ROPER TECHNOLOGIES INC - Quarter Report: 2008 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number   1-12273

ROPER INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark if the registrant is a shell company (as defined in Rule 12-b2 of the Act). o Yes xNo

The number of shares outstanding of the Registrant’s common stock as of July 18, 2008 was approximately 89,610,237.

ROPER INDUSTRIES, INC.

REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED June 30, 2008

TABLE OF CONTENTS

PART I.           FINANCIAL INFORMATION

Roper Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

Roper Industries, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

Roper Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

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Roper Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements

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Roper Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

June 30, 2008

The accompanying condensed consolidated financial statements for the three month and six month periods ended June 30, 2008 and 2007 are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows of Roper Industries, Inc. and its subsidiaries (“Roper” or the “Company”) for all periods presented.

Roper’s management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Actual results could differ from those estimates.

The results of operations for the three month and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year. You should read these unaudited condensed consolidated financial statements in conjunction with Roper’s consolidated financial statements and the notes thereto included in its 2007 Annual Report on Form 10-K filed on February 29, 2008 with the Securities and Exchange Commission (“SEC”).

Basic earnings per share were calculated using net earnings and the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share were calculated using net earnings and the weighted average number of shares of common stock and potential common stock outstanding during the respective period. Potentially dilutive common stock consisted of stock options, restricted stock awards and the premium over the conversion price on our senior subordinated convertible notes based upon the trading price of the Company’s common stock. The effects of potential common stock were determined using the treasury stock method. Outstanding stock options that were not included in the determination of diluted earnings per share because doing so would have been antidilutive were 14,000 for both the three and six month periods ended June 30, 2008, and 7,500 and 248,500 for the three and six month periods ended June 30, 2007, respectively.

On February 20, 2008, we acquired the CBORD Group, Inc., (“CBORD”), a provider of card systems and integrated security solutions to higher education, healthcare and other markets. CBORD’s results are reported in the RF Technology segment. The aggregate gross purchase price was $376 million of cash, which includes amounts incurred for direct external transaction costs associated with the acquisition. The allocation of the purchase price resulted in $158 million of identifiable intangible assets and $258 million of goodwill.

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During the second quarter of 2008, the Company completed the acquisition of an air shut-off valve provider in the United Kingdom, expanding our global reach for protective technologies in our Energy Systems & Controls segment. Subsequent to the end of the quarter, we acquired the assets, intellectual property and internet domain names of a business which adds new subscribers for our freight matching services in our RF Technology segment. Our total investment for the two businesses was $97 million.

The Roper Industries, Inc. Amended and Restated 2006 Incentive Plan (“2006 Plan”) allows us to grant incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights or equivalent instruments to the Company’s employees, officers, directors and consultants. Roper has never issued stock awards other than those issued to employees or its non-employee directors.

Roper’s stock purchase plan allows U.S. and Canada employees to designate up to 10% of eligible earnings to purchase Roper’s common stock at a 5% discount to the average closing price of its common stock at the beginning and end of a quarterly offering period. The common stock sold to the employees may be either treasury stock, stock purchased on the open market, or newly issued shares.

The Company recognized stock based compensation expense of $8.0 million and $5.1 million for the three months ended June 30, 2008 and 2007, respectively, and $14.7 million and $9.7 million for the six months ended June 30, 2008 and 2007, respectively. The total tax effect recognized in net income related to stock based compensation was $5.2 million and $3.4 million for the six months ended June 30, 2008 and 2007, respectively. The tax benefit from option exercises and restricted stock vesting under all plans totaled approximately $4.0 million and $4.3 million for the six months ended June 30, 2008 and 2007, respectively.

Stock Options - In the six months ended June 30, 2008, 1,020,500 options were granted with a weighted average fair value of $12.75. During the same period in 2007, 521,000 options were granted with a weighted average fair value of $13.66. All options were issued at grant date fair value.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected price volatility, the expected dividend yield, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following weighted average assumptions were used to estimate the fair value of options granted during the six month periods ended June 30, 2008 and 2007 using the Black-Scholes option-pricing model:

Cash received from option exercises for the six months ended June 30, 2008 and 2007 was approximately $7.8 million and $10.6 million, respectively.

