UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY  REPORT PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE SECURITIES EXCHANGE  ACT  OF  1934
For the quarterly period ended September 30, 2014.
 
TRANSITION REPORT  PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE SECURITIES EXCHANGE  ACT  OF  1934
For the transition period from                  to               .

Commission File Number   1-12273
 
ROPER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
51-0263969
(I.R.S. Employer Identification No.)
 
 
 
6901 Professional Pkwy. East, Suite 200
Sarasota, Florida
(Address of principal executive offices)
 
 
34240
(Zip Code)
 
(941) 556-2601
(Registrant's telephone number, including area code)
 
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.  Yes   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes     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):
 
   Large accelerated filer
 Accelerated filer
 
 
Non-accelerated filer
(do not check if smaller reporting company)
 Smaller reporting company
 
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    No
 
The number of shares outstanding of the Registrant's common stock as of October 24, 2014 was 102,105,552.

ROPER INDUSTRIES, INC.
 
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
 
TABLE OF CONTENTS
 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
Condensed Consolidated Statements of Earnings
  3
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
  4
 
 
 
 
Condensed Consolidated Balance Sheets
  5
 
 
 
 
Condensed Consolidated Statements of Cash Flows
  6
 
 
 
 
Condensed Consolidated Statement of Changes in Stockholders' Equity
  7
 
 
 
 
Notes to Condensed Consolidated Financial Statements
  8
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  12
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  18
 
 
 
Item 4.
Controls and Procedures
 18
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 18
 
 
 
Item 1A.
Risk Factors
 18
 
 
 
Item 6.
Exhibits
 19
 
 
 
 
Signatures
 20
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2

PART I.                          FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
Roper Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
 
 
  
Three months ended
    
Nine months ended
  
   
September 30,
    
September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Net sales
  
$
884,122
    
$
827,810
    
$
2,603,349
    
$
2,348,955
  
Cost of sales
    
360,082
      
345,185
      
1,067,191
      
999,247
  
Gross profit
    
524,040
      
482,625
      
1,536,158
      
1,349,708
  
 
                                
Selling, general and administrative expenses
    
278,382
      
263,276
      
820,434
      
765,436
  
Income from operations
    
245,658
      
219,349
      
715,724
      
584,272
  
 
                                
Interest expense, net
    
20,013
      
24,705
      
59,352
      
67,924
  
Other income, net
    
552
      
409
      
1,042
      
453
  
 
                                
Earnings before income taxes
    
226,197
      
195,053
      
657,414
      
516,801
  
 
                                
Income taxes
    
70,687
      
58,730
      
197,317
      
144,211
  
 
                                
Net earnings
  
$
155,510
    
$
136,323
    
$
460,097
    
$
372,590
  
 
                                
 
                                
Net earnings per share:
                                
Basic
  
$
1.55
    
$
1.37
    
$
4.61
    
$
3.76
  
Diluted
    
1.54
      
1.36
      
4.56
      
3.72
  
 
                                
Weighted average common shares outstanding:
                                
Basic
    
100,068
      
99,207
      
99,837
      
99,058
  
Diluted
    
101,006
      
100,302
      
100,803
      
100,152
  
 
                                
Dividends declared per common share
  
$
0.200
    
$
0.165
    
$
0.600
    
$
0.495
  

See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3

Roper Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 

   
Three months ended
    
Nine months ended
  
 
  
September 30,
    
September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Net earnings
  
$
155,510
    
$
136,323
    
$
460,097
    
$
372,590
  
 
                                
Other comprehensive income/(loss), net of tax:
                                
Foreign currency translation adjustments
    
(60,755
)
    
31,902
      
(53,763
)
    
(10,219
)
 
                                
Total other comprehensive income/(loss), net of tax
    
(60,755
)
    
31,902
      
(53,763
)
    
(10,219
)
 
                                
Comprehensive income
  
$
94,755
    
$
168,225
    
$
406,334
    
$
362,371
  
 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
Roper Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands)
 
 
  
September 30,
    
December 31,
  
   
2014
    
2013
  
ASSETS:
  
   
 
 
  
   
 
Cash and cash equivalents
  
$
564,112
    
$
459,720
  
Accounts receivable, net
    
528,734
      
519,075
  
Inventories, net
    
213,440
      
204,923
  
Deferred taxes
    
65,230
      
64,464
  
Unbilled receivables
    
103,124
      
86,945
  
Other current assets
    
58,051
      
38,210
  
Total current assets
    
1,532,691
      
1,373,337
  
 
                
Property, plant and equipment, net
    
115,243
      
117,310
  
Goodwill
    
4,731,394
      
4,549,998
  
Other intangible assets, net
    
2,020,798
      
2,039,136
  
Deferred taxes
    
29,051
      
28,773
  
Other assets
    
81,089
      
76,427
  
 
                
Total assets
  
$
8,510,266
    
$
8,184,981
  
 
                
LIABILITIES AND STOCKHOLDERS' EQUITY:
                
 
                
Accounts payable
  
$
145,660
    
$
150,313
  
Accrued compensation
    
115,167
      
107,953
  
Deferred revenue
    
221,552
      
209,332
  
Other accrued liabilities
    
161,057
      
153,712
  
Income taxes payable
    
-
      
4,275
  
Deferred taxes
    
7,495
      
6,490
  
Current portion of long-term debt, net
    
11,074
      
11,016
  
Total current liabilities
    
662,005
      
643,091
  
 
                
Long-term debt, net of current portion
    
2,358,474
      
2,453,836
  
Deferred taxes
    
753,798
      
783,805
  
Other liabilities
    
87,765
      
91,199
  
Total liabilities
    
3,862,042
      
3,971,931
  
 
                
Commitments and contingencies (Note 10)
                
 
                
Common stock
    
1,021
      
1,013
  
Additional paid-in capital
    
1,317,906
      
1,229,233
  
Retained earnings
    
3,359,297
      
2,959,196
  
Accumulated other comprehensive earnings
    
(10,680
)
    
