Roper Technologies, Inc. — Q2 2018 Form 10-Q
Business context and period. Roper is a diversified technology company operating software, services and engineered-products businesses across RF Technology, Medical & Scientific Imaging, Industrial Technology, and Energy Systems & Controls. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods unless stated otherwise. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1,293.7 | $1,134.7 | $2,496.2 | $2,221.0 |
| Gross profit | $815.9 | $705.7 | $1,566.4 | $1,373.3 |
| Operating income | $354.3 | $294.2 | $654.5 | $552.5 |
| Net earnings | $228.4 | $179.5 | $439.7 | $337.6 |
| Diluted EPS | $2.19 | $1.74 | $4.22 | $3.27 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $547.8 | $550.1 |
- Q2 revenue rose 14.0%; management attributed growth to 10.6% organic growth, 2.3% net acquisition/divestiture effect and 1.1% foreign exchange. First-half revenue increased 12.4%, comprising 9.2% organic growth, 1.7% net acquisition/divestiture effect and 1.5% foreign exchange.
- Q2 gross margin was 63.1%, up from 62.2%; operating income margin was 27.4%, compared with 25.9%; net margin was 17.7%, compared with 15.8%. First-half gross margin was 62.8% versus 61.8%, and net margin was 17.6% versus 15.2%.
- Q2 net interest expense declined to $43.2 from $45.8. First-half net interest expense declined to $86.4 from $91.7, despite higher weighted-average interest rates, primarily due to lower weighted-average debt balances.
- First-half operating cash flow was nearly flat year over year. Cash used in investing was $1,210.6, mainly reflecting $1,182.3 of acquisitions net of cash acquired. Financing provided $416.4, including $465.0 of net revolving-credit-facility borrowings. Cash declined by $249.5 to $421.8.
- At June 30, total debt was $5,623.4, net debt $5,201.6, and net debt/total net capital 41.6% (39.5% at year-end 2017). Current debt was $801.7, including $800 of 2.05% senior notes due 2018; long-term debt was $4,821.7. The $2,500 credit facility had $1,735 outstanding and $77.2 of letters of credit. Roper reported compliance with its debt covenants.
- Current assets were $1,651.1 and current liabilities $2,066.4. Cash was $421.8; net working capital, excluding cash and debt, was negative $35.4. Management stated that cash, operating cash generation, credit availability and expected capital-market access should fund requirements for the foreseeable future.
Segment trends and material changes
- Q2 segment revenue growth was strongest in Industrial Technology, up 20% to $231.6, and RF Technology, up 17% to $537.4. Medical & Scientific Imaging rose 7% to $373.7; Energy Systems & Controls rose 16% to $151.0.
- Q2 segment operating margins improved in RF Technology (29.3% versus 26.0%), Industrial Technology (32.0% versus 30.2%) and Energy Systems & Controls (27.7% versus 25.2%). Medical & Scientific Imaging margin declined to 33.6% from 34.6%, primarily due to unfavorable sales mix.
- First-half segment revenue growth ranged from 6% in Medical & Scientific Imaging to 19% in Industrial Technology. Management cited operating leverage in Industrial Technology and Energy Systems & Controls and software growth in RF Technology.
- Backlog was $1,757.1 at June 30, up 11% year over year; acquisitions contributed 6% and internal growth 5%. Remaining performance obligations totaled $2,852.7, with approximately 62% expected to be recognized over the next 12 months.
Outlook, transactions and risks
- No quantified earnings or revenue guidance was provided. Management expected positive operating cash flow and debt reduction, but said the pace would depend on acquisition financing needs and operating performance. It expected capital expenditures and capitalized software spending for the remainder of 2018 to be comparable to prior years as a percentage of revenue.
- Roper completed five acquisitions in the first half for $1,182.3 net of cash acquired, including PowerPlan and ConceptShare and three construction-estimating software businesses. Acquisition purchase-price allocations were preliminary; acquired goodwill and identifiable intangibles were $660.2 and $657.4, respectively.
- Roper agreed to sell Gatan to Thermo Fisher for approximately $925 in cash. Closing was expected by year-end 2018, subject to customary conditions including regulatory approval. Gatan’s assets and liabilities were classified as held for sale; the classification resulted in a $10.0 deferred tax liability.
- The Tax Act reduced the reported effective tax rate; first-half rate was 22.7% versus 27.7%, including $24.4 of excess tax benefits from equity compensation, partly offset by the Gatan-related deferred tax liability. Tax accounting estimates remained subject to adjustment.
- ASC 606 adoption increased opening retained earnings by $14.3; management said the effect on 2018 operating results was not material. The company expected the forthcoming lease standard to create a material right-of-use asset and corresponding lease liability, primarily for real estate leases.
- Risks cited include acquisition and integration challenges, leverage and interest rates, foreign exchange, cyclical markets, competition, customer concentration, government-contract exposure, product liability and warranty claims, asbestos litigation, cybersecurity and potential goodwill or intangible-asset impairment. Management said ordinary-course legal claims were adequately provided for and were not expected to have a material adverse effect; potential asbestos liability could not be determined. A stockholder derivative complaint filed in April 2018 had a motion to dismiss pending.
- Foreign-currency translation reduced Q2 comprehensive income: the company reported a $76.2 translation loss for the quarter. Management reported effective disclosure controls and no material change in internal controls during the period.
Important facts for investors to verify
- Repayment or refinancing of the $800 senior notes due in 2018, credit-facility utilization, covenant headroom and progress toward management’s debt-reduction expectations.
- Completion, proceeds and any final tax or other adjustments related to the proposed Gatan sale.
- Acquisition integration, final purchase-price allocations, and whether acquired businesses sustain the reported growth and margins.
- Organic growth, segment-margin trajectory, and conversion of the $1,757.1 backlog and remaining performance obligations into revenue and cash.
- Cash-flow trends and working-capital movements, including receivables, unbilled receivables and deferred revenue.
- Final tax effects of the Tax Act, future effective tax rates, and the balance-sheet impact of lease-standard adoption.
- Developments in pending litigation and product, warranty or asbestos exposures; the filing does not quantify potential asbestos liability.