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Roper Industries, Inc. (NYSE:ROP)

Q2 2012 Earnings Conference Call

July 30, 2012 08:30 ET

Executives

Brian Jellison – Chairman, President and Chief Executive Officer

John Humphrey – Chief Financial Officer

Paul Soni – Vice President and Controller

Analysts

Matt Summerville – KeyBanc

Mark Douglass – Longbow Research

Deane Dray – Citi Research

Terry Darling – Goldman Sachs

Christopher Glynn – Oppenheimer

Richard Eastman – Robert W. Baird

Jeff Sprague – Vertical Research Partners

Alex Blanton – Clear Harbor Asset Management

Operator

Good day, everyone and welcome to the Roper Industries’ Second Quarter 2012 Financial Earnings Conference Call. Today’s conference is being recorded. I would now like to turn the conference over to John Humphrey, Chief Financial Officer. Please go ahead, sir.

John Humphrey

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

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

Now, if you turn to slide two, we begin with our updated Safe Harbor statement. During the course of today’s call, we will be making forward-looking statements, which are subject to the risks and uncertainties as described on this page and as further detailed in our filings with the Securities and Exchange Commission. You should listen to today’s call in the context of that information.

Now, if you please turn to slide three, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. And after his prepared remarks, we’ll take questions from our telephone participants. Brian?

Brian Jellison

Well, good morning everybody. Today, we’ll go through the enterprise financial results for the quarter, talk a little bit about specific segment detail on the outlook for each of the segments, give you an overview of the Sunquest acquisition, and then established our third quarter and full year guidance and take your questions. I think we had indicated in our first quarter call that we expected going into the second quarter would be our most difficult challenge for the year.

We had really an outstanding quarter compared to what we expected, because we had quite a few headwinds this quarter. I’ve certainly had the uncertain economy and we’re able to blow through that. We had very difficult comps going into Q2, because of the Gaz de France. Revenue last year and outsized performance in toll tag shipments last year in our Gatan technology business that we knew wouldn’t be repeated. And then of course, we had currency which became a bigger surprise and we expect it cost us about a $0.01 a share versus our guidance and about $0.02 a share versus the prior year. That said let’s look at what we did in Q2, next slide.

We had record results in the second quarter, pretty well across the board, the highest level of orders in our history, highest level of sales in our history in the second quarter, biggest backlog that we’ve entered the second quarter with record net earnings and record EBITDA performance for the quarter. Our orders were up 8% and revenue was up 4% despite those headwinds and the effect of currency.

Our book-to-bill ratio was actually quite high at 1.05%. Our gross margins reached 54.9% in the quarter and our operating margin was really quite spectacular, it came up 130 basis points to 24.7%. If you look at the incremental OP and the incremental sales, our operating leverage in the quarter was 59%. And there is no smoke and mirrors in that, it’s just 59%.

Our EBITDA was up $214 million – sorry, was $214 million and our EBITDA margin reached 29.5%. Operating cash flow in the quarter was $119 million, slightly lower than we would expect in the second quarter, but we had a higher cash tax rate and that would happen again in the rest of the year. Our first half operating cash flow was $261 million and we’ll project what we believe will be for the full year later this morning. Our diluted earnings per share were $1.15 versus a $1.03 last year, that $1.15 would have been $0.01 higher based on our guidance if it weren’t for the currency scenario, and the $1.03 is the number that we use with the re-measurement gain last year, you might remember, was about $0.05 a share, so on GAAP, it would have been $1.08, but was really adjusted at $1.03.

Net earnings were up 13%. We’re very happy with the performance, because we had about a $30 million headwind between our scientific camera business and Gaz de France and some European activity coming into the quarter and we were able to really blow through that, very solid revenue throughout the world with the exception in Europe, which was down about 18%. Record performance really in an uncertain economic environment.

Next slide, in the Q2 income statement, you’ll see orders over $763 million, up 7% organically. Revenue, book-to-bill came in at 1.05%, gross profit was up 100 basis points to 54.9% from 53.9% a year ago and our operating income was an amazing 24.7%, up 130 basis points for a year ago. Our interest expense about flat, tax rate was consistent with the guidance we established for the quarter came in at 29.6%. And net earnings were $115 million versus $102 last year, up 13%.

Next slide, if we look at our EBITDA performance, our trailing 12 months EBITDA has now reached $845 million, it’s up from last year’s trailing number this time at $739 million and two years ago $540 million. So, EBITDA is up 57% over the last two years and our EBITDA margins continued to soar, we were 25.2% in 2010 and 29.3% on the trailing 12 months calculation now and of course this quarter at 29.5%.

Next, if we look here at the cash flow performance, you’ll see Q2 cash flow at $119 million of operating cash flow and $109 million of free cash flow, very good performance again in working capital. Our inventory actually improved by 30 basis points from 7.5% to 7.2% of revenue and our accounts receivable improved by 50 basis points from 15.6% to 15.1%. And when you adjust that for payables and accruals, we were still below 7%.

