The general theme from industrial companies in the current earnings season has been the return to growth of capital spending by energy and heavy industries, and the latest earnings report from Roper Technologies (ROP 1.46%) confirmed the trend. However, the good news didn't stop there: Management unveiled some excellent operational performance in the quarter and its other end markets reported good conditions. Let's take a closer look at a strong quarter for the company.
Roper Technologies first-quarter results: The raw numbers
Starting with headline numbers from the quarter:
- Revenue growth of 22% was fueled by acquisitions, but organic growth was also strong at 5%.
- Diluted EPS increased 17% to $2.11 and came in higher than the guidance range of $1.92 to $2.00.
It was clearly a strong quarter for Roper, and management was moved to increase full-year guidance:
- Full-year adjusted revenue is now expected to increase by 21%-22% and 4%-5% organically, compared to previous guidance for 20%-22% and 3%-5%, respectively.
- Full-year adjusted diluted EPS is now expected to be $8.98-$9.28 compared to previous guidance of $8.82-$9.22.
- Second-quarter guidance initiated for adjusted diluted EPS of $2.16 to $2.24.
Image source: Getty Images.
Conservative guidance?
As Cowen & Co. analyst Joe Giordano commented on the earnings call, the first-quarter diluted EPS beat the midpoint of management's expectations by $0.15 but the midpoint of full-year guidance was increased by only $0.11. The reason?
CFO Robert Crisci pointed out that the medical and scientific imaging and RF technology and software segment performances in the first quarter "were right where we expected them to be" and the outlook for those two segments hadn't changed.
The positive change to overall guidance came from an improved outlook in the energy systems and industrial technology segments. However, as you can see below, they are significantly smaller contributors to overall profitability. That said, it's still hard not to think that management is being conservative with guidance.
Data source: Roper Technologies presentations. Millions of U.S. dollars. Chart by author.
Productivity and cash flow
Another area where management might be being conservative is with cash flow guidance. On the earnings call, CEO Brian Jellison said,"The cash flow still looks to us like it's right at about $1.150 billion. That's around 24%, maybe even 25% of revenue."
That's a metric that management prides itself on, but it's worth noting a couple of points. First, the trailing-12-month operating cash flow is $1.135 billion (although the first quarter of 2017 was not at a normal tax rate). Second, management disclosed that working capital as a percentage of sales was negative 2.9% in the first quarter following the previous years' rates of 5.8% and 4.8%.
In plain English, this means that working capital requirements (inventory plus accounts receivables minus accounts payable and deferred revenue) actually contributed to cash flow in the quarter -- the big jump was in deferred revenue, which rose 87% year over year. Roper's working capital performance in the first quarter suggests its cash-flow generation might be stronger than expected in 2017.
Looking ahead
All told, it looks like a typical Roper Technologies quarter, with strong cash flow and working capital management -- key aspects of the company's asset-light business model. Meanwhile, its end markets are improving and management is arguably being typically conservative with guidance.