43,083
  
Treasury stock
    
(19,320
)
    
(19,475
)
Total stockholders' equity
    
4,648,224
      
4,213,050
  
 
                
Total liabilities and stockholders' equity
  
$
8,510,266
    
$
8,184,981
  
 
See accompanying notes to condensed consolidated financial statements.
5
Roper Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
  
Nine months ended
September 30,
  
 
  
2014
    
2013
  
Cash flows from operating activities:
  
   
 
Net earnings
  
$
460,097
    
$
372,590
  
Adjustments to reconcile net earnings to cash flows from operating activities:
                
Depreciation and amortization of property, plant and equipment
    
30,442
      
28,269
  
Amortization of intangible assets
    
117,179
      
111,210
  
Amortization of deferred financing costs
    
3,003
      
2,916
  
Non-cash stock compensation
    
47,011
      
40,040
  
Changes in operating assets and liabilities, net of acquired businesses:
                
Accounts receivable
    
(5,225
)
    
43,101
  
Unbilled receivables
    
(16,615
)
    
(13,257
)
Inventories
    
(8,833
)
    
(15,202
)
Accounts payable and accrued liabilities
    
10,342
      
13,055
  
Income taxes payable
    
(54,178
)
    
(12,643
)
Other, net
    
(3,991
)
    
(3,306
)
Cash provided by operating activities
    
579,232
      
566,773
  
 
                
Cash flows from investing activities:
                
Acquisitions of businesses, net of cash acquired
    
(305,254
)
    
(1,014,952
)
Capital expenditures
    
(29,835
)
    
(33,349
)
Proceeds from sale of assets
    
1,262
      
1,740
  
Other, net
    
(6,566
)
    
(144
)
Cash used in investing activities
    
(340,393
)
    
(1,046,705
)
 
                
Cash flows from financing activities:
                
Borrowings/(payments) under revolving line of credit, net
    
(95,000
)
    
290,000
  
Proceeds from senior notes
    
-
      
800,000
  
Principal payments on senior notes
    
-
      
(500,000
)
Principal payments on convertible notes
    
(561
)
    
(2,115
)
Cash premiums paid on convertible note conversions
    
(1,518
)
    
(5,100
)
Debt issuance costs
    
-
      
(7,717
)
Cash dividends to stockholders
    
(59,827
)
    
(32,706
)
Proceeds from stock based compensation, net
    
26,424
      
16,839
  
Stock award tax excess windfall benefit
    
14,892
      
7,763
  
Treasury stock sales
    
2,080
      
1,833
  
Other
    
38
      
723
  
Cash provided by/(used in) financing activities
    
(113,472
)
    
569,520
  
 
                
Effect of foreign currency exchange rate changes on cash
    
(20,975
)
    
(198
)
 
                
Net increase in cash and cash equivalents
    
104,392
      
89,390
  
 
                
Cash and cash equivalents, beginning of period
    
459,720
      
370,590
  
 
                
Cash and cash equivalents, end of period
  
$
564,112
    
$
459,980
  
 
See accompanying notes to condensed consolidated financial statements.
6
Roper Industries, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (unaudited)
(in thousands)
 
 
  
Common
stock
    
Additional
paid-in
capital
    
Retained
earnings
    
Accumulated
other
comprehensive
 earnings
    
Treasury
stock
    
Total
  
Balances at December 31, 2013
  
$
1,013
    
$
1,229,233
    
$
2,959,196
    
$
43,083
    
$
(19,475
)
  
$
4,213,050
  
 
                                                
Net earnings
    
-
      
-
      
460,097
      
-
      
-
      
460,097
  
Stock option exercises
    
6
      
29,488
      
-
      
-
      
-
      
29,494
  
Treasury stock sold
    
-
      
1,924
      
-
      
-
      
155
      
2,079
  
Currency translation adjustments, net of $1,652 tax
    
-
      
-
      
-
      
(53,763
)
    
-
      
(53,763
)
Stock based compensation
    
-
      
47,009
      
-
      
-
      
-
      
47,009
  
Restricted stock activity
    
2
      
(3,072
)
    
-
      
-
      
-
      
(3,070
)
Stock option tax benefit, net of shortfalls
    
-
      
14,727
      
-
      
-
      
-
      
14,727
  
Conversion of senior subordinated convertible notes, net of $115 tax
    
-
      
(1,403
)
    
-
      
-
      
-
      
(1,403
)
Dividends declared
    
-
      
-
      
(59,996
)
    
-
      
-
      
(59,996
)
Balances at September 30, 2014
  
$
1,021
    
$
1,317,906
    
$
3,359,297
    
$
(10,680
)
  
$
(19,320
)
  
$
4,648,224
  
 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7

Roper Industries, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2014


1. Basis of Presentation
 
The accompanying condensed consolidated financial statements for the three and nine month periods ended September 30, 2014 and 2013 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, comprehensive income and cash flows of Roper Industries, Inc. and its subsidiaries ("Roper" or the "Company") for all periods presented. The December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in the 2013 Annual Report on Form 10-K ("Annual Report") filed on February 21, 2014 with the Security and Exchange Commission ("SEC") but does not include all disclosures required by U.S. generally accepted accounting principles ("GAAP").
 
Roper's management has made 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 GAAP. Actual results could differ from those estimates.
 
The results of operations for the three and nine month periods ended September 30, 2014 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 Annual Report.

2. Recent Accounting Pronouncements
 
The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under GAAP in the form of accounting standards updates ("ASUs") to the FASB's Accounting Standards Codification.  The Company considers the applicability and impact of all ASUs.  

In June 2014, the FASB issued updates to the accounting for stock compensation. These updates, effective for fiscal years beginning after December 15, 2015, modify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Company does not expect these updates to have an impact on its results of operations, financial condition or cash flows.

