Business context and reporting period
Roper Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The diversified technology company develops software, SaaS and engineered products for niche markets. Its four reported segments were RF Technology, Medical & Scientific Imaging, Industrial Technology, and Energy Systems & Controls. The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $5.191 billion | $4.608 billion |
| Gross profit / margin | $3.280 billion / 63.2% | $2.865 billion / 62.2% |
| Operating income / margin | $1.396 billion / 26.9% | $1.210 billion / 26.3% |
| Net earnings | $944.4 million | $971.8 million |
| Diluted EPS | $9.05 | $9.39 |
| Cash from operations | $1.430 billion | $1.235 billion |
- Revenue rose 12.7%, comprising 9.4% organic growth, 2.9% net acquisition/divestiture contribution and 0.4% foreign-exchange benefit. Net earnings declined 2.8%; 2017 included a $215.4 million one-time net tax benefit related to U.S. tax reform.
- Fourth-quarter 2018 revenue was $1.376 billion, operating income $364.4 million, net earnings $257.1 million and diluted EPS $2.46.
- Cash and equivalents were $364.4 million at year-end, down from $671.3 million. Investing used $1.335 billion, primarily for acquisitions; financing used $388.1 million.
- Year-end debt was approximately $4.97 billion, including $865 million drawn on the $2.5 billion revolver; disclosed undrawn facility availability was approximately $1.6 billion. Net working capital, as defined by Roper excluding cash and debt, was negative $200.4 million.
- Segment revenue and operating margin: RF Technology $2.168 billion / 28.3%; Medical & Scientific Imaging $1.522 billion / 34.2%; Industrial Technology $900.0 million / 31.6%; Energy Systems & Controls $600.4 million / 30.1%.
Material changes and unusual items
- Roper completed seven acquisitions for an aggregate net purchase price of $1.279 billion, including PowerPlan for $1.111 billion. Acquisitions contributed 2.9% to consolidated revenue growth after divestitures.
- Corporate expenses increased to $203.5 million, primarily reflecting accelerated equity vesting following the death of the former executive chairman, higher equity compensation and acquisition costs. Stock-based compensation included $29.4 million related to accelerated vesting.
- A $15.9 million debt-extinguishment charge followed redemption of $500 million of 6.25% notes. Roper also issued $1.5 billion of senior notes and repaid $800 million of notes at maturity.
- ASC 606 adoption increased opening retained earnings by $14.3 million; management said its impact on 2018 results was not material. The company announced a new segment structure expected to be used for first-quarter 2019 reporting, with prior periods recast.
- Roper agreed to sell Gatan for approximately $925 million, subject to customary conditions, and its remaining scientific-imaging businesses for $225 million. The latter sale closed February 5, 2019.
Outlook, risks and contingencies
- Management expected a 2019 effective tax rate of 21%–23% and capital expenditures plus capitalized software spending of 1.0%–1.5% of annual revenue. It anticipated positive operating cash flow and debt reduction, but noted that acquisitions and operating performance could affect the pace. No consolidated revenue or earnings guidance is stated in the provided filing text.
- Key risks include acquisition execution and integration, substantial indebtedness and covenant compliance, cyclicality in some industrial and energy markets, competition, cybersecurity and data protection, foreign exchange, supplier constraints, environmental liabilities, and possible goodwill or intangible-asset impairment. Goodwill was $9.35 billion; no impairment was identified in 2018.
- The company reported ordinary-course litigation, asbestos-related claims for which potential liability could not be determined, and a pending stockholder derivative complaint. Management concluded no matter had a reasonable possibility of material loss; it stated other claims were adequately provided for and were not expected to materially affect results or cash flows.
- Auditors gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective; 2018 acquisitions were excluded from the control assessment.
Important facts for investors to verify
- How much of future growth and cash generation is organic versus acquisition-driven, particularly following the PowerPlan acquisition?
- Debt repayment capacity, revolver usage, interest expense and compliance with the 3.5-to-1 leverage covenant.
- Completion and proceeds of the Gatan sale, and the effects of the scientific-imaging divestitures on segment comparability.
- Whether the 2019 tax-rate outlook, operating cash flow and debt-reduction expectations were achieved.
- Performance of recently acquired businesses and sensitivity of goodwill and the lab-software trade name to weaker results or valuation assumptions.