Diversified industrial company Roper Technologies, Inc. (ROP +1.32%) played out the recurring theme established by far larger companies in the industrial sector. As with General Electric (GE 3.77%), Roper's energy-related operations posted disappointing results, and like 3M Company (MMM 2.91%), its cyclically exposed industrial business saw weakness as well. However, just as 3M reported strong results in its healthcare segment, so Roper did with its medical technologies. Let's take a closer look at the details of Roper's fourth-quarter earnings.
Roper Technologies' fourth quarter: The raw numbers
Revenue of $948 million came in flat compared to last year's fourth quarter, but that was only due to a 6% contribution from acquisitions. Underlying growth was weaker, with organic revenue declining 4% and foreign currency providing a 2% headwind.
The good news comes from margin and free cash flow, especially relevant numbers for a highly acquisitive company with a history of buying highly cash-generative businesses. Fourth-quarter gross margin increased to 61.8% from 59.9% in the same period last year, and earnings before interest, tax, depreciation, and amortization, or EBITDA, increased to 35.9% from 35.3%.
Ultimately, fourth-quarter EBITDA increased 2%, with free cash flow up 3%. It capped off a strong year, with full-year operating margin expanding to 29% from 28.2% in 2014. Meanwhile full-year free cash flow increased 11% to $893 million, representing 25% of full-year revenue.
What happened with Roper Technologies this quarter?
As alluded to earlier, there were contrasting outcomes from Roper's segments in the fourth quarter. Medical solutions contributed 41% of 2015 EBITDA, with RF technology responsible for 28%. The final two segments, industrial technologies and energy systems and controls, contributed 17% and 14%, respectively.
| Organic Revenue Growth | Reported Revenue Growth | Operating Profit Growth | Operating Margin Change (bp) | |
|---|---|---|---|---|
| Medical Solutions | 3% | 12% | 16% | 110 |
| RF Technology | 4% | 18% | 30% | 270 |
| Industrial Technology | (8%) | (17%) | (24%) | (270) |
| Energy Systems & Controls | (17%) | (21%) | (28%) | (340) |
DATA SOURCE: ROPER TECHNOLOGIES PRESENTATIONS. BP: BASIS POINTS WHERE 100 BP EQUALS 1%.
As you can see above, Roper's most important segments are outperforming, responsible for 69% of 2015 EBITDA still growing organically.
What management had to say
In addition, most of the trends discussed above seem firmly in place in 2016. On the earnings call, management gave guidance for mid-single-digit organic growth for medical solutions and RF technology in 2016 (both are set to have stronger second-halves), with energy systems and controls organic revenue forecast to fall in the high single digits. The outlier is industrial technology, where low-single-digit organic growth is expected.
Roper's industrial technology segment has some exposure to oil and gas upstream and management expects a 30% decline from the industry in 2016. To put it in context, the hit to revenue is forecast t o be around $20 million, or 2.7% of industrial technology revenue in 2015.
In reality, Roper is another industrial company being hit by its energy exposure. There is an argument to say that the market should have priced this in by now, but General Electric Company also fell after it gave results -- albeit those were closer to market expectations than were Roper's earnings -- so clearly the market hasn't quite learned to be fully comfortable with industrial companies' oil exposure.
Guidance
Acquisitions look set to help Roper grow revenue and earnings in 2016.
- Revenue growth of 8% to 10% is expected, with organic revenue growth of 2% to 4%
- Guidance for full-year adjusted diluted earnings per share of $6.85 to $7.15 implies a 2.5% to 7% increase in EPS
- Guidance for full-year operating cash flow of around $1 billion implies a 7.6% increase on 2015
- Plans to deploy $1 billion in strategic acquisitions in 2016 following $1.8 billion in 2015
Looking ahead
Roper's challenge in 2016 will be to manage declines in its oil and gas-related earnings, while its opportunities come from acquisitions and growing both revenue and margins in its medical solutions and RF technology segments. Also, any protracted market malaise is likely to create opportunities for acquisitions -- something Roper usually does very well.
