John Humphrey - Chief Financial Officer Brian Jellison - Chairman, President and CEO Paul Soni - Vice President and Controller Rob Crisci - Heads, Planning and Investor Relations.

Matt Summerville - KeyBanc Deane Dray - Citi Research Steve Tusa - JPMorgan Joe Ritchie - Goldman Sachs Chris Glynn – Oppenheimer Jeff Sprague - Vertical Research Alex Blanton - Clear Harbor Asset Management.

Please standby. Roper Industries' Second Quarter 2014 Financial Results Conference Call will begin now. I will turn the call over to Mr. John Humphrey, Chief Financial Officer. Please go ahead..

Thank you, Tina, and thank you all for joining us this morning as we discuss results of our record second quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, who Heads our Planning and Investor Relations for us.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. In addition, we have prepared slides to accompany today's call, which are available through the webcast and also on our website at www.roperind.com. Next slide, we begin with our Safe Harbor statement.

During the course of today's call, we will be making forward-looking statements, which are subject to risks and uncertainties as described on this page and as further detailed in our SEC filings. You should listen to today's call in the context of that information.

Now if you'll please turn to slide three, today we will be discussing our income statement results for the quarter primarily on a GAAP basis. Prior period results are presented on an adjusted basis for comparison purposes.

A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation on our website. Now if you'll please turn to slide, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

After his prepared remarks, we will take questions from our participants.

Brian?.

Thanks, John. Good morning, everyone. So we open up here, if we look at our enterprise financial results for the quarter, they were once again truly outstanding.

We had all time record orders, record backlog, closing out the quarter, record revenue within the quarter, record net earnings in a quarter and of course, another record for EBITDA performance. Our revenue was up 13% in the quarter on a GAAP basis but 10% on an adjusted basis, which is the way we really look at the quarter.

Organic revenue was quite substantial plus 8%. For us it was very broad based, all four segments were up organically, which was nice to see, but certainly, medical and RF had blow up kind of performance on an organic basis. Our gross margins just continued to go up.

It is a remarkable achievement, up 120 basis points to 59.1%, which is really why we call a Roper Technologies this days and not Roper Industries. Operating profits up 18% to $247 million in the second quarter.

Our operating margins up another 180 basis points, clearly above the gross margin improvement and 120 basis points, and operating margin came in at 27.9%, which includes a lot of amortization too. Hope so you add that on top of, I know, the number is even stronger.

Our DEPS in the quarter on an adjusted basis were $1.56 GAAP against last year’s adjusted number were up 19% on a GAAP basis, GAAP to GAAP were up 41%. And operating cash flow in the quarter was an additional $141 million, which was 14% better than the prior year.

So we are very well-positioned to show record year in 2014 for the company along with delivering just an outstanding second quarter. Next slide, if we look at the income statement, you can see that even though we had a very strong revenue quarter up 10% with organic gain. Our book-to-bill was virtually 1, little bit of lumpiness in RF with TransCore.

We will talk about but that’s not unusual. If we look at the gross profit as we said it went up from 57.9% in the second quarter of last year to 59.1% in this quarter and operating margin went up from 26.1% last year to 27.9% this year, interest expense was a tagged less and our tax rate was just little bit lower than it was a year ago 70 bps.

Net earnings we talked about it $156 versus $131 were really again broad based on a segment by segment basis. Nest slide, here if we look at the EBITDA growth and the trend in the company.

We tend to show you a couple years of trailing results at a time, pretty well served to remained people, if you go back to 2003, our EBITDA was about $125 million, not the $1,153 billion that you see now on a trailing basis. And our EBITDA margins were in the high-teens, not the 33.5% you see today.

So that’s why the company really has become much more of the technology company with higher margins, more sustained than continued performance.

And these very high margins up 420 basis points on an EBITDA basis and the last two years alone really allow us to reinvest internally for growth at a much faster pace than Roper would have been able to do 10 years ago or even five years ago.

If you look at the gross margins, which were probably I don’t talk enough about, you can see in 2012, trailing 12 months performance was 54.6% gross margins. Back in the 10 years ago gross margins were always higher at Roper say 50% or so. But, certainly, didn’t have the kind of reinvestment in gross strategy back than that we do today.

450 basis point improvements in gross margin is something we are very proud of over the last two years.

