The third-quarter earnings report from diversified industrial company Roper Technologies (ROP -1.02%) 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.
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.
