Next slide – here if we look at the full-year income statement, you’ll see bookings were up 11% on the year. Net sales up 17, organic 13. Gross margin up 80 BPs, operating margin up 200, as we said. Tax rate on the year came in at 29.4, which was 130 BPs headwind compared to the prior year, so that cost us $0.08 a share. Despite that, we reported DEPS of 4.34, and the one thing we’d point out there again is that re-measurement gain is in the GAAP number at 4.34.

Next slide – here if we look at our EBITDA growth, you can see the trends and performance in terms of capturing our gross margins in the form of EBITDA for our investors. We had EBITDA of 802, as we mentioned, which is up 300 million from two years ago. Our EBITDA margins two years ago were 24.5%, and common questions to us always are how are you ever going to keep those margins? They’ve got to degrade. Nobody can have margins like this. They’re going to regress to some artificial mean that S&P 500 companies are stuck with; but that’s not the case here. As you can see, our margins were up from 24.5% to 26.7% last year and just continued forward at 28.7% this year. That’s a 420 basis point improvement in just two years in our EBITDA margins.

Next slide – our full-year cash flow, again, tells the story of Roper’s business model: 602 million in operating cash flow representing 22% of revenue, free cash flow 20% of revenue, terrific execution throughout the enterprise. Net working capital, still—and our definition of inventory and receivables less payables and accruals is, like, 6% of less; so just spectacular performance from the field here. And you can see that trend up from 367 million of operating cash flow in ’09 to 500 to 602, and we’re forecasting continued growth in 2012.

Next slide – we have a really terrific balance sheet. We close out the year in a very strong position. You can see cash was up 68 million to 338 million. Our undrawn revolver is totally undrawn at 750 million; last year we had 520. We get the benefit of trailing EBITDA coming up at 802; last year it was 638, so when you think about all those kind of investment-grade characteristics and multiply it times EBITDA, and you look at the powder we have, we’ve got really a spectacular balance sheet. Gross debt to capitalization is 25.4, and when you look at the net debt number, we have about 1.85 billion in gross debt. With the 338 in cash, you’d have net debt of 747 million against 802 million of trailing EBITDA, so it goes without saying that 2012 is likely going to be a strongly above-average acquisition year for Roper, and we’re very excited about our prospects in that arena.

Next slide – here we’ll get into the individual segments. All of them are just faithfully executing the business models that they drive, and you can see there is just no softness anywhere inside the full-year activity. RF technologies, sales were up 17%, operating profit up 35, and margins up 300 BPs. Industrial technology was up 21%, OP up 29%, and margins up 150. And boy, when you’re up 150 and you finish at 28.2% OP margin for industrial flow control businesses, I can’t take my hat off enough to the quality of the people we have and the niches we’ve chosen to serve.

Medical and scientific imaging, sales were up 11%, OP was up 14, and margins were up 50; and then energy systems and controls was up 19% with OP up 31 and margins up to 50. Overall, the team produced 13% organic growth. They feel quite good about going into 2012, and the broad-based margin expansion we enjoyed this year, we think will continue next year.

Next slide – so here we’ll look at the smallest segment as a function of the total of 21%, is medical and scientific imaging. They had an unusual fourth quarter just mathematically – we’ll talk about it- but really the story is the medical growth continues with even better prospects at Northern Digital than we originally identified. Got significant OEM business that we believe is coming online in 2012. We had organic sales decline in the fourth quarter, really caused by two primary events: we had lower camera sales for an original equipment manufacturing video conferencing series of things that go on with one particular large client, and they were in decline this past year and the fourth quarter really brought that to a head; and then our rugged mobile computer shipments, which we rarely talk about because it’s certainly not the key to our medical or scientific imaging business, but they enjoyed unusual activity in the fourth quarter last year with their rugged mobile applications into certain overnight shipping arrangements, and those really waned this year in the fourth quarter.

We had very strong margin performance in the fourth quarter against an all-time record last year in the fourth quarter, so we wound up with 25% OP in the fourth quarter. For the full year, you can see sales were up 11%, OP 14, and margin up 50.

As we look to 2012, what we see in the segment is that medical growth, we expect to continue. We have several new product launches that are occurring, generally starting in Europe and then coming into North America. We expect those to provide a lift in the second half of the year. We’ll get the benefit of some growth from the Northern Digital acquisition in the first part of the year, and then it will turn into organic growth in the second; but we expect a very strong first quarter from Northern Digital.