In the first half cash flow, normally our first half cash flow is about 40% of the full year. This year it’ll – second half will be even a little stronger because of the acquisition of Sunquest and how cash accretive it really is. So, you can see that our full year operating cash flow, we’ve now raised our guidance to be about $700 million for the full year, that’ll clear operating cash flow at a very high percentage of revenue it could reach 23% of revenue in fact. It’s really driven by expanded margins. It’s driven by the Sunquest acquisition that we expect to close in the last four months of the year. And some cash tax benefits that we’re acquiring in the Sunquest transaction. It does exclude the deal cost and refinancing charges associated with the new credit facility we’ve put in place effective this past Friday. And you can see here that free cash flow, operating cash flow goes up to $700 million. Our estimate this year up from $602 million last year and $500 million the year before, so that would be 40% increase in cash flow over the last two years.

Next slide, on Friday we closed a new credit facility of $1.5 billion revolver. So, if you look at our normal credit stats here a year ago on June 30, 2011, you can see that we had $196 million in cash and $595 million in un-drawn revolver which gave us acquisition powder and investment powder of about $791 million. When we closed out the quarter on June 30, our cash had increased to $519 million on our un-drawn revolver was at its capacity at $750 million giving us $1.269 billion. As of Friday with the new $1.5 billion revolver and the cash from the end of the quarter, we now have capacity in excess of $2 billion. Our gross debt on the other hand is only $1.69 billion.

Our gross debt-to-capitalization is at 23.8, but if you look at the net debt-to-EBITDA you will see it’s actually been cut in half a year ago was 1.4 and at the end of the quarter it was 0.7. Even with the financing of the Sunquest acquisition at $1.4 billion, we’ll have ample capacity to pursue other opportunities in the near term and now the pipeline remains very, very exciting.

If we look next slide here at the Sunquest details – sorry the segment details, we’ll start with the RF technology slide next. So, on RF technology, really very, very outstanding orders in the quarter, they were up 18%. So, those orders and the execution really in the toll and traffic business kind of got us up to the high-end of our range despite the European pressures and help us deliver.

You can see the OP margin was amazing at 27%, up 290 basis points and if you want to look at leverage, revenue was down 2% and operating profit was up 10%. So, that would speak strongly to the execution, that’s occurring in those businesses. The software businesses continue to help us on the margin expansion as they grow. We got a very significant win again in Houston. We are going to upgrade the entire lane hardware in the Houston area with our United Toll Systems technology, which is really an advancement over what was in place in the past. We think that contract order produced about $65 million in revenue between maintenance and the change out.

Our CBORD cashless system business continued to grow. It had a record quarter in the second quarter for anytime and that involved both university and food management wins in both higher education and healthcare. And we had, of course, this difficult headwind for our technology business, Gaz de France, which had that sort of a one-time large install last year and that held us back by about $5 million in the quarter. In the second half, we’ll have the continued difficult comp with the Gaz de France, because it went throughout the year or last year. But our increased toll project and maintenance activity that will be led by this – these Texas wins will easily offset any challenges we have in the rest of those types of activities in the segment. And then the software businesses and software-as-a-service activity is continuing to increase and both iTrade and freight matching continue to roll along with the sort of nominal organic growth, but outstanding cash growth.

Next slide, if we look at the Industrial Technology segment, here just again spectacular performance there. Revenue was up 11%. The operating profit margins reached 30.4%, that’s an all-time record for the segment. The highest previous we ever had was a 29.2% in the fourth quarter of last year, this 30.4% to just add some perspective around how amazing it is, the S&P 500 Industrials gross margins as a group were 30.8%. Roper’s operating profit for Industrial is 30.4%. So, we got an all-time record here in OP margin – again, leverage off the growth, terrific execution everywhere. Food handling continues to grow in both agricultural food and the shale activity. Our general industrial markets have performed well. We are not seeing any early indicators of any softness on any of those businesses.

The material test business, which is primarily a European business actually had a record second quarter, very strong North America and Asia sales offset any weakness that we had in Europe. The Neptune business continued to grow, driven by the Toronto project and some higher shipments in the U.S. In the second half of the year, we would expect that the shale activity growth would moderate, not stall, but certainly moderate with gas activity on shale being down, but the oil activity on shale being up. The industrial end-markets again no signs of any fall off. The outstanding margins we expect to continue throughout the second half of the year, and just a personal note to all our people in Industrial, we just couldn’t be more proud of these teams as we watch them execute in a very tough market.

Next slide, we look at our Energy Systems and Controls business, here you can see revenue was up 6%, OP up 7%, margin at 26%, was up 200 basis points from the first quarter margin in energy. Organic growth in the quarter was 5%.

Compressor controls continues to do very well on LNG projects and the field service activity that we do drove double-digit growth for them. The bolt-on acquisitions that we did in the last are very small United Control Group, Trinity, and Cambridge. All have non-cash amortization charges in them. They are actually putting a little bit of a drag on the OP margins, even though at 26%, it’s hard to see a drag, but they actually would have been about 120 basis points higher on OP without a lot of amortization drag and integration on those three businesses. That said, they are performing well, they are all on plan from an integration view point, they will add the growth in the second half of the year. Our European markets weakened, in fact in the energy they were down about 18%, but our U.S. was up by about 18%. So, they – U.S. business being larger that was a benefit and the rest of the world was quite strong in the Middle East, and Asia, Australia, Brazil not quite as strong.

Our targeted cost actions are underway for the second half on a very selected basis for people who are executing some contingency plans in those things that relate to any softness that they see. We think Europe continued to be soft, but we’ll have continued growth in both North America and Middle East and Asia to offset that. With the exception of our Petrochem business which was down about 20% and that’s a worldwide shortfall. We’re not seeing any strength anywhere in that business. Very solid backlog though compressor controls gives us confidence of that growth in the second half and then we would expect normal very strong Q4 seasonal activity in energy would be repeated this year.

