Roper Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in millions, except per-share data and percentages. Roper is a diversified technology company operating software and engineered-products businesses across four reportable segments.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net revenue | $1,350.7 | $1,287.2 | +4.9%; organic growth 3.6%, net acquisition/divestiture contribution 1.7%, FX impact −0.4% |
| Gross profit / margin | $856.8 / 63.4% | $810.6 / 63.0% | Gross profit +5.7% |
| Operating income / margin | $349.2 / 25.9% | $346.4 / 26.9% | Income +0.8%; margin declined |
| Net earnings | $240.3 | $369.6 | Prior period included a $119.6 pretax gain on sale of the Imaging businesses |
| Diluted EPS | $2.28 | $3.53 | Prior-period disposal gain contributed to the decline |
| Operating cash flow | $363.9 | $290.3 | +25.4% |
| Cash and cash equivalents | $999.8 | $709.7 at Dec. 31, 2019 | Quarter-end balance |
| Total debt, net of deferred finance costs | $5,276.6 | $5,275.3 at Dec. 31, 2019 | Net debt $4,276.8; net debt / total net capital 30.8%, versus 32.5% |
Net interest expense was $45.4, versus $43.7. The effective tax rate was 21.1%, compared with 11.8%; the 2019 rate benefited from a $43.0 discrete tax benefit related to foreign restructuring. Comprehensive income was $112.1, including a $128.2 foreign-currency translation loss.
Segments and material period comparisons
- Application Software: Revenue $405.1, +6%; organic growth 5%. Operating margin was 24.1%, versus 24.0%.
- Network Software & Systems: Revenue $438.2, +27%; organic growth 9%, with acquisitions contributing 18%. Operating margin fell to 31.7% from 36.2%, reflecting mix and acquisition-related costs, including acquired-intangible amortization.
- Measurement & Analytical Solutions: Revenue $365.2, −9%; organic growth of 3% was more than offset by a 12% decline associated with the Imaging and Gatan divestitures. Operating margin improved to 31.2% from 29.4%.
- Process Technologies: Revenue $142.2, −10%, primarily from lower upstream oil and gas demand. Operating margin declined to 30.5% from 31.6%.
Software and related-services revenue was $668.5, up from $576.8; engineered-products and related-services revenue was $682.2, down from $710.4. Backlog was $2,070.3, up 22% year over year. Remaining performance obligations totaled $3,543.4; approximately 58% was expected to be recognized over the next 12 months.
Liquidity, outlook, risks and notable items
- Cash provided by investing activities was negative $17.0, primarily reflecting capital expenditures; financing cash flow was negative $38.7, primarily from dividends. Capital expenditures were $7.9 and capitalized software expenditures were $2.6.
- At March 31, Roper had no borrowings under its $2,500 revolving credit facility and had $68.6 of outstanding letters of credit. Management stated that cash, operating cash generation and available credit were expected to fund foreseeable needs, including dividends and certain strategic acquisitions, for at least the next 12 months.
- Management reported no material COVID-19 impact on Q1 results but said 2020 operating expectations had been lowered. Risks cited included limits on customer visits and implementations, reduced hospital-related demand, weak industrial and energy demand, and possible customer payment delays. The pandemic’s duration and financial effects remained uncertain; the filing provided no numerical earnings or revenue guidance.
- Management expected positive operating cash flow and debt reduction, but said the pace would depend on operating performance and acquisition financing needs. Full-year capital expenditures and capitalized software spending were expected to be comparable to prior years as a percentage of revenue.
- On April 23, 2020, after quarter-end, Roper amended its credit agreement to calculate leverage using net debt rather than gross debt. Through December 31, 2020, extensions of credit are subject to a $1,250 cap on unrestricted cash after the borrowing and its intended use. Roper reported covenant compliance during Q1.
- COVID-19 market declines prompted an impairment assessment; management concluded no triggering event existed at March 31. A prolonged pandemic could require an interim review, particularly for the lab-software trade name, whose fair value had approximated its $100.4 carrying value in the October 2019 analysis.
- Ordinary-course product-liability and employment claims were not expected by management to materially affect the company. Potential liability from asbestos litigation could not be determined. The company adopted the expected-credit-loss standard on January 1, recording a $1.7 after-tax reduction to opening retained earnings; Q1 receivable impairment losses were immaterial.
Important facts for investors to verify
- Whether COVID-19 effects on demand, customer collections, operations and cash generation differed materially from management’s expectations after March 31.
- How much reported growth reflected organic performance versus acquisitions and divestitures, especially in Network Software & Systems and Measurement & Analytical Solutions.
- The effect of the April 23 credit-covenant amendment, upcoming debt maturities and acquisition activity on leverage and liquidity.
- Whether backlog and remaining performance obligations converted to revenue on the expected schedule, and whether margin trends persisted.
- Whether a prolonged downturn led to impairment testing or charges, particularly for the lab-software trade name, and whether contingencies or customer payment delays became material.