Roper Industries (ROP)

Q3 2010 Earnings Call

October 25, 2010 8:30 am ET

Executives

B. Jellison - Chairman of the Board, Chief Executive Officer, President and Member of Executive Committee

John Humphrey - Chief Financial Officer and Vice President

Analysts

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

Alexander Blanton - Ingalls & Snyder

Terry Darling - Goldman Sachs Group Inc.

Jeffrey Sprague - Citigroup

D. Mark Douglass - Longbow Research LLC

Christopher Glynn - Oppenheimer & Co. Inc.

Deane Dray - Citigroup Inc

Presentation

Operator

Good day, and welcome to the Roper's Third Quarter Financial Results Conference Call. [Operator Instructions] I will now like to turn the call over to John Humphrey, Chief Financial Officer. Please go ahead, sir.

John Humphrey

Thank you, Coreen, and thank you all for joining us this morning as we discuss the results of our third quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; and Paul Soni, Vice President and Controller.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We've prepared slides to accompany today's call, which are available through the webcast and also are available on our website at www.roperind.com.

Now if you'll please turn to Slide 2. We'll begin with our Safe Harbor statement. During the course of today's call, we'll be making forward-looking statements, which are subject to the risks and uncertainties as described on this page and as detailed further in our SEC filings. You should listen to today's call in the context of that information.

And now if you'll please turn to Slide 3. I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we'll be taking questions from the participants. Brian?

B. Jellison

Thanks, John, and good morning, everybody. So we'll start off with the enterprise overview and then an individual talk through the four segments. I'll talk about updating guidance with the huge increase we've taken in free cash flow in the fourth quarter and the summary in Q&A period. So next slide.

On the enterprise overview, you'll see the third quarter was an all-time record for us for any quarter in the history of the company. That included record levels of orders, of sales, the ending backlog, net earnings, EBITDA, cash flow and a whole lot of other metrics as well. Orders were up 31% to $654 million, with organic growth of 20% in orders. RF, we'll talk about a little bit, it was actually down one point organically. If you look at the excluded RF, we were up 32% organically on orders.

Sales were up 25% to $605 million. Organic growth there was 14%, again because of some unusual comps in Q3 at RF. It was basically flat, so it would've been up about 22% organically in revenue.

Our net earnings were up 49% to $84 million, and our EBITDA was $163 million on that $605 million of sales. So EBITDA finished the quarter at 27%.

Free cash flow was up 65% to $133 million, and probably the most startling statistic I can recall seeing free cash flow is now 22% of revenue. That's 158% of cash conversion. So all of these generally are all-time records.

Next slide. On the income statement, you can see bookings were up from $499 million a year ago to $654 million, 31%. Our net sales as we said before, up 25%. Gross margins expanded substantially from 50.6% in the third quarter of last year to 53.2% this year, 260 basis points higher.

Our income from ops were up 40%. Our operating margin was up from 18.9% to 21.2% in the third quarter, a gain of 230 basis points. And that includes the intangible amortization, that of course is added in from our latest acquisition.

Interest expense was up modestly. Other income there, you can see was up $3 million, which is this foreign FX remeasurement benefit that sometimes is positive and sometimes negative. Our tax rate was a little lower than the third quarter last year. It is turning out that Q3, because of the FIN 48 process, is generally going to have the lowest tax rate in the quarter as your prior year rolls off with the filing. We were down 1.4% from the year before, which is not really the FIN 48 portion at all. It's really some improved tax planning that we've been doing over the last several years.

So on a FIN 48 basis, the numbers were quite similar. Our net earnings, as you can see, up $84 million versus $56 million, 49%, and of course, the DEPS at $0.87.

Next slide. Here in our asset velocity is the same way we've been showing this for several years now, and the improvement continues. Inventory dropped in the third quarter to 7.7% of revenue, down from 9% a year ago. And when you look at the inventory plus receivables, less payables and accruals, you can see we're down to 6.9% when just three years ago, that same math was 12.1% of revenue. So we picked up 520 basis points of sales that we can redeploy in cash.

Next slide. Here, the record cash performance is really worth noting and thinking about. Our free cash flow at 22% of sales is certainly an unprecedented number. Our operating cash flow was 23%, meaning we had CapEx of 1% of sales.

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