The Roper Industries Third Quarter 2013 Financial Results Conference Call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer.

Thank you, Alicia, and thank you, all, for joining us this morning as we discuss the results of our third quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, who heads up Planning and Investor Relations for us. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. In addition, 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'll 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, which are subject to risks and uncertainties as described on this page and as detailed on our SEC filings. You should listen to today's call in the context of that information. Now if you'll please turn to Slide 3. Today, we will be discussing our income statement results for the quarter, primarily on an adjusted basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning, and also included as a part of this presentation on our website. For the third quarter, the difference between GAAP and adjusted consists of 2 discrete items. First, a fair value adjustment to acquire deferred revenue at Sunquest. For the quarter, this impact was $1 million to revenue and operating profit. And this also represents the last time we'll be talking about this adjustment, as we've now completed our 12 months and this deferred revenue adjustment is now completed. This adjustment does represent revenue that, absent our acquisition, Sunquest would have recognized. Second, a fair value adjustment to revenue for MHA totaling $7.9 million. Again, this represents revenue that, absent our acquisition, MHA would have recognized. We believe showing our results on this basis provides additional insight into the ongoing and recurring results of the business. Now if you'll please turn to Slide 4, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Thank you, John, and good morning, everyone. So the first slide here is the quarter 3 enterprise financial results. We achieved record results in the third quarter across almost every important line, and these are substantial increases in orders, in backlog, in revenue, in net earnings, in EBITDA and in cash flow. Our orders were $846 million. Revenue was $837 million, with a book-to-bill of 1.01x, and backlog ended the quarter at $1.04 billion. Gross margin was really spectacular in the quarter, up 280 points to 58.7%. Our EBITDA was up 20% to $278 million in the quarter. EBITDA margin was also spectacular, up 240 basis points to 33.2%. Our diluted earnings per share were up 15% on the adjusted basis, and I think it was 17% on a GAAP basis. The GAAP operating cash flow was up 25% to $256 million. We'll talk a little bit more about how that positions us so well going forward. Very compelling margins and cash flow in the quarter. Next slide. If we look at the Q3 income statement, you'll see orders increased by $126 million from last year, from $720 million to $846 million, an 18% increase in orders, with organic orders up 7%. Our revenue was up 11%, with organic at 3%. We'll talk a little bit about that, as that was a little less than we'd like to have seen on organic. Our gross margin was up sharply, as I said, to 58.7%. Our operating margin, which we probably ought to talk more about, was up another 160 basis points to 27.3%. Now our tax rate actually was a $0.02 headwind in the quarter compared to the prior year actual as it increased from 29.4% to 30.3%, but that was somewhat consistent with what we expected. Net earnings, that figure…

[Operator Instructions] We'll go first to Matt Summerville of KeyBanc.

Just to put this Zetec thing to bed a bit, Brian. If you look at the $0.19 reduction in EPS guidance at the midpoint, how much of that $0.19 is being driven by Zetec?

Well, it's quite a bit. I mean, in the second half of the year, it's going to be off at least $15 million. And so you have to use whatever assumption about its contribution would be. So it's not hard to see how it could be down $8 million or $10 million at least, and tax, it could be worse than that. So it's a significant -- it's the single biggest portion of what's going on, and then you got kind of a nut on the upstream oil and gas, which is -- caught us offguard, I'd say.

With regards to drilling activity, I mean, it hasn't been super robust for a while. However, you had launched some new products in the market at Roper Pump. There was a pretty attractive market share story going on there. Is that still true in that regard? Have you anniversary-ed that launch and now you're seeing more of a broader market impact? Is that what's going on here?

No. That's a great question. The new product is called DuraTorque. It's doing very well. It's more around the directional drilling. It has a lot of different things, whether it's a mixture of wet product or dry product or gas only. It's a certain kind of thing, but our coiled tubing product, which much more is gas-oriented, is what didn't meet our expectations. We actually were up. We had year-over-year improvement. It's just that we had expected substantially more. Now the new product is doing well on certain sizes, and we're opening a new facility in Texas, which -- I mean, it's actually sort of open now, but it's all getting geared up. That will allow us to sell larger sizes. That's not yet in production, won't get in production until the first quarter of next year. So that's a positive, the -- as we gain market share with that technology in the larger sizes, but we can't produce those in Commerce. They're physically too large for our equipment.