Next slide, if we look at the cash flow, cash flow in the quarter, $414 million of operating cash flow and $130 million free cash flow, really resulted from the fact that we had very little cash tax due in the first quarter about $25 million and we had $132 million of cash tax here. As economics patriots we are. So you wind up with quite a high.

Now the tax paid in second quarter. It’s about $107 million more than it was in the first. Those things tend to level themselves out over the course of the year. Our first half operating cash flow, you could see represents 21% of revenue at $353 million and our free cash flow at $333 million is up 15% over last year.

We expect outstanding cash conversion throughout remainder of the year and our total operating cash flow to revenue will be as it has been in years past continuing to grow.

In the metric you see here, $845 million of operating cash in the last 12 months and that’s up from $620 million, just two years ago, so 36% improvement in operating cash flow during that two-year period. Next slide, we look at the asset like business, again, astonishingly good numbers.

Two years ago we were below 10% and people were marveling about our ability to get there. But we certainly haven’t given up any of our internal strategy, so you can see we reduced inventory from 7.2% of revenue two years ago to 6% now and our payables and accruals have expanded from what they were two years ago.

You can see that the networking capital the way we define it inventory plus receivables minus payables on accrual has dropped from 9.5% to 6.2%, so that’s 35% improvement in just two years. On next slide, if we look at the balance sheet, the strong financial performance always gets best scene, when you compare your balance sheets.

The year ago our cash was $375 million, today its $565 million and our undrawn revolver is virtually at -- they just very little grown against it. So it gives us a cash and undrawn revolver flexibility to invest $2 billion.

More importantly, you can see the gross debt has dropped by $513 million even after doing the $1 billion MHA acquisition last year. So we continue to pay down debt pretty quickly.

The gross debt-to-EBITDA number is below 2, 1.9, our willingness to have a debt level than that our debt tolerances is certainly much higher than the kind of number you see here and that coupled with the reality of having a couple of billion dollars to deploy.

We would expect to have pretty rapid cash deployment aggressively over the next few quarters. We would -- we think you will see some things now and some things later in the year and much larger things probably next year. Next slide, here we look at the segment detail for each one of the business.

Next slide, looking at energy systems and controls, you can see was up organically 5%. Again had strong revenue out of our compressor controls business driven by both midstream and downstream installations. We had decent growth in our instruments and consumables business and service for refineries.

And then we had much better demand certainly kind of resurgence in Canada with oilsand activity and various things that have to do with. Our pressures sensors we have and things that have to do with these line in shutoff valves and what have you. Our book-to-bill in the second quarter, even though organic was up 5% was still at 1%.

You can see total revenue was up 7%, a little bit of contribution from small acquisition we made last year. Operating profit up 8% and OP margin improved little bit to 27%. Organic growth in the second half of the year for energy, we think to be pretty strong in the third quarter, probably a little less than that in the fourth quarter.

But over the balance of the year should be fine. We do have this sort of mid single-digit outlook for the segment for the entire year. I would be better if we saw return to large project activity that’s pretty slow you can see that with everybody that’s in the oil and gas side of activity.

The geopolitical ambiguity that could get worse, could create project timing issues and slow decision making. Notwithstanding that, everything else is strong, so the aftermarket products doing very well, field service is also doing well.

We have an easy comp in the second half of this year, because Zetec will be back to its sort of normal type of activity, which will be substantial increase over last year’s this point third quarter.

And the oil and gas end markets remained pretty favorable, particularly with the oilsands getting stronger and the prices associated with Canadian products going up. Next slide, we look here industrial technology you’ll see we had continued great results out of Neptune. They grew revenue and also had better margins in the quarter. U.S.

was particular strong for Neptune and Neptune was awarded an Amazon Web Services Award for what’s call the City on the Cloud Invocation Challenge.

They have a program called N_SIGHT which is trademark N_SIGHT IQ which helps municipal water companies manage the flood of water data that they get, which there sort of really equip to deal with and this allows us either to host or provide software that makes it easer for them to understand the data that they have and respond the questions about from users.

I believe there is a, I think, you can see YouTube video about that too. Roper Pumps continues to have great business in the Directional Drilling Applications that we’ve talked about in the past. They continue to gain share from other people.

And our Material Analysis business stores at Denmark had particularly strong equipment orders and sales of their Hardness Testers which is good news on that handle of their lower margin items and it did impact their margin some as equipment grew much faster than the consumables and that’s something we think will rectify itself in the second half.

