Roper 3Q Beats, Guidance Up

| About: Roper Technologies, (ROP)

Roper Industries Inc. (NYSE:ROP) reported third quarter 2010 results before the market opened. Earnings for the third quarter were 87 cents per share, beating the Zacks Consensus Estimate of 79 cents. Earnings were up 42.6% year over year from 61 cents. Net earnings for the third quarter were $84 million, a 49.0% increase over the third quarter of 2009.

The company reported higher earnings and sales, increased order growth, impressive cash flow and improved margins. Third quarter results included the acquisition of iTradeNetwork, which was completed on July 27, 2010. Roper Industries also lifted its 2010 guidance for the third time this year, based on better-than-expected results.


Third quarter revenues of $605.1 million were up 24.6% year over year, of which 11.9% of the growth came from Acquisitions/Divestitures and 13.7% from organic growth. Foreign exchange had a negative impact of 1% on revenues. Revenues beat the Zacks Consensus Estimate of $593.0 million by 2%.

All of the segments performed well in the quarter. Scientific & Industrial Imaging segment revenues of $134.4 million soared 70.3% year over year, Industrial Technology segment revenues of $161.2 million escalated 23.5%, Energy Systems & Controls segment revenues of $123.4 million increased 19.9% and RF Technology segment sales of $186.0 million were up 7.4%.

Revenues increased primarily due to better-than-expected customer orders, which climbed 31.1% over the prior-year quarter to a record $653.9 million. Order flow represented a 1.08 book-to-bill ratio.

Roper Industries witnessed an increase in orders in all of its segments, driven by an 81.0% increase in Scientific Imaging/Medical, a 29.0% growth in Energy Systems & Controls and a 35.0% rise in Industrial Technology. The company’s backlog at quarter end was a record $770 million, up 39% from the year-ago quarter.

Operating Performance

Gross margins increased to 53.2% in the quarter from 49.4% in the year-ago quarter, reflecting strong execution and a higher margin business mix. Margins improved in all of its segments, excluding RF Technology, leading to overall higher margins for the company.

The gross profit margin for the Industrial Technology segment improved to 51.1% from 47.5% in the year-ago quarter. The Scientific & Industrial Imaging margin expanded to 61.5% from 56.0% in the year-ago quarter. The Energy Systems & Controls segment margin of 53.1% increased from 50.9% in the year-ago quarter. This was offset by RF Technology margin that fell to 49.0% from 50.1% in the year-ago quarter.

Operating income of $128.2 million was up 39.5% from the year-ago quarter based on improved sales. Although the selling and administrative costs rose 25.9% year over year, the operating margins came in at 21.2% in the quarter, an improvement of 230 basis points year over year.

Balance Sheet & Cash Flow

Roper Industries ended the quarter with $250.8 million in cash and equivalents and $1.48 billion in long-term debt (including the current portion). This compares with $290.7 million in cash and equivalents and $1.13 billion in long-term debt (including the current portion) in the previous quarter.

Operating cash flow was a record $139.4 million in the quarter, versus $110.0 million reported in the previous quarter. Year to date, the company reported an operating cash flow of $344.4 million.

During the quarter, EBITDA increased to $163.1 million, or 27.0% of sales. In the previous quarter, EBITDA was $145 million, or 25.7% of sales. Free cash flow of $132.8 million was 22.0% of sales and 158.0% of net earnings in the third quarter 2010. Free cash flow of $102.6 million was 18% of sales and 144% of net earnings in the second quarter of 2010.

2010 Guidance Raised

As a result of its strong first nine months performance and improving order trends, Roper Industries again lifted its full-year 2010 earnings per share guidance (third time in a row) in the range of $3.22 to $3.26 from the previously expected range of $3.05 to $3.15. The Zacks Consensus Estimate for the full year 2010 is pegged at $3.14, at the time the company reported third quarter results.

The company also raised its operating cash flow guidance for 2010 in the range of $465 million to $485 million, up from $425 million to $450 million previously projected.

For the fourth quarter, management anticipates earnings per share guidance in the range of 96 cents to $1.00. The Zacks Consensus Estimate for fourth quarter 2010 is currently pegged at 96 cents.

As a part of its growth strategy, Roper has made numerous acquisitions and is likely to continue doing so in the future. With the help of numerous acquisitions that are low on investment and high in margins, Roper has been growing into the SaaS business. We remain positive on the company’s recent acquisitions. With a record backlog, the company expects strong organic sales growth in 2010.

We have an Outperform rating on Roper Industries on a long-term basis with a Zacks #2 Rank #2, which implies a short-term Buy rating on the stock.