Restricted Stock Awards - During the six months ended June 30, 2008, the Company granted 599,810 shares of restricted stock with a weighted average fair value of $55.71. During the same period in 2007, 227,015 shares were granted with a weighted average fair value of $52.19. All grants were issued at grant date fair value.

During the six months ended June 30, 2008, 282,243 restricted shares vested with a weighted average grant date fair value of $43.30, at a weighted average vest date fair value of $57.55.

Employee Stock Purchase Plan - During the six months ended June 30, 2008 and 2007, participants of the employee stock purchase plan purchased 17,725 and 19,458 shares, respectively, of Roper’s common stock for total consideration of $1.04 million and $0.94 million, respectively. All of these shares were purchased from Roper’s treasury shares.

Comprehensive earnings include net earnings and all other non-owner sources of changes in net assets. Comprehensive earnings (in thousands) for the three months ended June 30, 2008 and 2007 were $73,028 and $76,335, respectively, and $158,097 and $128,635 for the six months ended June 30, 2008 and 2007, respectively. The differences between net earnings and comprehensive earnings were currency translation adjustments and unrealized gains on interest rate swaps accounted for under hedge accounting, net of tax.

Other primarily represents tax adjustments and acquisition purchase price allocation adjustments.

The increase in intangible assets during the six months ended June 30, 2008 related to 2008 acquisitions offset by revised allocations of intangible assets of 2007 acquisitions. The revised allocations resulted in a $9 million decrease in intangible assets, and a corresponding increase in goodwill. Amortization expense of other intangible assets was $31,440 and $28,431 during the six months ended June 30, 2008 and 2007, respectively.

Roper, in the ordinary course of business, is the subject of, or a party to, various pending or threatened legal actions, including those pertaining to product liability and employment practices. It is vigorously contesting all lawsuits that, in general, are based upon claims of the kind that have been customary over the past several years. After analyzing the Company’s contingent liabilities on a gross basis and, based upon past experience with resolution of its product liability and employment practices claims and the limits of the primary, excess, and umbrella liability insurance coverages that are available with respect to pending claims, management believes that adequate provision has been made to cover any potential liability not covered by insurance, and that the ultimate liability, if any, arising from these actions should not have a material adverse effect on the consolidated financial position, results of operations or cash flows of Roper.

Over recent years there has been a significant increase in certain U.S. states in asbestos-related litigation claims against numerous industrial companies. Roper or its subsidiaries have been named defendants in some such cases. No significant resources have been required by Roper to respond to these cases and Roper believes it has valid defenses to such claims and, if required, intends to defend them vigorously. Given the state of these claims it is not possible to determine the potential liability, if any.

The Company’s financial statements include accruals for potential product liability and warranty claims based on the Company’s claims experience. Such costs are accrued at the time revenue is recognized. A summary of the Company’s warranty accrual activity for the six months ended June 30, 2008 is presented below (in thousands).

Sales and operating profit by industry segment are set forth in the following table (dollars in thousands):

*Segment operating profit is calculated as operating profit before unallocated corporate general and administrative expenses. These expenses were $13,639 and $10,776 for the three months ended June 30, 2008 and 2007, respectively, and $26,927 and $20,310 for the six months ended June 30, 2008 and 2007, respectively.

On July 7, 2008, the Company entered into a new unsecured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders, which replaces its amended and restated secured credit facility, dated as of December 13, 2004. The new facility is comprised of a two year $350.0 million term loan facility and a five year $750.0 million revolving credit facility. The Company may also, subject to compliance with specified conditions, request additional term loans or revolving credit commitments in an aggregate amount not to exceed $350.0 million.

The Company expects to record a $3 million non-cash debt extinguishment charge in the third quarter of 2008 related to the early termination of the Company’s amended and restated secured credit facility, dated as of December 13, 2004. This charge reflects the unamortized fees associated with this credit facility.

