TOP CONTRIBUTORS

Vikram Parsani

ROP AT A GLANCE

P/E ► 19.8   EV/EBITDA ► 14.7   ROA ► 7.4%   ROE ► 11.3%   Debt to Equity ► 0.801   Current Ratio ► 2.03   Interest Coverage Ratio ► 5.62

 

 

 

 

Roper Industries (NYSE:ROP) makes devices to control and monitor energy usage, radio frequency identification (RFID) devices used in toll and traffic systems across North America, and industrial testing and metering equipment for materials analysis and flow measurement.^[1] In 2007, the company had sales of $2.1 billion, a net income of $250 million and a net profit margin of 11.9%.^[2]

Over the last two years, Roper Industries grew its sales orders by 18.4% and reinvested its free cash flows in acquisitions. From January 2006 to March 2008, the company acquired eleven businesses under its four business segments for a total of $813 million.^[3]

In February 2008, Roper Industries paid $367 million to acquire CBORD, a leading supplier of card and integrated security systems in Australia, Europe and North America.^[4] The acquisition of CBORD gives the company's RF Technology segment access to approximately 2,500 institutional clients in the health care and higher education markets.^[5]

When acquiring companies, Roper Industries targets businesses like CBORD that operate in stable, high growth markets and have a stable customer base. As a result, 80% of Roper's revenues were recurring in 2007 and it retained 95% of its customers in the same year.^[6]

Company Overview

As mentioned above, the company uses its free cash flows to fuel an acquisitive growth strategy. In 2006 and 2007, Ropers Industries acquired ten companies under its four business segments, increasing sales orders by 18.4% (8.7% due to business acquisitions and 9.7% due to internal growth). ^[7]

Financial Analysis

Total Sales, Net Income and Profit Margin in 2003, 2004, 2005, 2006 and 2007 for Roper Industries, Inc.

In 2007, Roper Industries had sales of $2.1 billion, up 23.6% from $1.7 billion in 2006.^[8] Its net income was $250 million with a net profit margin of 11.9%.^[9] The company attributed this increase in sales to strong internal growth, full-year sales from companies acquired in 2006 (AC Controls, Dynisco, Intellitrans, Lumenera and Sinmed) and partial-year sales from companies acquired in 2007 (Black Diamond, DJ Instruments, Dynamic Instruments, JLT and Roda Deaco).^[10]

In 2006, Roper Industries’ sales were up 17.0% from $1.5 billion in 2005.^[11] Its net income was $193 million with a profit margin of 11.4%.^[12] Again, this increase in sales was attributed to strong internal growth, full-year sales from companies acquired in 2005 (CIVCO, Inovonics and MEDTEC) and partial-year sales from companies acquired in 2006 (AC Controls, Dynisco, Intellitrans, Lumenera and Sinmed).^[13]

Business Segments

Roper Industries' four business segments are Industrial Technology, Energy Systems and Controls, Scientific and Industrial Imaging and RF Technology.^[14] In each of the company's four business segments, no customer was responsible for more than 10% of sales in the segment for 2007.^[15]

• Industrial Technology (30.7% of total sales and 25.6% of operating profits in 2007): The Industrial Technology segment produces industrial analysis, measuring and testing equipment at six U.S.-based and two Europe-based operating units.^[16] In 2007, sales from this segment amounted to $644 million, up 17.2% from $550 million in 2006.^[17] The company attributed this increase to good sales from its materials testing business and high market penetration for its new RF-integrated water meter.

• Energy Systems and Controls (24.6% of total sales and 24.5% of operating profits in 2007): The Energy Systems and Controls segment produces energy testing, control, inspection and measurement equipment at six U.S.-based and two Europe-based operating units.^[18] In 2007, sales from this segment amounted to $516 million, up 50.3% from $344 million in 2006.^[19] The company attributed this increase to a strong global oil and gas market and good full- and partial-year sales from companies acquired in 2006 and 2007 respectively.

