Roper Technologies, Inc. — Q1 2016 Form 10-Q
Business context and period: Diversified technology company serving niche markets through software, engineered products and solutions. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $902.4 million | $865.3 million | +4.3% |
| Gross profit / margin | $559.5 million / 62.0% | $518.2 million / 59.9% | Margin +2.1 points |
| Operating income | $245.0 million | $246.9 million | -0.8% |
| Pretax earnings | $217.4 million | $226.4 million | -3.9% |
| Net earnings | $151.4 million | $155.8 million | -2.8% |
| Diluted EPS | $1.48 | $1.54 | -3.9% |
| Cash from operations | $207.1 million | $260.4 million | -20% |
| Capital expenditures | $9.5 million | $10.0 million | — |
Gross margin improved, but SG&A rose to 34.9% of sales from 31.4%, including higher corporate costs. Operating margin was 27.1% versus 28.5%; net margin was 16.8% versus 18.0%. Interest expense rose to $27.4 million from $19.8 million, attributed to higher average debt balances and interest rates. The effective tax rate was 30.4%, versus 31.2%.
Segment sales: Medical & Scientific Imaging rose 13.9% to $332.2 million; RF Technology rose 15.3% to $280.2 million; Industrial Technology fell 10.2% to $171.2 million; Energy Systems & Controls fell 15.1% to $118.8 million. Medical and RF growth reflected acquisitions; both industrial segments faced weakness in oil-and-gas-related markets. Total orders increased to $926.7 million from $848.7 million, and backlog rose 7% to $1.12 billion.
Liquidity, debt and balance sheet
- Cash and equivalents were $523.0 million at March 31, down from $778.5 million at year-end. Operating activities provided $207.1 million; investing used $274.0 million, including $265.2 million for acquisitions; financing used $190.2 million, primarily for net debt repayment and dividends.
- Long-term debt, net of current portion, was $3.105 billion on the balance sheet. The debt note reports total debt, net of deferred financing costs, of $3.112 billion; the leverage table reports total debt of $3.128 billion. Net debt in that leverage table was $2.605 billion, up from $2.510 billion at year-end, and net debt to total net capital increased to 32.4% from 32.1%.
- Current assets were $1.432 billion and current liabilities $779.5 million. Net working capital, using the company’s stated definition excluding cash and debt, was $136 million versus $126 million at year-end.
- Cash at foreign subsidiaries was $465 million and considered permanently reinvested; repatriation for domestic use could incur additional taxes. The company said it was in compliance with debt covenants and expected available cash, U.S. operating cash flow, credit facilities and capital-market access to fund U.S. operations.
Material changes, outlook and risks
- Roper acquired CliniSys Group and PCI Medical for an aggregate purchase price of approximately $264 million, funded with cash on hand. Both are in Medical & Scientific Imaging. Purchase accounting was preliminary; approximately $145 million of goodwill and $141 million of identifiable intangibles were recorded.
- Management expects the 2016 effective tax rate to be approximately 30%. It expects full-year capital expenditures, as a percentage of sales, to be comparable to prior years. It anticipates operating cash flows will support debt reduction, but the pace depends on acquisitions and business performance. No specific full-year revenue or EPS guidance is provided in this filing.
- Management attributed lower operating cash flow partly to tax paid on the 2015 Abel Pumps sale and increased receivables from sales timing. Organic sales declined 3% overall; acquisition contributions were partly offset by foreign exchange.
- Risks highlighted include economic and geopolitical uncertainty, acquisition integration and liabilities, indebtedness and rising rates, foreign exchange, cyclical markets and oil-and-gas exposure, competition, customer concentration, product liability and warranty claims, asbestos litigation, and possible impairment of goodwill or intangibles. Management said ordinary-course claims were adequately provided for and not expected to materially affect results; potential asbestos liability could not be determined.
- The company early adopted stock-compensation accounting guidance, recognizing a $1.3 million tax benefit in earnings and increasing diluted weighted-average shares by 318,000. Management noted the change could make the effective tax rate more volatile. No interim goodwill impairment review was considered necessary.
Most important facts to verify
- Reconcile the differing total-debt figures reported in the debt note and leverage table, and assess debt maturities, interest-rate exposure and capacity for planned debt reduction.
- Track whether order growth and the 7% higher backlog translate into sales, particularly given declines in Industrial Technology and Energy Systems & Controls.
- Monitor acquisition integration, final purchase-price allocations, acquired-asset amortization and cash returns from the two acquisitions.
- Assess whether operating cash flow recovers from the Q1 decline and whether receivables, tax payments and acquisition spending continue to constrain cash.
- Review exposure to oil-and-gas markets, asbestos claims and other contingencies; the filing does not quantify potential asbestos liability.