Roper Industries, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing identifies the registrant as Roper Industries, Inc. (not Roper Technologies, Inc.). Annual results are summarized below; fourth-quarter figures are identified separately where available.
Business context
Roper is a diversified designer, manufacturer and distributor of engineered products, software and services across four segments: Industrial Technology; Energy Systems and Controls; Medical and Scientific Imaging; and RF Technology. Its strategy combines operating improvements, product development and acquisitions. 2010 included the acquisitions of Heartscape and iTradeNetwork (iTrade).
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $2.386 billion | $2.050 billion |
| Gross profit / margin | $1.275 billion / 53.4% | $1.043 billion / 50.9% |
| Operating income / margin | $514.3 million / 21.6% | $395.4 million / 19.3% |
| Net earnings | $322.6 million | $239.5 million |
| Diluted EPS | $3.34 | $2.58 |
| Cash from operations | $499.5 million | $367.5 million |
| Cash and cash equivalents at year-end | $270.4 million | $167.7 million |
| Total debt at year-end | $1.341 billion | $1.154 billion |
- Sales grew 16.4%; management attributed the increase to 7.8% internal growth and acquisition contributions. Net earnings rose about 34.7% and diluted EPS about 29.5%.
- Capital expenditures were $28.6 million. Operating cash flow less capital expenditures was approximately $470.9 million.
- Working capital was $458.4 million in selected financial data. Management’s narrower measure—current assets excluding cash less current liabilities excluding debt—was $281.4 million, versus $337.8 million in 2009.
- Net orders increased 25.3% to $2.536 billion; year-end backlog rose 38.9% to $785.4 million. Backlog includes orders scheduled for shipment within twelve months.
- Segment sales: Industrial Technology $607.6 million; Energy Systems and Controls $503.9 million; Medical and Scientific Imaging $548.7 million; RF Technology $725.9 million.
- Fourth-quarter sales were $679.5 million versus $553.6 million; net earnings were $107.3 million versus $71.9 million; diluted EPS was $1.10 versus $0.77.
Material changes and notable items
- Sales growth reflected broad recovery in Industrial Technology and Energy Systems and Controls, strength in medical, imaging and handheld-computer markets, and acquisitions. RF Technology sales increased only 1.1%; internal sales declined 3.2%, partly due to delays in transportation projects amid reduced state and local funding.
- Gross margin improved 2.5 percentage points. Management cited higher volume and relatively flat cost structure in Industrial Technology and Energy Systems and Controls, and favorable medical-product mix in Medical and Scientific Imaging.
- Interest expense increased $8.0 million to $66.5 million, primarily due to higher rates and a higher average debt balance. The effective tax rate declined to 28.1% from 29.5%.
- Acquisitions used $536.4 million of cash, net of cash acquired. iTrade’s purchase price was approximately $523 million; acquisition activity contributed to goodwill of $2.728 billion and other intangible assets of $1.105 billion at year-end.
- No goodwill impairment was recorded in the 2010 annual review. Research and development spending rose to $102.4 million from $83.4 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expected operating cash flows and available credit capacity to fund normal operations and potential acquisitions, and anticipated cash generation would allow debt reduction; the pace depends on acquisition funding needs and operating performance.
- Expected capital expenditures are 1.0%–1.5% of annual sales. The quarterly dividend was increased 15.8% to $0.11 per share, paid in January 2011; future dividends remain subject to board discretion.
- Debt totaled $1.341 billion, with $230 million drawn on a $750 million revolving facility and $468 million of stated undrawn availability. The company reported compliance with debt covenants. Management cited leverage, refinancing, interest-rate and covenant risks; a 1 percentage-point rate increase was estimated to raise annualized interest costs by $7.3 million.
- Goodwill was approximately 54% of total assets and nearly equal to stockholders’ equity, creating potential exposure to material impairment charges if business performance or valuations deteriorate.
- Other material risks include acquisition execution and integration, economic and industry cyclicality, foreign exchange and international exposure, customer or government-contract reductions, competition, component supply constraints, product liability, environmental matters and intellectual-property protection.
- Asbestos-related lawsuits are pending; the company states potential liability cannot be determined. Other litigation was not expected by management to materially affect consolidated results. Surety bonds outstanding were $317 million.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective; iTrade was excluded from the internal-control assessment because it was acquired during 2010.
Investor facts to verify
- Separate organic growth from acquisition contributions, especially the effect of iTrade and the full-year contribution from 2009 acquisitions.
- Assess the sustainability of higher margins, order growth and backlog conversion, particularly RF Technology’s weaker internal sales and transportation-project delays.
- Review acquisition returns and the carrying value, amortization and impairment sensitivity of goodwill and acquired intangibles.
- Confirm debt maturities, revolving-credit availability, interest-rate exposure and the company’s capacity to reduce debt while continuing acquisitions and dividends.
- Monitor unresolved asbestos claims, environmental exposure, foreign-currency effects and the realization of tax assets and unrecognized tax benefits.