We’ve got significant backlog in the scientific imaging arena that supports modest growth of the year. It’s certainly going to be probably the low point of 2012 organic growth for Roper; but that said, given fears around research funding, as we’ve gone through our planning reviews with people, people seem reasonably confident and certainly the physical science aspect of this looks better than the molecular and biological aspect does. But on balance, it should be a net gain for us in 2012 and we are confident we’re going to have margin expansion from growth in the other arenas.

Next slide – we look at the energy systems and controls. Here, you can see just virtually all of the divisions here, with the exception of Zetec’s nuclear steam-gen activity, have had very strong growth across the segment. They all had record margin performance. We continue to get our diesel engine shut-off systems that we’ve talked about frequently—continue to grow at a very rapid pace. We don’t see any pullback in that area. We have had record results, really, for compressor controls, primarily due to the continuing expansion projects around the world; and you can see for the full year, our revenue was up 19%, OP up 31, and margin up 250. To have OP in the fourth quarter at 30.5% is really quite substantial performance.

If you look at 2012, we don’t really see any headwinds here. We would expect that this segment ought to grow the fastest of our four segments in 2012. It’s got major drivers, none of which are waning in any way with the oil and gas markets remaining favorable. Compressor Control has a backlog that assures its success for the year.

The bolt-on acquisitions, which we haven’t talked a lot about because they’re small – United Controls done earlier this year – gives us access to very substantial OEMs that we haven’t been involved with in the past. Trinity is a software company in the U.K. that’s just coming onboard now. It’s modest revenue but it gives us a lot of technology and it’s going to allow us to get compressor control even more embedded in software activity. And then Hao Ying is a Chinese company; it’s our first Chinese acquisition that we acquired for Dynisco. Dynisco is enjoying very nice growth. Probably everyone is aware that tire manufacturing CAPEX is doing well, and the things that Hao Ying can do for us in China are similar to what we do in the U.S. We have a lot of new products coming online, and having our own in-house manufacturing capability and distribution channel reach directly in China for the rubber industry is quite useful for us.

Next slide – here if we look at industrial technology, fourth quarter was up 20% in sales, 25% in OP, margins at 29.2%. Let’s not be confused – those are not gross margins of an industrial company, those are the operating margins of our flow control businesses. Fluid handling, very rapid growth from new customers, expanding oil and gas markets here. Certainly fracking is driving a significant portion of our growth. Very important indicator for us – our material test business is headquartered in Denmark, along with the Dynisco business I just mentioned, were two of three indicators that late in 2008, about the downturn for ’09 that were people going to experience, and they finished the fourth quarter at a very strong rate – up over 20%. Dynisco finished very strong as well, so we haven’t seen any sign of any deterioration in forward activity.

Neptune is continuing to grow in the U.S. despite the concerns that we and others would have had about the municipal market, and the fourth quarter was favorable for Neptune and we delivered both growth and execution with these record margins. Full year, you can see sort of similar – 20% in the fourth quarter, 21 for the year, OP up 29, margin up 150 basis points.

For this coming year, we really don’t see anything that’s going to arrest the trend. The major drivers – we get a big benefit from the Toronto project at Neptune, which will roll out more rapidly in 2012 than it did in ’11. We don’t see any pullback in any of our flow control businesses, and then we have new product and material tests that ought to allow that to continue to grow, so we think it will do nicely in the high end of any range we’ve established for organic growth.

Then we look at the RF technology business, and here in the fourth quarter we had sales up 4%, OP up 12, and significant margin improvement – up 190 BPs. The organic was flatter than—it was far better than what it looks here because we had the completion of the France technolog—Gaz de France automated meter reading project, which was completed; so from a revenue viewpoint, it helped us all year, but in the prior year it had been in the bookings so that was sort of an artificial headwind on a comparative basis.

We had very strong toll tag shipments that offset somewhat less project work in tolling in the fourth quarter, but we continue to have growth in our software as a service subscription and software maintenance businesses. We had really a terrific contribution throughout the year from our college campus software and integrated security solutions out of CBORD. They accounted for a significant portion of our growth in the full year, and importantly you can see the full-year sales growth for RF was up 17%, OP up 35, and margin up 300. We’re encouraged about margins in general in RF, so when we look to 2012, what we see is continued growth in the software and SAS businesses that we have. We think toll project and maintenance growth will be stronger next year while tag shipments will be lower. We have this headwind that we have to get through with the Gaz de France project that won’t recur, although we’ll have ongoing service with it; so that will be a drag into 2012. But the operating margin expansion that we expect to see by having the software businesses becoming a bigger portion of the segment and the backlog that we have in this segment gives us confidence that we’ll produce both more cash and operating profit in 2012 in RF.