• Scientific and Industrial Imaging (17.9% of total sales and 19.5% of operating profits in 2007): The Scientific and Industrial Imaging segment offers high-performance digital imaging and patient positioning products and software through five U.S-based and two Canada-based operating units.^[20] In 2007, sales from this segment amounted to $376 million, up 11.0% from $339 million in 2006.^[21] The company attributed this increase to a strong electron microscopy market and good full- and partial-year sales from companies acquired in 2006 and 2007 respectively. The increase was offset by a weak market for handheld computers and motion cameras.

• RF Technology (26.8% of total sales and 20.7% of operating profits in 2007): The RF Technology segment provides identification and satellite-based communication products and software through three U.S.-based operating units.^[22] In 2007, sales in the RF Technology segment amounted to $565 million, up 20.7% from $468 million in 2006.^[23] The company attributed this success to good sales from its traffic and tolling business, which has benefited from a large project in the Middle East, together with good full- and partial-year sales from companies acquired in 2006 and 2007 respectively.

Sales by Business Segment and Geographic Region in 2007 for Roper Industries, Inc.

Geographic Regions

In 2007, sales to customers outside the United States amounted to $858,574 or 40.8% of total sales.^[24] These sales were made to customers in Canada (5.5%), Europe (18.0%), Asia (9.4%), Middle East (4.0%) and the Rest of the World (3.9%).^[25]

Key Trends and Forces

High recurring revenues and customer retention rates from subsidiaries and acquisitions

Many of the company's subsidiaries and acquisitions operate in stable, high growth markets and have a stable customer base. As a result, Roper Industries currently has 80% of its revenues recurring in nature and retains 95% of its customers annually.^[26] CBORD, which was acquired by Roper Industries on 21 February 2008, is a clear example of this. Prior to being acquired, CBORD made card and integrated security systems for over 750 higher education institutions and 1,700 major health care licensees, corporate campuses, supermarkets, theme parks and dining chains in the United States, Canada, Europe, South Africa, New Zealand and Australia.^[27]

Focus on high growth markets results in strong free cash flows

In 2006 and 2007, Roper Industries grew sales orders by 18.4% (8.7% due to business acquisitions and 9.7% due to internal growth).^[28] Almost half of this growth was achieved organically by focusing on high growth markets such as industrial technology, RF applications and medical imaging. In the case of RF applications, the market for such devices is expected to reach $5.3 billion in 2008, up 7.3% from $4.9 billion in 2007.^[29] In the case of medical imaging, a global population explosion, increased aging, a rise in chronic illnesses and better awareness of medical operations will grow the market to $11.4 billion in 2012, up 48.1% from $7.7 billion in 2007.^[30]

Strong free cash flows used on acquisition spree results in negative tangible book value

In 2007 alone, Roper Industries acquired Black Diamond for $6 million, DJ Instruments for $8 million, Dynamic Instruments for $31 million, JLT for $12 million and Roda Deaco for $45 million.^[31] On account of this acquisition spree, more than two thirds of the company's balance sheet is tied up in intangible assets such as goodwill.^[32] As of 31 December 2007, the company’s goodwill amounted to $1.7 billion as compared to $1.8 billion in stockholders’ equity, $1.7 billion in total liabilities and $3.5 billion in total assets.^[33] Given that the company's intangible assets are valued at an amount that is high relative to its total assets, the company risks a major hit to its balance sheet if intangible assets are written down.

Lack of hedging results in sensitivity to foreign exchange rate fluctuations

Although several of the company's subsidiaries and acquisitions have transactions and balances denominated in currencies other than the dollar, Roper Industries does not currently hedge against foreign exchange rate risks.^[34] In 2007, sales to customers outside the United States amounted to $858,574 or 40.8% of total sales. These sales were made to customers in Canada (5.5%), Europe (18.0%), Asia (9.4%), Middle East (4.0%) and the Rest of the World (3.9%).^[35] As such, unfavorable changes in the exchange rates between the dollar and the currencies of these countries could significantly impact the company's sales and net income.

