Business context and reporting period
The filing is Roper Industries, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013; the filing uses the name Roper Industries, rather than Roper Technologies. Roper operates across Industrial Technology, Energy Systems & Controls, Medical & Scientific Imaging, and RF Technology. Results below compare Q2 and the first six months of 2013 with the respective 2012 periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $784.0m | $724.9m | $1,521.1m | $1,435.9m |
| Gross profit / margin | $445.5m / 56.8% | $397.6m / 54.9% | $867.1m / 57.0% | $788.8m / 54.9% |
| Operating income / margin | $179.7m / 22.9% | $178.8m / 24.7% | $364.9m / 24.0% | $349.1m / 24.3% |
| Net earnings | $111.4m | $114.8m | $236.3m | $223.1m |
| Diluted EPS | $1.11 | $1.15 | $2.36 | $2.24 |
For the first half, operating cash flow was $311.0m, versus $260.8m; capital expenditures were $21.9m. Cash at June 30 was $374.6m, and working capital as defined by the company was $339.5m. Total debt was $2.76bn, net debt $2.38bn, and net debt to total net capital 38.0%, compared with 30.9% at December 31, 2012. The company reported compliance with debt covenants.
Material changes and business drivers
- Q2 sales rose 8.2%; management attributed this to 7.9% growth from acquisitions and 0.5% organic growth, partly offset by foreign exchange. First-half sales increased 5.9%, reflecting 7.7% acquisition growth and a 1.5% organic decline, plus a small FX impact.
- Medical & Scientific Imaging Q2 sales rose 37.8% to $208.0m, primarily from acquisitions. Industrial Technology sales fell 3.1% to $197.5m, including weakness in water metering and materials testing. Energy Systems & Controls sales were nearly flat; RF Technology sales rose 3.7%.
- On May 1, Roper acquired Managed Health Care Associates for approximately $1.0bn in cash. The preliminary allocation included $680.0m of goodwill and $465.5m of identifiable intangibles. The acquisition materially increased goodwill, intangible assets and debt.
- Q2 net earnings declined despite higher sales, while operating income was nearly flat. Higher SG&A, including a warranty charge, and increased interest expense contributed; interest expense rose to $22.4m from $15.1m. Six-month net earnings increased, aided in part by lower effective taxes, including disclosed discrete tax benefits.
Outlook, risks and unusual items
No numeric earnings or sales guidance is provided. Management expects positive operating cash flow and intends to reduce debt, but says the pace depends on acquisitions and operating performance. It expects remaining-year capital expenditures to be comparable to prior years as a percentage of sales and intends to use its $1.5bn revolving facility to repay $500m of notes maturing August 15, 2013. At quarter-end, $42m was drawn on the facility.
- Roper issued $800m of 2.05% senior unsecured notes due 2018; proceeds were used to repay part of its revolver balance. Debt and associated interest expense increased with acquisition financing.
- A $9.1m pretax warranty charge covered replacement of refrigeration-system valves containing a vendor-supplied component that failed Roper’s quality standards. The company’s warranty accrual was $18.5m at June 30.
- Q2 other income included a one-time pretax legal-settlement gain, partly offset by foreign-exchange losses. First-half foreign-currency translation reduced other comprehensive income by $42.1m; $24m related to goodwill and did not directly affect reported earnings or cash flow.
- Management cites acquisition integration and liabilities, leverage, interest rates, foreign exchange, market cyclicality, customer concentration, product liability and warranty exposure, asbestos claims, and potential goodwill or intangible-asset impairment among relevant risks. It says ordinary-course litigation provisions are adequate; potential asbestos liability cannot be determined.
- Some MHA administrative-fee revenue related to pre-acquisition customer purchases was not recognized as revenue under acquisition accounting. The filing says the remaining net fair-value adjustment of $7.9m was expected to be amortized in Q3 2013.
Important facts for investors to verify
- Whether acquired businesses, particularly MHA, sustain growth and contribute earnings and cash flow after acquisition-accounting effects.
- Whether organic demand improves, given first-half organic sales declined 1.5% and weakness in water metering, materials testing, and camera markets.
- How the August 2013 note maturity was refinanced and whether Roper can reduce debt and interest expense while continuing acquisitions.
- The ultimate cost and resolution of the valve warranty issue, other contingencies, and the preliminary MHA purchase-price allocation.
- Whether currency movements, goodwill and intangible balances, and disclosed forward-looking risks materially affect future results.