In May 2014, the FASB issued updates on accounting and disclosures for revenue from contracts with customers. These updates, effective for annual reporting periods after December 15, 2016, create a single, comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets (rights to receive consideration) and liabilities (obligations to provide a good or service). Revenue will be recognized based on the satisfaction of performance obligations, which occurs when control of a good or service transfers to a customer. The Company is evaluating the impact of these updates on its results of operations, financial condition and cash flows.

3. Earnings Per Share
 
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 and the premium over the conversion price on Roper's senior subordinated convertible notes based upon the trading price of Roper's common stock. The effects of potential common stock were determined using the treasury stock method.  Weighted average shares outstanding are shown below (in thousands):
 
 
  
Three months ended September 30,
    
Nine months ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Basic shares outstanding
    
100,068
      
99,207
      
99,837
    
$
99,058
  
     Effect of potential common stock:
                                
     Common stock awards
    
788
      
905
      
815
      
894
  
     Senior subordinated convertible notes
    
150
      
190
      
151
      
200
  
Diluted shares outstanding
    
101,006
      
100,302
      
100,803
      
100,152
  

For the three and nine month periods ended September 30, 2014 there were 670,000 and 781,000 outstanding stock options, respectively, that were not included in the determination of diluted earnings per share because doing so would have been antidilutive, as compared to 551,850 and 601,350 outstanding stock options, respectively, that would have been antidilutive for the three and nine month periods ended September 30, 2013.

8
4.    Business Acquisitions

During the quarter ended September 30, 2014, Roper acquired 100% of the shares of  for  million of cash, in order .  Foodlink is reported in the RF Technology segment, and SHP and IPA are both reported in the Medical & Scientific Imaging segment.  The Company recorded  million in goodwill and  million of other identifiable intangibles in connection with the acquisitions; however, purchase price allocations are preliminary pending final intangibles valuations and tax-related adjustments.  Supplemental pro forma information has not been provided as the acquisitions were immaterial both individually and in aggregate.

During the nine month period ended September 30, 2014, the Company expensed transaction costs of  million related to the acquisitions as corporate general and administrative expenses, as incurred.

5. Stock Based Compensation
 
The Roper Industries, Inc. Amended and Restated 2006 Incentive Plan is a stock-based compensation plan used to grant incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights or equivalent instruments to Roper's employees, officers and directors.
 
Roper's stock purchase plan allows employees in the U.S. and Canada to designate up to 10% of eligible earnings to purchase Roper's common stock at a 5% discount to the average closing price of the stock at the beginning and end of a quarterly offering period. Common stock sold to employees may be either treasury stock, stock purchased on the open market, or newly issued shares.

The following table provides information regarding the Company's stock-based compensation expense (in thousands):
 
 
Three months ended September 30,
  
Nine months ended September 30,
  
 
2014
  
2013
  
2014
  
2013
  
Stock based compensation
  
$
16,998
    
$
13,756
    
$
47,011
    
$
40,040
  
Tax effect recognized in net income
    
5,949
      
4,814
      
16,454
      
14,014
  
Windfall tax benefit/(shortfall), net
    
3,126
      
2,075
      
14,727
      
7,632
  

Stock Options - In the nine months ended September 30, 2014, 614,500 options were granted with a weighted average fair value of $35.02 per option. During the same period in 2013, 560,350 options were granted with a weighted average fair value of $36.87 per option. All options were issued at grant date fair value, which is defined by the Plan as the closing price of Roper's common stock on the date of grant.
 
Roper 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. Historical data is used 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 current and prior year quarters using the Black-Scholes option-pricing model:

 
Nine Months Ended September 30,
 
2014
 
2013
Risk-free interest rate (%)
  
1.63
 
  
0.80
Expected option life (years)
  
5.23
 
 
5.19
Expected volatility (%)
  
27.27
 
 
36.20
Expected dividend yield (%)
  
0.59
 
 
0.57

Cash received from option exercises for the nine months ended September 30, 2014 and 2013 was $29.5 million and $20.5 million, respectively.
 
Restricted Stock Awards - During the nine months ended September 30, 2014, 341,810 restricted stock awards were granted with a weighted average fair value of $140.91 per restricted share. During the same period in 2013, 357,240 restricted stock awards were granted with a weighted average fair value of $116.76 per restricted share. All grants were issued at grant date fair value.
 
During the nine months ended September 30, 2014, 94,645 restricted awards vested with a weighted average grant date fair value of $85.33 per restricted share, and a weighted average vest date fair value of $143.14 per restricted share.
 
Employee Stock Purchase Plan - During the nine months ended September 30, 2014 and 2013, participants of the employee stock purchase plan purchased 15,695 and 15,458 shares, respectively, of Roper's common stock for total consideration of $2.10 million and $1.80 million, respectively. All shares were purchased from Roper's treasury shares.
 
 
 
9
6. Inventories

The components of inventory were as follows (in thousands):
 
  
September 30,
2014
    
December 31,
2013
  
Raw materials and supplies
  
$
133,473
    
$
127,525
  
Work in process
    
33,915
      
30,498
  
Finished products
    
91,054
      
90,352
  
Inventory reserves
    
(45,002
)
    
(43,452
)
 
  
$
213,440
    
$
204,923
  

7. Goodwill and Other Intangible Assets

The carrying value of goodwill by segment was as follows (in thousands):
 
 
  
Industrial
Technology
    
Energy Systems
& Controls
    
Medical &
Scientific Imaging
    
RF Technology
    
Total
  
Balances at December 31, 2013
  
$
425,501
    
$
434,697
    
$
2,435,506
    
$
1,254,294
    
$
4,549,998
  
Goodwill Acquired
    
-
      
-
      
173,707
      
33,470
      
207,177
  
Other
    
-
      
275
      
(2,549
)
    
-
      
(2,274
)
Currency translation adjustments
    
(8,913
)
    
(3,550
)
    
(9,484
)
    
(1,560
)
    
(23,507
)
Balances at September 30, 2014
  
$
416,588
    
$
431,422
    
$
2,597,180
    
$
1,286,204
    
$
4,731,394
  

Other relates primarily to a tax purchase accounting adjustment for MHA, Inc., acquired in May 2013.