Competition

Most of Roper Industries' competitors are more specialized, focusing on only one or two of the company's four business segments. The most significant of these competitors is General Electric which operates in six different business segments, three of which (Infrastructure, Industrial and Healthcare) overlap closely with the company's core business segments.

Agilent Technologies produces bio-analytical and electronic measurement products for the communications, electronics, life sciences and chemical analysis industries.^[36] In 2007, the company had sales of $5.4 billion, a net income of $638 million and a net profit margin of 11.8%.^[37]

General Electric is a multinational corporation with products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, industrial products and media content.^[38] In 2007, the company had sales of $173 billion, a net income of $22.2 billion and a net profit margin of 12.8%.^[39]

PerkinElmer designs, manufactures, markets and services components, systems and products for the photonics and diagnostics, detection and analysis markets.^[40] In 2007, the company had sales of $1.8 billion, a net income of $132 million and a net profit margin of 7.4%.^[41]

References

1. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
2. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
3. ↑ ROP 2007 10-K, Part II, Item 8, "Financial Statements and Supplementary Data", Page 32.
4. ↑ ROP 2008 News, "Roper Industries Acquires The CBORD Group".
5. ↑ ROP 2008 News, "Roper Industries Acquires The CBORD Group".
6. ↑ ROP 2007 Earnings Call, "Roper Industries, Inc. Q4 2007 Earnings Call".
7. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
8. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
9. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
10. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
11. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
12. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
13. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
14. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
15. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
16. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
17. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
18. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
19. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
20. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
21. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
22. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.
23. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
24. ↑ ROP 2007 10-K, Part II, Item 8, "Financial Statements and Supplementary Data", Page 32.
25. ↑ ROP 2007 10-K, Part II, Item 8, "Financial Statements and Supplementary Data", Page 32.
26. ↑ ROP 2007 Earnings Call, "Roper Industries, Inc. Q4 2007 Earnings Call".
27. ↑ ROP 2008 News, "Roper Industries Acquires The CBORD Group".
28. ↑ ROP 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 19.
29. ↑ IDTechEx 2008 RFID Articles, "RFID in 2008 - Where is the Action?".
30. ↑ PR-Inside.com 2008 Business, "Demographic Trends Driving Medical Imaging Market ".
31. ↑ ROP 2007 10-K, Part II, Item 8, "Financial Statements and Supplementary Data", Page 32.
32. ↑ ROP 2007 10-K, Part I, Item 1A, "Risk Factors", Page 8.
33. ↑ ROP 2007 10-K, Part I, Item 1A, "Risk Factors", Page 8.
34. ↑ ROP 2007 10-K, Part I, Item 1A, "Risk Factors", Page 8.
35. ↑ ROP 2007 10-K, Part II, Item 8, "Financial Statements and Supplementary Data", Page 32.
36. ↑ A 2007 10-K, Part I, Item 1, "Business", Page 3.
37. ↑ A 2007 10-K, Part II, Item 6, "Selected Financial Data", Page 37.
38. ↑ GE 2007 10-K, Part I, Item 1, "Business", Page 3.
39. ↑ GE 2007 10-K, Part II, Item 6, "Selected Financial Data", Page 21.
40. ↑ PKI 2007 10-K, Part I, Item 1, "Business", Page 3.
41. ↑ PKI 2007 10-K, Part II, Item 6, "Selected Financial Data", Page 27.
42. ↑ A 2007 10-K, Part II, Item 6, "Selected Financial Data", Page 37.
43. ↑ PKI 2007 10-K, Part II, Item 6, "Selected Financial Data", Page 27.
44. ↑ PKI 2007 10-K, Part I, Item 1, "Business", Page 3.
45. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2.