Next slide, so here we’ll look at Medical and Scientific Imaging. This is one of those things where it looks like nothing happened, but there is great variability throughout the different businesses here and while revenue was flat and operating margin was up 20 bps. What really was going on is the Europe and the North American academic resource funding softness impacted our camera portion of the Photonics business, as cameras are not a big part of Roper, but they do come in around $125 million to $140 million worth of total revenue. And they were down as much as 20% in some cases. And we don’t see any real turnaround as it relates to those research markets for the camera technology businesses. And while we perform relatively well there is certainly a drag on the short-term growth.

Our medical businesses continued to grow organically. The channel expansion we’ve been able to provide them in Asia is offsetting any weakness that they have in Europe. And the Northern Digital business performed very well expanding its offerings to OEM customers. And also we were able to do a Bolt-on acquisition in the quarter, called Ascension Technology Corporation, which is in upstate Vermont. And Ascension does 3D tracking for minimally invasive surgery which you probably all know is a rapidly growing aspect in surgical applications. We paid about $18 million for Ascension, we expected to deliver $3 million plus in EBITDA over the next 12 months.

In the second half, we expect to have continued weakness in this academic research area, which will affect our Photonics businesses. Fortunately, the medical expansion is going to continue, our markets remain pretty favorable. Ascension will give us a little bit of gross work for Northern Digital. The Gatan business has a substantial backlog, which we expect to be able to shift during the second half of the year which will add to our growth. And then we have this transformational Sunquest acquisition which will add substantial amount of revenue and EBITDA to our medical platform. We would expect it will add somewhere in the neighborhood of $75 million of revenue in the last four months of the year. It’s going to add well over 35% to the Medical and Scientific segment for the next year in revenue. It’s going to add quite a substantial amount to the Roper’s overall revenue base for 2013.

Next slide, so as we look at the Sunquest acquisition, I’ll talk a bit about the transaction and John will talk a little more in depth about the specific business. Next slide, so if we look at the Sunquest acquisition, you can see that it meets all of our acquisition criteria, it’s really an amazing fit where we are able to take our software platforms inside RF and the medical platforms inside Medical and Scientific imaging and hook them up in a very creative way with the Sunquest business, which is truly a software business, but it’s also a medical business. If you look at our criteria, we talk about all the time asset like low CapEx absolutely, it’s almost no CapEx and exceptionally light asset business.

Focusing on the market structures and driving forces at work, we’ve done probably more marketplace diligence on this business because we actually looked at it in 2010 and have maintained 100% of business forever and really felt that based on the work that we have done and things that we thought they could and should be looking at and then seeing how they’ve done. Our diligence revealed a lot of strategic competitive advantages that Sunquest enjoys and they have a lot of wide space opportunities for growth that are beyond their core traditional business. They’ve done a great job in transforming their business that was acquired by Vista in 2007 and certainly was high margin business, but could be better and to the Sunquest leadership team’s efforts, they have done an incredible job in making that a transformational business that we are acquiring now compared to what it was in 2007.

The incentives as always are linked to the commitments that their leadership teams made and those are in place. It has technology advantages that are clear and easily measured against competition and has very deep application expertise. It really is a niche business in the lab market. Management continuity as always is valued, and everybody on that team has agreed to stay in place. The communication for the Sunquest employees is taking place this morning in Tucson.

We’ve asked them as always to preserve what’s made them a very good company in core values, but stimulate progress. In this area, the progress is going to come in the form of even more investment in the sales and marketing arena and some faster execution in the development area. This is a business that when we talk about growing what you buy, my goodness, this business has higher margins than been we do. It has twice the EBITDA margins that Roper enjoys. And when you look at those kind of margins and you recognize the incredible strength of the company, it has two-thirds of its revenue comes on a recurring basis. 98% of its customers sign up annually for the software programs that it has. It has negative working capital and very low CapEx and we expect in 2013 that it will generate $140 million or more EBITDA for us.

The fourth quarter run-rate, which we just completed their fiscal company May 31st and just had their audit and signed up prior to our closing actually supports our expectations for ‘13 – 2013 nicely. It’s really a business when John talks about, if you want to kind of think about well, what do they do and where are they located and why did they win, because it is a phenomenal management team and outstanding group of employees that have really done things in the space that no one can really replicate.

So, with that, we’ll turn into next slide and John Humphrey.

John Humphrey

Sure. Thanks, Brian. So, I’ll just talk a little bit more about kind of what Sunquest is and what it’s able to provide for its customers. Those are the global market leaders for providing the underlying software and information solution for laboratories and hospitals and large academic medical centers, with a headquarter in Tucson, Arizona, locations both in the UK and a development center in Bangalore. They have a global footprint that allows them to serve that customer base, really, their customer base are those folks who – for whom the effectiveness and efficiency of the lab is of critical importance.

The lab ends up with in many cases hundreds of thousands of tests being done each month to support the diagnostic decisions that are made in a hospital. And they rely upon the Sunquest information and the quality and safety associated with that to help drive those decisions. The comprehensive solutions is about improving the productivity with workflow automation tools, you see on the right hand side both the Sunquest laboratory 7.0 and the CoPath solution. Both of those are about workflow automation to make sure that the right test is done on the right patient at the right time, leading to the right diagnosis. So, those things also reach beyond just the lab and also go out to the collection manager, which is one of the modules that Sunquest has. So, that nurse has a point of collection tool that integrates back with the lab, so you have full connectivity between both of those parts of the hospital.