And then just lastly, what do you think has to happen in the marketplace for you to start to see a turn in your imaging business, as this has continued to cycled down?

I'm looking at John. It's cycling down, but it's still -- it's better than anybody else's. It has high gross margins. It's contributing positive cash. Parts of it are really pretty good. I just don't think that the camera portion of what it is we do is a secular growth story. It requires government investment and research spending. We're in a period where that's under high scrutiny, and so there's not a lot of end-market-derived demand. There's nothing you can do to push elasticity in demand for cameras. People have to have grant money available. When they do, we get a disproportionate share of that. But if you look at any of the other people in these spaces, there aren't very many, it's kind of an oligopoly, you'll see they're all doing very poorly.

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

Brian, thanks for the color on the variance on 4Q. I just want to dive in to Zetec a little bit. Last quarter, you mentioned that there were -- I believe, you mentioned 4 nuclear plants that weren't going to come back. And so I'm trying to understand what the big variance was relative to your expectations for this quarter. So perhaps maybe we can start there, if you could provide a little bit more color.

Well, I think that people had certain expectations around various things. The San Onofre thing was a big variable that we sort of understood, and had factored that into the guidance. But these other things that have happened and not doing testing in the third quarter, fourth quarter, rolling it into 2014, was not expected. We also do a big business in Korea with that, and they've had some political issues over there with information reporting. And so the normalized business we would have expected there didn't occur. There -- it's just been sort of a dark period, if you will, in the second half. Our people in that business, I mean, we -- in our quarterly review, they detailed a bridge down to $100,000 of variance from a walk last year. So it's one of the things -- they tell you exactly what didn't work and in terms of why, and they would say, "Well, it's just external things we have no control over, and we'll get most of it back next year." But it certainly -- it's not a growth business. It's more of a cash cow. But next year, because of this ridiculous collapse of its revenue in 2013, it will be a temporary growth business.

So is this something that then continues to bleed into the first half of next year because, really, the problem started surfacing last quarter?

Well, it's not expected to at all. It's expected that these things that are not happening in the second half would begin to happen again, favorably, in the first half, although I don't think they know what the detailed schedules are. We took quite a few people out of this business, I think like 24 or something like that, and didn't comment on that in terms of the cost to take them out. But that's about as much as you could do without eating into people that are really field service engineering people and guys that work on the algorithms and analysis for everybody. But the cooling towers are still in operation, and there are mandatory checks and they'll happen. So it's certainly not a part of our growth strategy. It's just been an unfortunate problem for us in the second half of the year.

That's helpful. I think just switching gears a little bit into some of the tolling projects. I think, last quarter, you mentioned that the Florida tag was moving into 4Q, could slip into 1Q. I missed your comments earlier. Perhaps you can talk a little bit about that confidence that you have in Florida tag, specifically for 4Q. What's embedded into expectations? Or has that slipped out into 1Q? And maybe some commentary around Virginia and Texas as well.

Well, we're going to have a terrific fourth quarter in toll and traffic. I mean, it's going to be very, very, very strong. The dynamic for the second half of the year, though, was we've had some projects that we expected would start earlier in the third quarter than they did. And so third quarter was good, but could have been substantially better. The ability of these agencies to deploy various things is kind of a fixed deployment. And so we'll have an exceptional fourth quarter, but that will then carry over into a very strong first half of the year for toll and traffic. I mean, I think John's going to be comfortable to say toll and traffic is going to be up over 15%, maybe more, in the fourth quarter of this year. So there really aren't any problems there. It's just a slower start than we expected.

We'll go next to Christopher Glynn of Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Just looking at the RF and how the backlog and quotation activity is maybe setting up for the 2014 top line. If you could comment on that. And is there any sense that 2014 could be pretty front-end loaded in terms of the full year expectation?

Oh, I wouldn't say -- I mean, we're not going to give you a lot of guidance around '14, but we're going to feel pretty good about it. So John, why don't you...

Yes. And the projects that we have going on that, of course, started to revenue in the third quarter but really ramp-up a little bit more in the fourth, which is Virginia, as well as the Houston project, where we're replacing an awful lot of lane equipment with some of our proprietary lane equipment, in addition to the continuing Florida tag upgrade project. Those things started to ramp in Q3. They kind of reach a steady-state level in Q4. We expect that steady-state level to continue into Q1. And then we'll just -- I vow[ph] that they'll all have various times when they start to complete, but I don't think any of those projects will be completed even in the first quarter of next year. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then a big-picture question on operating margins for you guys. They're very high, obviously, across the segments. And just wondering if you could comment, what are the drivers from here in terms of mix, volume, leverage, et cetera. If you can kind of tackle that question on a segment-by-segment basis.

