Mixed 3Q for Roper

Roper Industries Inc. ( ROP - Snapshot Report ) reported third quarter 2012 non-GAAP earnings per share of $1.24 per share, up 10.7% year over year. The earnings per share surpassed the Zacks Consensus Estimate by a penny.

Quarter Details

Roper’s non-GAAP total revenue (excluding all one time items relating to the Sunquest acquisition and debt extinguishment charge) increased 5.3% year over year to $750.8 million in the quarter. However, reported revenue missed the Zacks Consensus Estimate of $760 million.

On GAAP basis, Roper reported revenues of $747.6 million. Acquisitions contributed 4.0% to revenue growth in the quarter, while 3.0% came from organic growth, which offset the negative 2.0% impact of foreign currency fluctuations.

Growth across most its business segments also contributed to the year-over-year increase in total revenues. Revenue from Industrial Technology was up 7.4% year over year to $199 million, primarily attributable to strong performance from the fluid handling business. Moreover, oil shale activity remained strong, and helped offset the weak demand in natural gas applications.

Energy Systems & Controls revenue was up 5.2% year over year to $158.2 million aided by growth in the compressor controls business. Medical & Scientific Imaging revenue increased 12.2% from the previous-year quarter to $175.6 million, primarily attributable to strong demand for Verathon Glidescope and robust performance by Northern Digital. However, revenue from RF Technology was down 1.2% year over year to $217.9 million, due to lower-than-expected toll project activity.

Non-GAAP gross profit climbed up 9.7% year over year to $419.7 million. Gross margin in the reported quarter increased to 55.9% from 53.7% in the year-ago quarter, driven by prudent revenue mix. Moreover, gross profit margin was positively impacted by margin expansions across its business segments.

Non-GAAP income from operations increased 15.2% year over year to $192.7 million. The upside in operating income was based on improved sales. Operating margin improved from 23.5% to 25.7% on a year-over-year basis. Net earnings on non-GAAP basis increased 12% from the previous-year quarter to $123.5 million.

Roper exited the quarter with $355.1 million of cash and cash equivalents and $2.10 billion of total debt (including the current portion) compared with $518.7 million of cash and cash equivalents and $1.07 billion of total debt (including the current portion) in the previous quarter. Operating cash flow was $205.0 million in the quarter versus $119.0 million in the previous quarter. Free cash flow for the quarter was $197 million.

Guidance

For the fourth quarter, Roper expects non-GAAP earnings per share in the range of $1.43–$1.49. The Zacks Consensus Estimate is pegged at $1.46 per share.

For fiscal 2012, Roper expects non-GAAP earnings per share to be in between $4.91 and $4.95 per share. Currently, the Zacks Consensus Estimate for fiscal 2012 is pegged at $4.94. Moreover, management expects operating cash flow for fiscal 2012 to be approximately $700 million.

Recommendation

We believe that a strong backlog and improvement across segments coupled with strong organic growth are likely to drive revenues going forward. Moreover, the acquisitions are expected to benefit the company in the long run. However, competition from Agilent Technologies Inc. ( A - Analyst Report ) and Halliburton Company ( HAL - Analyst Report ) are the near-term headwinds.

We maintain a Neutral recommendation for Roper over the long term (6-12 months). Currently, Roper has a Zacks #3 Rank, which implies a short-term Hold rating on the stock.