The very large customer base, very high retention rates, over 98% retention each year, continue to utilize and depend upon the software set of solutions and fully supported by a 30-year history. And these are very long-term relationships, relationships that are supported by the decades of application expertise. The Sunquest has developed about what the hospital lab needs and their unique set of needs that Sunquest is going to be able to meet.

And as Brian talked about, it is a proven team, it’s a great culture everything that we’ve learned during the diligence process continues to support the fact that their culture of excellence of execution is really phenomenal and I think they’re going to be a great addition to the team. And I think the company is very well-positioned to capture the growth opportunities that they’ve identified over the coming years.

So, with that I’ll turn it back to Brian to talk a little bit about guidance and summary for the quarter.

Brian Jellison

Okay. So, after we get that title sheet on guidance, we’ll move to the guidance slide. We’ve raised our full-year guidance to $4.84 to $5 that reflects about a $0.04 reduction due to currency. We had started out at $4.75 to $4.91, you might remember. $0.04 comes off the bottom here, $0.0471 or $0.05 off the top here for 86 and we’re adding back $0.12 to $0.14 on a GAAP accretion for Sunquest excluding any of the deal cost. And then in addition of course we’ve got other things that we’re absorbing and other things that are good. So $4.84 to $5 on full-year guidance, the quarter comes in at $1.19 to $1.25 in the third quarter.

Most importantly really is that we now expect our full-year operating cash flow to be approximately $700 million. And just a couple of footnotes you’ll notice there, the acquisition of Sunquest, we expect to close at the end of August will have the HSR filing and since there is no competitive issues, it should move along quickly.

We have some deferred revenue that’s unusual in Sunquest, similar to some other businesses when you acquire them there are some GAAP issues around that. And so we’ll have to kind of reveal that huge quarter as we report out. And this does exclude whatever cost we will have that will be registered in the third quarter that would be related to the acquisition and removal of the remaining amortization and the old revolver.

Next slide, so looking at the summary of the second quarter, we go back to the top point being that it’s again an all-time record for any second quarter in our history, highest level of orders, revenue backlog, net earnings and EBITDA. Organic order growth at 7% was really a pleasant benefit for the quarter, the operating margins at 24.7%, the EBITDA, 29.5%, and gross margins at 54.9%, really terrific. Leverage is kind of breathtaking at 59%. We used to talk about 30% to 35% of leverage and it’s hard to see how our leverage isn’t going to be above 40% for a long time.

Doing a new revolver, big help, $1.5 billion as the older revolver was put in place in July of 2008 and would have the deal replaced in July of 2013. So, this removes any refinancing risk around that for next year. It gives us twice as much capacity to write checks against as we had previously and $1.5 billion is pretty sizable revolver for Roper. That was completed last Friday, a timely completion we might add relative to the deal closing on Saturday.

Sunquest, just an exceptional financial profile, higher gross margins than we have twice the EBITDA margins. Terrific that you couldn’t find a business that’s sort of marry what we’re doing in software and what we’re doing in Medical that would benefit both so much as Sunquest. It’s got a great development people. Our software people spent last week in Bangalore, visiting and talking with people. We’ve done tremendous diligence around the robustness of the software platforms in place for Sunquest and how they can be used. All of this then creates an opportunity for us to be positioned again in 2012 for an all-time record year. $700 million in operating cash flow and perhaps most importantly that a transformation process that we’re doing here continues as we get more and more technology.

You think about where we are now, we’ve continued this. We’ve more technology content, we have higher margins, higher cash returns, more recurring revenue and it’s just a much different company than what you’d looked at 2002. And in the next five years, we added Neptune and TransCore.

And then if you look at 2007 and you look at the forward five years here till 2012 you’ve picked up Seaboard and Horizon and I-Trade, and Technolog and now Sunquest. So, the technology content gets better margins, get better cash return, gets better and available forward acquisition power for growth will be better than it ever has been in the past.

And with that, I think we’re ready for questions.

Question-and-Answer Session

Operator

Thank you. We will now go to our question-and-answer portion of the call. (Operator Instructions) We’ll go first to Matt Summerville, KeyBanc.

Matt Summerville – KeyBanc

Good morning.

Brian Jellison

Hey, good morning Matt.

Matt Summerville – KeyBanc

I just wanted to clarify something Brian on Sunquest, a $0.12 to $0.14 is that a GAAP number that we’ll have under GAAP rules, the deferred revenue adjustments, I just want to make sure I have that right?

John Humphrey

That is a – Matt, this is John. That’s a non-GAAP number. So, as you are probably aware like an awful lot of software companies, Sunquest has deferred revenue for the annual maintenance. They get paid in advance for that.

Matt Summerville – KeyBanc

Sure.

John Humphrey

And the accounting rules upon acquisition will require us to take a write-down of that. So, to basically move that deferred revenue to fair value and then over the next 12 months as those renewals happen, that deferred revenue will get built back up. So, the $0.12 to $0.14 is a non-GAAP number. And as we are able to estimate exactly what that deferred revenue fair value adjustment is, then we’ll be able to provide that for you. We will be able to do that until after we closed the business, but we’ll be providing that insight each quarter. So, you are able to reconcile between the GAAP numbers and then the non-GAAP numbers that we think provide better visibility in understanding the operations of the company.