Sure. So I think the place to look for insight into that is what the gross margin is for each of the 4 segments. So I think if you look at our medical and imaging segment, where our gross margin has now reached 70%, I think it's fair to say that every incremental dollar of revenue there means more than it does, say, in our industrial business. We love our industrial businesses, but we have gross margins there that are right at 50%. So you have a different level of contribution that's going to come from growth in our core medical area. And also, once you start to look over at RF, where our gross margins are also pretty high, largely as a result of our SaaS and software businesses. So in those areas where we have outsized growth, software, medical, MHA and Sunquest and things like that, then that -- I mean, that should convert at probably 50%, or maybe even a little more. In those areas like industrial and our core energy businesses, those things are probably closer into the 35% range. And so I think as you start to see us continue to build in some of those areas, I think you'll see the incremental leverage associated with that, and that's really what's going to drive the operating profit improvement as we go forward.

We'll go next Deane Dray of Citi Research.

Brian, back in September, you were describing the M&A environment and specifically, pricing of assets. I think the word you were using was horrendous. Maybe give us an update on the pipeline. And as your leverage comes down now well below your normalized leverage rates, do you have a Plan B in terms of capital allocation or you just want to keep all the gunpowder dry?

Oh, no. I mean, we're always involved in something. I would say that the pricing and seller expectations are as horrendous as they were before, which is why you're seeing a lot of things not getting done out in the marketplace. I mean, we're fortunate to continue to find things that we think are great additions to the family, and we can do that by offering people opportunities to be part of Roper in a way that works for them and still doesn't blow out pricing multiples. Their -- the pipeline is really quite large. There are a lot of different things that we're -- it would be a rare moment that we're not looking at 3 or 4 things simultaneously. And so I -- we don't have, like, a budgeted thing like, "Gee, you did a $1 billion deal in the first quarter. Are you're going do another one in the fourth quarter?" It doesn't work like that. I mean, we do them when everything sort of aligns. We like the management team, we like the core market, we think we can add some value to it, we think it's a cultural fit and we think the numbers work out over time. And we're definitely seeing things like that. Now that said, when the debt staples are as enormous as they are, oftentimes 7x debt-to-EBITDA, it gets stapled to a transaction. And junk bond, kind of high yield, if you want to call it that, is still very low, so it drives up the multiples. And that's as horrendous now as it was whenever I made that comment.

Okay. And then I know this was a knit last quarter, but is the chapter closed on the Hansen refrigeration valve story?

No, it's not. And so we continue to go through that process. We've shipped out roughly half of the affected valves, but we have not received as many back. So that process, for the field and for our installation partners, is still continuing as far as them being out in the field and replacing those products. But we're fully engaged on that. We expect to be about 90% completed with that part of the project by the end of the year. And we're still in the process of discussing with the supplier, the -- any restitution. So we will call that out once anything like that happens. As Brian mentioned back at the second quarter call, it's a pretty small company, not a lot of capital there. But we're still looking for the ability to offset some of this $9 million that we're having to spend in order to make sure our customers stay whole.

We'll go next to Richard Eastman of Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Brian, could you just talk for a couple of minutes about both MHA and then also Sunquest? You had mentioned Sunquest's backlog pipeline was strong. Does Sunquest now start to look like a mid-single-digit grower as it becomes core sales? And then the follow-up question to that is, if you look at those 2 acquisitions, MHA and Sunquest, if I make some estimates as to what their contribution margin in the quarter was, does the core business in med scientific, did they make progress on their margins or they slipped a little bit?

So I'll address at least the first one of those, talking a little bit about our expectations for Sunquest. They've built, I mean, just a tremendous backlog with not only upgrades but also new facilities, so new badges as well, particularly as hospitals are continuing to comply with meaningful use regulations in order to be able to drive additional revenue into the hospital system. One of the ways that they can do that is better utilization of information, and MHA -- and Sunquest allows them to do that. So that's quite a bit of the backlog that we've been able to build there, and we expect that to start to deliver. It's already started deliver, but continue to ramp up deliveries against that in 2014, even in 2015. So I think -- I mean, you mentioned the mid-single-digit growth area. I would definitely expect that, and we would actually hope for a little bit more than that. And as we look forward -- so even if you exclude the contributions of both MHA and Sunquest, we did have margin expansion across the company. We had good incremental leverage on our -- on the 3% growth. Of course, it was 3% growth, so that incremental leverage works out to be, I think, in the mid-30% range, if my recollection is correct. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So the core in medical scientific, the incrementals is still kind of mid-30s there despite the weakness on the imaging side?