Next slide – here as we get into the 2012 guidance – next slide – the full-year guidance for us is 467 to 487, and the assumptions around that is that organic growth would be up from a 5% at the low end of the range to 8% or more at the high end of the range. Last year, we said 9 to 11, I believe; this year 5 to 8, given all the uncertainty in the world, seems like a rational approach to this. We’re assuming currency is the same as it was at January 31, 2012. The tax rate, we’re assuming is going to be about 30%. Share count creeps up a little bit from 98.5 million diluted shares to 99.5 million. First quarter, we’d see coming in between $1.01 and $1.05; and full-year operating cash flow should exceed 650 million in 2012. I’m sure some people worry – we haven’t commented much about Europe in here. It’s not overly significant for us. We don’t see much difficulty in Europe. Our businesses there are often exporters to emerging markets, so we remain pretty comfortable with what’s happening in Europe.

Next slide – if you look at the 2011 summary then, we had an all-time performance record for orders and sales, net earnings, cash flow, and EBITDA. We had terrific margin leverage—you know, when we look back on the year, one of the things I didn’t cover that’s worth really talking about in the income statement is if we look at the difference, we were up—operating income reached 661 million, up from 514, so that’s 147 million up in operating income while sales were up by 411 million. You take that 147 OP and divide it by an incremental 411 in net sales, and you get operating profit leverage of 36%. So our leverage is still world-class and we expect that to continue in 2012.

Operating cash flow at 602 million speaks for itself. Twenty percent free cash flow to sales – I don’t think you can find people doing that, and our family of businesses and our end markets are continuing to look quite reasonable for 2012, so we expect to have another record year in 2012, and we certainly are off to a good start.

So with that, John, I think we’re open for questions.

John Humphrey

Okay.

Question and Answer Session

Operator

Thank you. We will now go to our question and answer session of the call. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. We ask that our callers limit their questions to one main question and one follow-up.

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

Matt Summerville – Keybanc

Good morning. A couple questions – first, Brian, can you talk about in your oil and gas-related businesses, whether or not a reduction in gas rig counts, an increase in oil rig counts – is that good for Roper, not good, or are you guys indifferent to that? And then I have one follow-up.

Brian Jellison

You know, Matt, we’re probably indifferent to that, although it’s probably a little bit better for us on the oil side than on the gas side. We have products that are used on both of those applications, and as Roper Pump in particular, they’ve continued to expand their new products and in fact have worked with our Dynisco business on some polymer technology for one of their power sections, which allows that to be utilized in downhole oil applications as well as what they’d been doing previously for gas applications.

So we’re largely indifferent to that, but also remember an awful lot of this is about building the base and expanding into some channels that we hadn’t been in before, so it’s not only the growth in the drilling activity overall but also some good channel development that those guys have done.

Matt Summerville – Keybanc

And then can you sort of what through the same thing, specifically talking about Compressor Controls, more around kind of the application-specific things that are driving what Brian seemed to describe as a backlog that gives you very good visibility through the year. Is this mostly—are you seeing good replacement or retrofit activity, or is this new capacity? And can you talk about what you’ve been doing maybe on the power side of that business as well?

Brian Jellison

Well, generally what happens with us is while we do OEM to certain very well-known manufacturers, most of our business is aftermarket business so we get a whole lot of several year out from new CAPEX activity where people want to see us deploy better technology for their controls than perhaps they had in the original purchase. It’s just a phenomenon that’s not unusual, so people who are looking for productivity or more throughput or less consumption of the gas in the pipeline frequently are going to choose us. That business, we’ve really become quite effective in distribution channels around the world and are sort of growing in China as well, so we really have—anybody who wants to have LNG operations that are as efficient as possible in getting the least consumption of gas inside their gas turbines is likely to look to us as a solution provider. That reputation just continues to build, so from an aftermarket perspective, the projects that we get a bid on—I mean, it would be not the least bit unusual for us to have six months of backlog at Compressor Control and known service work that’s going to fill things up.