Matt Summerville – KeyBanc

Perfect.

Brian Jellison

The great news though is the cash is the cash.

Matt Summerville – KeyBanc

Absolutely. Brian, could you maybe spend a minute talking about just more broadly for Roper’s, you moved through Q2, how would you characterize the overall demand environment for your businesses and then how are orders so far in July from what you’ve seen?

Brian Jellison

I think really the quarter from our organic – we wouldn’t have given ourselves so much of a shot that had been 7% organic. Orders in the quarter that was a pleasant surprise, but we got really strong activity that we knew we’d eventually come in the year wouldn’t have necessarily seen in the quarter, so that helped. I think we entered the quarter with more concern and turned out to be justified. So, those any like early indicators of things that would make us nervous, that would be in energy or industrial, we really haven’t seen that. There is just a little bit of activity mostly in petrochem and oil and gas that we are going to do some very modest internal retrenchment all in, but on balance, it’s pretty good. We never really talk about a quarter in which we’re in, but I would say, things remain pretty decent. We’re going to expect organic growth that actually kind of picked up in the second quarter and we would expect it to continue to be mid-single digits really for the rest of the year. So, it’s really kind of better than we expect, because there is more European headwinds than we would have originally forecast.

Matt Summerville – KeyBanc

How much was your European business down in the quarter?

Brian Jellison

It was down 18% for us in total, about a half of that is just due to currency though, so maybe 8% or 9% on an organic basis.

Matt Summerville – KeyBanc

Great. Thanks a lot guys.

John Humphrey

One thing to remember on that Matt is that does include the headwind associated with Gaz de France, so that’s got $5 million, but even once you take that out, we saw a decline in Europe that was definitely mid-single digits.

Matt Summerville – KeyBanc

Got it. Thanks John.

John Humphrey

Sure.

Operator

We’ll go next to Mark Douglass, Longbow Research.

Mark Douglass – Longbow Research

Hello. Good morning.

Brian Jellison

Hey good morning, Mark.

Mark Douglass – Longbow Research

So, on the Sunquest, Brian, you talked about there is a lot of wide space, you talk about what that would look like, I mean is it market share shift, is it just under-penetrated as far as the clinics and hospitals or is it geographies?

Brian Jellison

Well, I think we don’t want to tip off other people to things that we think are available to us, but it would be safe to say that we think that they can continue to grow share at the expense of other people. We think people have been paying a lot of attention to electronic health records and companies that are in the EHR space. Here again, we picked out a niche that we think is unrelated to that activity. And this niche has got an opportunity, very high return for people investing in this in the hospital space and in the clinic space and in private care space. Basically the lab work is critical to every aspects of people, diagnosing folks and it happens at a variety of different places. We think we have the pre-eminent technology to do that. And we think we can make people more productive and more efficient in what they do when they do it.

It has been hard, I think the last couple of years to get the attention, hospitals that have had these mandates to do a variety of thing around health records, now they get a chance to make an investment and things like this business that will give them an actual return. So, we think it’s got pretty exciting growth.

And these guys they brought in a new sales executive women in who we have great confidence in that we think it’s going to drive better focus on organic growth, it’s been a very high cash contributor. And it’s same old situation, private equity has done in this case of a really amazing job with this business versus what they acquired in ‘07, but it can grow one and it has – it does have opportunities for share gain and expansion around the world. I mean this business it doesn't do much in certain portions as the world and we do a lot in other portions of the world that they do. It’s also got an incredible development team in Bangalore and that's very, very bullish for us.

Mark Douglass – Longbow Research

Okay and then want to give too much away on them I suppose, what are this for the industries at least typically growth rates, what kind of returns are you assuming as you model it out over the next three to five years?

Brian Jellison

For a Sunquest kind of thing?

Mark Douglass – Longbow Research

Yes.

Brian Jellison

Oh, I think it ought to – it will grow its cash and EBITDA double-digits. Revenue, just kind of year forward revenue is probably go to work by 10%. We would think over time that it grows revenue, remember it’s got this massive recurring business right. So, in fact new business won’t look like a high number. So, if you have got couple of hundred million of constant business, it could grow its net new business by 20% and it wouldn’t look like a big number on the core business, right. So, it’s not like looking at a cyclical company that’s up and down and looking at various trends. This is just as it starts with its Q4 and then each quarter it gets better all the time.

Mark Douglass – Longbow Research

Okay. Thank you.

Operator

We’ll go next to Deane Dray, Citi Research.

Deane Dray – Citi Research

Thank you. Good morning everyone.

Brian Jellison

Hey good morning.

Deane Dray – Citi Research

Brian, I’d be interested in hearing what the lessons you’ve learnt from iTrade and how that played into both the negotiation for Sunquest, but also integration, managing a software company and so forth?

Brian Jellison

We have a big advantage today versus when we first took on iTrade in that we have recently hired a Chief Architect for our technology businesses. He is working in our software arena. We also have a software executive full time that’s looking over a various software companies. And we have a medical executive which we didn’t have before looking over the medial scenarios. So, between the two new executives, someone that’s a domain expert in medical and one that’s a domain expert in software and the architectural person, the quality of our diligence that we’re able to do on our own was a dramatic improvement. We have a much deeper understanding about source code and the ways in which development programs need to be done and measured.