Yes, that's correct. That's correct. It's really because -- actually, because -- even if you exclude the contributions of MHA and Sunquest, so talking specifically just for that segment, we still had net organic growth there, largely driven by our image-guided medical products. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just a real quick question. This Advanced Sensors business that you acquired, could you just give an approximate revenue size for that?

Well, it's really a new technology. So it's -- I mean, they have an expectation that they would be in excess of $10 million, but it could be really substantially better than that. They have a very substantial ramp that they think they'll get, and we'd like to believe they're right. But it's a [indiscernible] margin business. And they really do have a proprietary technology that when you see it, it's remarkable because, today, the way people get information at the wellhead or on the platform is archaic. And you could be sitting somewhere else and getting this information feed basically through a very different type of access technology. And it's where -- I mean people kind of see it and don't believe it. It was introduced in the second half of this year at a trade show, and they are under siege for people wanting to buy the product, which was one of the reasons that we were able to come in and acquire the company, because it requires some investment and has very interesting forward prospects.

We'll go next to Mark Douglass of Longbow Research.

Brian, as we think about the risk to organic growth, not only in fourth quarter, but also looking to '14. Guidance taken down a couple of times. 35% organic growth guide earlier this year, not going to hit it. Obviously, Zetec is a big part of that, oil and gas. Are there other parts of your business where you're just lacking real strong confidence that things are going to turn? Or can you just talk about other risks in other businesses?

Well, in the fourth quarter, it's really driven quite substantially by these 3 things: the sort of almost freeze on nuclear activity, and then the upstream oil and gas, and then the camera reductions. Those make up the lion's share of everything. When you look about 2014, we're going to get solid growth out of all the RF businesses, we expect, and solid growth out of our existing medical product businesses and really, sort of everything in that capacity. Energy has had a somewhat disappointing year in 2013. So it sets up for pretty easy comps in 2014. And then you have industrial, which will have capacity that we don't have today for higher-diameter DuraTorque products in Texas. We think -- we've had 2 or 3 things this year that aren't going to repeat. So you ask this customer renewal situation, which was millions and millions of dollars, and you've got -- you're past the Zetec situation, which is millions of dollars. So we're setup for comps in '14 better. Now we haven't gone through our planning with all the field people, but we're looking forward to a strong year.

Okay. But nothing -- I mean, any areas where you're just getting perpetually weaker without any of these big kind of onetime...

No, not at all. I think what you have is just you've got a pretty slow growth macro economy. And so there are guys who are looking to grow at twice GDP. You're looking at a pretty lousy GDP base off of which to grow. So if you get 3%, 3.5% GDP growth that some people think you'd get in '14, I mean, that's going to help some of those kind of businesses.

We'll go next to Steve Tusa of JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: On that gross margin improvement, obviously, another great quarter there. Is there anything -- I know there's a mix dynamic because you've been buying stuff that's a little more high gross margin. What would you point to as kind of the 1 to 2 things that you're doing there? Is it mix? Is it -- it's kind of hard to -- for us to reach in and analyze that gross margin. It's just so strong that maybe if you could talk about a couple of the big drivers there over the long -- over the last couple of years.

Well, I think there's 2 different things, right? So the kind of things we've been acquiring have been high-margin businesses. Many of them get paid in advance for what they do, which drives so much of the positive you see here around cash. The other businesses have sort of focused on different kinds of disciplines around our market share and customer profitability. So they work very hard on making sure they're serving customers that make sense for them to serve, and not wasting time selling to people that are high maintenance and low margin. Our guys have a very disciplined approach around product development, and when they're looking at their product roadmaps, they're looking at ways to have contributions from the new products that are higher than contributions they had from the old products. So that continues to sort of anniversary beneficially to us. Now when you move 500 basis points up in 2 years, from the 53.7% to 58.7%, certainly, some of that is due to Sunquest and due to MHA a little bit in the third quarter. But pretty much everybody has improving gross margins. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Right, right, yes. No, it's definitely pretty broad-based when you look back over the last couple of years. There's not really 1 segment that's carrying you there. On the leverage, is there a target where you would get more aggressive? Or are you pretty comfortable here deploying capital at 2.5x -- I think it's gross -- 2.5x gross?

