ROPER TECHNOLOGIES INC - Quarter Report: 2013 March (Form 10-Q)

Other intangible assets are comprised of (in thousands):

At March 31, 2013, the conversion of 3,495 notes was pending, with a settlement date of April 4, 2013.  The conversion resulted in the payment of $5.5 million in cash.

At March 31, 2013, the conversion price on the remaining outstanding notes was $461.87.  If converted at March 31, 2013, the value would have exceeded the $10 million principal amount of the outstanding notes by $24 million and could have resulted in the issuance of 193,257 shares of Roper's common stock.

 

The Company manages interest rate risk by maintaining a combination of fixed- and variable-rate debt, which may include interest rate swaps to convert fixed-rate debt to variable-rate debt, or to convert variable-rate debt to fixed-rate debt.   At March 31, 2013, an aggregate notional amount of $500 million in interest rate swaps designated as fair value hedges effectively changed Roper's $500 million senior notes due 2013 with a fixed interest rate of 6.625% to a variable-rate obligation at a weighted average spread of 4.377% plus the 3 month London Interbank Offered Rate ("LIBOR").

The swaps are recorded at fair value in the balance sheet as assets or liabilities, and the changes in fair value of both the interest rate swap and the hedged senior notes due 2013 are recorded as interest expense. At March 31, 2013, the fair value of the swap was an asset balance of $3.4 million and was reported in other current assets. There was a corresponding increase of $2.6 million in the notes being hedged, which was reported as current portion of long-term debt.  The impact on earnings for the three months ended March 31, 2013 was immaterial. The Company has determined the swaps to be Level 2 in the FASB fair value hierarchy, and uses inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks in order to value the instruments.

This report includes "forward-looking statements" within the meaning of the federal securities laws. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the U.S. Securities and Exchange Commission ("SEC") or in connection with oral statements made to the press, potential investors or others. All statements that are not historical facts are "forward-looking statements."  Forward-looking statements may be indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "believes" or "intends" and similar words and phrases. These statements reflect management's current beliefs and are not guarantees of future performance. They involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statement.

Examples of forward-looking statements in this report include but are not limited to statements regarding operating results, the success of our internal operating plans, our expectations regarding our ability to generate operating cash flows and reduce debt and associated interest expense, profit and cash flow expectations, the prospects for newly acquired businesses to be integrated and contribute to future growth and our expectations regarding growth through acquisitions. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, timing and success of product upgrades and new product introductions, raw materials costs, expected pricing levels, the timing and cost of expected capital expenditures, expected outcomes of pending litigation, competitive conditions, general economic conditions and expected synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to:

·	general economic conditions;

·	difficulty making acquisitions and successfully integrating acquired businesses;

·	any unforeseen liabilities associated with future acquisitions;

·	limitations on our business imposed by our indebtedness;

·	unfavorable changes in foreign exchange rates;

·	difficulties associated with exports;

·	risks and costs associated with our international sales and operations;

·	increased directors' and officers' liability and other insurance costs;

·	risk of rising interest rates;

·	product liability and insurance risks;

·	increased warranty exposure;

·	future competition;

·	the cyclical nature of some of our markets;

·	reduction of business with large customers;

·	risks associated with government contracts;

·	changes in the supply of, or price for, raw materials, parts and components;

·	environmental compliance costs and liabilities;

·	risks and costs associated with asbestos-related litigation;

·	potential write-offs of our substantial goodwill and other intangible assets;

·	our ability to successfully develop new products;

·	failure to protect our intellectual property;

·	the effect of, or change in, government regulations (including tax);

·	economic disruption caused by terrorist attacks, health crises or other unforeseen events; and

·	the factors discussed in other reports filed with the SEC.

We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update any of these statements in light of new information or future events.