And we’ve got a deeper understanding about cost structures around development activity. And all those things were good. I think we’ve also come to recognize that slightly lower organic growth rates in the software businesses really aren’t a problem because of the recurring revenue that they have inside them and the quality of the cash that they generate. I mean to look at a company I think most people would look at us and say this is best-of-breed EBITDA margins and yet here we’re acquiring one that has twice the margins that we enjoy. So, they were fundamentally different and our executive leadership capability around them is better than ever.

Deane Dray – Citi Research

And just to clarify on the deferred revenues, you said that it refers to the maintenance side of it, is that two years it’s pretty typical that you’re seeing three years of maintenance fees and are any of the licensing fees included in that deferred revenues or just maintenance?

John Humphrey

So, the short answer is nothing on the license fees and the maintenance contracts and the differed revenue are two slightly different things. So, the maintenance agreements range anywhere from one-year, three-year, five-year, some of them even seven-year agreements because of course the customer would like to make sure that they have kind of the long-term commitment with Sunquest. And Sunquest might have in the long-term contracts so, but they don’t pay for all seven years or all five years upfront. So it’s a one-year payment and that’s what goes into the differed revenue so, we would expect to see that differed revenue build backup after the fair value adjustment after 12 months to be back to the normal steady state.

Deane Dray – Citi Research

Great, just last one from me on the $25 million in cash tax benefits, well, what’s the duration of that asset, will it be used up first year or are you restricted in how much you can draw down.

John Humphrey

We will be utilizing that in 2012.

Deane Dray – Citi Research

Great, thank you and congratulations.

John Humphrey

Alright.

Operator

We will go next to Terry Darling, Goldman Sachs.

Terry Darling – Goldman Sachs

Thanks. Good morning.

Brian Jellison

Hey, good morning, Terry.

John Humphrey

Good morning, Terry.

Terry Darling – Goldman Sachs

And congratulations on Sunquest.

Brian Jellison

Thank you.

Terry Darling – Goldman Sachs

So couple of follow-ups there, in terms of thinking about accretion for 2013, any reason not to on a non-GAAP basis as you are presenting it here, $0.13 for four months, 10% plus revenue growth profile, anything outside the scope of that as we annualize those numbers that we ought to be aware off.

Brian Jellison

Notably so. Just to remember on the growth profile that you want to be careful on the revenue growth profile, you are going to have that massive baseline, so it’s just the net new that grows, right. So, we will have a double-digit organic growth on the non-recurring revenue side and we will have double-digit EBITDA growth.

Terry Darling – Goldman Sachs

Okay, that is helpful. And then the interest rate on the new revolver, John, do you have that.

John Humphrey

Yeah, we do. It’s basically the same as what we have now on a drawn basis, the jump was 125, the facility fee is 15 basis points so, the un-drawn portion is 15 bps.

Terry Darling – Goldman Sachs

Okay. And then in terms of the changes in the outlook for 2012 on the base business, Brian, you had called out that there were some minuses offset by some pluses and all that kind of rounded to where you were before. But I’m wondering if you can just kind of go through the list here on both the plus and the minus side, you have been very clear on the energy piece with the petrochem and oil and gas component. The RF margins look a little stronger, perhaps that’s a plus up the industrial margins, perhaps that’s a plus up the RF Europe. On the technology side, you call that as a negative, am I missing any of the other pieces within that context.

Brian Jellison

I would say that it’s probably only one you might have missed is that the camera business is specifically that are serving the academic research markets probably a little bit worse than even what we had handicapped three months ago. So seeing them down kind of in the high-teens in the second quarter and frankly not a lot of encouraging signs in there in the market as we look forward to the third quarter, probably a little bit of incremental headwind. But once again offset by some of the pluses that we have seen in RF and some of the better margin performance.

Terry Darling – Goldman Sachs

Okay. And then in terms of the second half for organic growth in the mid single-digits, you are much tougher comp obviously in the third quarter than the fourth quarter. Do you expect mid singles for both quarters or would that comp profile suggest a little tougher 3Q.

Brian Jellison

Probably similar throughout the second half.

Terry Darling – Goldman Sachs

Okay, great. And then just lastly, can you help us with what iTrade organic was in the quarter, presumably with the Europe comment that might have been down. But can you just clarify on that for us.

Brian Jellison

No iTrade was up organically in the quarter.

Terry Darling – Goldman Sachs

Okay, great. Thanks very much.

Operator

We’ll go next to Christopher Glynn, Oppenheimer.

Christopher Glynn – Oppenheimer

Thanks, good morning.

Brian Jellison

Good morning.

Christopher Glynn – Oppenheimer

On the RF order, they were pretty striking, I think you called up some new strength in toll and traffic, I don’t know if that was mainly related to Houston. But any signs you are entering sort of a new era of growth for that business and brought interest on the road conversion.

Brian Jellison

Well, you are happy to find new era. So, it’s the one big area that’s alive and well for those activities. There are a lot of initiatives. There are a number of things that’ll come out for bid. I think the longer we go with people learning more and more about our United Toll Systems technology, the more and more people recognize that it is dramatically superior to what other people have done for a long period of time including ourselves. So, the lead time for getting agencies to understand and see and test and kick tires around that is kind of long. But in terms of long-term growth vehicle, nobody’s got a better mouse trap than us and I don’t think anybody is going to get one. So, we like the long-term nature of the business and we certainly like the second quarter and we think the rest of the year will be fine.