I would point out Industrial Tech which had operating margins of 29.5%, which are beyond world-class and they were up 100 basis points sequentially from our first quarter operating margins. In the second half of the year, we think we’ll have little bit better organic growth in the fourth quarter than in the third quarter.

Some of those businesses tend to get year end benefits. We expect for the balance of the second half to have kind of mid single-digit revenue growth in the segment, but with very strong margins and excellent cash contribution from the segment in the second half.

Two double-digit growth type things are, our Cornell pump business is going to have very strong second half as the rental market continues to add capacity for pumping stations, we are tracking back alive and well.

And Roper Pumps’ strong demand and increased capacity, means we will grow double digits there and we will have better margins as they get leverage out of that growth, certainly stronger than it was in the second half of 2013. Next slide.

Here if we look at the RF Technology businesses, everything in here is quite spectacular, although we had fairly soft booking -- book-to-bill period, the segment came in at 0.96, which is certainly not unusual. But everything else was really just amazing.

We had an absolute all-time record for TransCore in terms of revenue for the toll and traffic operations, the projects that were underway in Florida, Texas, and California, Virginia all performed very well.

Actually Q2 enjoyed some pull-in from project execution effectiveness that we would have not expected until end of the third quarter, so that benefited us in the second quarter. We had some really important wins in the area.

We got San Francisco Bay area, expressly in convergence, which were extremely hard thought by everybody in the industry and we were selected, that will be over a $50 million project. We got the Massachusetts Department of Transportation back off extended that’s a big contract over a decade 250 million bucks.

We’ve got the Henry Hudson Bridge which is very strategic thing because New York, New Jersey tolling is the largest agency in the country and that’s not an agency we have had much with.

So, again, our technology being preempted allows us to kind of get a foot in the door there which will be a -- we think forward predictor of how well we are going to do there over the next several years. We had great tag shipments in the second quarter which benefited the revenue which you can see is up 10%, OP up 17% in the quarter.

We also had some strong sales out of our RF security products for all of us who go through airports and look at the TSA agents, who probably don’t know that now everyone will have little pendent so people know little bit more about what’s going on there and we received the award for those pendants which will start to ship here in the second half of the year.

Our SaaS business is continued to grow so to modestly in the quarter, but they are growing.

The College & University Security Projects though were little lower than last year, because we have finished North Eastern University which was a very big install, profitability was actually better for CBORD because the installation business is always carries a very modest margins but the revenue was not up a lot in the quarter for that.

In the second half of the year we will expect kind of low signal-digit growth. We’ve got a couple of headwinds that are probably going to pull down our overall organic growth but we’ll grow organically in the half of 2014.

Our Toll and Traffic projects are going to continue to remain at high levels, but we saw a lot of those last year, so the comps will be a little bit more difficult even though the numbers will be high. And iTrade was able to make an acquisition that closed on July 2nd called Foodlink.

This was really a technology acquisition that reminds us of United Toll Services for TransCore.

And what they do is they provide the traceability sort of a farm to fourth basis, so we are from the grower if you will to the in-store purchaser of products, which are fresh and one wants to know where they came from and how long they have been in transit and all this traceability factors are things that iTrade could acquire from others but now will have its own technology, be able to do this makes it much easier for the stores to deal with iTrade on a broader network basis.

So we’re encouraged by that. Our next slide. We look at the Medical and Scientific Imaging segment. You can see it just continues to be spectacular. The organic growth in the second quarter is up 12% after being up 7% in the first quarter, suddenly led by medical. Sunquest had an all-time record quarter.

There is meaningful use implementation and our ability to approve Sunquest’s ability to execute really paying huge dividends now, lot of upgrades in the hospitals. And we continue to invest very aggressively internally in Sunquest to capture more of the anatomic pathology and genomic testing opportunities that we see ahead.

That’s lot of internal investment in there but we’re also very active in the acquisition pipeline area around those areas. We’ve had very strong performance at MHA with a lot of new members acquired for both long-term care pharmacies and long term care facilities that results in management area and facilities, that are encouraging for them.

We also had that double-digit growth at Verathon with new and enhanced products. There are several things we’ve talked about and in the second half, you’ll see this Titanium GlideScope which is kind of a break through product for certain applications. We’ll continue to drive that growth and enhance it in the second half.

