ROPER TECHNOLOGIES INC annual report, FY2014

Roper Industries, Inc. (identified in the request as Roper Technologies Inc.) — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing’s registrant name is Roper Industries, Inc.; the filing text does not identify the company as Roper Technologies Inc.

Business context

Diversified technology company serving niche markets through four segments: Medical and Scientific Imaging, RF Technology, Industrial Technology, and Energy Systems and Controls. Its products and services include software and SaaS, medical and imaging products, toll and traffic systems, industrial equipment, and energy controls. The company emphasizes operating improvement and growth through acquisitions.

Financial performance and liquidity

Net cash used in investing activities was $348.1 million, chiefly for acquisitions; financing activities used $298.1 million, primarily for debt repayment and dividends. Capital expenditures were $37.6 million. Year-end cash less total debt was approximately $1.604 billion of net debt, calculated from reported figures. The company had a $1.5 billion undrawn revolving facility and was in compliance with its debt covenants. Net working capital, as defined in MD&A excluding cash and debt, was $285 million versus $282 million in 2013; selected financial data reports working capital of $884.2 million using a different presentation.

Fourth quarter: Sales were $946.1 million versus $889.2 million in Q4 2013; operating income was $283.7 million versus $258.1 million; net earnings were $185.9 million versus $165.7 million; diluted EPS was $1.84 versus $1.65.

Segments and changes versus prior year

• Medical and Scientific Imaging: Sales rose 20% to $1.080 billion, including $91 million from acquisitions and 10% organic growth. Operating margin increased to 34.8% from 29.7%, helped by mix and sales leverage.
• RF Technology: Sales rose 5% to $950.2 million, led by toll and traffic, university card systems, and security solutions. Operating margin increased to 28.5% from 28.0%; gross margin declined on product mix.
• Industrial Technology: Sales rose 6% to $827.1 million, with 7% organic growth partly offset by currency. Operating margin increased to 29.9% from 28.6%, including the non-recurrence of a $9.1 million 2013 warranty charge.
• Energy Systems and Controls: Sales rose 6% to $691.8 million, including 5% organic growth. Operating margin increased to 29.3% from 28.2%.

Net orders increased 5.7%, while year-end backlog declined 1.3% to $1.041 billion. The largest backlog decrease was in Industrial Technology, down 20%.

Outlook, risks, contingencies, and unusual items

• Management expected positive operating cash flows to support scheduled debt reduction, while noting that acquisitions and operating performance could affect the pace. No specific earnings or sales guidance is provided. Planned capital expenditures were expected at 1.0%–1.5% of annual sales.
• Management expected the effective tax rate to rise in 2015, primarily because a greater share of pretax income was expected in higher-tax jurisdictions, especially the U.S.
• 2014 acquisitions—Foodlink, IPA, and SHP—cost $303 million in cash and added $208 million of goodwill; purchase-price allocations were preliminary. After year-end, the company acquired Strata Decision Technology and Softwriters for $360 million cash.
• Currency translation reduced 2014 comprehensive income by $115.0 million net of tax; the related pretax decrease in net assets was $118.9 million, including $50.5 million of goodwill. Management said operating profit fell by less than 1% from currency movements.
• Goodwill was $4.711 billion, or 56% of total assets. No impairment was indicated in the 2014 annual review; impairment remains a risk if performance, market conditions, or valuation assumptions weaken.
• Key exposures include indebtedness and covenant restrictions, acquisition integration and liabilities, foreign exchange and international operations, cyclical energy and industrial markets, customer and government-contract concentration, product liability and warranty claims, suppliers, environmental obligations, cybersecurity, and intellectual property protection.
• Management reported no contingency accrual was necessary and no matter with a reasonable possibility of material loss. Asbestos-related claims remain pending, and the company said potential liability could not be determined; it intends to defend the claims.
• Other notable items: effective tax rate rose to 29.9% from 28.6%; stock-based compensation was $63.0 million; the 2014 year-end dividend was raised to $0.25 per share quarterly from $0.20.

Most important facts for investors to verify

• Whether reported 2014 growth and segment margin gains persist after separating organic growth from acquisitions and one-time items.
• Acquisition performance, final purchase-price allocations, integration costs, and the cash and debt implications of the $360 million post-year-end acquisitions.
• Debt repayment capacity, near-term refinancing or maturity needs, and the availability and covenant terms of the revolving facility.
• Backlog conversion and the continued decline in Industrial Technology backlog; backlog is limited to orders expected to be recognized within twelve months.
• Exposure to goodwill impairment, especially given goodwill’s size relative to assets and equity, and the sensitivity of valuation assumptions.
• Tax-rate expectations, foreign-currency effects, and the amount and accessibility of cash held by foreign subsidiaries, which management considers permanently reinvested.
• Developments in asbestos-related litigation, environmental matters, and the Puerto Rico Highways & Transportation Authority customer exposure.