ROPER TECHNOLOGIES INC quarterly report, Q3 FY2009

Roper Industries, Inc. (now identified in the request as Roper Technologies, Inc.) — 10-Q summary

Reporting period: Quarter ended September 30, 2009; results compare with the 2008 periods, which were retrospectively adjusted for convertible-debt accounting. The filing registrant name is Roper Industries, Inc.

Financial performance

MetricQ3 2009Q3 2008Nine months 2009Nine months 2008
Net sales$485.7 million$593.1 million$1,496.0 million$1,730.5 million
Gross margin50.6%52.1%50.2%51.5%
Operating income$91.9 million$132.3 million$274.6 million$367.1 million
Net earnings$56.4 million$74.0 million$167.6 million$211.0 million
Diluted EPS$0.61$0.79$1.81$2.24
Operating cash flow$86.9 million$138.2 million$247.8 million$305.5 million

Q3 net sales fell 18.1%; organic sales declined 19%, with acquisitions and divestitures contributing a net 2% increase and currency a 1% decrease. Nine-month sales declined 13.5%, reflecting a 15.3% organic decline and 2.3% negative currency impact, partly offset by 4.0% acquisition contribution.

At September 30, cash was $256.0 million and total debt was $1.124 billion, down from $1.267 billion at year-end 2008. Net debt was $868.2 million, versus $1.089 billion; net debt to total net capital improved to 28.1% from 35.2%. Working capital, as defined by the company, was $325.3 million. The company reported no revolver borrowings and compliance with debt covenants.

Material changes and business trends

  • All four segments had lower Q3 sales. Industrial Technology fell 22.8%, Energy Systems & Controls 25.1%, Scientific & Industrial Imaging 16.6%, and RF Technology 9.7%. For the first nine months, RF Technology was the exception to the sales decline, up 6.4%, largely reflecting acquisitions.
  • Segment operating margins contracted year over year across all segments. Management cited weaker demand, lower-volume operating leverage, product mix, and severance and cost-control expenses.
  • Q3 net orders declined 14.1% year over year to $498.9 million; backlog was down 10.2% to $554.2 million. Management said a delayed large transportation project was awarded in October 2009.
  • Nine-month operating cash flow decreased 19% year over year. Management attributed the decline to lower income, higher tax payments and lower accrued compensation, partly offset by improved receivables collection.

Liquidity, financing and unusual items

  • In September, the company issued $500 million of 6.25% senior unsecured notes due 2019. Proceeds repaid its $350 million term loan and outstanding revolver balance. The early term-loan repayment generated a $0.4 million noncash extinguishment charge.
  • During the first nine months, about half of the 3.75% convertible notes were converted, involving $116.2 million cash and 963,100 shares. At quarter-end, $117.6 million principal remained; further conversions were pending and settled in October.
  • Nine-month severance and related cost-control actions totaled $10 million; $7 million had been paid and $3 million remained accrued. The company expected substantially completing the remaining actions and payments within 12 months.
  • Effective tax rates were 27.3% for Q3 and 29.0% for the first nine months, compared with 34.7% in both 2008 periods. Management cited releases of uncertain-tax reserves, foreign tax planning and, for the nine-month period, a discrete foreign tax benefit.
  • In October, the company entered into $500 million of interest-rate swaps that effectively convert its 2013 senior notes to variable-rate debt at a weighted-average spread of 4.377% plus three-month LIBOR.

Outlook, risks and contingencies

The filing gives no specific earnings or revenue guidance. Management expected operating cash flows to support debt reduction at a historically consistent pace, but said the pace depends on operating performance and any acquisitions. Capital spending for the balance of 2009 was expected to be comparable to prior years as a percentage of sales.

Management highlighted weak global economic conditions, cyclical markets, acquisition and integration risks, leverage and interest-rate exposure, foreign exchange, customer concentration, government-contract risks, product liability and warranty exposure, environmental matters, and potential impairment of substantial goodwill and intangible assets. Roper reported ordinary-course litigation and asbestos claims; management considered provisions adequate for covered claims but said potential asbestos liability could not be determined. It did not expect pending matters, based on current information, to have a material adverse effect.

Most important facts for investors to verify

  • Whether the decline in organic sales, orders and backlog stabilizes, particularly in the more cyclical segments.
  • Whether cash generation remains adequate to reduce debt while funding operations, dividends and potential acquisitions.
  • The effects of the 2019 note issuance and subsequent swaps on interest costs, debt mix and exposure to rising rates.
  • Whether margin pressure and the remaining severance actions resolve as expected, and whether tax benefits are repeatable.
  • The implications of the convertible-note conversions, including share dilution and cash settlement requirements.
  • The filing’s retrospectively adjusted 2008 comparatives and the uncertain potential exposure from litigation, including asbestos claims.