In fact, we completely redesigned our Des Moines headquarters last year, created a much, much more engineering-oriented facility that gives people an opportunity to work in teams in a very different way. It’s certainly among our most exciting businesses we’ve got, just world-class human resources in that business. We’re at the early phases of our growth, frankly; and good heavens, if we got to exporting gas and LNG, it would be phenomenal what will happen to our business in that area.

Matt Summerville

Thanks a lot.

Operator

And next we’ll go to Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good morning, gentlemen. Congrats on the quarter and year.

Brian Jellison

Hey, good morning Mark.

Mark Douglass – Longbow Research

Let me talk about the medical – obviously there’s some weakness in the whole segment, but you had some tough comps. But what degree is that attributable to some product introductions? You mentioned you have some new products rolling out in the back half, so does that keep people on the sidelines a little bit? And what gives you a—

Brian Jellison

No, no. These are not substitution products at all. These are entirely new products, but we’ve had an ongoing ramp-up on certain kinds of positioning devices for MRI technology, we’ve got new products in Verathon around GlideScope. We have this Heartscape product that we’ve launched in Europe that we haven’t brought into the U.S. at all yet. We have a product called AortaScan that is a phenomenal product. All these things are just ramping up – in fact, we have an international sales meeting starting Sunday night with the Verathon people for three days to try to gear it up. We had a similar situation last week with our CIVCO people around growth opportunities outside the U.S., so we’re quite comfortable with that. And really, any—this organic stuff in Q4 has really not affected medical much in any way. Medical is still performing very well. We expect it will continue to do that. This is really much more about a business that we have stuck inside scientific and imaging because it just doesn’t fit anywhere, and that business had a really strong Q4 last year which is quite unusual, and it had its more normalized weak results in the fourth quarter of this year. So that’s—rugged mobile has for a long time been not a typical Roper business in terms of performance, but we’ve got a lot of energy in that business and people are hopeful for a much brighter 2012.

Mark Douglass – Longbow Research

Okay, thanks. And then moving to industrial tech, I mean, it actually accelerated growth versus the third quarter on a year-over-year basis. I assume a lot of that is due in large part to the fluid handling, the material test. And then looking in material test, how much of that is automotive driven – excuse the pun – and what do you see going into ’12?

John Humphrey

Well, I mean, the derived demand for that business is really anyone who is utilizing or looking to understand their material contents better; and so as one can imagine, that does include one who is making steel or aluminum or other types of really hard surface materials. So there is obviously some impact from automotive production and for the supply chain, even though we don’t really sell very much to any of the automotive companies, or even the Tier 1 automotive suppliers directly. We have some sales there, but that’s not the primary end market. But clearly the fact that automotive production has come back in 2011 and is expected to grow again in 2012, I think is adding some benefit for our material test business.

Mark Douglass – Longbow Research

And is it safe to say that the non-Neptune businesses probably outperformed Neptune in the quarter?

John Humphrey

No, I don’t think that’s fair. I don’t think that’s—

Mark Douglass – Longbow Research

Probably on a quarter-to-quarter, maybe year-to-year.

John Humphrey

On an annual basis, the answer is yes. For the quarter itself, I mean, Neptune continued to do very well; and remember, we are ramping up with the Toronto project, which did give us some additional revenue in the fourth quarter, and that will continue into 2012 and ’13 and ’14.

Mark Douglass – Longbow Research

Okay, thank you.

John Humphrey

You’re welcome.

Operator

Next we’ll go to Deane Dray with Citi.

Deane Dray – Citigroup

Thank you. Good morning everyone. For the orders this quarter, it’s rare that we’d see a book-to-bill below 1; and Brian, as I recall, any time this has happened – it really hasn’t happened for, like, 10 quarters – you bring out these historical references about any time you’re below 1. You can see—you get some one-off comments, but then look at the trend that comes back. We didn’t hear that this time. You gave a little bit of the comp issue, but just put this in perspective about the order activity, bid activity, some of the leading indicators; because this is a little bit of an anomaly to see you below 1.

Brian Jellison

Yeah, well not below 1, Deane. I think what we’ve said is from 0.97 to 1.03 is kind of a band that we would have, and routinely—oh, I don’t know what percentage, a very high percentage of the time we’re between 0.97 and 1.03. But we had some unusual situations in Q4 last year – the large Mexico City project that we revealed to people in industrial in fourth quarter from an order perspective, and then obviously wouldn’t repeat in the fourth quarter this year. So that alone explains most of the book-to-bill in industrial. And then RF is a lumpy situation – book-to-bill in RF was weak at, like, 0.9 or something like that. We’re not really worried about that. We have huge backlog in RF and the non-toll project activity is quite robust going into 2012, so it’s not much of a factor.