Yes. I think we've said 2.5x, but 2.5x to 3x because we have so much cash. It really assembles so quickly for us. We wouldn't have any problem being at 3x or slightly above 3x for a temporary period, if we had a clear pathway to reduce it back. But from a sort of planning or modeling viewpoint, we'd like to think we're more like 2.5x debt-to-EBITDA on a gross basis. But we're not uncomfortable at a little over 3x as long as it doesn't stay there.

We'll go next John Quealy of Canaccord.

It's Chip Moore for John. On Zetec, it sounds like you have pretty good visibility on things coming back next year. Can you just talk a little bit about historical precedents, if you've ever seen delays like this?

Not to this magnitude, no, where you have both a little bit of an impact from plant shutdowns and actually mothballing some nuclear facilities, in addition to what is a little more normal for Zetec, which is lumpiness. So quarter-to-quarter, lumpiness for Zetec is not a surprise. What we're seeing here in the second half is more than what we've seen in the past. So when you talk about visibility, it's one of those things that when I look 12 months out and look at what's going to happen over a 12-month period, there's actually better visibilty than looking out over a 3-month period, just because some of these things can be pushed or delayed, but they can't be eliminated, right? You still have to -- I mean, there are still regulations around shutting down and testing the cooling tower and the tubes and the other parts of the process. So that part can't be eliminated, but it can be postponed sometimes. And so that part is not unusual, but what we're seeing this time is unusual.

Okay, that's helpful. And just a follow-up to that. You've mentioned taking some costs out there as you look forward. Assuming it bounces back next year, what kind of benefit can that have?

It's a modest benefit. People are not that expensive. It's 24 people times whatever, and some of them would be variable, you'd bring them back. So not material to anything Roper does.

Right.

We'll take our next question from Alex Blanton of Clear Harbor Asset Management.

This is sort of a nonquantitative question. You've had a lot of those so far today. But given the unusual nature of some of the problems that you've had here in the second half, I mean, you don't usually have misses in earnings estimates and guidance. How much of a distraction have these problems been, if any, to management in pursuing its acquisition program? Because that seems to have slowed a bit at the same time as some of these problems cropped up. Has there been a problem or not?

Not a problem at all, and I'm not sure how you could say it slowed. I mean, we invested $1 billion this year in the MHA acquisition. And that's...

Well, that's true, but I mean in the fourth quarter. In fourth quarter, we didn't see much.

Well, hold on. I mean, this is the most aggressive acquisition investment deployment policy in the history of the enterprise in the last 2 years, over $2.5 billion. And we just announced the bolt-on now. So good Lord, what would you want in acquisitions. So our capital deployment is just off the charts compared to anybody else.

Okay, okay. So you anticipate some good stuff coming in 2014, that I gather from that?

We always expect good stuff to come. I mean, we are going to deploy capital. We have proven that for a long number of years, and we're going to continue to deploy capital in great opportunities.

And would you say that you've got the operating management in place to handle the problems you've had effectively and minimize them?

I do think that. I think that these are macro trends and upstream stuff that has nothing to do with the quality of the management that we have at Viatran and the diesel engine shutoff valve business and some of the core AMOT businesses and certainly, the coiled tubing aspect at Roper Pump or dewatering pumps or any of these things. The underlying nature of those businesses is outstanding. You can see it by the sustained operating profit margin they have and their product roadmap. So I think that's fine. And any acquisitions we do, frankly, come with quality management teams. So assimilating them isn't very risky. So I think we're -- I mean, I could tell you that we have the best leadership group here at Roper right now that we've ever had, and it's stronger today than it was 5 years ago. So I don't think it has anything to do with sort of taking your eye off of anything. It's really the incredible negative reaction to people who were going to bring up nuclear power plants, who aren't the people who are mothballing them, and the big falloff in gas activity and sort of modest falloff in rig counts.

That will end our question-and-answer session for this call. We will now return back to John Humphrey for any closing remarks.

Thank you, Alicia, and I thank all of you for joining us today. And we look forward to talking to you again in 3 months, when we finish up the fourth quarter.

That does conclude today's conference. We thank you for your participation.