Roper Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Roper is a diversified technology company operating software and engineered-products businesses across niche markets. Comparisons below are with Q1 2016 unless noted. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $1,086.3 million | $902.4 million; up 20.4% |
| Gross profit / gross margin | $667.6 million / 61.5% | $559.5 million / 62.0% |
| Operating income / margin | $258.3 million / 23.8% | $245.0 million / 27.1% |
| Net earnings / net margin | $158.1 million / 14.6% | $151.4 million / 16.8% |
| Diluted EPS | $1.53 | $1.48 |
| Operating cash flow | $378.2 million | $207.1 million |
| Cash and cash equivalents | $730.7 million | $757.2 million at Dec. 31, 2016 |
| Total debt / net debt | $5.84 billion / $5.11 billion | $6.21 billion total debt / $5.45 billion net debt at Dec. 31, 2016 |
| Net debt to total net capital | 46.1% | 48.5% at Dec. 31, 2016 |
Revenue growth comprised 15.6% contribution from acquisitions, 5.6% organic growth and a 0.8% negative foreign-exchange effect. Net earnings rose about 4.4%, while diluted EPS rose about 3.4%. Operating margin contracted as SG&A increased to 34.5% of revenue from 31.6%; higher interest expense also weighed on pretax earnings. Net interest expense was $45.9 million versus $27.4 million.
Segments
- Medical & Scientific Imaging: Sales $348.2 million, up 4.8%; segment operating margin 34.4% versus 34.5%. Gross margin fell to 72.3% from 74.3%, partly due to sales mix and expense reclassification at CliniSys.
- RF Technology: Sales $429.6 million, up 53.3%, largely reflecting the 2016 Deltek and ConstructConnect acquisitions; organic sales grew 5%. Operating margin declined to 20.7% from 31.7%, with management citing acquired businesses’ higher SG&A structure, including acquired-intangible amortization.
- Industrial Technology: Sales $183.4 million, up 7.1%; operating margin improved to 29.2% from 27.3%.
- Energy Systems & Controls: Sales $125.0 million, up 5.3%; operating margin improved to 24.2% from 20.4%.
Cash, debt and liquidity
Operating cash flow increased 83% year over year, which management attributed to higher earnings net of noncash charges, increased deferred revenue, improved receivables collections and timing of interest payments. Investing used $21.3 million, including $14.9 million of capital expenditures and $2.8 million for acquisitions, compared with $274.0 million used in Q1 2016, when acquisitions were substantially higher. Financing used $397.1 million, including $370.0 million of net revolver repayments and $35.4 million of cash dividends. Cash decreased $26.5 million during the quarter.
At March 31, debt included $1.56 billion outstanding on a $2.5 billion revolving credit facility. The company reported $76 million of outstanding letters of credit and compliance with all credit-facility covenants. Net working capital, as defined by the company, was negative $156 million versus negative $25 million at year-end. Foreign subsidiaries held $642 million of cash and short-term investments considered permanently reinvested; repatriation for U.S. use could incur additional taxes.
Outlook, risks and unusual items
- Management expects a 2017 effective tax rate of 29%–30%; the Q1 rate was 25.2%, benefiting from resolution of a tax matter and excess tax benefits from equity compensation.
- Management expects capital expenditures for the remainder of 2017 to be comparable to prior years as a percentage of sales. It expects operating cash flows to support debt reduction, but the pace depends on acquisition financing, operating requirements and business performance.
- Orders were $1.11 billion versus $927 million; backlog was $1.58 billion versus $1.12 billion a year earlier, up 41%. Acquisitions contributed 18% of current-quarter orders and 35% of backlog growth; internal growth contributed 6% of backlog growth.
- Foreign-currency translation increased comprehensive income by $30.4 million net of tax; management noted $11 million related to goodwill and not directly affecting expected future cash flows.
- Risks cited include acquisition execution and integration, substantial indebtedness and interest rates, economic and market cyclicality, foreign exchange, competition, product liability and warranty exposure, regulation, cybersecurity and other disruptions, and potential impairment of goodwill and intangibles.
- The company is party to customary product-liability and employment claims and asbestos-related litigation. Management believes provisions and insurance are adequate for the former and does not expect a material adverse effect; potential asbestos liability cannot be determined. Warranty accrual was $10.5 million at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether organic growth and the elevated order backlog convert into revenue, particularly in RF Technology, and how much growth remains acquisition-driven.
- Whether RF Technology margins recover as acquired businesses are integrated and their higher SG&A burden is managed.
- Progress on debt reduction, refinancing or repayment of the $400 million notes due in 2017, and the effect of debt and interest costs on earnings.
- Cash generation and liquidity, including the working-capital position and practical availability of foreign-held cash.
- Whether the expected 29%–30% tax rate and stated capital-spending outlook hold, and whether legal, warranty or goodwill risks change materially.