Recently Released Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.” Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of 2009, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect SFAS 162 to have a material impact on the preparation of our consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact, if any, that FSP 142-3 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133,” (“SFAS 161”) which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. This Statement will not impact the Company’s consolidated financial position as it is disclosure-only in nature.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 did not have a material effect on the consolidated financial position for fair value measurements made during the first quarter of 2008. While the Company does not expect the adoption of this Statement to have a material impact on its consolidated financial position in subsequent reporting periods, the Company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets, nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the financial statements on at least an annual basis.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest (previously referred to as minority interest) in the acquiree. The provisions of SFAS 141(R) are effective for business combinations occurring on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company is currently assessing the impact of SFAS 160 on its consolidated financial position and results of operations.

ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF

You should read the following discussion in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007 as filed on February 29, 2008 with the SEC and the notes to our Condensed Consolidated Financial Statements included elsewhere in this report.

Overview

Roper Industries, Inc. (“Roper”, “we” or “us”) is a diversified growth company that designs, manufactures and distributes energy systems and controls, scientific and industrial imaging products and software, industrial technology products and radio frequency (“RF”) products and services. We market these products and services to selected segments of a broad range of markets, including RF applications, water, energy, research and medical, security and other niche markets.

We pursue consistent and sustainable growth in sales and earnings by emphasizing continuous improvement in the operating performance of our existing businesses and by acquiring other carefully selected businesses that offer high value-added, engineered products and solutions and are capable of achieving growth and maintaining high margins. Our acquisitions have represented both financial bolt-ons and new strategic platforms. We strive for high cash and earnings returns from our investments.

During the fourth quarter of 2007, we contributed the Redlake Motion product line and working capital for a minority investment in Integrated Design Tools, Inc.

Application of Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). A discussion of our significant accounting policies can be found in the notes to our consolidated financial statements for the year ended December 31, 2007 included in our Annual Report.

GAAP offers acceptable alternative methods for accounting for certain issues affecting our financial results, such as determining inventory cost, depreciating long-lived assets and recognizing revenues. We have not changed the application of acceptable accounting methods or the significant estimates affecting the application of these principles in the last three years in a manner that had a material effect on our financial statements.

The preparation of financial statements in accordance with GAAP requires the use of estimates, assumptions, judgments and interpretations that can affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures.

The development of accounting estimates is the responsibility of our management. Our management discusses those areas that require significant judgments with the audit committee of our board of directors. The audit committee discusses critical estimates with our external auditors and reviews all financial disclosures to be included in our filings with the SEC. Although we believe the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively.

Our most significant accounting uncertainties are encountered in the areas of accounts receivable collectibility, inventory utilization, future warranty obligations, revenue recognition (percent of completion), income taxes and goodwill analysis. These issues, except for income taxes (which are not allocated to our business segments), affect each of our business segments. These issues are evaluated primarily using a combination of historical experience, current conditions and relatively short-term forecasting.

Accounts receivable collectibility is based on the economic circumstances of customers and credits given to customers after shipment of products, including in certain cases, credits for returned products. Accounts receivable are regularly reviewed to determine customers who have not paid within agreed upon terms, whether these amounts are consistent with past experiences, what historical experience has been with amounts deemed uncollectible and the impact that current and near-term forecast economic conditions might have on collection efforts in general and with specific customers. The returns and other sales credit histories are analyzed to

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determine likely future rates for such credits. At June 30, 2008, our allowance for doubtful accounts receivable, sales returns and sales credits was $12.4 million, or 3.0% of total gross accounts receivable and has decreased slightly from 3.2% at December 31, 2007.

We regularly compare inventory quantities on hand against anticipated future usage, which we determine as a function of historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. When we use historical usage, this information is also qualitatively compared to business trends to evaluate the reasonableness of using historical information as an estimate of future usage. Business trends can change rapidly and these events can affect the evaluation of inventory balances. At June 30, 2008, inventory reserves for excess and obsolete inventory were $31.4 million, or 14.0% of gross inventory cost, and are unchanged as a percentage of gross inventory cost from December 31, 2007.

