Roper Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Roper is a diversified technology company operating software and engineered-products businesses. The company realigned its reporting segments in Q1; prior periods were recast.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,287.2 | $1,202.5 | +7.0% |
| Gross profit / margin | $810.6 / 63.0% | $750.5 / 62.4% | Margin +0.6 percentage points |
| Income from operations | $346.4 | $300.2 | +15.4% |
| Net earnings | $369.6 | $211.3 | +74.9% |
| Diluted EPS | $3.53 | $2.03 | +73.9% |
| Operating cash flow | $290.3 | $281.7 | +3.1% |
Revenue growth comprised 6.4% organic growth, 1.8% net acquisition/divestiture contribution, and a 1.2% negative foreign-exchange effect. Net earnings included a $119.6 pretax gain on the Imaging business sale; income taxes also benefited from a $43.0 discrete tax benefit related to a foreign restructuring. The reported earnings increase therefore was substantially affected by unusual items.
- Segments: Application Software revenue was $381.2 (+17.7%) and Network Software & Systems was $345.7 (+10.1%); both had higher operating margins. Measurement & Analytical Solutions revenue was $401.8 (-0.5%), reflecting Imaging divestiture and FX despite 5% organic growth. Process Technologies revenue was $158.5 (-1.4%), with upstream oil and gas weakness partly offset by growth elsewhere.
- Cash and investment: Cash from investing activities was $197.2, primarily from $220.4 in Imaging sale proceeds. Cash used in financing was $464.3, mainly net revolver repayments and dividends. Cash increased $28.1 to $392.5.
- Debt and liquidity: Total debt was $4,502.8, down from $4,941.7 at year-end; net debt was $4,110.3. Net debt to total net capital improved to 33.6% from 37.2%. The company reported $410.0 drawn on its $2.5 billion unsecured credit facility, $77.0 of letters of credit, and compliance with debt covenants. Net working capital was negative $235.4.
Material changes, outlook, and risks
- Roper sold its Imaging businesses on February 5, 2019 for approximately $225.0 cash, recognizing a $119.6 pretax gain and $30.0 related income tax expense. Gatan remained classified as held for sale; its approximately $925.0 cash sale to Thermo Fisher was pending customary closing conditions.
- After quarter-end, on April 18, Roper acquired Foundry for £410.0 in an all-cash transaction. Its results were expected to be included from Q2 2019 in Network Software & Systems.
- Management expected positive operating cash flow to support debt reduction and said available cash, operating cash flow, credit-facility availability, and capital-market access should fund foreseeable requirements. The pace of 2019 debt reduction and interest savings depends partly on acquisitions and operating performance. No specific earnings or revenue guidance was provided.
- Management cited geopolitical and economic uncertainty. Other disclosed risks include acquisition and integration execution, indebtedness and interest rates, FX, cybersecurity, competition, cyclical markets, customer concentration, raw-material costs, litigation, product liability, and potential goodwill or intangible-asset impairment.
- Ordinary-course product-liability and employment claims were considered adequately provided for, net of insurance. Asbestos claims remain difficult to quantify; a stockholder derivative suit was pending, with a motion to dismiss pending. Management said these matters were not expected to materially affect the company, though asbestos liability could not be determined.
- ASC 842 lease accounting was adopted January 1, 2019, recording operating-lease assets and liabilities; management reported no impact on earnings or cash flow. Disclosure controls were assessed as effective.
Key facts for investors to verify
- How much of earnings growth reflects recurring operations versus the Imaging gain and the discrete tax benefit.
- Completion and proceeds from the Gatan sale, and Foundry’s acquisition funding, integration, and contribution to results.
- Whether operating cash flow remains sufficient to reduce debt while funding acquisitions and dividends.
- Segment growth and margins, particularly the effects of divestitures, foreign exchange, and weakness in upstream oil and gas markets.
- Developments in asbestos litigation, the derivative complaint, and other contingent liabilities.