Other intangible assets were comprised of (in thousands):
 
  
Cost
    
Accumulated
amortization
    
Net book
value
  
Assets subject to amortization:
  
   
   
 
Customer related intangibles
  
$
1,936,336
    
$
(464,018
)
  
$
1,472,318
  
Unpatented technology
    
216,044
      
(120,091
)
    
95,953
  
Software
    
160,618
      
(58,084
)
    
102,534
  
Patents and other protective rights
    
31,394
      
(21,922
)
    
9,472
  
Trade names
    
656
      
(16
)
    
640
  
Assets not subject to amortization:
                        
Trade names
    
358,219
      
-
      
358,219
  
Balances at December 31, 2013
  
$
2,703,267
    
$
(664,131
)
  
$
2,039,136
  
Assets subject to amortization:
                        
Customer related intangibles
  
$
1,988,946
    
$
(522,581
)
  
$
1,466,365
  
Unpatented technology
    
212,812
      
(129,498
)
    
83,314
  
Software
    
156,740
      
(59,716
)
    
97,024
  
Patents and other protective rights
    
26,771
      
(17,866
)
    
8,905
  
Backlog
    
1,100
      
(168
)
    
932
  
Trade names
    
653
      
(60
)
    
593
  
Assets not subject to amortization:
                        
Trade names
    
363,665
      
-
      
363,665
  
Balances at September 30, 2014
  
$
2,750,687
    
$
(729,889
)
  
$
2,020,798
  
 
Amortization expense of other intangible assets was $114,317 and $108,223 during the nine months ended September 30, 2014 and 2013, respectively.
 
An evaluation of the carrying value of goodwill and indefinite-lived intangibles is required to be performed on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. There have been no events or changes in circumstances which indicate an interim impairment review is required in 2014. The Company expects to perform the annual analysis during the fourth quarter.
10
8. Debt
 
Roper's 3.75% senior subordinated convertible notes due 2034 became convertible on January 15, 2009.  During the nine months ended September 30, 2014, 1,178 notes were converted by note holders for $2.1 million in cash.  No gain or loss was recorded upon these conversions.  In addition, a related $0.12 million deferred tax liability associated with excess deductions recorded for tax purposes was relieved to additional paid-in capital upon the conversions.
 
At September 30, 2014, the conversion price on the remaining outstanding notes was $488.37 per note.  If converted at September 30, 2014, the value would have exceeded the $8 million principal amount of the outstanding notes by $22 million and could have resulted in the issuance of 151,922 shares of Roper's common stock.

9. Fair Value of Financial Instruments

Roper's debt at September 30, 2014 included $2.2 billion of fixed-rate senior notes with the following fair values (in millions):
 
$400 million senior notes due 2017
  
$
403
  
$800 million senior notes due 2018
    
797
  
$500 million senior notes due 2019
    
582
  
$500 million senior notes due 2022
    
487
  

The fair values of the senior notes are based on the trading prices of the notes, which the Company has determined to be Level 2 in the FASB fair value hierarchy.  Short-term debt included $8 million of fixed-rate convertible notes which were at fair value due to the ability of note holders to exercise the conversion option of the notes.

10. Contingencies
 
Roper, in the ordinary course of business, is the subject of, or a party to, various pending or threatened legal actions, including 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 Roper's consolidated financial position, results of operations or cash flows.
 
Over recent years there has been an 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 the Company 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.

Roper's financial statements include accruals for potential product liability and warranty claims based on its claims experience. Such costs are accrued at the time revenue is recognized. A summary of the warranty accrual activity for the nine months ended September 30, 2014 is presented below (in thousands):
 
Balance at December 31, 2013
  
$
14,336
  
Additions charged to costs and expenses
    
10,357
  
Deductions
    
(13,561
)
Other
    
(1
)
Balance at September 30, 2014
  
$
11,131
  
 
 
 
 
 
 
 
 
 

 
11
11. Business Segments

Sales and operating profit by industry segment are set forth in the following table (dollars in thousands):
 
 
  
Three months ended September 30,
    
   
Nine months ended September 30,
    
 
 
  
2014
    
2013
    
Change
    
2014
    
2013
    
Change
  
Net sales:
  
   
   
   
   
   
 
Industrial Technology
  
$
205,688
    
$
200,684
      
2.5
%
  
$
607,503
    
$
580,466
      
4.7
%
Energy Systems & Controls
    
170,765
      
155,058
      
10.1
%
    
491,804
      
456,031
      
7.8
%
Medical & Scientific Imaging
    
268,809
      
237,338
      
13.3
%
    
793,899
      
645,739
      
22.9
%
RF Technology
    
238,860
      
234,730
      
1.8
%
    
710,143
      
666,719
      
6.5
%
Total
  
$
884,122
    
$
827,810
      
6.8
%
  
$
2,603,349
    
$
2,348,955
      
10.8
%
Gross profit:
                                                
Industrial Technology
  
$
104,012
    
$
101,259
      
2.7
%
  
$
306,464
    
$
296,414
      
3.4
%
Energy Systems & Controls
    
99,233
      
88,104
      
12.6
%
    
281,055
      
256,431
      
9.6
%
Medical & Scientific Imaging
    
193,132
      
167,433
      
15.3
%
    
572,738
      
440,718
      
30.0
%
RF Technology
    
127,663
      
125,829
      
1.5
%
    
375,901
      
356,145
      
5.5
%
Total
  
$
524,040
    
$
482,625
      
8.6
%
  
$
1,536,158
    
$
1,349,708
      
13.8
%
Operating profit*:
                                                