Most of our sales are covered by warranty provisions that generally provide for the repair or replacement of qualifying defective items for a specified period after the time of sale, typically 12 months. Future warranty obligations are evaluated using, among other factors, historical cost experience, product evolution and customer feedback. At June 30, 2008, the accrual for future warranty obligations was $12.2 million or 0.5% of annualized second quarter sales, as compared to 0.4% in previous quarters. The increase is due to a special $3.5 million warranty charge at Neptune related to a certain vendor-supplied component used in select water meters which were causing a malfunction.

Net sales recognized under the percentage-of-completion method of accounting are estimated and dependent on a comparison of total costs incurred to date to total estimated costs for a project. During the second quarter of 2008, we recognized $33.2 million of net sales using this method. In addition, approximately $161.3 million of net sales related to unfinished percentage-of-completion contracts had yet to be recognized at June 30, 2008. Net sales accounted for under this method are generally not significantly different in profitability compared with net sales for similar products and services accounted for under other methods.

Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how and when cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. Our second quarter effective income tax rate was 34.5%, which is 10 basis points higher than the 34.4% rate experienced in the prior year second quarter.

The evaluation of the carrying value of goodwill and indefinite-lived intangibles is required to be performed annually. We perform this analysis during our fourth quarter.

Results of Operations

General

The following tables set forth selected information for the periods indicated. Dollar amounts are in thousands and percentages are the particular line item shown as a percentage of net sales. Percentages may not foot due to rounding.

Three months ended June 30, 2008 compared to three months ended June 30, 2007

Net sales for the quarter ended June 30, 2008 were $594.4 million as compared to $530.6 million in the prior-year quarter, an increase of 12.0%. Approximately $31 million of our sales increase was due to acquisitions, resulting in internal sales growth of 6.2%, which included a 2.5% positive foreign exchange impact.

In our Industrial Technology segment, net sales were up 13.6% to $183.2 million in the second quarter of 2008 as compared to $161.3 million in the second quarter of 2007 due to strong sales throughout the segment, led by increased sales at Neptune represented by growth in both domestic and international markets. Gross margins were slightly lower at 47.4% for the second quarter of 2008 as compared to 47.5% in the second quarter of 2007. The decrease was due primarily to a $3.5 million warranty charge at Neptune, offset in part by price increases, volume leverage and other cost reductions in the manufacturing process. SG&A expenses as a percentage of net sales were 21.4%, down from 22.3% in the prior year quarter due to operating leverage from higher sales. The resulting operating profit margins were 26.0% in the second quarter of 2008 as compared to 25.1% in the second quarter of 2007.

Net sales in our Energy Systems & Controls segment increased by 14.8% to $144.7 million during the second quarter of 2008 compared to $126.0 million in the second quarter of 2007. Approximately $4 million of the increase was due to acquisitions. Internal growth of 11% was driven by strong year over year sales in our sensor technology business and continued strength in petroleum analysis instrumentation. Gross margins were 55.2% in the second quarter of 2008 compared to 53.0% in the second quarter of 2007 due to operating leverage from higher sales. SG&A expenses as a percentage of net sales increased to 30.6% compared to the prior year quarter at 29.3%. Operating margins were 24.6% in the second quarter of 2008 as compared to 23.7% in the second quarter of 2007.

Net sales in our Scientific & Industrial Imaging segment decreased by 2.7% to $91.2 million during the second quarter of 2008 as compared to $93.7 million in the second quarter of 2007. Internal sales were down 1%, primarily due to lower sales in our camera business. Gross margins decreased slightly to 53.9% in the second quarter of 2008 from 54.6% in the second quarter of 2007. SG&A as a percentage of net sales increased to 37.0% in the second quarter of 2008 as compared to 35.7% in the second quarter of 2007 due to higher engineering costs at our microimaging companies. As a result, operating margins were 16.8% in the second quarter of 2008 as compared to 18.9% in the second quarter of 2007.