Our Northern Digital business image-guided surgical had a phenomenal quarter and based on orders and their flow of activity looks to continue that throughout the second half of the year and Scientific Imaging continue to improve up kind of mid-single digits in the quarter on a revenue basis.

In the second half of the year, we probably come in just under double-digit growth, just with imaging continues to be modest grower, where as the rest of medical we expect to have double-digit growth.

New and enhanced medical products and measurement were about Verathon’s titanium GlideScope being the biggest single product but there are actually quite a few others and enhancement made to our BladderScan product. Both Sunquest and MHA will deliver double-digit growth in the second half and that certainly means more than 10%.

And then I would say -- I would expect that you’d see announcements from us throughout the year about possible things and that will have occurred in the acquisition pipeline area. There is a lot of very attractive small companies that we’re working with and a few larger ones as well. So we’re very encouraged by what’s going on in the space.

Our next slide, if we look at the guidance update. Turn to next slide, we are increasing the full-year DEPS guidance from $6.22 on the low end of $6.27 and high end to $6.37. We think revenue grow should come in for the four year around the 8% to 9% and organic growth should be around 6% to 7%.

Now the organic growth when we started the year at the end of 2013, January quarter, we are established organic guidance of 4% to 7% and then as we went into the second quarter, we move the organic guidance up to 5% to 7%, as we had -- continue to see more strength.

And then now we’re moving it up to 6% to 7% for the full year with the 8% growth, we enjoyed in the second quarter. So the organic growth has been very strong through out the year for us. Tax rate for the full year, we think it will be around 31%, it was 30.4%, I believe in Q2.

We have some FIN 48 roll-offs that occurred in the third quarter last year that’s probably going to make it difficult to have a tax rate that’s as low as the 30.3%, we enjoyed last year. So we’re going in with the assumption it will be about 32% which will cost us a few pennies in the quarter.

Revenue growth in the third quarter, those should be up 5% or 6%. So we established DEPS guidance here at $1.49 to $1.53 and I think our revenue in the third quarter will be somewhat similar, little bit above hopefully in Q3 which is sort of a typical very new pattern for us but certainly up nicely from the third quarter of last year. Our next slide.

If we look at the summary for the second quarter, it was just an extraordinarily great quarter for us. In addition to having all these nominal numbers of records with orders and revenue and backlog and net earnings and EBITDA, the variables were really good with the revenue up 10%, gross margin up 120 to 59.1%, operating margins up 180 bps to 27.9%.

The leverage was just phenomenal in the quarter. For those of you who are without your calculator, you’ll see our operating leverage was about 46% in the second quarter which is why getting any nominal growth is so powerful here at Roper.

Our EBITDA was up 14% to $295 million and we’ve raised our full year guidance and we had just an excellent first half performance with these record margins of organic growth. We think our full year cash conversion will again be outstanding like it was last year.

And our current acquisitions discussions remain mostly in the medical and software, they are very active with lots of opportunity and have very powerful balance sheet to take advantage of them. So with that, John, I think we’re positioned for both a record year and questions from the investment community..

Okay, Tina, can you go and start the question-and-answer period?.

Yes. Thank you. (Operator Instructions) We’ll take our first question from Matt Summerville with KeyBanc..

Good morning. Couple of questions, first, Brian, can you talk about the sustainability you see in the growth you’re experiencing in Sunquest and MHA just looking out over the next couple of years? And also sort of fold into that, what you think is going on with market share. And I obviously recognize there is a larger recurring revenue component here.

So I just want to get a feel for what you think these normalize out?.

Well, we’re going to expect double-digit growth for some time out of Sunquest that areas that we’re taking them into are very exciting areas. There is a lot of opportunity in the short run.

You get the benefit from meaningful use requirements to take care of government regulation and in the long run, you get many new forms of testing with us having just a very unique way to capture that.

So we’re very positive about the long-term prospects for Sunquest, whether it turns out to be a high single-digit grower over the next five years or modest double-digit grower or substantially more, it’s hard to say. It generates lot of cash.

It gives us a lot of money to add from acquisition view point and certainly when I think about what we’ll do organically there, plus the acquisitions we’re going to make in that space, it will be one of those, if not the most exciting business we have along with MHA..

And just as a follow-up, you’ve definitely seen more incrementally upbeats on you M&A prospects looking out over the next couple of quarters.

Can you talk about on the relative size of the assets you’re looking to acquire the multiples and that you might -- would be willing to pay here knowing this is a tough environment?.

