The third-quarter earnings report from diversified industrial company Roper Technologies (NYSE:ROP) must have exceeded the highest expectations held by its investors. By any measure, Roper's results were very strong, so let's take a closer look at a standout quarter for the company and how its management is preparing for the future.

A new CEO

Roper's new CEO, Neil Hunn, paid tribute to former CEO Brian Jellison during the conference call, and the praise was well-deserved. Since Jellison took over the role in 2001, the stock has risen by more than 1,280%. He decided to step down as president and CEO in August, for health reasons, although he remains active in the business as executive chairman.

Hunn took the time to highlight that Roper would be following the business strategy executed by Jellison -- namely, an asset-light business model focused on small businesses operating in niche markets.

A Roper Technologies (Cornell) municipal wastewater pump.

Image source: Roper Technologies.

Given that Roper owns a collection of small businesses in disparate end markets, its decentralized operating structure (operating decisions are made locally) makes perfect sense. However, decisions over the deployment of capital and cash investment into businesses are made centrally. Hunn plans to continue this strategy.

Roper Technologies' third-quarter results: The raw numbers

Turning to the headline details from the quarter:

  • Adjusted revenue increased 13% on a year-over-year basis with organic revenue up 9%.
  • Adjusted diluted EPS came in at $3.01, representing a 31% increase year over year and exceeding the guidance range of $2.89-$2.95.

Revenue grew by double digits in the quarter, and this performance was replicated across all of Roper's segments.

In fact, reported revenue and operating profit grew by double digits across all of Roper's segments in the quarter. Moreover, operating profit margin expanded across each segment, too. All of the businesses increased operating margin by more than 100 basis points (equivalent to 1%) with energy systems and controls' margin up a whopping 420 basis points in the quarter.

Segment

Organic Revenue Growth (Year Over Year)

Revenue Growth (Year Over Year)

Operating Profit

Operating Profit Growth (Year Over Year)

RF technology and software

4%

14%

$168 million

16%

Medical and scientific imaging

11%

11%

$133 million

15%

Industrial technology

15%

15%

$74 million

19%

Energy systems and controls

11%

10%

$46 million

27%

Data source: Roper Technologies' presentations.

It's notable that Roper's more cyclical segments -- industrial technology and energy systems and controls -- are growing faster than its less cyclical segments. It's the reverse of what happened in 2015-2016, when the U.S. entered an industrial recession and oil prices slumped.

The rising price of oil has helped stocks with exposure to oil and gas spending, and Roper's industrial technology segment has heavy exposure to fluid pumps, valves, meters, and water treatment -- industries that benefit from an investment in sustainable water solutions

Roper Technologies' guidance

Guidance for the fourth quarter looks good, with each segment expected to grow in the mid-single digits. Management raised its full-year 2018 guidance for the third quarter in a row.

Full-Year 2018 Guidance

Current

In July

In April

In February

Organic revenue growth (year over year)

7%-plus

About 7%

4%-6%

4%-5%

Adjusted diluted EPS

$11.69-$11.73

$11.40-$11.56

$11.08-$11.32

$10.88-$11.20

Data source: Roper Technologies' presentations.

Strategic matters

It's not often that a CFO starts talking about bond yields on an earnings call, but Robert Crisci took the time to outline how Roper had tidied up its balance sheet in anticipation of rising interest rates. The company issued $1.5 billion worth of bonds at attractive rates ($700 million five-year notes at 3.65% and $800 million at 4.2%) and redeemed $500 million 6.25% notes due in 2019.

The end result is that Roper now has $4.1 billion worth of debt at a weighted fixed-term rate of just 3.5% -- not bad when 10-year Treasury yields are around 3%. This is an important point for Roper because the company has a history of making acquisitions, and a solid balance sheet is a prerequisite for making deals in the future. 

Looking ahead

It was a very good quarter for the company, and investors will be hoping that Hunn picks up where Jellison left off. The balance sheet is in good shape and Roper's asset-light model shields it somewhat from rising raw material costs.

The key long-term question lies in whether Hunn will be able to keep up Jellison's record of successful acquisitions. The good news is that he's inherited a company in very good shape to do so.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Roper Technologies. The Motley Fool has a disclosure policy.