Industrial Technology
  
$
62,046
    
$
60,753
      
2.1
%
  
$
178,540
    
$
164,278
      
8.7
%
Energy Systems & Controls
    
49,033
      
41,076
      
19.4
%
    
130,844
      
118,432
      
10.5
%
Medical & Scientific Imaging
    
91,227
      
71,968
      
26.8
%
    
275,379
      
179,433
      
53.5
%
RF Technology
    
69,351
      
66,469
      
4.3
%
    
203,183
      
183,828
      
10.5
%
Total
  
$
271,657
    
$
240,266
      
13.1
%
  
$
787,946
    
$
645,971
      
22.0
%
Long-lived assets:
                                                
Industrial Technology
  
$
47,147
    
$
49,055
      
(3.9
)%
                        
Energy Systems & Controls
    
17,537
      
19,501
      
(10.1
)%
                        
Medical & Scientific Imaging
    
44,513
      
43,105
      
3.3
%
                        
RF Technology
    
29,211
      
28,360
      
3.0
%
                        
Total
  
$
138,408
    
$
140,021
      
(1.2
)%
                        
 
*Segment operating profit is before unallocated corporate general and administrative expenses. These expenses were $25,999 and $20,917 for the three months ended September 30, 2014 and 2013, respectively, and $72,222 and $61,699 for the nine months ended September 30, 2014 and 2013, respectively.


ITEM 2.                          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 for the year ended December 31, 2013 as filed on February 21, 2014 with the SEC and the notes to our Condensed Consolidated Financial Statements included elsewhere in this report.
 
Information About Forward-Looking Statements
 
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.
 
 
 
 
 
12
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.

Overview
 
Roper Industries, Inc. ("Roper," "we" or "us") is a diversified technology company that designs, manufactures and distributes radio frequency ("RF") products, services and application software, industrial technology products, energy systems and controls and medical and scientific imaging products and software. We market these products and services to a broad range of markets, including RF applications, medical, water, energy, research, education, software-as-a-service ("SaaS")-based information networks, security and other niche markets.
 
We pursue consistent and sustainable growth in 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 services, 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.
 
Critical Accounting Policies
 
There were no material changes during the nine months ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K filed on February 21, 2014.
 
Recently Issued Accounting Standards
 
Information regarding new accounting pronouncements is included in Note 2 of the Notes to Condensed Consolidated Financial Statements. 
 
 
 
 
13
Results of Operations
 
General
 
The following table sets 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 September 30,
    
Nine months ended September 30,
  
   
2014
    
2013
    
2014
    
2013
  
Net sales:
                
Industrial Technology
  
$
205,688
    
$
200,684
    
$
607,503
    
$
580,466
  
Energy Systems & Controls
    
170,765
      
155,058
      
491,804
      
456,031
  
Medical & Scientific Imaging
    
268,809
      
237,338
      
793,899
      
645,739
  
RF Technology
    
238,860
      
234,730
      
710,143
      
666,719
  
Total
  
$
884,122
    
$
827,810
    
$
2,603,349
    
$
2,348,955
  
Gross margin:
                                
Industrial Technology
    
50.6
%
    
50.5
%
    
50.4
%
    
51.1
%
Energy Systems & Controls
    
58.1
      
56.8
      
57.1
      
56.2
  
Medical & Scientific Imaging
    
71.8
      
70.5
      
72.1
      
68.3
  
RF Technology
    
53.4
      
53.6
      
52.9
      
53.4
  
Total
    
59.3
      
58.3
      
59.0
      
57.5
  
Selling, general & administrative expenses:
                                
Industrial Technology
    
20.4
%
    
20.2
%
    
21.1
%
    
22.8
%
Energy Systems & Controls
    
29.4
      
30.3
      
30.5
      
30.3
  
Medical & Scientific Imaging
    
37.9
      
40.2
      
37.5
      
40.5
  
RF Technology
    
24.4
      
25.3
      
24.3
      
25.8
  
Total
    
28.5
      
29.3
      
28.7
      
30.0
  
Segment operating margin:
                                
Industrial Technology
    
30.2
%
    
30.3
%
    
29.4
%
    
28.3
%
Energy Systems & Controls
    
28.7
      
26.5
      
26.6
      
26.0
  
Medical & Scientific Imaging
    
33.9
      
30.3
      
34.7
      
27.8
  
RF Technology
    
29.0
      
28.3
      
28.6
      
27.6
  
Total
    
30.7
      
29.0
      
30.3
      
27.5
  
Corporate administrative expenses
    
(2.9
)
    
(2.5
)
    
(2.8
)
    
(2.6
)
 
    
27.8
      
26.5
      
27.5
      
24.9
  
Interest expense
    
(2.3
)
    
(3.0
)
    
(2.3
)
    
(2.9
)
Other income
    
0.1
      
-
      
-
      
-
  
Earnings before income taxes
    
25.6
      
23.6
      
25.3
      
22.0
  
Income taxes
    
(8.0
)
    
(7.1
)
    
(7.6
)
    
(6.1
)
Net earnings
    
17.6
%
    
16.5
%
    
17.7
%
    
15.9
%

 
Three months ended September 30, 2014 compared to three months ended September 30, 2013
 
Net sales for the quarter ended September 30, 2014 increased by 7% as compared to the third quarter of 2013. The increase was the result of organic growth of 5% and sales related to acquisitions of 2%.
 
In our Industrial Technology segment, net sales increased by 2% to $206 million in the third quarter of 2014 as compared to $201 million in the third quarter of 2013, due primarily to increased sales in our fluid handling businesses.  Gross margin was relatively unchanged at 50.6% for the third quarter of 2014 as compared to 50.5% for the third quarter of 2013. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were relatively unchanged at 20.4% in the current year quarter as compared to 20.2% in the prior year quarter. The resulting operating margin was 30.2% in the third quarter of 2014 as compared to 30.3% in the third quarter of 2013.
 