If we had a poor book-to-bill in the first quarter, then we’d be talking more about that; but we wouldn’t have established organic guidance at 5, 8% or more if we were really worried about the book-to-bill. But it’s a fair thing to point out because normally we would expect it to not be worse than 0.97. This time, it was 0.94; but there were these three unusual events with cameras and rugged mobile and Mexico that aren’t really core to the overall nature of activity. So the rest of it was much more in our wheelhouse.

Deane Dray – Citigroup

Okay. And for my follow-up, we pay attention to how you craft the expectations regarding M&A in a strongly above-average year, both in terms of fire power within the balance sheet. But take us through what you’re seeing in the pipeline, pricing, and in particular if opportunities to add on medical – there’s big leverage to be able to drop in a new medical line into an existing sales force. My question there is are you restricted at all as to what type of medical products that need to be complementary to some of your existing surgical products, or can you go into some newer areas on the medical side? Thank you.

Brian Jellison

Well, we have kind of three different sales forces that are available to us, so at the low end you have the overnight delivery people with consumables and telephony-driven responses with hospitals around the world, and that—we’re extremely competent in that area with the right call centers, right SKU sorting, almost a mini-distributor function. Then we have the technical cell around radiation oncology, which is a unique specific trait calling on a very small niche in the hospital and has to really be joined at the hip with major OEM manufacturers that are involved in that equipment. And then we have the third sales force, which is the Verathon sales force, which is more generic; but they’re selling products that are in the thousands of dollars, not the hundreds of thousands of dollars, not really CAPEX for the most part. Those people have very specific people they call on. It’s organized into an acute care activity and a private practice activity. It’s easy for them to add things in those two areas. Increasingly, we’re investing outside the U.S. in channel presence, and that’s doing really well. So it is certainly possible that we can do a bolt-on acquisition and take advantage of our existing sales force in that area; but we look at a lot of things in medical, and I’d have to say a number of the things that we look at are in software in medical, and we find those to be exceptionally exciting.

Deane Dray – Citigroup

And just in terms of expectations, how close do you think you are to making some announcements on the M&A side?

Brian Jellison

Well, you never know. You just—you never know. I mean, we’re sitting here with a lot of capacity, which is matched by a lot of patience. So our goal is to buy things at the right price, at the right time, and have the right people in place to monitor them. One of the things we did last year, which was very important strategically, is add two new very senior resources. We brought Neil Hunn in to focus on medical activity. Neil’s an M&A pro, former CFO of a publicly-traded company running a revenue business in medical, just a world-class guy. But we wanted to marry him up with a world-class software guy. We brought Joe Bergera in, who has worked for Wolters Kluwer and Sage for his career. Joe’s a domain expert around architecture, platforms and software, and trying to get our software to leaders, more capable, doing more bolt-ons and activities. So we have dramatically enhanced our internal capability to assimilate both software and medical companies, which we really needed to do. I think the rest of us here in Sarasota were only interested in doing transactions that brought world-class management teams and didn’t take too much more of our time, so now that we’ve really beefed up our capability in this area, we have a lot more firepower intellectually than we did in the past. Fortunately, that matches our balance sheet.

Deane Dray – Citigroup

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 just continue that last topic. You mentioned software as being an area of focus, and on acquisitions; and historically, Roper has acquired companies that were often converting from old analog technology to new digital technology, and that involved a lot of new software-driven equipment, so that the software really was an integral part of the equipment business that you were in. That started with CCC, which by the way I was happy to hear that you think you’re still in the early phases of growth with CCC, given that you acquired it almost 20 years ago. In September of 1992, it was 17 million in sales, so at this point after 20 years, it’s pretty impressive to be in the early phases of growth. But it’s software-driven, mainly, very—equipment is only a small part of it.

So going forward, are you really going to go into standalone software, or are you going to just continue to acquire equipment businesses that have a high component of software? Could you clarify that?

