Roper Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Financial amounts are in millions of dollars unless noted. Roper is a diversified technology company with software and engineered-products businesses across four reportable segments.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,202.5 | $1,086.3 | +10.7% |
| Gross profit / margin | $750.5 / 62.4% | $667.6 / 61.5% | Margin +0.9 percentage points |
| Operating income | $300.2 | $258.3 | +16.2% |
| Net earnings / margin | $211.3 / 17.6% | $158.1 / 14.6% | +33.7% |
| Diluted EPS | $2.03 | $1.53 | +32.7% |
| Operating cash flow | $281.7 | $378.2 | −25.5% |
Revenue growth comprised 7.8% organic growth, a 1.0% net contribution from acquisitions and divestitures, and a 1.9% foreign-exchange benefit. Segment revenue growth was RF Technology 12.1%, Medical & Scientific Imaging 5.2%, Industrial Technology 17.8%, and Energy Systems & Controls 10.8%. Segment operating profit rose 16.8% to $341.9; RF Technology led at +35.2%, while Medical & Scientific Imaging was nearly flat at +0.7%.
Net interest expense declined to $43.2 from $45.9, reflecting lower average debt balances partly offset by higher average rates. The effective tax rate fell to 17.3% from 25.2%, mainly due to the U.S. federal tax-rate reduction and $21.1 of excess tax benefits from equity compensation (versus $5.5). Dividends declared were $0.4125 per share, up from $0.3500.
Cash, debt, and liquidity
Cash and equivalents were $366.2 at quarter-end, down from $671.3 at December 31, 2017. Operating cash flow was lower year over year, primarily because of higher tax and bonus payments and working-capital timing. Investing used $51.5, including $38.9 for acquisitions; financing used $551.6, including $535.0 of net repayments on the revolving credit facility and $42.1 of cash dividends.
Total debt was $4,622.0, down from $5,155.5 at year-end; net debt was $4,255.8. Net debt to total net capital improved to 37.3% from 39.5%. Debt included $735.0 drawn on the $2,500.0 unsecured facility and $801.3 of current debt, including $800.0 of senior notes due in 2018. Roper reported compliance with facility covenants and expected cash, operating cash flow, credit availability, and capital-market access to fund foreseeable requirements. Net working capital, as defined by the company, was negative $110.4.
Material changes, outlook, and risks
- Roper adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $14.3. The adoption did not materially affect Q1 results, but 2018 and 2017 revenue are reported under different accounting standards.
- Two RF Technology software acquisitions, Quote Software and PlanSwift Software, were completed for an aggregate purchase price of $38.7. Their operating results were not material; purchase-price allocations were preliminary.
- Remaining performance obligations totaled $2,721.7; approximately 62% was expected to be recognized over the next 12 months. Reported order backlog was $1,693.7, up 7% year over year.
- No specific earnings or revenue forecast was provided. Management expected positive operating cash flow to support scheduled debt reduction, while noting that acquisition spending and business performance could affect the pace of deleveraging. Capital expenditures and capitalized software spending for the rest of 2018 were expected to be comparable to prior years as a percentage of revenue.
- Risks identified include acquisition execution and integration, indebtedness and interest rates, foreign exchange, market cyclicality and demand, competition, input costs, product liability and warranty claims, asbestos litigation, regulation, and goodwill or intangible-asset impairment. Management said ordinary-course legal matters were not expected to materially affect results; potential asbestos liability could not be determined.
- The Tax Act accounting remained subject to adjustment during the measurement period. The company also said its assessment of the forthcoming lease-accounting standard was incomplete and anticipated recognition of a material right-of-use asset and corresponding lease liability, primarily for real-estate leases.
Important facts for investors to verify
- Whether Q1’s strong earnings growth is repeatable, given the lower tax rate and unusually large equity-compensation tax benefit.
- How operating cash flow and working capital develop after the year-over-year decline in quarterly cash generation.
- The 2018 senior-note maturity and the company’s planned refinancing or repayment, alongside continued debt reduction.
- Organic growth, margins, and backlog conversion by segment; compare periods with care because ASC 606 was applied only to 2018.
- Final purchase-price allocations for the two acquisitions and any subsequent updates to Tax Act accounting, lease obligations, or legal contingencies.