In our RF Technology segment, net sales were up 17.2% at $175.3 million compared to $149.6 million in the second quarter of 2007. Acquisitions accounted for $27.8 million in increased sales for 2008. The prior year quarter included the initial phase of a large Middle East project, and internal growth in 2008 excluding this project would have been 5%. Gross margins were 51.1% as compared to 45.3% in the prior year quarter, due to the inclusion of the higher margin CBORD business in 2008, as well as the successful transition of the Company's tolling project in the Middle East from the installation phase to the operational phase. SG&A as a percentage of sales in the second quarter of 2008 was 27.3% up from 24.9% in the prior year due the higher SG&A structure related to the CBORD business.  Operating profit margins increased to 23.8% in 2008 as compared to 20.5% in 2007.

Corporate expenses were $13.6 million, or 2.3% of sales, in the second quarter of 2008 as compared to $10.8 million, or 2.0% of sales, in the second quarter of 2007. The primary reason for the increase was higher equity compensation costs related to retention programs and the additional costs to the Company as Roper’s stock price rises.

Interest expense of $10.3 million for the second quarter of 2008 was $3.1 million lower as compared to $13.4 million in the second quarter of 2007. This is due to a decrease in interest rates on the variable rate portion of our outstanding debt and an increase in offsetting interest income related to higher cash balances, partially offset by higher average balances on our credit facility over the prior year quarter.

Income taxes were 34.5% of pretax earnings in the current quarter as compared to 34.4% in the second quarter of 2007.

At June 30, 2008, the functional currencies of our European subsidiaries were stronger against the dollar since June 30, 2007 and December 31, 2007, with the exception of the British pound, which weakened against the dollar since June 30, 2007 and December 31, 2007. The Canadian dollar was stronger against the dollar compared to June 30, 2007, but weaker as compared to December 31, 2007. The currency changes resulted in a decrease of $3.5 million in the foreign exchange component of comprehensive earnings for the quarter.

Approximately $1.7 million of the total adjustment is related to goodwill and is not expected to directly affect our expected future cash flows. Operating results in the second quarter of 2008 increased slightly due to the weakening of the US dollar as compared to a year ago, primarily against the euro. The difference between the operating results for these companies for the three months ended June 30, 2008, translated into U.S. dollars was approximately 1%.

Net orders were $606.5 million for the quarter, 13.8% higher than the second quarter 2007 net order intake of $532.8 million. Approximately $45 million of the order increase was due to acquisitions resulting in internal growth of 5.4%. We experienced strong bookings in all of our segments. Overall, our order backlog at June 30, 2008 was up 13.8% as compared to June 30, 2007. The increase in backlog is due to 4.3% internal growth as well as 9.5% or $52.7 million from acquisitions and the exit from the Redlake Motion product line.

Six months ended June 30, 2008 compared to six months ended June 30, 2007

Net sales for the six months ended June 30, 2008 were $1.1 billion as compared to $1.0 billion in the prior year six month period, an increase of 12.7%. Approximately $47.7 million of our sales increase was due to acquisitions; however, all of our segments showed improvement over the prior year six month period resulting in internal sales growth of 8.0%.

In our Industrial Technology segment, net sales were up 13.0% to $356.9 million in the first six months of 2008 as compared to $315.8 million in the first six months of 2007 due to strong sales throughout the segment, led by increased sales at Neptune represented by growth in both domestic and international markets. Despite increased cost of raw materials and a $3.5 million warranty charge at Neptune, gross margins were higher at 48.1% for the first six months of 2008 as compared to 47.5% in the first six months of 2007, due to operating leverage from higher sales volume and continuous operating improvements. SG&A expenses as a percentage of net sales were 22.0%, down from 22.6% in the prior year six month period due to operating leverage from higher sales. The resulting operating profit margins were 26.0% in the first six months of 2008 as compared to 24.9% in the first six months of 2007.