Brian Jellison

Well, no, it will be both. If there was sort of one core in Roper that unifies the enterprise, it would be algorithms. Every one of our businesses almost is dependent on some kind of algorithmic technology and feedback mechanism for people for data, and so that’s almost always the core of something. But our recent acquisitions, many of them have been pure software plays. Certainly iTrade and CBORD and Horizon back in ’04, or freight matching which was a core portion of what we wanted to acquire when we did the TransCore transaction, and of course it’s now split off into a separate company. We acquired another company called Getloaded, pure software. They have a link up in Canada, pure software. Certainly a lot of the acquisitions that we’re moving through the pipeline now are software-driven things. You know, I think every once in a while we’ll look at an equipment business, but for the most part the software businesses or the digitization of analog businesses, as you pointed out, are more attractive in terms of a shareholder return on a cash-on-cash basis. Our--

Alex Blanton – Clear Harbor Asset Management

Oh, absolutely. But—go ahead.

Brian Jellison

--just spectacular the last several years.

Alex Blanton – Clear Harbor Asset Management

But still, your—this is software for Roper equipment, not software for somebody else’s equipment.

Brian Jellison

No, that’s true. We’re not—it’s not like Rockwell Automation or something, no. We’re not doing software for other people’s products. When we’re saying software, we’re doing software for other people who manage the cash in their channel; so if you look at what CBORD does, it’s software that’s managing campus activity and monetizing activity, and showing people what the flow looks like. When you’re looking at Horizon, it’s pure software, no products, providing cash register support mechanisms and telling people about the supply chain. When you look at freight matching, it’s pure software subscription model where thousands and thousands of people are looking every minute about available freight movement. When you look at iTrade, you’re looking at people sorting through supply chains so that vendors can sell to supermarkets. We like networks, as such, and we continue to look at software companies that provide niche networks to people.

Alex Blanton – Clear Harbor Asset Management

Okay, thank you. Second question is this – EPS last year for the year as a whole was up 29.9%, and that was well above your average rate; and of course, you also had some headwinds like higher tax rate and so on. But guidance for this year is only 9.9%, less than 10% above 2011. Actually, it’s a little bit higher than the consensus, which was looking for a 9.5% increase, so it’s not a big surprise. But one of the reasons could be that you didn’t make very many big acquisitions last year, so you have to depend more on the organic growth this year; but also are there any big headwinds that you’re—could you just go over the things that made last year above average and might be responsible for making this year below average in terms of EPS growth? Because I think investors are kind of looking for a continuation of the long-term trend, which is about 20%.

Brian Jellison

Well yeah, you know, the long-term trend certainly includes acquisitions; our guidance doesn’t, so it’s that simple. So if you’re looking at—

Alex Blanton – Clear Harbor Asset Management

But you’re going to make very many—

Brian Jellison

Right, so you don’t have them rolling in so much into 2012. The last three years, we’ve done about 1 billion, 1.25 in acquisitions, and we’ve generated cash of about 1.4 billion. So we’ve reinvested our cash at about a 75% clip into acquisitions, and the next three years – good heavens, we’re giving one-year guidance at 650, so obviously we’d expect well over $2 billion in cash in the next three years, so that it’s easy to see how that will carry. When that does, you’ll get a lot more revenue so the overall revenue will be going up. So in any one year, you can’t look at a step change; you have to look at what it is over time. We don’t see any disruption in any long-term trends around Roper. I think we’re going to just continue to have compound growth that’s favorable, just it doesn’t look like organic growth on an acquisition until a year later.

Alex Blanton – Clear Harbor Asset Management

Right. Yeah, what were some of the things, though, that last year might have in addition to not having acquisitions to roll in this year but might have made last year a tough comparison with this year?

Brian Jellison

Well, you had record performance last year. You’re looking at lousy GDP around the world. You’re looking at people who are terrified about a whole variety of end markets. Our organic growth in the fourth quarter, I think is best in class. Our projection around organic growth for 2012, I haven’t seen anybody projecting 8% or more; so if we were simply at the high end of our organic growth and we captured the kind of leverage we expect to capture, we have more like 13% diluted earnings per share year-over-year variance, Alex, and that’s without acquisitions. So I don’t think we’re going through the year without acquisitions. So if you said can you get several points out of earnings related to acquisitions, the answer is yes. So yeah, I don’t think it’s—to go back over all those things that were favorable, we kind of—we’re doing that in the slides. If you look at our statements going into ’12, we aren’t really describing any deterioration. All you’re doing is having a slower rate of organic growth based on an abysmal global GDP forecast and fears people have in Europe, so we’re hoping not to participate in those negatives.