 
14
Net sales in our Energy Systems & Controls segment increased by 10% to $171 million during the third quarter of 2014 compared to $155 million in the third quarter of 2013.  Organic sales increased by 8% and sales related to acquisitions added 2%.  The increase in organic sales was due to increased sales in oil and gas products, including safety systems and valves, and nuclear power plant testing equipment markets.  Gross margin increased to 58.1% in the third quarter of 2014, as compared to 56.8% in the third quarter of 2013 due to product mix. SG&A expenses as a percentage of net sales were 29.4% compared to 30.3% in the prior year quarter due to leverage on higher sales volume. As a result, operating margin was 28.7% in the third quarter of 2014 as compared to 26.5% in the third quarter of 2013.
 
Our Medical & Scientific Imaging segment net sales increased by 13% to $269 million in the third quarter of 2014 as compared to $237 million in the third quarter of 2013.  Organic sales increased by 10% and acquisitions added 3%. The increase in organic sales was due to increased sales in our medical businesses. Gross margin increased to 71.8% in the third quarter of 2014 from 70.5% in the third quarter of 2013 due primarily to additional sales from medical products and software which have a higher gross margin.  SG&A expenses as a percentage of net sales were 37.9% in the third quarter of 2014 as compared to 40.2% in the third quarter of 2013 due to leverage on higher sales volume.  As a result, operating margin was 33.9% in the third quarter of 2014 as compared to 30.3% in the third quarter of 2013.
 
In our RF Technology segment, net sales were $239 million in the third quarter of 2014 as compared to $235 million in the third quarter of 2013, an increase of 2%.  Organic sales increased by 1% and acquisitions added 1%. The increase in organic sales was due primarily to growth in our toll and traffic businesses.  Gross margin was relatively unchanged at 53.4% as compared to 53.6% in the prior year quarter.  SG&A expenses as a percentage of net sales in the third quarter of 2014 decreased to 24.4% as compared to 25.3% in the prior year due to operating leverage on higher sales volume. The resulting operating margin was 29.0% in the third quarter of 2014 as compared to 28.3% in the third quarter of 2013.
 
Corporate expenses were $26.0 million, or 2.9% of sales, in the third quarter of 2014 as compared to $20.9 million, or 2.5% of sales, in the third quarter of 2013.  The increase was due to an increase in acquisition expenses, as well as increased stock-based compensation costs (see Note 5 of the Notes to Condensed Consolidated Financial Statements for details of stock-based compensation costs).
 
Interest expense was $20 million for the third quarter of 2014 as compared to $25 million for the third quarter of 2013.  The decrease was due to lower average interest rates on lower average outstanding debt balances.
 
Other income was $0.6 million in the third quarter of 2014, as compared to $0.4 million in the third quarter of 2013.
 
Income taxes as a percent of  pretax earnings were 31.3% in the third quarter of 2014 and as compared to 30.1 % in the third quarter of 2013.  We expect the effective tax rate for 2014 to be approximately 31%.
 
At September 30, 2014,  the functional currencies of most of our European subsidiaries and the Canadian dollar were weaker against the U.S. dollar compared to currency exchange rates at June 30, 2014. The currency changes resulted in a pretax decrease of $63 million in the foreign exchange component of comprehensive earnings for the current year quarter, $28 million of which is related to goodwill and does not directly affect our expected future cash flows. During the quarter ended September 30, 2014, the functional currencies of our European subsidiaries were stronger and the Canadian dollar was weaker against the U.S. dollar as compared to the quarter ended September 30, 2013.  The difference in operating profit related to foreign exchange, translated into U.S. dollars, was less than 1% for these companies in the third quarter of 2014 compared to the third quarter of 2013.
 
Net orders were $893 million in the third quarter of 2014, 7% higher than the third quarter 2013 net order intake of $838 million.  Our order backlog at September 30, 2014 was 3% higher compared to September 30, 2013. Acquisitions contributed 2% to the current quarter orders.
 
 
Net orders booked for the
three months ended
September 30,
    
Order backlog as of
 September 30,
  
 
2014
    
2013
    
2014
    
2013
  
 
(in thousands)
  
Industrial Technology
  
$
205,945
    
$
197,549
    
$
121,768
    
$
131,768
  
Energy Systems & Controls
    
173,172
      
148,922
      
127,803
      
120,415
  
Medical & Scientific Imaging
    
270,881
      
262,320
      
303,295
      
276,926
  
RF Technology
    
243,363
      
229,484
      
519,824
      
515,683
  
Total
  
$
893,361
    
$
838,275
    
$
1,072,690
    
$
1,044,792
  
 
 
Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
 
Net sales for the nine months ended September 30, 2014 increased by 11% as compared to the nine months ended September 30, 2013. The increase was the result of organic growth of 7% and sales related to acquisitions of 4%.
 
 
 
 
15
In our Industrial Technology segment, net sales increased by 5% to $608 million in the nine months ended September 30, 2014 as compared to $580 million in the nine months ended September 30, 2013, due primarily to increased sales in our water meter, fluid handling and materials testing businesses.  Gross margin decreased to 50.4% for the nine months ended September 30, 2014 as compared to 51.1% for the nine months ended September 30, 2013 due to product mix. Selling, general and administrative expenses as a percentage of net sales decreased to 21.1% in the current year from 22.8% in the prior year due primarily to the non-recurrence of a $9.1 million warranty expense in the prior-year period. The resulting operating margin was 29.4% in the nine months ended September 30, 2014 as compared to 28.3% in the nine months ended September 30, 2013.
 
Net sales in our Energy Systems & Controls segment increased by 8% to $492 million during the nine months ended September 30, 2014 compared to $456 million in the nine months ended September 30, 2013.  Organic sales increased by 6% and acquisitions added 2%.  The increase in organic sales was due to sales of new instruments for refinery applications and increased sales in the fluid properties testing equipment market.  Gross margin increased to 57.1% in the nine months ended September 30, 2014, as compared to 56.2% in the nine months ended September 30, 2013, due to operating leverage on higher sales volume. SG&A expenses as a percentage of net sales were relatively unchanged at 30.5% in the current nine month period as compared to 30.3% in the prior year nine month period. As a result, operating margin was 26.6% in the nine months ended September 30, 2014 as compared to 26.0% in the nine months ended September 30, 2013.
 
