Roper Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context
Roper is a diversified technology company operating software and engineered-products businesses across niche markets. Its four segments are Medical & Scientific Imaging, RF Technology, Industrial Technology, and Energy Systems & Controls.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Net sales | $945.1 million | $883.9 million | $2,779.1 million | $2,638.8 million |
| Gross profit | $578.5 million | $533.5 million | $1,705.5 million | $1,585.6 million |
| Income from operations | $267.4 million | $250.4 million | $765.5 million | $749.2 million |
| Net earnings | $167.1 million | $160.4 million | $476.6 million | $487.5 million |
| Diluted EPS | $1.63 | $1.58 | $4.65 | $4.80 |
| Gross margin | 61.2% | 60.4% | 61.4% | 60.1% |
| Operating margin | 28.3% | 28.3% | 27.5% | 28.4% |
| Net margin | 17.7% | 18.1% | 17.1% | 18.5% |
Q3 sales rose 6.9%, comprising 6% contribution from acquisitions net of divestitures, 2% organic growth, and a 1% negative foreign-exchange effect. For the nine-month period, sales rose 5%: acquisitions net of divestitures contributed 7%, while organic growth and foreign exchange each reduced growth by 1%.
Operating cash flow was $316.5 million in Q3 2016 versus $226.6 million in Q3 2015, and $693.4 million for the first nine months versus $659.6 million. Nine-month capital expenditures were $26.9 million. Cash and cash equivalents were $882.3 million at September 30, 2016.
Total debt was approximately $3.1 billion and net debt $2.22 billion at quarter-end, compared with $3.29 billion and $2.51 billion, respectively, at December 31, 2015. Net debt to total net capital improved to 28.0% from 32.1%. The company reported $123 million of net working capital under its stated definition. There were no borrowings outstanding under the new $2.5 billion revolving facility.
Changes versus comparable periods
- Q3 net earnings increased 4.2% and diluted EPS increased to $1.63 from $1.58. Nine-month net earnings declined 2.2% and diluted EPS fell to $4.65 from $4.80, despite higher sales and operating income.
- Q3 gross margin improved 0.8 percentage point, while operating margin was unchanged. Nine-month gross margin rose 1.3 points, but operating margin declined 0.9 point and net margin declined 1.4 points.
- Q3 segment sales grew in Medical & Scientific Imaging (+12.8%) and RF Technology (+19.7%); Industrial Technology declined 4.2% and Energy Systems & Controls declined 13.4%. For the nine months, those segments grew 13.1% and 16.0%, and declined 6.2% and 14.5%, respectively.
- Interest expense rose to $26.8 million in Q3 from $20.4 million and to $81.1 million for the nine months from $60.4 million, reflecting higher average debt balances and interest rates.
- Nine-month acquisition cash outflow was $277.6 million, versus $1.02 billion in the prior-year period. The company completed three acquisitions for aggregate consideration of $283 million, funded with cash on hand.
Outlook, risks, and unusual items
- Management expected a 2016 effective tax rate of approximately 30% and capital expenditures for the remainder of the year comparable to prior years as a percentage of sales. It expected operating cash flows to support operations and debt reduction, but noted acquisition needs and business performance could affect the pace. No specific revenue or EPS guidance is stated in the provided filing text.
- On October 31, 2016, after quarter-end, Roper acquired ConstructConnect for $631 million in cash. It provides cloud-based commercial-construction data and workflow solutions and is to be reported in RF Technology; purchase-price allocations were pending.
- A new five-year, unsecured $2.5 billion revolving credit facility was entered into on September 23, 2016, replacing the prior facility. Early termination resulted in a $0.9 million non-cash debt-extinguishment charge. The facility includes a maximum consolidated total leverage ratio of 3.5; Roper reported compliance with debt covenants throughout the nine-month period.
- Q3 results included $4.2 million of excess share-based-award tax benefits recognized in income tax expense under an early-adopted accounting standard. The standard may increase effective-tax-rate volatility. Nine-month tax expense also reflects a $9.7 million benefit from such awards; the prior-year period included a discrete $15.9 million tax benefit from resolution of a tax matter.
- Foreign-currency translation reduced nine-month comprehensive income by $35.7 million after tax; management said $22 million related to goodwill and did not directly affect expected future cash flows. Goodwill and other intangible assets were substantial, totaling approximately $8.51 billion at quarter-end.
- Risks cited include economic and market cyclicality, acquisition execution and integration, indebtedness and interest rates, foreign exchange, customer concentration, government contracts, product liability and warranties, asbestos litigation, regulation, and potential goodwill or intangible-asset impairment. Management said ordinary-course legal matters were not expected to have a material adverse effect; potential asbestos liability could not be determined.
Important facts for investors to verify
- Whether organic growth and margins in Medical & Scientific Imaging and RF Technology can offset continued weakness in Energy Systems & Controls and certain Industrial Technology markets.
- ConstructConnect’s integration, financing and contribution to results, and the final purchase-price allocation.
- Debt repayment progress, interest expense, covenant headroom, and the use and availability of the new credit facility.
- Cash-flow sustainability, including the effects of tax-payment timing and working-capital movements; $561 million of cash at foreign subsidiaries was considered permanently reinvested.
- Tax-rate variability following the share-based compensation accounting change, and developments in litigation, warranty exposure, and goodwill impairment assessments.