Roper Industries Inc. (ROP) posted stellar third quarter 2011 results. The company reported earnings of $1.12 per share, up 28.7% year over year and surpassed the Zacks Consensus Estimate of $1.08 per share.
Earnings per share (EPS) were in line with the high end of management’s guided range of $1.05 to $1.09. The strong results were primarily driven by solid revenue growth and margin expansion in the quarter.
Operating Performance
Gross profit rose 18.9% year over year to $382.6 million. Gross margin in the reported quarter inched up to 53.7% from 53.2% in the year-ago quarter, driven by strong revenue growth across all the segments.
Gross profit margin in the Industrial Technology segment stood at 49.2% versus 51.1% in the year-ago quarter. The Medical & Scientific Imaging margin expanded to 63.3% from 61.5% in the year-ago quarter.
The Energy Systems & Controls segment reported gross margin of 54.4%, up from 53.1% in the year-ago quarter. RF Technology margin was 50.1% compared with 49.0% in the year-ago quarter.
In the reported quarter, operating income increased 30.4% year over year to $167.2 million. The significant upside in operating income was based on improved sales.
All the segments posted strong operating profit growth. Operating margins for the Industrial Technology segment, Medical & Scientific Imaging, Energy Systems & Controls and RF Technology increased 30 bps, 250 bps, 150 bps and 380 bps on a year-over-year basis, respectively. Banking on the significant upside in operating margin across all the segments, overall operating margin improved 230 bps to 23.5% from 21.2% in the year-ago quarter.
Net income increased 30.9% year over year to $110.3 million in the quarter, with net margin climbing 160 bps year over year to 15.5%.
Revenue
Roper delivered total revenue of $712.7 million, up 17.8% year over year. Acquisitions/Divestitures contributed 3.0% to the revenue growth in the quarter, while 13.0% came from organic growth and 2.0% from favorable foreign currency fluctuations.
The strong year-over-year growth was driven by better-than-expected double-digit sales growth across all the four segments. Net orders increased approximately 10.0% year over year to $718.6 million during the quarter.
Revenues from Industrial Technology (26.0% of sales) increased 15.0% year over year to $185.3 million. Medical & Scientific Imaging revenues (22.0% of sales) were $156.5 million, up 16.4% year over year, whereas Energy Systems & Controls revenues (21.0% of sales) increased 21.8% year over year. Revenues from RF Technology (31.0% of sales) were $220.6 million, up 18.6% year over year.
Balance Sheet & Cash Flow
Roper Industries ended the quarter with $246.5 million in cash and equivalents and $1.17 billion in total debt (including the current portion) compared with $196.0 million in cash and equivalents and $1.25 billion in total debt (including the current portion) in the previous quarter.
Operating cash flow was $166.6 million in the quarter versus $155.9 million reported in the previous quarter. In the third quarter of 2011, free cash flow was $156.8 million versus $145.0 million in the prior quarter.
Guidance
For the fourth quarter, management anticipates EPS in the range of $1.18 to $1.22. The Zacks Consensus Estimate for the fourth quarter of 2011 is currently pegged at $1.21, below the guided range.
Roper Industries expects earnings per share in the range of $4.29 to $4.33 for fiscal 2011, up from its previous guidance of $4.20 to $4.30. Currently, the Zacks Consensus Estimate for fiscal 2011 is pegged at $4.26, below the company’s guidance.
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 #3 Rank, which implies a short-term Hold rating on the stock.