John Humphrey

And just to put a little more color on that Chris, for instance the win in Harris County is not a conversion from a non-tolled to a tolled lane or a new road is being constructed. It’s really an upgrade of the technology and so it’s a technology insertion and maintenance for the equipment that’s already on those roads. So, it’s really just building out our maintenance and support capabilities with the team that we have rather than net new if you will.

Christopher Glynn – Oppenheimer

Understood and then on Neptune, wondering if you’re starting to see an impact on new resi and how you think about the opportunity for residential recovery on the Neptune business if you could contextualize that a little bit?

Brian Jellison

Well, if that happens it’ll be great. I mean getting 700,000 housing starts is better than 400,000. It’s not as good against getting a million for. So, we’re hopeful and I wouldn’t say much if anything is baked into our guidance around stronger housing start thing. But if it happens, that will definitely – we would think that certainly benefit us in 2013.

Christopher Glynn – Oppenheimer

Great, thanks.

Operator

We’ll go next to Richard Eastman, Robert W. Baird.

Richard Eastman – Robert W. Baird

Yes. Good morning. Brian, could you just speak for a minute or two about the RF segment EBIT, significant jump in the quarter on the growth rate that was slightly negative. Is that – first of all is that mix or secondly is that and maybe also was that sustainable at that level as we move forward?

Brian Jellison

It’s very sustainable, here one of the things Richard you might note, if you want to get in trouble at Roper, you come in from operations and you say well we had a mix variance. Okay, so we know exactly where it came from in every one of the businesses and certainly we have tightened up our execution in the TransCore toll business and have better margins as a result of that activity which has showed out terrific work that’s been done really by George McGraw, our Amtech business and some work that’s been done in IPS business. That said software tends to grow at a faster cliff than our friends do and the rest of the product measure of RF and as it grows it carries with an extraordinary margins compared to the product businesses.

Richard Eastman – Robert W. Baird

So again, given where we booked backlog if it’s partly Houston and it’s been on the tolling side, we can expand that business in the second half off of this 27% EBIT margin?

Brian Jellison

I think that’s – I wouldn’t do that if I were in your shoes, I’ll put it that way. I mean we have…

Richard Eastman – Robert W. Baird

Which is up in my shoes, so that’s not a good assumption.

John Humphrey

No, I don’t believe so. So, I mean clearly IPS has improved their operating performance and their margins. But, we haven’t changed the underlying economics of the fact that maintenance of toll and road services doesn’t carry the same type of margin profile as our software businesses or as hardware photo applications. So, as we continue to do more on the tolling, maintenance and service side, we will have a – I won’t say mix because Brian will kick me, but we’ll have a variance associated with the relative growth rates of those businesses.

Richard Eastman – Robert W. Baird

Okay. And then on the industrial tech side, just given that much of the leverage came at the SG&A line to get the EBIT leverage that you delivered, is it fair to assume that Toronto was finally a significant contributor in the quarter?

John Humphrey

I mean Toronto was a nice contributor in each of the quarters.

Richard Eastman – Robert W. Baird

Okay. Was there any cost take-out visible on the SG&A line there? So, again in this space, you did comment about Europe weakness on the materials analysis side and some other things, but I am just again a little bit curious as to where the SG&A leverage came from? Is that take-out or is that?

John Humphrey

We just – the SG&A, it is drive revenue growth. And so when you are largely selling direct and you got the best technologies than anybody and you’ve got solid gross margins, you get the leverage on incremental revenue. So, we got some incremental revenue, we get the leverage.

Richard Eastman – Robert W. Baird

Okay. Okay, thank you.

John Humphrey

Okay.

Operator

We’ll go next to Jeff Sprague, Vertical Research Partners.

Jeff Sprague – Vertical Research Partners

Thank you. Good morning, gentlemen.

Brian Jellison

Good morning, Jeff.

Jeff Sprague – Vertical Research Partners

Hey, just a couple things. Brian, it sounded like the pipeline is fairly active despite biting off this nice big chunk here, should we expect more before the year end?

Brian Jellison

I don’t really know Jeff, it’s possible. I wish or wouldn’t rule against it. I know what we are willing to do. You never know what other people are willing to do. So, usually a bit outspread all the time when we are doing work. This transaction with Sunquest demonstrates kind of how we act right, so I mean, we started talking to these people in 2010 and we’ve – I’ll tell you sometimes we’ll get people ideas or whatever we wonder about what they are going to do, I think these people have done just a spectacular job of taking advantage of some momentum that we thought could be available to them. And they’ve done that. So, we have some transactions that are similar to this that we have been talking to people off and on about for several years.

I think that depending on who owns the asset and what peoples think is going to happen between now and the end of the year around the tax structures going into next year. You have higher levels of seller activity if they believe nothing is going to change and they don’t have capital gains if they are worried about, they may hold on. On the other hand, they think that getting a high percentage of something is better than a lower percentage of something else. We may close the valuation gap, I don’t know. So, I think it’s possible that we would do another transaction, probably not quite as large as $1.4 billion, however.

