Business context and reporting period
Roper Industries, Inc. (the registrant identified in this filing; now associated with the Roper Technologies name) filed this unaudited Form 10-Q for the quarter ended September 30, 2011. It designs and sells products and services across Industrial Technology, Energy Systems & Controls, Medical & Scientific Imaging, and RF Technology. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $712.7 million | $605.1 million | $2,057.9 million | $1,706.6 million |
| Gross profit | $382.6 million | $321.7 million | $1,109.7 million | $903.3 million |
| Income from operations | $167.2 million | $128.2 million | $473.2 million | $348.1 million |
| Net earnings | $110.3 million | $84.3 million | $305.6 million | $215.3 million |
| Diluted EPS | $1.12 | $0.87 | $3.11 | $2.23 |
| Gross margin | 53.7% | 53.2% | 53.9% | 52.9% |
| Net margin | 15.5% | 13.9% | 14.8% | 12.6% |
Q3 sales rose 18% year over year, comprising 13% organic growth, 3% from acquisitions, and 2% from foreign exchange. Nine-month sales rose 21%: 15% organic, 4% acquisition-related, and 2% foreign exchange. Q3 gross margin improved modestly; operating margin was 23.5% versus 21.2% and net margin was 15.5% versus 13.9% (margins calculated from reported figures). Nine-month operating margin was 23.0% versus 20.4%.
Growth spanned all segments. Q3 sales growth was 15% in Industrial Technology, 22% in Energy Systems & Controls, 16% in Medical & Scientific Imaging, and 19% in RF Technology. Q3 segment operating margins improved in each segment; RF Technology had the largest reported increase, to 23.8% from 20.0%.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $409.1 million, up from $344.4 million. Capital expenditures were $29.1 million, implying operating cash flow less capital expenditures of approximately $379.9 million.
- Cash and cash equivalents were $246.5 million at September 30, 2011, versus $270.4 million at December 31, 2010. Current assets were $1.03 billion and current liabilities $525.8 million.
- Total debt was $1.174 billion, down from approximately $1.341 billion at year-end 2010. The company reported $85 million drawn on its revolving facility and said it complied with debt covenants. Net working capital, as defined by the company, increased to $328.9 million from $281.4 million.
- Foreign subsidiaries held $199 million of cash and short-term investments, considered permanently reinvested; repatriation could result in additional taxes. Management said available borrowing capacity and expected operating cash flows should fund U.S. operating requirements.
- Cash dividends paid were $31.5 million for the first nine months; dividends declared were $0.33 per share versus $0.285 in the prior-year period.
Material changes, outlook, and risks
- Roper acquired Northern Digital for $205 million in June, adding medical 3-D measurement technology, and United Controls Group for $23 million in September, adding oil-and-gas control systems. The filing says the acquisitions were not material to consolidated results individually or together. Nine-month acquisition cash outflow, net of cash acquired, was $227.2 million.
- Quarterly orders rose 10% to $718.6 million; backlog increased 14% year over year to $875.5 million. Management cited continuing end-market strength and expects operating cash flows to support debt reduction, but gave no specific earnings or revenue guidance. Debt-reduction pace depends on acquisition needs and business performance.
- Management highlighted economic and geopolitical uncertainty, acquisition execution and integration, indebtedness, foreign exchange, interest rates, cyclicality, competition, customer concentration, raw-material costs, warranty and product-liability exposure, asbestos litigation, and possible impairment of substantial goodwill and intangible assets.
- Interest expense declined to $15.4 million in Q3 from $17.1 million. A 1 percentage-point increase in interest rates was estimated to raise annualized pretax interest costs by $5.85 million. A $500 million swap position converts the 2013 senior notes to a variable-rate obligation.
- Q3 foreign-currency movements reduced the foreign-exchange component of comprehensive earnings by $30.2 million pre-tax; about $20.8 million related to goodwill and did not directly affect expected cash flows. Q3 effective tax rate rose to 27.7% from 25.9%, partly because 2010 benefited from tax-planning initiatives that did not recur.
- Ordinary-course litigation includes product-liability and employment claims; management believes provisions and insurance are adequate and does not expect a material adverse effect. Asbestos-related potential liability could not be determined. Warranty accrual was $8.1 million at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth and order/backlog strength continued after Q3, and whether backlog converts to sales as expected.
- Acquisition performance, integration costs, and the effect of future acquisitions on debt reduction and returns.
- Debt maturities, revolver usage, covenant headroom, and exposure to higher variable interest rates.
- Working-capital trends, especially receivables and inventory, and the sustainability of operating cash flow.
- Foreign-cash repatriation assumptions, tax-rate changes, foreign-exchange exposure, and the resolution or development of litigation and warranty claims.