Our Medical & Scientific Imaging segment net sales increased by 23% to $794 million in the nine months ended September 30, 2014 as compared to $646 million in the nine months ended September 30, 2013.  Organic sales increased by 11% and acquisitions added 12%. The increase in organic sales was due to increased sales in our medical businesses. Gross margin increased to 72.1% in the nine months ended September 30, 2014 from 68.3% in the nine months ended September 30, 2013 due primarily to additional sales from medical products and software which have a higher gross margin.  SG&A expenses as a percentage of net sales were 37.5% in the nine months ended September 30, 2014 as compared to 40.5% in the nine months ended September 30, 2013 due to leverage on higher sales volume.  As a result, operating margin was 34.7% in the nine months ended September 30, 2014 as compared to 27.8% in the nine months ended September 30, 2013.
 
In our RF Technology segment, net sales were $710 million in the nine months ended September 30, 2014 as compared to $667 million in the nine months ended September 30, 2013, an increase of 7%.  The increase was due primarily to growth in our toll and traffic businesses.  Gross margin decreased to 52.9% as compared to 53.4% in the prior year nine month period due to product mix in our toll and traffic businesses.  SG&A expenses as a percentage of net sales in the nine months ended September 30, 2014 decreased to 24.3% as compared to 25.8% in the prior year nine month period due to operating leverage on higher sales volume. The resulting operating margin was 28.6% in 2014 as compared to 27.6% in 2013.
 
Corporate expenses were $72.2 million, or 2.8% of sales, in the nine months ended September 30, 2014 as compared to $61.7 million, or 2.6% of sales, in the nine months ended September 30, 2013.  The increase was due to higher compensation costs, including increased stock-based compensation costs (see Note 5 of the Notes to Condensed Consolidated Financial Statements for details of stock-based compensation costs).
 
Interest expense was $59 million for the nine months ended September 30, 2014 as compared to $68 million for the nine months ended September 30, 2013.  The decrease was due to lower average interest rates on lower average outstanding debt balances.
 
Other income was $1.0 million in the nine months ended September 30, 2014, as compared to $0.5 million in the nine months ended September 30, 2013.
 
Income taxes were 30.0% of pretax earnings in the nine months ended September 30, 2014, higher than the 27.9% rate experienced in the nine months ended September 30, 2013.  The current year rate was impacted by a $6 million reduction in the liability for unrecognized tax benefits due to the lapse of applicable statute of limitations. The prior year rate was lower 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 correction of an out of period adjustment of tax balances which were immaterial to any covered period.  We expect the effective tax rate for 2014 to be approximately 31%.
 
At September 30, 2014, the functional currencies of most of our European subsidiaries and the Canadian dollar were weaker against the U.S. dollar compared to currency exchange rates at December 31, 2013. The currency changes resulted in a pretax decrease of $55 million in the foreign exchange component of comprehensive earnings for the nine months ended September 30, 2014, $24 million of which is related to goodwill and does not directly affect our expected future cash flows. During the nine month period ended September 30, 2014, the functional currencies of our European subsidiaries were stronger and the Canadian dollar was weaker against the U.S. dollar as compared to the nine month period ended September 30, 2013.  The difference in operating profit related to foreign exchange, translated into U.S. dollars, was less than 1% for these companies in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

Financial Condition, Liquidity and Capital Resources
 
Selected cash flows for the three and nine months ended September 30, 2014 and 2013 were as follows (in millions):
 
 
  
Three months ended September 30,
    
Nine months ended September 30,
  
Cash provided by/(used in):
  
2014
    
2013
    
2014
    
2013
  
Operating activities
  
$
226.1
      
255.8
    
$
579.2
      
566.8
  
Investing activities
    
(317.6
)
    
(18.6
)
    
(340.4
)
    
(1,046.7
)
Financing activities
    
112.9
      
(161.4
)
    
(113.5
)
    
569.5
  
 
 
16
Operating activities - Net cash provided by operating activities decreased by 12% to $226 million in the third quarter of 2014 as compared to $256 million in the third quarter of 2013 due primarily to higher tax payments and a decrease in receivables collections offset in part by increased earnings net of intangible amortization, and increased by 2% to $579 million in the nine months ended September 30, 2014 as compared to $567 million in the nine months ended September 30, 2013, due to increased earnings net of intangible amortization related to acquisitions offset in part by tax payments and a decrease in receivables collections.
 
Investing activities - Cash used in investing activities during the three and nine months ended September 30, 2014 and 2013 was primarily for business acquisitions and capital expenditures.
 
Financing activities - Cash used in financing activities was primarily for debt principal repayments and dividends in the three and nine months ended September 30, 2014 and 2013.  Cash provided by financing activities in the three and nine months ended September 30, 2014 and 2013 was primarily from debt borrowings. Net debt payments were $96 million in the nine months ended September 30, 2014 as compared to net debt proceeds of $588 million in the nine months ended September 30, 2013.
 
Total debt at September 30, 2014 consisted of the following (amounts in thousands):
 
$400 million senior notes due 2017
  
$
400,000
  
$800 million senior notes due 2018
    
800,000
  
$500 million senior notes due 2019
    
500,000
  
$500 million senior notes due 2022
    
500,000
  
Senior Subordinated Convertible Notes
    
7,928
  
Revolving Facility
    
155,000
  
Other
    
6,620
  
Total debt
    
2,369,548
  
Less current portion
    
11,074
  
Long-term debt
  
$
2,358,474
  
 
The interest rate on borrowings under our $1.5 billion credit facility is calculated based upon various recognized indices plus a margin as defined in the credit agreement. At September 30, 2014, there were $155 million of outstanding borrowings under the facility.  At September 30, 2014, we had $6.6 million of other debt in the form of capital leases, several smaller facilities that allow for borrowings or the issuance of letters of credit in various foreign locations to support our non-U.S. businesses and $38 million of outstanding letters of credit.
 