Well, we could but it wouldn’t be our interest to what sellers know what we might be willing to pay for anything about. So -- Matt, it’s hard to say but we said generally we like to not pay over 10 or 11 times first year EBITDA, that’s something that’s absolutely true.

Yeah, sometimes, you maybe a little higher and sometimes you maybe lower but if you look at a blended basis, we think we need to be investing at a clip that’s $1 billion to $1.5 billion a year and sometimes we’re ahead of that, behind it and there will be different price values based on the kind of cash flows that we can see from businesses.

But over time, we still kind of think of modeling our acquisition growth with debt-to-EBITDA, somewhere around 3 or less, could be higher from time to time and looking to have a blended acquisition first year number around 11 but it could be higher.

And we’re trailing -- selling in a trailing 15 times enterprise value multiple and the people that are like us in market place, many of them are 20 to 25 times. So these are very high value to assets.

But I would have to say that we’re not seeing difficulty again in what we think it will be our ability to close transactions in the next several months, having to do with pricing. I think pricings are high but rationale..

Great. That’s all I need. Thanks Brian..

We’ll take our next question from Deane Dray with Citi Research..

Thank you. Good morning everyone..

Hey, good morning Deane..

While we’re on the topic of M&A, just if you would clarify one point here Brian because definitely you’re standing little bit more positive in your ability to close deals.

So what’s changed in past quarter in terms of your being more optimistic here? It didn’t sound like pricing has changed but is it the availability of assets and more active discussions but certainly you can see something has changed?.

I’d like to say that we like to mix the things that we’re involved with and we feel like we’re making a lot of progress and talking to people we haven’t decided whether they’re ready to engage or not. So that all feels pretty good. Usually, when we get -- as we get further and further down the line, there is a lot of people that have an orientation.

They wanted to get something done before the end of the year. So it’s getting closer than the end of the year and there is a kind of seasonality that probably shouldn’t be there that is. And the things that we’re involved with now that we really like, more diligence we do the better, we feel about them. And so those are all encouraging.

And there is just a lot to say, I think that you’ve got unbelievably powerful management teams in some of these arenas. In medical arena, and some of the software arena, so we have that really give us an ability to make bolt-on things for these guys that frankly we didn’t have before we have these two big legs in-house.

And so when you get back to being able to pick up some really great businesses that not each one is a $1.5 billion that we have to drive, it increases your confidence about being able to execute and deploy cash. We need to deploy cash in the next year.

We’re not interested in sitting on a balance sheet with gross debt-to-EBITDA at 1.9 or net debt at 1.5. That’s in our view not acceptable..

Great. That’s helpful. And could you clarify on the RF business, you mentioned there were some poll-ins related to project effectiveness.

Just kind of flash out that point, what were the businesses and can you quantify that portion that was build in?.

It’s pretty much all the TransCore project businesses which John, if you want to give Dean..

Yeah. So we have a number of projects there underway in Virginia as well as in Florida. I don’t really think of them as poll-ins. It’s just that the revenue was recognized in the second quarter. We probably would have expected a little bit at the end of the third quarter.

It wasn’t anything we tried to do but just because of the effectiveness of completing and getting milestones on those projects with a little more revenue to what we would have expected for the second quarter..

Would that be reflected in lower third quarter or the TransCore business or would we not see that blip?.

No, there is probably not as much growth as what we would have thought three months ago. So we had a little more in second quarter, may be a little less than the third quarter but still for the year, we can -- we continue to see our total traffic business performing extremely well with a very nice growth..

That’s helpful. Thank you..

We’ll take our next question from Steve Tusa, JPMorgan..

Hi. Good morning..

Hi. Good morning, Steve..

Just on the guidance, when you tweaked up the organic growth rate for the year up to the high end and you barely budge the EPS number with your conversion rates being extremely strong at 50% or so. I would have expected maybe at least a nickel or dime with the additional revenue. I don’t think there is a change in tax rate.

There is something on mix and margin, that’s going to change here in the second half?.

I wouldn’t say so. I mean, what it is, is that our range of particular outcomes on the organic roadside, and we just continue to move towards the higher end of that range because the performance that we’ve been able to post in both the first and the second quarter.

So we’ve been mostly done in the second quarter that won’t we expected, but the second half still looks very consistent with kind of what we’ve seen throughout the year. So we wouldn’t read too much into that..

