Business context and reporting period
Roper Technologies, Inc. is a diversified technology company operating software, services and engineered-products businesses across niche markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts are in millions except per-share data.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,318.7 | $1,159.9 | $3,814.9 | $3,380.9 |
| Operating income | $377.5 | $310.8 | $1,032.0 | $863.3 |
| Net earnings | $247.6 | $190.3 | $687.3 | $527.9 |
| Diluted EPS | $2.37 | $1.84 | $6.58 | $5.11 |
| Gross margin | 63.7% | 62.6% | 63.1% | 62.1% |
| Operating margin | 28.6% | 26.8% | 27.1% | 25.5% |
| Net earnings margin | 18.8% | 16.4% | 18.0% | 15.6% |
- Q3 revenue increased 13.7%, comprising 9.7% organic growth, 4.4% acquisition contribution and a 0.4% negative foreign-exchange impact. Nine-month revenue rose 12.8%, with 9.4% organic growth, 2.6% net acquisition/divestiture contribution and 0.9% foreign-exchange benefit.
- All four segments grew in Q3: RF Technology revenue +16.6%, Medical & Scientific Imaging +10.6%, Industrial Technology +14.5%, and Energy Systems & Controls +10.0%. Segment operating margins were 29.6%, 34.9%, 32.3% and 31.1%, respectively.
- Operating cash flow was $966.0 for the nine months, versus $865.7 a year earlier. Investing used $1,230.4, primarily for acquisitions; financing used $40.8. Cash declined to $363.4 from $671.3 at year-end 2017.
- At September 30, total debt was $5,215.9 and net debt was $4,852.5; net debt to total net capital was 39.1%, compared with 39.5% at December 31, 2017. Net working capital was negative $73.1. The company reported $340.0 drawn on its $2,500.0 unsecured credit facility and compliance with its debt covenants.
Material changes and notable items
- Roper completed six acquisitions during the first nine months for $1,188.3 net of cash acquired. The acquired businesses contributed to growth; purchase-price allocations remained preliminary. Acquisition activity included PowerPlan and several software businesses.
- Roper agreed to sell Gatan to Thermo Fisher Scientific for approximately $925.0 in cash. Gatan’s assets and liabilities were classified as held for sale at September 30; closing was expected by year-end, subject to customary conditions including regulatory approvals.
- In August, Roper issued $700.0 of 3.65% senior notes due 2023 and $800.0 of 4.20% notes due 2028. Proceeds funded redemption of $500.0 of 6.25% notes due 2019 and repayment of credit-facility borrowings. The redemption generated a $15.9 debt-extinguishment loss. The $800.0 of 2.05% notes due October 1, 2018 was repaid at maturity with credit-facility borrowings.
- Q3 net interest expense increased to $48.4 from $45.5, reflecting higher weighted-average rates partly offset by lower debt balances. Nine-month interest expense declined to $134.8 from $137.2.
- The effective tax rate fell to 20.5% in Q3 from 28.1%, and to 21.9% for nine months from 27.8%. Management attributed the decrease principally to the U.S. federal tax-rate reduction and, for the nine-month period, excess tax benefits on equity compensation. Tax Act provisional estimates remained subject to adjustment.
- Roper adopted ASC 606 using the modified retrospective method, recording a $14.3 increase to opening retained earnings; the effect on 2018 operating results was described as not material. The company expected lease-accounting adoption in 2019 to result primarily in recognition of a material right-of-use asset and lease liability.
Outlook, risks and contingencies
- Management gave no specific earnings or revenue guidance in this filing. It expected operating cash flows, existing cash, credit-facility availability and access to capital markets to fund requirements for the foreseeable future, and anticipated positive operating cash flow and debt reduction. The pace of debt reduction depends partly on acquisition needs and business performance.
- Remaining performance obligations were $2,817.4; approximately 60% was expected to be recognized as revenue over the next 12 months. Order backlog was $1,694.4, up 6% year over year.
- Management cited risks including economic and geopolitical disruption, acquisition execution and integration, indebtedness and interest rates, foreign exchange, competition, cyclical markets, customer concentration, product liability and warranty exposure, regulation, cybersecurity, and potential goodwill or intangible-asset impairment.
- Pending matters include ordinary-course product-liability and employment claims, asbestos litigation for which potential liability could not be determined, and a stockholder derivative suit alleging director and former CEO fiduciary-duty breaches; a motion to dismiss was pending. Management stated it had adequate provision for covered claims and did not expect ordinary-course matters to materially affect consolidated results, financial position or cash flows.
Important facts for investors to verify
- Whether the Gatan sale closed on the expected timetable and the final proceeds, taxes and impact on segment results.
- Acquisition integration and the final purchase-price allocations, particularly for the 2018 acquisitions and their contribution to organic growth and margins.
- Debt maturities, borrowing costs, credit-facility usage and the company’s ability to reduce net debt while pursuing acquisitions and paying dividends.
- Whether revenue growth, backlog and remaining performance obligations convert into sustained cash generation, especially given working-capital investment.
- Final tax effects under the Tax Act, including adjustments to provisional estimates, and the expected balance-sheet impact of lease-accounting adoption.
- Developments in the derivative and asbestos litigation, and any changes in related exposure or reserves.