Business context and reporting period
Roper Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company operates diversified technology businesses across Medical & Scientific Imaging, RF Technology, Industrial Technology, and Energy Systems & Controls, including software, SaaS, and engineered products.
Financial performance
All dollar amounts are in millions except per-share data.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,134.7 | $931.6 | $2,221.0 | $1,834.0 |
| Gross profit | $705.7 | $567.5 | $1,373.3 | $1,127.0 |
| Income from operations | $294.3 | $253.1 | $552.5 | $498.1 |
| Net earnings | $179.6 | $158.1 | $337.6 | $309.5 |
| Diluted EPS | $1.74 | $1.54 | $3.27 | $3.02 |
| Operating cash flow | $171.9 | $169.7 | $550.1 | $376.8 |
- Q2 sales increased 22% year over year, with acquisitions contributing 17%, organic growth 6%, and foreign exchange reducing growth by 1%. Six-month sales rose 21%, reflecting a 16% net contribution from acquisitions and divestitures, 6% organic growth, and a 1% foreign-exchange headwind.
- Gross margin was 62.2% in Q2 versus 60.9% a year earlier; for the first half it was 61.8% versus 61.5%. Operating margin, after corporate costs, was 25.9% versus 27.2% in Q2 and 24.9% versus 27.2% for the first half. Net margin was 15.8% versus 17.0% in Q2 and 15.2% versus 16.9% year to date.
- Net interest expense rose to $45.8 million in Q2 from $26.9 million and to $91.7 million for the first half from $54.3 million, primarily reflecting higher average debt balances; first-half expense also reflected higher average rates.
- At June 30, cash was $663.3 million and total debt was $5.642 billion, down from $6.210 billion at year-end 2016. Net debt was $4.979 billion; net debt to total net capital was 44.5%, versus 48.5% at year-end. The $2.5 billion unsecured credit facility had $1.36 billion drawn, and the company reported compliance with its covenants.
- First-half investing cash outflow was $62.1 million, including $35.5 million for acquisitions and $24.8 million for capital expenditures. Financing cash outflow was $618.4 million, including $570 million of net debt repayments and $70.9 million of dividends. Cash declined by $93.9 million from year-end.
Material changes and operating drivers
- RF Technology was the largest growth contributor: Q2 sales increased 59.5% to $460.5 million and first-half sales increased 56.4% to $890.1 million. Acquisitions accounted for 54% of Q2 segment growth and 52% for the first half; organic growth was 7% and 6%, respectively. Segment operating margin fell to 26.0% in Q2 from 30.9% and to 23.4% for the first half from 31.3%, reflecting acquired software businesses’ higher SG&A burden, including acquired-intangible amortization.
- Q2 sales increased 3.0% in Medical & Scientific Imaging, 8.0% in Industrial Technology, and 5.6% in Energy Systems & Controls. Operating margins improved in each of these segments, supported by operating leverage. The filing cites growth in medical businesses and SaaS, fluid handling and water metering, and pressure sensors and valves, respectively.
- Order backlog was $1.582 billion at June 30, up 39% from $1.137 billion a year earlier; acquisitions contributed 32% and internal growth 7%.
- Q2 corporate expenses increased to $37.7 million from $29.6 million, primarily from professional services and equity compensation costs.
Outlook, risks, and unusual items
- Management expected a 2017 effective tax rate of 29%–30% and capital expenditures for the remainder of the year to be comparable to prior years as a percentage of sales. It anticipated operating cash generation would support repayment of credit-facility borrowings, but said the pace would depend on acquisition funding needs and operating performance. The filing provides no specific full-year sales or earnings guidance.
- Q2 other income included a $9.4 million pretax gain on the sale of an Energy Systems & Controls product line, partly offset by a $1.8 million impairment of a minority investment. The product-line sale generated $10.4 million. Roper also acquired Phase Technology for approximately $33 million; its results did not materially affect the quarter.
- Management cited uncertainty from geopolitical events, economic conditions, foreign exchange, interest rates, competition, cyclicality, customer concentration, acquisition integration and financing, indebtedness, product liability, warranties, regulation, cybersecurity, and potential impairment of substantial goodwill and intangibles.
- Routine product-liability and employment claims were being defended; management considered recorded provisions adequate and did not expect these matters to materially affect the company. Asbestos-related claims remain pending, and the company said potential liability could not be determined. Warranty accruals were $10.5 million at both December 31, 2016 and June 30, 2017.
Important facts for investors to verify
- How much of reported growth and backlog reflects acquisitions versus sustainable organic demand, particularly in RF Technology.
- Whether RF Technology’s lower operating margins stabilize as acquired businesses are integrated, and how acquired-intangible amortization affects reported profitability.
- Debt repayment progress, upcoming maturities, variable-rate exposure, and the effect of interest costs on earnings and liquidity.
- Cash-flow conversion and working-capital trends; management reported negative net working capital of $59 million at June 30, 2017.
- The final purchase-price allocation for Phase Technology, the status and possible exposure of asbestos litigation, and the realization of stated tax-rate and debt-reduction expectations.