ROPER TECHNOLOGIES INC annual report, FY2015

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Roper Technologies, Inc. — FY2015 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; quarterly figures below are for Q4 2015. Roper is a diversified technology company operating across medical and scientific imaging, RF technology, industrial technology, and energy systems and controls. It changed its name from Roper Industries to Roper Technologies in April 2015.

Financial performance and liquidity

  • FY2015 revenue: $3.582 billion, up 1% from $3.549 billion in 2014. Acquisitions contributed 4%; organic growth was negative 0.3%, and foreign exchange reduced sales by 3%.
  • Profit and margins: Gross profit was $2.165 billion, with a 60.4% gross margin versus 59.2%. Operating income was $1.028 billion (28.7% of sales) versus $999.5 million (28.2%). Net earnings were $696.1 million versus $646.0 million; diluted EPS was $6.85 versus $6.40.
  • Q4: Revenue was $943.6 million versus $946.1 million in Q4 2014. Net earnings were $208.6 million versus $185.9 million. Diluted EPS from continuing operations was $2.05 versus $1.84.
  • Cash flow: Operating cash flow was $928.8 million, up from $840.4 million. Investing activities used $1.698 billion, primarily for acquisitions; financing activities provided $996.2 million, mainly from debt issuance and borrowings. Capital expenditures were $36.3 million.
  • Debt and liquidity: Total debt was $3.271 billion, up from $2.201 billion; cash and equivalents were $778.5 million. The company reported $1.7 billion of undrawn availability under its senior unsecured credit facility and compliance with debt covenants. Balance-sheet current assets were $1.618 billion and current liabilities $720.1 million.
  • Other metrics: Backlog expected to convert to revenue within 12 months was $1.070 billion, up 2.8%. Dividends declared were $1.05 per share for 2015; the board raised the quarterly dividend to $0.30 from $0.25 for the January 2016 payment.

Material changes versus 2014

  • Medical & Scientific Imaging revenue rose 12.5% to $1.215 billion, with operating margin increasing to 36.4% from 34.8%. RF Technology revenue increased 9% to $1.034 billion and operating margin rose to 30.2% from 28.5%.
  • Industrial Technology revenue fell 10% to $745.4 million, primarily due to weaker oil-and-gas-related fluid handling sales, foreign exchange, and the Abel Pumps divestiture. Operating margin declined to 28.8% from 29.9%.
  • Energy Systems & Controls revenue fell 15% to $587.7 million, reflecting lower oil-and-gas sales and foreign exchange; operating margin declined to 27.6% from 29.3%.
  • Roper completed eight acquisitions for an aggregate purchase price of $1.8 billion and recorded $1.2 billion of goodwill and $731 million of identifiable intangible assets from them. It sold Abel Pumps for $106 million, recognizing a $70.9 million pretax gain, and also divested Black Diamond Advanced Technologies.
  • Interest expense increased 7.1% to $84.2 million, primarily due to higher average debt balances. Goodwill rose to $5.825 billion; total assets rose to $10.168 billion.

Outlook, commentary, risks, and unusual items

  • Management expects positive operating cash flow and intends to reduce debt in 2016, but the pace depends on acquisition needs and operating performance. It expects 2016 capital expenditures of 1.0%–1.5% of annual sales and a higher effective tax rate, principally from a greater share of pretax income in higher-tax jurisdictions.
  • Management cited continued growth through acquisitions and operating improvements, while noting that acquisition integration, indebtedness, foreign exchange, and cyclical industrial and energy markets could affect results. 2015 operating profit was reduced by approximately 2% due to currency movements.
  • The Abel sale gain materially affected other income and tax expense. The company also recorded a $9.5 million impairment charge on a minority investment. The Abel gain contributed to the higher effective tax rate, which was 30.6% versus 29.9% in 2014.
  • Goodwill was 57% of total assets and exceeded stockholders’ equity. Annual impairment testing found no impairment in 2015, but future underperformance or adverse market conditions could result in non-cash charges.
  • Other disclosed exposures include environmental liabilities, product liability and warranty claims, cybersecurity and operational disruptions, foreign-currency risks, and asbestos-related litigation. Management said no contingency accrual was necessary and no matter had a reasonable possibility of material loss; potential asbestos liability was not quantifiable.
  • After year-end, Roper acquired CliniSys Group Ltd. for £170 million in cash. Purchase accounting was incomplete at the filing date.

Most important facts for investors to verify

  • How much of the modest FY2015 revenue growth and earnings increase was attributable to acquisitions and the one-time Abel gain, rather than ongoing organic performance?
  • Whether the declines in Industrial Technology and Energy Systems & Controls continue, particularly given their exposure to oil-and-gas markets and falling orders.
  • Whether acquisition integration and cash generation support debt reduction while maintaining the company’s acquisition program; debt increased by about $1.07 billion in 2015.
  • How foreign exchange, higher expected taxes, and rising intangible amortization affect future earnings and cash flow.
  • Whether goodwill and acquired intangible values remain supportable given goodwill of $5.825 billion and substantial acquisition-related balances.