Okay. And then I guess just on the same kind of lot of question here third quarter, I mean I think it’s been a while since your earnings were -- didn’t grow nicely from the second to third quarter, just kind of from season perspective yet. You’re kind of guiding something, that’s more flattish to even maybe down a little bit again.

Is there something -- is there a specific couple of businesses? Or on the margin front but that we should be looking at to justify that?.

Our test business is expected to be higher, so our taxes are expected to be higher in the third quarter than the one….

Right. Okay. So it’s just the tax dynamic, I think sales as well though. I mean, your sales are guided to be flat as well, flattish..

I think on a sequential basis, sales will be a little higher than they were in the second quarter, but not dramatically higher in the second quarter.

And part of that is, what we’re saying where you’ve got some revenue recognition in the second quarter around the TransCore project so that it does in fact taken away from the third quarter when that would be there.

So we look at two quarters together, our guidance is kind of about where it would have been for, although just we raised the bottom in quite a bit because it’s already in the back..

Right. Okay. That makes sense. And just one last quick on the acquisition front, I would say this is kind of the material change in what you’re saying versus what you’re saying several months ago when you really were talking about the pricing environment being very tough.

And then you talked about the size of the deals, some smaller ones closing near term, larger ones next year.

Why -- is it just takes a longer, the large ones longer to get done, or is that just something about how the way the M&A environment kind of unfold in cycles, where the smaller ones go first and then the larger ones? I don’t know I’m just kind of curious as to why the difference in comments around the size of the deals..

I don’t think that there is any seasonality related to the size. There is a desire for lot of people if there is a market with asset they want to get it done generally before the end of the year for lots of reasons. So there is an opportunity to close more towards the end of the year.

If you look at our history over time, you see a lot of the things that happen in the last quarter of the year.

In terms of the size of deals, I mean, most of the things that we’ve been looking at this year are relatively large, but we have so many more smaller things that we can tucked in to an MHA and to a Sunquest that we’ve been willing to look at those things, which frankly we would have not paid a lot of energy to that, because we would have thought that we didn’t need another $100 million business here and another $80 million business here unless we had a leadership team that can assimilate those in a very good way.

So we are encouraged by that and we’ve added an awful lot of strength to those two businesses in terms of people and leadership and capability. So that probably is as much of reason why I sound the way I do about that because of our confidence in the leadership in those companies.

And then at the beginning of the year there were -- there certainly were large deals that we were interested in that we thought we’re going at high-teens multiples from an adjusted EBITDA basis that our diligence wasn’t willing to buy into the adjustments.

So I think there is a little bit more clarity on the part of people about what they think they are going to do for the balance of this year and what they are going to do for the balance of next year, and diligence process is coming in with the more realistic outcome than guys trying to tell you this trees are going to the moon and they are not.

They are a little more realistic. And we said for long time that things like junk bonds and CCC debt and subordinated. This crazy, crazy, crazy risk factors relative to where they trade on the pricing and start to see some erosion in that finally. So that changes attitudes instantly..

Right. Great. Thanks a lot..

We will take our next question from Joe Ritchie, Goldman Sachs..

Hi, good morning, everyone..

Good morning, Joe..

So the first question I guess just talking about M&A, it does sound pretty encouraging how optimistic you are about getting the deals done. I guess, is there way you can quantify over the next 12 months how much you can get done? And clearly your balance sheet is in great shape. It seems like the pipeline is strong.

And the follow-on beyond that is the focus has really been on the medical and scientific imaging, is that squarely where you are looking at today? Or are there areas across the rest of your portfolio where you are looking at due diligence as well?.

Well, we look at a lot of different areas, but the reality is that the economic performance and cash on cash returns in medical and software just blow away the stuff that is generally available in energy or in any kind of core industrial business.

So we’ve enjoyed great growth in our pump businesses, record level growth, but they take a lot of assets. So they don’t provide same level of cash on cash return that our software businesses do or that our medical businesses do.

So we look at a lot of stuff, but the stuff that tends to get through the filter, we -- our overall company has a cash return on it, gross investment of over 100%.

If you look at probably the single best multi industry guide that companies in the 40s, so we see a lot of incoming stuff, but generally if they are going to have cash returns in the 20s, they are not going to join our family. So it’s just the dynamic of the economic performance of the businesses that keeps us so active in the medical and software.

