Roper Technologies, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The company changed its name from Roper Industries, Inc. to Roper Technologies, Inc. on April 24, 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $889.5 million | $885.2 million | $1,754.8 million | $1,719.2 million |
| Gross profit | $533.9 million | $523.2 million | $1,052.1 million | $1,012.1 million |
| Income from operations | $252.0 million | $246.7 million | $498.9 million | $470.1 million |
| Net earnings | $171.3 million | $157.4 million | $327.1 million | $304.6 million |
| Diluted EPS | $1.69 | $1.56 | $3.22 | $3.02 |
| Gross margin | 60.0% | 59.1% | 60.0% | 58.9% |
| Net margin | 19.3% | 17.8% | 18.6% | 17.7% |
Q2 revenue grew 0.5%; acquisitions contributed 4%, offset in part by a 3% negative foreign-exchange impact. First-half revenue rose 2%, reflecting 2% organic growth, a 3% negative currency effect and a net 3% contribution from acquisitions and divestitures. Q2 net earnings increased about 9%, with a $15.9 million discrete tax benefit contributing to the improvement. The reported Q2 effective tax rate was 25.6%; management expects a 30%–31% effective rate for full-year 2015.
Segments and material changes
- Medical & Scientific Imaging: Q2 sales increased 12% to $302.3 million; acquisitions contributed 13%, organic sales grew 2%, and currency reduced sales 3%. Operating margin rose to 36.1% from 35.1%.
- RF Technology: Q2 sales increased 4% to $255.6 million, with 6% organic growth. Operating margin improved to 31.3% from 29.0%, primarily reflecting operating leverage.
- Industrial Technology: Q2 sales declined 9% to $186.5 million, including a 4% organic decline and 5% negative currency impact. Weakness was concentrated in fluid-handling businesses serving oil and gas markets; operating margin fell to 28.0% from 29.5%.
- Energy Systems & Controls: Q2 sales declined 12% to $145.3 million, including a 7% organic decline and 5% negative currency impact. Oil and gas product weakness contributed to an operating-margin decline to 26.0% from 27.0%.
Q2 orders were $881.1 million versus $873.9 million a year earlier, while backlog was essentially unchanged at $1.055 billion. For the first half, segment operating margins improved in Medical & Scientific Imaging and RF Technology, while Energy Systems & Controls weakened. Industrial Technology’s first-half operating margin was broadly stable.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $432.9 million, up from $353.1 million. Investing cash outflow was $614.3 million, primarily reflecting $589.7 million for acquisitions; capital expenditures were $20.7 million.
- Cash and cash equivalents were $678.6 million at June 30, 2015, compared with $610.4 million at year-end 2014. Cash from financing was $273.2 million, including $315.0 million of net revolving-facility borrowings; dividends paid were $50.1 million.
- Total debt was $2.525 billion, up from $2.214 billion at year-end, primarily due to acquisition funding. Net debt was $1.846 billion; net debt to total net capital was 26.9%, versus 25.2% at year-end. The company had $315 million outstanding under its $1.5 billion unsecured credit facility and was in compliance with its debt covenants.
- Foreign-subsidiary cash and short-term investments totaled $579 million and were considered permanently reinvested; repatriation for domestic use could incur additional taxes. Management stated that available cash, U.S. operating cash flow, credit facilities and capital-market access should fund U.S. operating requirements for the foreseeable future.
Acquisitions, outlook and risks
In Q1, Roper acquired Strata Decision Technology, SoftWriters and Data Innovations for approximately $590 million in cash, expanding its Medical & Scientific Imaging businesses. Preliminary purchase accounting included $424 million of goodwill and $213 million of identifiable intangibles. On July 20, 2015, the company acquired On Center Software for $157 million in cash; it will be reported in RF Technology.
Management expects acquired and existing businesses to generate positive operating cash flow and says this should permit debt reduction, but the pace depends on acquisition funding needs and business performance. Capital expenditures for the rest of 2015 were expected to be comparable to prior years as a percentage of sales. The filing gives no specific revenue or earnings guidance. Key stated risks include acquisition integration and liabilities, indebtedness and interest rates, foreign exchange, cyclical markets and oil-and-gas exposure, competition, product liability and warranty claims, goodwill impairment, and geopolitical or economic disruption.
Other unusual items included a $3 million write-off of an investment in a startup technology company during the first half and a $15.9 million discrete tax benefit in Q2. The company reported pending ordinary-course litigation, including asbestos-related claims; management said it had adequate provisions for covered product-liability and employment claims, but stated that potential asbestos liability could not be determined. No interim goodwill impairment review was considered necessary.
Important facts for investors to verify
- Whether organic growth and orders remain resilient as acquisition and currency effects change, particularly in the oil-and-gas-exposed segments.
- How the three Q1 acquisitions and On Center perform, and whether final purchase-price allocations or integration costs materially change reported results.
- Debt reduction, revolving-facility usage, interest expense and the company’s ability to access foreign cash without significant tax cost.
- Whether the 30%–31% full-year effective tax-rate expectation and operating cash-flow assumptions are achieved.
- Developments in asbestos and other litigation, warranty exposure, and the valuation of substantial goodwill and intangible assets.