Roper Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparisons are with the corresponding 2011 periods. The supplied filing identifies the registrant as Roper Industries, Inc.; the request metadata says Roper Technologies Inc.
Business context and results
Roper is a diversified provider of industrial technology, energy systems and controls, medical and scientific imaging, and RF technology products and services. It reported four operating segments. Results include Sunquest Information Systems from its August 22, 2012 acquisition date.
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Revenue | $747.6 million | $712.7 million | $2,183.6 million | $2,057.9 million |
| Gross profit | $416.6 million | $382.6 million | $1,205.4 million | $1,109.7 million |
| Operating income | $183.3 million | $167.2 million | $532.3 million | $473.2 million |
| Net earnings | $116.7 million | $110.3 million | $339.8 million | $305.6 million |
| Diluted EPS | $1.17 | $1.12 | $3.41 | $3.11 |
| Gross margin | 55.7% | 53.7% | 55.2% | 53.9% |
| Operating margin | 24.5% | 23.5% | 24.4% | 23.0% |
| Net margin | 15.6% | 15.5% | 15.6% | 14.8% |
Financial position, cash flow and liquidity
- For the first nine months, operating cash flow was $466.2 million, versus $409.1 million a year earlier. Capital expenditures were $29.2 million. Acquisitions used $1,445.5 million, contributing to investing cash outflow of $1,474.1 million.
- Cash at September 30 was $355.1 million, up from $338.1 million at December 31, 2011. Total debt rose to $2,104.8 million from $1,085.0 million; net debt was $1,749.7 million, compared with $746.9 million. Net debt to total net capital increased to 32.8% from 18.9%.
- Current assets were $1,217.7 million and current liabilities $1,112.1 million. The current debt portion was $551.8 million. Management reported net working capital of $302.3 million, up from $293.1 million at year-end.
- In July, the company replaced its $750 million revolving facility with a five-year, $1.5 billion unsecured revolver. At quarter-end, $1.05 billion was drawn at a 1.29% interest rate; the company reported compliance with debt covenants. The leverage covenant limit is 3.5.
- Cash and short-term investments at foreign subsidiaries totaled $260 million and were considered permanently reinvested; repatriation could result in additional tax.
Changes versus prior period and segment performance
- Q3 revenue increased 4.9%; management attributed the change to 2% organic growth, 4% acquisition contribution, and a 1% negative foreign-exchange effect. Nine-month revenue rose 6%, reflecting 4% organic growth, 3% from acquisitions, and a 1% negative currency effect.
- Q3 segment revenue increased in Industrial Technology (7%), Energy Systems & Controls (5%), and Medical & Scientific Imaging (10%); RF Technology declined 1%. Medical & Scientific Imaging’s Q3 organic sales fell 3%, as medical growth was more than offset by weaker research-camera sales. RF sales were affected by completion of prior-year installation projects.
- Q3 net orders were $719.7 million, roughly level with $718.6 million a year earlier; backlog was $978.4 million, up 12%. Medical & Scientific Imaging backlog rose substantially year over year, while Industrial Technology backlog declined.
- Margins improved across all four segments, reflecting operating leverage, product mix, and, in Medical & Scientific Imaging, acquired businesses. Corporate expense increased to $24.5 million from $14.9 million in Q3, including Sunquest-related costs and higher compensation expense.
- Q3 interest expense increased to $16.5 million from $15.4 million, as higher average debt balances were partly offset by lower average rates. The Q3 effective tax rate rose to 29.0% from 27.7%, primarily because of lower R&D deductions.
Acquisition, outlook and risks
- Roper acquired Sunquest for approximately $1.416 billion in cash to expand its medical platform. Sunquest contributed $21.0 million of revenue and $0.2 million of earnings, including deal-related costs, during the period included in Roper’s results. Purchase accounting was preliminary; goodwill of about $991 million was recorded, most of which was not expected to be tax-deductible. The filing reports $6.4 million of Sunquest transaction costs for the nine-month period.
- Management provided no specific numerical earnings or revenue guidance. It expected acquired and existing businesses to generate positive operating cash flow and said cash generation should permit debt reduction, but noted the pace would depend on acquisition activity and business performance. Capital spending for the rest of 2012 was expected to be comparable to prior years as a percentage of sales.
- Key stated risks include economic and market uncertainty, acquisition integration and liabilities, indebtedness and interest-rate exposure, foreign exchange, cyclicality, large-customer reductions, product liability and warranty exposure, government contracts, raw-material costs, and impairment of substantial goodwill and intangible assets.
- Roper reported ordinary-course litigation, including product liability and employment claims, and asbestos-related cases. Management believed provisions and insurance were adequate for customary claims and did not expect a material adverse effect; it said potential asbestos liability could not be determined.
- A 1% increase in interest rates was estimated to increase annualized pretax interest expense by approximately $15.5 million. A 10% currency-rate difference during Q3 was estimated to affect net earnings by approximately $2.7 million.
Important facts for investors to verify
- How Sunquest performs after acquisition, and the final purchase-price allocation, including acquired intangible values and related amortization.
- Debt repayment capacity, the 2013 senior-note maturity, revolver utilization, covenant headroom, and sensitivity to higher rates.
- Whether organic growth and orders improve, particularly in Medical & Scientific Imaging and RF Technology, and whether backlog converts to revenue as expected.
- Cash generation and working-capital trends, including receivables, inventory reserves, and the amount of foreign cash that is not planned for repatriation.
- Potential exposure from asbestos and other litigation, warranty claims, and impairment risks associated with increased goodwill and intangible assets.