Alex Blanton – Clear Harbor Asset Management

Yeah, thank you. If you average the two years, it’s right in line with your historic. Okay, thanks very much.

Brian Jellison

You’re welcome.

Operator

Next we’ll go to Terry Darling with Goldman Sachs.

Terry Darling – Goldman Sachs

Thanks. Morning, gentlemen.

Brian Jellison

Good morning, Terry.

Terry Darling – Goldman Sachs

Wondering if we might be able to just help us with some color on where your organic expectations for the segments are, relative to the 5 to 8% for the year. It kind of sounded from your comments like perhaps energy and industrial may be above the high end of the range, or at the high end of the range, and maybe RF and medical at or below the low end of the range. But maybe you can put a finer point on that color.

Brian Jellison

Hey, I think we’re still expecting double-digit growth out of energy and industrial in terms of organic growth in 2012, and then the bottom end of the range on medical and imaging and only modest growth out of RF because of the tolling activity, which is a big piece of that, with other stuff growing. We’ve got a few things that affect us there in RF because we have that headwind around the Gaz de France project, so you take out 30 million or whatever it is out of that, it’s a big chunk that you have to beat up. And so we actually—if you were adjusting for that, we’d have growth even there. So—and it’s our first guess out of the box, right, that 5 to 8. So clearly the industrial and energy segment will drive, but particularly energy is going to drive outperformance in 2012.

Terry Darling – Goldman Sachs

Okay, and Brian, maybe how are you thinking about the first quarter or cadence through the year? Do you start stronger and end up a little slower towards the end of the range, or do you think it’s even through the year, or how do you feel about that?

Brian Jellison

I don’t know, Terry. It’s hard to say. I mean, we’re expecting maybe 6 to 8% organic growth inside our guidance for the quarter with $1.01, $1.05 with really strong leverage. Whether it could be better than that, it’s hard to say. I think we were impressed as we went through our year-end reviews with people that if you didn’t have all the headline news and you didn’t have the political environment and the conversations that are going on, our people would be probably be forecasting better results because they’re seeing really excellent results. They’re not seeing a big fall-off in anything, but it tends to make everybody conservative.

Terry Darling – Goldman Sachs

Okay. And then I know there’s a lot of noise, as you mentioned, in the 4Q orders; but I’m just wondering if you were to try to strip out the noise, can you give us a sense for how the order trends were through the quarter – in other words, did you end up stronger than you started, or was it a strong start and a weak finish?

Brian Jellison

Hm, no, I don’t think—I wouldn’t say month-to-month was a big difference. I think the thing that we would have liked to have seen a little more year-end buying than we got in the fourth quarter that’s just residual MRO activity – people have money left in their budgets – and particularly in energy, it’s not at all unusual for us to get disproportionate mid-Q4 orders for instruments because it’s just something people can do when they don’t want to lose their budget. I think their activity throughout the year was so strong that they didn’t have that leftover money, and so we didn’t see that dynamic that we frequently see. But I don’t think it has anything to do with Q1 demand or 2012 demand. I think it’s just that it was so strong all year long that people didn’t wait to buy things.

Terry Darling – Goldman Sachs

Okay. And then just lastly, one more on medical – Brian, I guess I’m just trying to discern, is there any element of the revenue miss in the quarter—at least, I perceived it missed your expectations a bit - maybe you could calibrate that - that was just related to timing; in other words, it slipped by a couple of weeks or something like and that’s part of what gives you the confidence on the Q1, despite the little bit softer order trends in the year-end.

Brian Jellison

Well, in the segment in medical and imaging, we have our very high end optics and imaging business that had a record year that didn’t ship everything in Q4 that we would like to have seen, for a variety of reasons that I think we expected to have a banner 2012. But it was more the unusual comp situation where we had basically laboratory camera technology that was going into Asia that was a one-off thing that couldn’t be repeated, and then just frankly, without mentioning the company, the video conferencing business for that enterprise went down dramatically. They’ve talked about it in their own company, and it pulled down us, which makes for an easy comp for 2012 for us, frankly.

Terry Darling – Goldman Sachs

Okay, thanks very much.

Operator

Next we’ll go to Christopher Glynn with Oppenheimer.

Christopher Glynn – Oppenheimer

Thanks. Brian, I’m impressed—it sounds like—I think I heard you have a sales meeting during the Super Bowl Sunday night.