Jeff Sprague – Vertical Research Partners

I would bet not, but that brings up another topic. What are you thinking about on the divestiture side, not naming names, of course, but clearly, the portfolio is changing this, maybe some pieces out of that are as not as core they used to be. It’s an interesting juncture right, I mean, your returns are so high anything you divest is dilutive, but at the time when you got maybe such accretive acquisition activity going on, perhaps there is an opportunity to move the portfolio a little bit differently. Are you thinking that way at all, is there any prospect for something leaving the portfolio in the next 6, 12 months?

Brian Jellison

Well, our core business is delivering a tremendous amount of cash. They have gotten dramatically better. Their cash returns are more than 50% better than they were like five years ago. They give us tremendous EPS performance, because they don’t have the non-GAAP amortization charges way against them. There is certainly an increasing inflection point, where you look at this and say what about this situation. We are in a marvelous place, where since we have maintained the autonomy of each one of these businesses.

We can always decouple a business and not have any problem doing that. It’s not like some other strategic that’s got everything so embedded that one factory is making five items and one information system can’t go with the business. So, all our businesses are total, isolated and independent and anyone could be spun-off to another party. I think people largely have some ideas about which things might become available, kind of like the trade deadline right for Tuesday. So, depends who is willing to pay what, but we are not an active seller, but we have some assets that are probably more valuable to others than they are to us.

Jeff Sprague – Vertical Research Partners

And then just one final one for John, just on the EBITDA for Sunquest, does that $140 million include associated DA that comes with the acquisition accounting or is that the organic number?

John Humphrey

Well I mean since the EBITDA excludes the effect of amortization, I don’t think it really impacts that. Having said that the accretion number for the back half this year, the $0.12 to $0.14 that we expect, that does include the new amortization that we are estimating that we will absorb and then start to record post acquisition. So, on the EPS side, it definitely does include that of course always with the caveat it does not include the impact of the deferred revenue, fair value accounting treatment.

Jeff Sprague - Vertical Research Partners

Could you just kind of clarify for us how much EBIT is in that $140 million EBITDA number next year?

John Humphrey

Well, here is – we have to finalize.

Brian Jellison

$35 million.

John Humphrey

Amortization, so I’d say if utilization comes in at $35 million to $40 million to $100 million of…

Brian Jellison

Roughly $35 million.

Jeff Sprague - Vertical Research Partners

Thank you, gentlemen. Good luck.

John Humphrey

And I think we’ll – one more question.

Operator

We’ll go next to Alex Blanton, Clear Harbor Asset Management.

John Humphrey

Hello.

Alex Blanton – Clear Harbor Asset Management

Yes. I think you’ll have to speaker him, okay. Can you hear me?

John Humphrey

Yes.

Alex Blanton – Clear Harbor Asset Management

First I wanted to ask you about the Industrial Technology business and the Pump business specifically. Another company recently recorded a substantial decline in orders as Gardner Denver in the petroleum and industrial pump business and that particular business of theirs orders were down 36% in the quarter. And then in another division they had a pressure pumping order decline of 17%. And you haven’t seen anything like that, according to what you said, do you compete with them or are you taking market share or just what is going on here, because the two results are dramatically different?

Brian Jellison

Yeah, I think the markets we’re focused on are totally different for the most part than Gardner Denver, I mean we do have de-watering pumps that Cornell makes and those have certainly been used in the shale activity. Those have had strong growth, that growth is moderating, but it’s not totally negative at all. That’s pretty small part of the overall enterprise and our Roper Pump business continues to grow quite substantially. So, I think – gosh, I’m not really at all close to Gardner Denver but I’m – I think they’re building a lot of stuff that maybe is going into rental and platforms and that stuff. We have some rental business with Cornell, but it’s not the core component of what we do. So, we’re still making pumps for waste water activity, agriculture or irrigation and those kind of things.

Alex Blanton – Clear Harbor Asset Management

Okay. Thank you. And second question is on the orders for RF technology, TransCore on July 19, said they were awarded Texas Department of Transportation Statewide Toll System integration and maintenance contract, replacing one of your competitors and you’ve get to replace all of their systems plus add your own to new systems that come on board. So, you didn’t mention this, I don’t believe. It seems to be a different project than the one you talked about in RF technology. Could you talk about this new TransCore business that was announced July 19?

John Humphrey

Sure Alex and you are correct it’s not the same one. The Hextra business of the Harris County is the one that we talked about. What you’re referring to is the TxDOT, which operates a different set of toll lanes across the State of Texas. Anyway, I’ll be providing them with software and maintenance activity. More of a – it’s an indefinite quantity, indefinite timing, so it’s in IDIQ type of contract. And so it doesn’t have the same immediate booking that the more definite execution for the Harris County does. So we expect the Texas contract to – sorry the TxDOT contract to add maybe $30 million over the next three years, but at a timing that may be a little bit lumpy as they decide on when to update and when to update their specific lanes.

Alex Blanton – Clear Harbor Asset Management

Okay.

Brian Jellison

It just validates the strength of our technology. I think people just – I’m not sure by understand the strength of our technology compared to others and increasingly they are going to learn that

Alex Blanton – Clear Harbor Asset Management

Okay. Thank you very much and congratulations on the Sunquest.

Brian Jellison

Thank you very much, Alex.

John Humphrey

Thanks, Alex.

Operator

That ends our question-and-answer session for this call. We would now like to turn the conference back over to Mr. John Humphrey for any additional or closing remarks.

John Humphrey

Thank you and thank you all for joining us this morning. We look forward to talking to you after we complete our third quarter.

Operator

That concludes today’s conference. Thank you for your participation.

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