Business context and reporting period
Roper Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2022. It is a diversified technology company focused on vertical software and technology-enabled products. Following a reporting-structure change, continuing operations are reported in Application Software, Network Software, and Technology Enabled Products; prior periods were recast.
Roper classified its industrial businesses and the TransCore, Zetec, and CIVCO Radiotherapy businesses as discontinued operations. The industrial-business sale to CD&R was pending at quarter-end, subject to customary closing conditions and regulatory approvals, and was expected to close in Q4 2022.
Financial performance
Amounts are in millions, except per-share data and percentages. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,350.3 | $1,232.1 | $3,940.9 | $3,577.2 |
| Gross profit | $941.8 | $871.7 | $2,750.5 | $2,527.2 |
| Income from operations | $393.2 | $346.9 | $1,112.0 | $980.7 |
| Net earnings from continuing operations | $276.9 | $210.8 | $738.3 | $638.2 |
| Total net earnings | $327.0 | $289.5 | $2,616.3 | $864.8 |
| Diluted EPS from continuing operations | $2.59 | $1.97 | $6.91 | $6.00 |
| Gross margin | 69.7% | 70.7% | 69.8% | 70.6% |
| Operating margin | 29.1% | 28.2% | 28.2% | 27.4% |
Q3 revenue rose 9.6%, including 9.8% organic growth; foreign exchange reduced growth by 1.6 percentage points. Q3 continuing-operations earnings and diluted EPS increased year over year. Total nine-month net earnings were heavily affected by a $1,707.7 after-tax gain on discontinued-operation dispositions.
Segments and revenue mix
- Q3 revenue growth was 7.3% in Application Software, 9.7% in Network Software, and 13.9% in Technology Enabled Products. Organic growth was 6.8%, 10.4%, and 15.1%, respectively.
- Q3 segment operating margins were 27.0% for Application Software, 42.7% for Network Software, and 35.2% for Technology Enabled Products. Network Software and Technology Enabled Products margins improved; Application Software margin declined.
- Recurring software revenue was $721.8 in Q3, versus $646.8 a year earlier. Total software revenue was $994.1; product revenue was $356.2.
- Remaining performance obligations were $3,621.1 at September 30; the company expected to recognize about 67%, or $2,420.9, over the next 12 months. Backlog was up 23% year over year.
Cash flow, debt and liquidity
- For the first nine months, continuing-operations operating cash flow was $550.2, down from $1,142.6. Management attributed the decline chiefly to cash taxes related to prior divestitures, higher cash taxes associated with Internal Revenue Code Section 174, and working-capital timing. Consolidated operating cash flow, including discontinued operations, was $662.9.
- Continuing-operations investing cash outflow was $634.6, including $580.9 for acquisitions. Financing cash outflow was $1,401.8, including debt repayments and dividends. Cash proceeds from discontinued-operation dispositions were $2,997.1.
- Cash and equivalents were $1,894.5 at quarter-end, compared with $351.5 at December 31, 2021. Total debt was $6,659.5 and net debt was $4,765.0; net debt to total net capital was 25.6%, down from 39.6% at year-end.
- There were no borrowings under the new five-year $3.5 billion revolving credit facility at September 30; letters of credit outstanding were $20.8. The company reported covenant compliance. Management said cash, operating cash generation, and available facility capacity should fund foreseeable operating requirements.
- Net interest expense fell to $41.3 in Q3 from $58.2, primarily due to lower average debt and increased interest income. The company redeemed $500.0 of notes and repaid $300.0 of notes at maturity during the quarter.
Material changes, outlook and risks
- Completed 2022 sales of TransCore and Zetec, generating a combined $2,997.1 in cash proceeds reported in investing activities. Their after-tax disposition gains contributed to the large year-to-date discontinued-operations earnings.
- The proposed industrial-business transaction would provide approximately $2.6 billion in upfront pretax cash proceeds while Roper retained a 49% minority interest. Terms also include a potential earnout of up to $51 million and ongoing payments initially totaling about $29 million annually, or an in-kind equity transfer. Closing remained conditional at quarter-end.
- On October 4, 2022, after the quarter-end, Roper completed its acquisition of Frontline Education for $3,738 net of cash acquired and debt assumed, funded with cash and the revolving facility.
- Management provided no specific earnings or revenue guidance in this filing. It expected positive operating cash flows to support debt reduction and capital spending plus capitalized software spending for the remainder of the year to be comparable to prior years as a percentage of revenue.
- Management cited inflation, supply-chain disruption, labor shortages, foreign exchange, rising interest rates, COVID-19, geopolitical uncertainty, acquisition integration, competition, and cybersecurity and data-privacy matters as risks. Technology Enabled Products faced elevated material, component, and freight costs; Application Software margins reflected higher staffing and SaaS/professional-services mix.
- Legal matters include a pending Vertafore driver-data privacy class action and Texas Attorney General investigation, and a Verathon patent case scheduled for trial in 2023. Management said it had made adequate provision for ordinary-course claims but gave no assurance of outcomes. A $4.1 one-time charge related to transferring asbestos-claim exposure was recorded in the first quarter.
Important facts for investors to verify
- Whether the industrial-business sale closed as expected, and the final proceeds, retained-interest accounting, earnout, and ongoing payment obligations.
- How the $3.738 billion Frontline acquisition was financed and its subsequent contribution to revenue, earnings, cash flow, and debt.
- Underlying growth and margins by segment, particularly the effects of foreign exchange, acquisitions, SaaS mix, and input-cost inflation.
- Cash conversion in continuing operations after unusually high divestiture-related taxes and other working-capital timing effects.
- Debt repayment capacity, interest-rate exposure, and compliance with the new credit facility’s leverage covenant.
- Developments in the Vertafore and Verathon legal matters and any resulting financial exposure.