And if you look at the next several quarters, over the next two years we view what expect we would -- we set for long time, we deploy $5 billion over the next four or five years, we would expect to deploy at least $1 billion to $1.5 billion every year, but it’s always lumpy about when that will happen.

So I think that there are few things that we will probably do relatively quickly, and then there will be other things that we will reach in over time whether that happens in the next six months or the next 12 months is impossible to predict.

And whether you do something for $100 million or you do something for a $1 billion on the timeline at which comes next is also impossible to predict because we will have offers to acquire things in which we are doing diligence, some which will be at a $100 million and others will be at a $1 billion. So we’re never in control of that dynamic..

That’s helpful color, Brian. And my follow-on question is around the drop to margins, clearly the incrementals were really strong this quarter at 46%. I think last quarter we were talking about an incremental range of 35%, 40%.

So my question was, was there anything specific about the quarter that helped use the margin this quarter and how should we then think about your incremental margins moving forward.

Is 35%, 40% the appropriate way to think about it or your business is really just kind of operating on all cylinders and maybe a higher range is appropriate at this time?.

No, I think we think 35%, 40% is appropriate guidance for people over time. We’re always going to have mix variance second quarter on our company. It gets a lot of renewals in the software business, gets a lot of things happen in Q2.

Q3 is really not as active Q4, then it gets to be really big, because all kinds of year end MRO and investments occur in the first quarter. I think our leverage was something like 37% and that was outstanding. This was extraordinary. And if it happens again, we will take it..

And just one follow-on question I guess on the margins for industrial tech. This is a margin that you call about a few things in the quarter. The operating margins have been down now for I think six quarters in a row on a year-over-year basis and things that it sounds like they are getting better at Cornell pump.

Should we start to see margin expansion in this business moving forward?.

I always react to that because I believe that the operating margins in the business are pretty close to the gross margin of everybody that they compete with. So thinking about the 29.5% operating margins in that business and wondering if they could get better, seems to me to be unrealistic, but we could deliver, you never know.

These are the best industrial businesses known to anyone, I’m aware of. If you got anybody that’s got margins that look like these, please send us..

All right. Thanks for taking my questions..

And our next question from Chris Glynn, Oppenheimer..

Hello..

A very nice year-over-year expansion. Just wondering how to think about the dynamic there of mix versus core incremental margins? Clearly volume helped, but we talked about mix a lot with this business in the past..

I’m sorry Chris.

The first part of your question we didn’t catch, so which particular segment are you referring to?.

Yeah. John, this is RF and historically as the margins have moved, mix has been a big part of the discussion. So I’m just wondering if there is a way to think about core volume leverage since you did have good volumes and the margins were up nicely..

Yeah. They’re really not a good way to think about that because of the vast difference in the underlying margin structure across this segment. The software business is the incrementals, they are coming much higher, particularly for their software renewals and the expansion.

Their software, if it’s installations, it’s lower, of course, on the toll and traffic side, you also have the similar dynamic in terms of whether it’s tags and readers, which because of the technology and the investment, they make they carry higher gross margins versus the service and ongoing work.

So I would love to give you the rule of thumb, but I just don’t have one, so based upon the relative contribution of our toll and traffic project business versus the technology that delivered through hardware or software..

Right. Yeah. Just struck me with toll and traffic leading to growth and then near record margins, but understood there is mix within that as well..

And if I just follow up on that, it was especially strong in terms of the delivery of hardware and tags, our Amtech business, which is part of toll and traffic just had a phenomenal quarter, particularly with the continuing tag upgrade project in Florida..

Okay. And then we got some good color on the long run expectations for MHA and Sunquest. Verathon has got some things going on.

Was wondering if we could get a similar commentary on Verathon Northern digital type businesses?.

So hope those have very good tailwind but for different reasons.

So in terms of Northern Digital and the technology that they enable for image-guided surgery, so they have just a preeminent position inside image-guided surgery for what they are able to accomplish and that’s just the continuing growth in that market and because of their dominant share, they continue to benefit from that.

Verathon on the other hand is really more of introduction of new and enhanced products when going through what is just a world class sales organization. And so therefore for different reasons, we expect both of those businesses to continue to have high-single-digit growth going forward for quite a long time I think..

Great. Thanks for the color..

We’ll take our next question from Jeff Sprague with Vertical Research..

Thank you. Good morning, gentlemen..

