Roper Technologies - 10-Q quarterly report FY

Financial Condition, Liquidity and Capital Resources

Net cash provided by operating activities was $78.5 million in the second quarter of 2007 as compared to $48.4 million in the second quarter of 2006, a 62% increase. This change is due to the higher income levels from the prior year quarter, improved receivables collections, and reduced inventory levels. Cash used in investing activities during the current and prior year quarter was primarily business acquisitions. Cash provided from financing activities was primarily revolver borrowings for acquisitions of $11.6 million and $9.4 million in the three month periods ending June 30, 2007 and 2006, respectively. Cash used in financing activities was term loan principal payments and dividends in both the current and prior year quarters. Principal payments of $16.4 million were made on the Company’s $655.0 million term loan in accordance with the terms of the credit facility, as compared to $8.2 million in the second quarter of 2006.

For the six month period ended June 30, 2007, net cash provided by operating activities was $135.6 million in as compared to $105.8 million in the six month period ended June 30, 2006, a 28% increase. This increase is primarily due to the higher income levels over the prior year period, and slightly improved working capital metrics. Cash used in investing activities during the current and prior six month periods was primarily for business acquisitions. Cash provided by financing activities during the current and prior year six month periods was primarily related to debt borrowings for acquisitions. Cash used in financing activities during the current and prior year six month periods was for paydown on our revolving credit line and scheduled payments on our term debt and dividend payments. $56.4 million of revolver debt was borrowed during the six months ended June 30, 2007 as compared with $12.9 million paid in the prior year period. In the current year, principal payments of $32.8 million were made on the Company’s $655.0 million term loan in accordance with the terms of the credit facility, as compared to $16.4 million in the six months ended June 30, 2006.

Net working capital (total current assets, excluding cash, less total current liabilities, excluding debt) was $315.0 million at June 30, 2007compared to $270.3 million at December 31, 2006, reflecting increases in working capital due to 2006 and 2007 acquisitions and a higher level of sales during the second quarter of 2007. In addition, we had approximately $9 million of unbilled receivables at quarter end that were subsequently billed and collected in July 2007. Total debt was $1.05 billion atJune 30, 2007 compared to $1.03 billion at December 31, 2006. The leverage of the Company is shown in the following table:

Our debt consists of a $1.055 billion senior secured credit facility with a diverse group of participating financial institutions and banks, and $230 million of senior subordinated convertible notes. The credit facility consists of a $655 million amortizing term loan with a five year maturity and a $400 million revolving loan with a five year maturity. Our senior subordinated convertible notes are due in 2034. At June 30, 2007, our debt consisted of the $230 million in senior subordinated convertible notes, $557.4 million of term loans and $259.0 million in outstanding revolver debt under the credit facility. The Company also had $54.0million of outstanding letters of credit at June 30, 2007. We expect that our available additional borrowing capacity combined with the cash flows expected to be generated from existing business will be sufficient to fund normal operating requirements and finance additional acquisitions. We also have 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. In total, these smaller facilities do not represent a significant source of credit for us.

The Company was in compliance with all debt covenants related to our credit facilities throughout the six month period ended June 30, 2007.
 

At June 30, 2007, 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 $12.7million and $16.8million were incurred during the six month periods ended June 30, 2007 and 2006respectively.Thedecrease over the prior year period was primarily due to the non-recurrence of $4.8 million in expenditures related to our new facility in Houston in the first quarter of 2006. We expect capital expenditures for the balance of the year to be comparable to prior years asa percentage of sales.

Recently Issued Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure and report many financial instruments and certain other assets and liabilities at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce the complexity in accounting for financial instruments and to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing SFAS No. 159 to determine whether it will have any impact on our Consolidated Financial Statements upon adoption.
 
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.
 
The Company adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” on January 1, 2007. This Interpretation requires the Company to recognize in the consolidated financial statements only those tax positions determined to be “more likely than not” of being sustained upon examination based on the technical merits of the positions. As a result of the adoption of FIN 48, the Company recorded an increase of $3.3 million in the liability for unrecognized tax benefits, which was accounted for as a decrease to the January 1, 2007 balance of retainedearnings. At January 1, 2007, the Company had $21.3 million of unrecognized tax benefits of which, if ultimately recognized, $10.1 million will reduce the Company’s tax rate in the year the benefits are recognized. There have been no material changes in the unrecognized tax benefits since January 1, 2007. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company accrued $1.7 million for interest and penalties at January 1, 2007. The change in accrual for interest and penalties for the three months ended March 31, 2007 was not material. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state, city andforeign jurisdictions. The Company’s federal income tax returns for 2003 through the current period remain subject to examination and the relevant state, city and foreign statutes vary. There are no current tax examinations in progress where the Company expects the assessment of any significant additional tax in excess of amounts reserved.

