Roper Industries Inc. (ROP) posted strong second quarter 2011 earnings per share (EPS) of $1.03, up 39.2% year over year and surpassing the Zacks Consensus Estimate of 99 cents.
Reported EPS also beat management’s guided range of 95 cents to $1.00. The strong results were primarily driven by solid revenue growth and margin expansion in the quarter.
Operating Performance
Gross profit rose 25.0% year over year to $377.1 million. Gross margin in the reported quarter inched up to 53.9% from 53.2% in the year-ago quarter, driven by strong revenue growth across all the segments.
Gross profit margin for the Industrial Technology segment stood at 50.2% versus 50.8% in the year-ago quarter. The Medical & Scientific Imaging margin expanded to 62.9% from 60.9% in the year-ago quarter.
The Energy Systems & Controls segment reported gross margin of 55.2%, up from 54.3% in the year-ago quarter. RF Technology margin was 49.9% compared with 48.9% reported in the prior-year quarter.
In the reported quarter, operating income was $164.0 million, up 37.6% from the year-ago quarter. The significant upside in operating income was on account of improved sales.
Although selling and administrative costs jumped 16.6% year over year, operating margin improved 240 bps year over year to 23.4%.
During the quarter, EBITDA increased to $199.1 million or 28.5% of total sales compared with $145.5 million or 25.7% of total sales in the year-ago quarter.
Net income increased 43.0% year over year to $102.0 million in the quarter, with net margin climbing 200 basis points (bps) from the prior-year quarter to 14.6%.
Revenue
Roper delivered total revenue of $700.0 million, up 23.4% year over year. Acquisitions/Divestitures contributed 4.0% to the revenue growth in the quarter, while 16.0% came from organic growth.
Foreign exchange had a positive impact of 3% on revenues. The strong year-over-year growth was driven by better-than-expected double-digit sales growth across all the four segments.
At the end of the second quarter, book-to-bill ratio was greater than 1.0, with a record backlog of $872.0 million, up $230.0 million from the prior-year quarter.
Segmental Revenue details
RF Technology (31.0% of sales) – Revenue was $220.0 million, up 26.4% from the prior-year quarter. Orders increased 13.0% year over year to $217.0 million. The better-than-expected result was driven by growth across all the products. Roper continued to drive strong growth from the U.K. water network monitoring products.
CBORD recorded higher double-digit sales primarily driven by higher deployments in colleges and universities. Moreover, strong North American toll tag shipments also drove quarterly results.
Industrial Technology (26.0% of sales) – Revenue increased 26.1% year over year to $183.0 million. The better-than-expected result was primarily attributed to strong growth at Fluid Handling driven by oil & gas and new customer growth. The segment also benefited from robust demand for material test equipment. Orders increased 15.0% year over year to $189.0 million in the quarter.
Roper’s next generation residential meter Neptune achieved double-digit growth during the quarter.
Energy Systems & Controls (21.0% of sales) – Revenue increased 22.1% year over year to $146.0 million, with orders increasing 19.0% to $151.0 million. The exceptional growth was driven by strong end markets.
Increased adoption of the diesel engine safety systems and strong growth in the refining & petrochem market from higher instrument sales contributed to the strong results in the quarter.
Medical & Scientific Imaging (22.0% of sales) – Revenue increased 17.6% year over year to $151.0 million and orders stood at $150.0 million, up 11.0% year over year. This growth was driven by strong performance from the medical segment. Moreover, new products for high end imaging and electron-microscopy filters were key growth drivers in photonics.
During the second quarter, Roper completed the acquisition of Northern Digital Inc. a leading provider of 3-D measurement technology for medical applications. The all-cash transaction is valued at Canadian $200.0 million and is expected to contribute more than Canadian $20.0 million in EBITDA over the next twelve months.
Balance Sheet & Cash Flow
Roper Industries ended the quarter with $196.0 million in cash and equivalents and $1.25 billion in total debt (including the current portion) compared with $261.4 million in cash and equivalents and $1.24 billion in total debt (including the current portion) in the previous quarter.
Operating cash flow was $155.9 million in the quarter versus $86.6 million reported in the previous quarter. In the second quarter of 2011, free cash flow increased 41.0% year over year to $145.0 million (21.0% of sales).
Guidance
For the third quarter, management anticipates EPS in the range of $1.05 to $1.09. The Zacks Consensus Estimate for the third quarter of 2011 is currently pegged at $1.02, below the guided range.
Roper Industries expects fiscal 2011 earnings per share in the range of $4.20 to $4.30, up from its previous guidance of $3.97 to $4.12. Currently, the Zacks Consensus Estimate for fiscal 2011 is pegged at $4.12, below the company’s guidance.
Strong results across all the company’s segments will likely drive earnings in the second half of 2011.
According to management, RF Technology segment is expected to achieve strong growth in the second half driven by higher toll & traffic shipments, expansion of electronic tolling in Puerto Rico and strong CBORD backlog.
Industrial Technology will continue to gain from strong order trends and backlog support in fluid handling, new product introductions in the material test markets and continued momentum in Neptune adoption. Healthy backlog is expected to drive growth in both Energy Systems & Controls and Medical & Scientific Imaging segments.
Roper expects operating cash flow of more than $575.0 million for fiscal 2011.
Recommendation
We believe record backlog and upside across all the segments will drive revenue growth in fiscal 2011. Moreover, Roper’s substantial free cash flow generating abilities will help the company to pursue its acquisition strategy going forward.
However, Roper faces tough competition from Agilent Technologies Inc. (A) and Halliburton Company (HAL), which may hurt profitability going forward.
We maintain our Neutral recommendation over the long term (6-12 months). Currently, Roper has a Zacks #2 Rank, which implies a short-term Buy rating on the stock.
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