Cash and short-term investments at our foreign subsidiaries at September 30, 2014 totaled $495 million.  Repatriation of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes.  We consider this cash to be permanently reinvested.  We expect existing cash and cash equivalents, cash generated by our U.S. operations, our unsecured credit facility, as well as our expected ability to access the capital markets, will be sufficient to fund operating requirements in the U.S. for the foreseeable future.
 
We were in compliance with all debt covenants related to our credit facilities throughout the nine months ended September 30, 2014.
 
Net working capital (total current assets, excluding cash, less total current liabilities, excluding debt) was $318 million at September 30, 2014 compared to $282 million at December 31, 2013, reflecting increases in working capital due primarily the timing of income tax payments and an increase in unbilled receivables which was offset in part by an increase in deferred revenue. Total debt was $2.37 billion at September 30, 2014 as compared to $2.46 billion at December 31, 2013, due to the use of operating cash flows to reduce outstanding debt.   Our leverage is shown in the following table (in thousands):
 
 
  
September 30, 2014
    
December 31, 2013
  
Total Debt
  
$
2,369,548
    
$
2,464,852
  
Cash
    
(564,112
)
    
(459,720
)
Net Debt
    
1,805,436
      
2,005,132
  
Stockholders' Equity
    
4,648,224
      
4,213,050
  
Total Net Capital
  
$
6,453,660
    
$
6,218,182
  
 
                
Net Debt / Total Net Capital
    
28.0
%
    
32.2
%
 
At September 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Capital expenditures of $30 million and $33 million were incurred during the nine months ended September 30, 2014 and 2013, respectively. We expect capital expenditures for the balance of the year to be comparable to prior years as a percentage of sales.
17
There have been no significant changes to our contractual obligations from those disclosed in our 2013 Annual Report on Form 10-K filed on February 21, 2014.
 
Outlook
 
Current geopolitical uncertainties could adversely affect our business prospects. A significant terrorist attack or other global conflict could cause changes in world economies that would adversely affect us. It is impossible to isolate each of these factor's effects on current economic conditions. It is also impossible to predict with any reasonable degree of certainty what or when any additional events may occur that also would similarly disrupt the economy.
 
We maintain an active acquisition program; however, future acquisitions will be dependent on numerous factors and it is not feasible to reasonably estimate if or when any such acquisitions will occur and what the impact will be on our business, financial condition and results of operations. Such acquisitions may be financed by the use of existing credit lines, future cash flows from operations, the proceeds from the issuance of new debt or equity securities or some combination of these methods.
 
We anticipate that our recently acquired companies as well as our other companies will generate positive cash flows from operating activities, and that these cash flows will permit the reduction of currently outstanding debt. However, the rate at which we can reduce our debt during 2014 (and reduce the associated interest expense) will be affected by, among other things, the financing and operating requirements of any new acquisitions and the financial performance of our existing companies; and none of these factors can be predicted with certainty.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See "Item 7A - Quantitative and Qualitative Disclosures about Market Risk," in our 2013 Annual Report on Form 10-K filed on February 21, 2014. There were no material changes during the nine months ended September 30, 2014.

ITEM 4. CONTROLS AND PROCEDURES
 
As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report ("Evaluation Date"). This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation as of the Evaluation Date, these officers have concluded that the design and operation of our disclosure controls and procedures are effective.
 
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There were no changes to our internal controls during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Information pertaining to legal proceedings can be found in Note 10 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report, and is incorporated by reference herein.

Item 1A. Risk Factors
 
For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 as filed on February 21, 2014 with the SEC. See also, "Information about Forward-Looking Statements" included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

In Item 1A of our Annual Report we disclosed that our operating results could be adversely affected by a reduction of business with our large customers, as we derive a significant amount of revenue from large customers in some of our businesses. The loss or reduction of any significant contracts with any of these customers could materially reduce our revenue and cash flows. Additionally, many of our customers are government entities. In many situations, government entities can unilaterally terminate or modify our existing contracts without cause and without penalty to the government agency. In July 2014, Puerto Rico passed the Public Corporation Debt Enforcement and Recovery Act which may impact the future prospects of our customer, the Puerto Rico Highways & Transportation Authority.  At the present time, we believe that existing contracts and payable obligations will be honored.
 
 
18
Item 6. Exhibits
 
31.1
 
Rule 13a-14(a)/15d-14(a), Certification of the Chief Executive Officer, filed herewith.
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a), Certification of the Chief Financial Officer, filed herewith.
 
 
 
32.1
 
Section 1350 Certification of the Chief Executive and Chief Financial Officers, filed herewith.
 
 
 
101.INS
 
XBRL Instance Document, furnished herewith.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document, furnished herewith.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document, furnished herewith.
 
 
  
  101.PRE
 
  XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Roper Industries, Inc.
 
/s/ Brian D. Jellison
 
Chairman of the Board, President,
October 31, 2014
Brian D. Jellison
 
and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
/s/ John Humphrey
 
Chief Financial Officer and
October 31, 2014
John Humphrey
 
Executive Vice President
 
 
 
(Principal Financial Officer)
 
 
/s/ Paul J. Soni
 
Vice President and Controller
October 31, 2014
Paul J. Soni
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

20

EXHIBIT INDEX
TO REPORT ON FORM 10-Q


 
Number
 
Exhibit
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a), Certification of the Chief Executive Officer, filed herewith.
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a), Certification of the Chief Financial Officer, filed herewith.
 
 
 
32.1
 
Section 1350 Certification of the Chief Executive and Chief Financial Officers, filed herewith.
 
 
 
101.INS
 
XBRL Instance Document, furnished herewith.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document, furnished herewith.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document, furnished herewith.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21