Hey, good morning..

Good morning. Two questions, Brian, we heard you complain about your tax rate through years actually and here is the discussion about M&A and the focus on healthcare and probably one of my question is going.

I mean, is there a way to do something a little bit more creative with the corporate structure, the tax structure of the company?.

The answer could be that there a lot of different things. As the topic (indiscernible) specifically today with a few other people, of course, are more and more inversions with the portion of the company or something. We’ve had a bright path to the door from people try to tell us about this, that and the other.

Usually, they’re talking of businesses that are really pathetic and so the concept of doing something purely for taxes is not something we’re going to do. It needs to be a solid business. It is hard for people to find businesses like ours.

It’s pretty unique to find a molding industry player, that’s got 59% gross margins and 33% EBITDA margins and has more than 20% cash to sales and find a partner with it. So we were still blessed with massive cash performance.

And so as interest cost goes up for other people that are doing acquisitions, prices come down and we’re the biggest beneficiary that’s because we self fund most of everything we do and if we went out far in a billion or two and at the moment it is pretty modest.

So we’re in a very, very good position, probably the best we’ve ever been in to do transactions.

And if something came along that was a partial inversion with one of the businesses we wouldn’t necessarily rejected, but putting one of our great businesses with something that’s not very exciting because you might be able to save some tax in an environment that’s pretty ambiguous, is not a good strategy in our view.

What we’ve said and we always say is there are to be a much better concept around corporate tax rates. And we’re having to pay a tax rate like ours when we compete in the global market is tough, but a lot of our businesses, even though 40% of the revenue is not in the United States.

A lot of the best performing cash generated businesses are in the U.S. and it’s a little harder to do something with that and meet the inversion requirements that the government has. Let alone the risk of retroactivity from the March number that you’re seeing politicians trying to bring there..

Right. And then as follow-up actually on cash flow, so you have the cash tax noise in the quarter, we know it’s year-to-date, I mean, your cash taxes may have been $30 million or so, about what kind of went through on a GAAP P&L. So not a huge GAAP there.

With the structural amortization benefit you have, I would have thought cash would have been a little bit better year-to-date.

Is there anything else going on working capital and the comment about closing the year strong, should we expect something kind of in the 130% kind of zip code for the cash conversion rate for the year?.

Yeah. I think the least that could -- we were expected to probably do a little bit better than 130%..

Thank you..

We’ll take our next question from Alex Blanton with Clear Harbor Asset Management..

Yeah. Good morning..

Hey, good morning, Alex..

Puts you on a new…..

Hello..

Hello, hello..

Hello..

Mr. Blanton, please go ahead..

Hello, I got cut out. Hello..

You’re still -- Alex you’re still on. We can hear okay..

Okay. I didn’t know whether I was on it, sorry. I want to go into a little more along the line that someone was talking about the decline in earnings from second quarter.

As to the reasons, I see the tax rate was 30.4% in the second quarter and that increased to 32%, it will cost you $0.04, but you’ve mentioned headwinds in TransCore and I don’t think, I heard anything more about that.

And also are there any acquisition expenses connected with FoodLink?.

So, any acquisition expenses that we have, were recorded in the second quarter, since we did close on that transaction on July 2. So I wouldn’t say that that’s material but we do expect to have some acquisition expenses in the third quarter, not related to FoodLink.

On the other hand you did obviously pickup on the tax rate increase in Q2 to Q3 and we just had a very strong conversion as Brian mentioned for the second quarter. Some of the software renewal did happen during that timeframe, carry along with them very high margins.

So we continue to see the second half, somewhere in 35% to 40% leverage on incremental growth and then so it’s very similar to what we have in the first half..

And what were the headwinds in TransCore that Brian referred to when he was talking about that segment but didn’t go into any detail on it?.

So really headwinds as much is timing associated with the milestones on a project. So as we mentioned, we had very strong performance for executing on those projects in Virginia and Texas and in Florida and other places and that comes along with some revenue recognitions, profit recognitions in the second quarter.

That looks a little bit better than what we would have expected for the third quarter..

Okay. Thank you..

You’re welcome Alex..

That will end our question-and-answer session for today’s call. I’ll turn the call back over to John Humphrey for closing remarks..

Thank you, Tina and thank you all for joining us this morning. And we look forward to talking to you at the end of our third quarter..

This does conclude today's conference. Thank you for your participation..