Our Medical & Scientific Imaging segment net sales increased by 23% to $200.4 million in the first quarter of 2013 as compared to $162.8 million in the first quarter of 2012.  Acquisitions completed in 2012 accounted for 32% of the increase, with negative organic growth of 8% due to decreased sales in our electron microscopy and imaging businesses. The foreign exchange impact was a negative 1%.  Gross margins increased to 67.3% in the first quarter of 2013 from 65.2% in the first quarter of 2012 due primarily to additional sales from medical products which have a higher gross margin.  SG&A expenses as a percentage of net sales were 37.4% in the first quarter of 2013 as compared to 38.6% in the first quarter of 2012 due to additional sales from medical products which have a lower fixed-cost structure.  As a result, operating margins were 29.9% in the first quarter of 2013 as compared to 26.6% in the first quarter of 2012.

In our RF Technology segment, net sales were $208.8 million in the first quarter of 2013 as compared to $204.5 million in the first quarter of 2012, an increase of 2%.  The increase was due primarily to growth in our toll and traffic and security solutions businesses.  Gross margins increased to 53.9% as compared to 51.8% in the prior year quarter due to a more favorable product mix and operating leverage on higher sales volume. SG&A expenses as a percentage of net sales in the first quarter of 2013 decreased to 26.8% as compared to 27.2% in the prior year due to operating leverage on higher sales volume. As a result, operating profit margins were 27.1% in 2013 as compared to 24.6% in 2012.

Corporate expenses were $20.0 million, or 2.7% of sales, in the first quarter of 2013 as compared to $16.6 million, or 2.3% of sales, in the first quarter of 2012.  The increase was due to higher stock-based compensation resulting from higher stock prices.

Interest expense was $20.9 million for the first quarter of 2013 as compared to $15.5 million in the first quarter of 2012.  The increase was due to higher average outstanding debt balances related to 2012 acquisitions, offset in part by lower average interest rates.

Other expense increased to $2.5 million in the first quarter of 2013 as compared to $0.5 million in the first quarter of 2012 due to foreign exchange losses at our non-U.S. based subsidiaries.

Income taxes were 22.8% of pretax earnings in the current quarter, lower than the prior year rate of 29.8%. The reduction was due to $6 million in discrete tax benefits related to the enactment of the American Taxpayer Relief Act of 2012 ("ATRA"), as well as a $6 million benefit from the adjustment of tax balances which were immaterial to any covered period.

At March 31, 2013, the functional currencies of most of our European and our Canadian subsidiaries were weaker against the U.S. dollar compared to currency exchange rates at December 31, 2012. The currency changes resulted in a pretax decrease of $40 million in the foreign exchange component of comprehensive earnings for the current year quarter, $21 million of which is related to goodwill and does not directly affect our expected future cash flows. During the quarter ended March 31, 2013, the functional currencies of our Canadian and some of our European subsidiaries were weaker against the U.S. dollar as compared to the quarter ended March 31, 2012.  The difference in operating profits related to foreign exchange, translated into U.S. dollars, was less than 1% for these companies in the first quarter of 2013 compared to the prior year quarter.

Net orders were $793.6 million for the quarter, 9% higher than the first quarter 2012 net order intake of $729.4 million.  Our order backlog at March 31, 2013 was 17% higher as compared to March 31, 2012. Acquisitions completed in 2012 contributed 8% to the current quarter orders and 15% to the current quarter order backlog.

 

Investing activities - Cash used in investing activities during the first quarter of 2013 was primarily for capital expenditures, and was primarily for business acquisitions and capital expenditures in the first quarter of 2012.

Financing activities - Cash used in financing activities in the current year quarter, and was primarily for debt principal repayments and primarily for dividends and debt principal repayments in the prior year quarter.  Cash provided by financing activities in the first quarters of 2013 and 2012 was primarily from stock option proceeds. Net debt payments were $100.1 million in the three months ended March 31, 2013 as compared to $6.3 million in the three months ended March 31, 2012.

Information pertaining to legal proceedings can be found in Note 9 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report, and is incorporated by reference herein.