Brian Jellison

You know, I have a feeling that when that was scheduled that they perhaps missed the significance of the day, Chris. And the amazing thing is it’s not in Indianapolis. It’s actually in the northeast, so it will be quite interesting.

Christopher Glynn – Oppenheimer

Yeah, someone will bring a transistor. So you called out the scientific imaging as maybe the low point of organic growth for Roper, along with another number of companies, but doing particularly well. But just looking for some color, maybe you put too fine a point on that. Just wondering maybe about TransCore and Neptune ex-Toronto, how those trends are?

Brian Jellison

Well certainly Neptune ex-Toronto is better than we expected, and maybe John wants to provide a little color on that.

John Humphrey

Sure.

Brian Jellison

I think it’s the rugged mobile thing which is certainly not a core asset that really had the very difficult comp measurement. But why don’t you talk about that?

John Humphrey

Yeah, as far as some of the other units you were asking about there, Chris, Neptune continued to do extremely well during the year, and they’ll get continued benefit out of Toronto; but even excluding Toronto, they were up kind of in the mid-single digits in 2011 in the U.S., which I don’t think most people looking at the municipal market would have expected something like that. So I think Neptune did a very nice job there, and then of course with the high degree of recurring revenue that comes out of our TransCore toll and traffic business, that is a business that will naturally kind of be in the mid-single digits also, and that’s kind of what it did in 2011. And then variation that we see in that business is largely due to the timing of tag shipments, based upon when customers are going to replenish their inventory. They’ve done a nice job outside the U.S., our toll and traffic business has, with the expansion of electronic tolling opportunities in Puerto Rico, and continuing with the largest tolling project in the world in Dubai. So we have a nice global footprint there and a large installed base that gives us a lot of visibility and good recurring revenue.

Christopher Glynn – Oppenheimer

Okay. My question was a little more forward-looking than the answer, but I appreciate the great color. Is that kind of a trend you’d expect to continue, and just—it sounds like Neptune probably just continues to execute on market share domestically.

John Humphrey

Yeah, I think that’s right; and also of course, Toronto ramps up in 2012. And far as the toll and traffic business, I mean, as Brian said, to the extent that we’re at the 5 to 8% for the enterprise, we’d expect that to be at the lower side but with good margin performance.

Christopher Glynn – Oppenheimer

Okay, thank you.

Operator

And next we’ll go to Richard Eastman with Robert W. Baird.

Richard Eastman – Robert W. Baird

Yeah, just my two questions here – in the energy systems and controls business, just curious – were there any missed shipments in that segment in the fourth quarter? I would have thought maybe revenue should have been a higher, given the bookings number through nine months in ’11.

John Humphrey

No, I don’t believe so.

Richard Eastman – Robert W. Baird

Okay, so that kind of met revenue expectations?

John Humphrey

Uh-huh.

Richard Eastman – Robert W. Baird

And then also in industrial tech, a little bit curious – I would think you had a good quarter out of Toronto—Neptune, Toronto. I was just curious – is it mix that maybe pulled the gross margin in a little bit year-over-year? What accounted for that?

John Humphrey

You are exactly correct.

Richard Eastman – Robert W. Baird

Okay, so that’s primarily Toronto, then?

John Humphrey

And you will notice, of course, that even though the gross margin may be a little bit lower in the segment, the operating margin continues to expand.

Richard Eastman – Robert W. Baird

I did notice that, yes. And then lastly, one thing on the—if we could just double back to iTrade for a second in RF Tech, you made some investments in Europe there and made some investments in the forward growth expectations. How does that play out in ’12 – are you seeing some visibility on the payback on those growth investments in iTrade?

Brian Jellison

Absolutely. I think that we have one large turnkey operation that’s going more slowly than we’d like and more customer-driven, so we’d like to see the pace of that pick up where more people are required to go online there. But there’s not—it’s kind of their pace. There’s not much we can do about that. But we’re certainly looking forward to an even better 2012 in iTrade than we had in 2011.

Richard Eastman – Robert W. Baird

Okay, okay. Very good. Thank you.

Operator

And that will end our question and answer session for this call. We’ll return to John Humphrey for any closing remarks.

John Humphrey

Okay. Thank you, and thank you all for joining us this morning. We look forward to talking to you after the end of our first quarter.

Operator

And that does conclude today’s conference. We thank everyone for their participation.

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