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 will 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 at a pace consistent with that which has historically been experienced. However, the rate at which we can reduce our debt during 2007 (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.

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 SEC or in oral statements made to the press, potential investors or others. All statements that are not historical facts are “forward-looking statements.” The words “estimate,” “project,” “intend,” “expect,”“should,” “will,” “plan,” “believe,” “anticipate,” and similar expressions identify forward-looking statements. These forward-looking statements include statements regarding our expected financial position, business, financing plans, business strategy, business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, in each case relating to our company as a whole, as well as statements regarding acquisitions, potential acquisitions and the benefits of acquisitions.
 
Forward-looking statements are estimates and projections reflecting our best judgment and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Examples of forward looking statements in this report include but are not limited to our expectations regarding our ability to generate operating cash flows and reduce debt and associated interest expense 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:
 

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risks on our outstanding borrowings, and we are exposed to foreign currency exchange risks on our transactions denominated in currencies other than the U.S. dollar. We are also exposed to equity market risks pertaining to the traded price of our common stock.
 

At June 30, 2007 we had a combination of fixed-rate borrowings (primarily our $230 million senior subordinated convertible notes and $250 million of our term loan with accompanying interest rate swaps) and variable rate borrowings under the $1.055 billion credit facility. Our $655 million 5-year term note under this credit facility was variable at a spread over LIBOR. Any borrowings under the $400 million revolving credit facility have a fixed rate, but the terms of these individual borrowings are generally only one to three months. To reduce the financial risk of future rate increases, the Company entered into a $250 million fixed rate swap agreement expiring March 13, 2008. At June 30, 2007, the prevailing market rates were between 1.6% and 2.4% higher than the fixed rate on our debt instruments.

At June 30, 2007, Roper’s outstanding variable-rate borrowings under the $1.055 billion credit facility were $566.4 million. An increase in interest rates of 1% would increase our annualized pre-tax interest costs by approximately $5.7 million.
 

Several Roper companies have transactions and balances denominated in currencies other than the U.S. dollar.Most of these transactions or balances are denominated in Euros, Canadian dollars, British pounds, or Danishkrone. Sales by companies whose functional currency was not the U.S. dollar were 27.8% of our total second quarter 2007sales and 66.6% of these sales were by companies with a European functional currency. The U.S. dollar weakenedagainstEuropean and Canadian currenciesduring the second quarter of2007 versus December 2006,and was relatively stable compared to other currencies. The difference between the current quarter operating results for these companies translated into U.S. dollars at exchange rates experienced during second quarter2007 versus exchange rates experienced during secondquarter2006 led to increased operating profitsof approximately 1%. If these currency exchange rates had been 10% different throughout the second quarter of2007 compared to currency exchange rates actually experienced, the impact on our net earnings would have been approximately $2.7million.

The changes in these currency exchange rates relative to the U.S. dollar during the second quarter of2007 compared to currency exchange rates at December 31,2006 resulted in an increase in net assets of $18.0 million that was reported as a component of comprehensive earnings, $11.8million of which was attributed to goodwill. Goodwill changes from currency exchange rate changes do not directly affect our reported earnings or cash flows.

The trading price of Roper's common stock influences the valuation of stock option grants and the effects these grants have on net income. The stock price also influences the computation of the dilutive effect of outstanding stock options to determine diluted earnings per share. The stock price also affects our employees' perceptions of various programs that involve our common stock. We believe the quantification of the effects of these changing prices on our future earnings and cash flows is not readily determinable.

ITEM 4.      CONTROLS AND PROCEDURES

As required bySECrules, 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 Effective Date, these officers have concluded that the design and operation of our disclosure controls and procedures are effective.

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.

Disclosure controls and procedures are our controls and other procedures 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 theSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company 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.

Part II.          OTHER INFORMATION

Item 1A.           Risk Factors
 

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion in Item  1Aof Roper’s Annual Report on Form 10-K for the fiscal year ended December 31,2006 as filed with the SEC on March 1, 2007. See also, “Information aboutForward-Looking Statements” included in Item 2 of this Quarterly Report on Form 10-Q.