Roper Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Roper is a diversified technology company operating software and engineered-products businesses. Its four reportable segments are Application Software, Network Software & Systems, Measurement & Analytical Solutions, and Process Technologies. Prior periods were recast for a segment realignment effective in Q1 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,330.3 million | $1,293.7 million | $2,617.5 million | $2,496.2 million |
| Gross profit | $850.0 million | $815.9 million | $1,660.6 million | $1,566.4 million |
| Income from operations | $368.4 million | $354.3 million | $714.8 million | $654.5 million |
| Net earnings | $249.7 million | $228.4 million | $619.3 million | $439.7 million |
| Diluted EPS | $2.38 | $2.19 | $5.90 | $4.22 |
- Q2 revenue grew 2.8% (organic growth 2.3%); first-half revenue grew 4.9% (organic growth 4.3%). Q2 gross margin was 63.9%, versus 63.1%; first-half gross margin was 63.4%, versus 62.8%.
- Q2 net earnings rose 9.3%. First-half net earnings rose substantially, primarily reflecting a $119.6 million pretax gain on the Imaging business sale and a $41.0 million discrete tax benefit from a foreign restructuring plan. The filing reports first-half tax expense of $122.2 million and a 16.5% effective tax rate, compared with $129.0 million and 22.7% in 2018.
- Q2 segment revenue grew 9% in Application Software and 10% in Network Software & Systems; it declined 4% in Measurement & Analytical Solutions and 6% in Process Technologies. First-half segment revenue changes were +13%, +10%, -2%, and -4%, respectively. Process Technologies weakness was tied chiefly to lower upstream oil and gas demand.
Cash flow, balance sheet and debt
- First-half operating cash flow was $591.1 million, up from $547.8 million. Investing used $354.1 million, including the Foundry acquisition, partly offset by Imaging sale proceeds. Financing used $282.9 million, mainly for revolver repayments and dividends. Cash declined by $43.6 million to $320.8 million.
- At June 30, 2019, total debt was $4,721.0 million, net debt $4,400.2 million, and stockholders’ equity $8,351.0 million. Net debt to total net capital was 34.5%, down from 37.2% at year-end 2018. Long-term debt included $640.0 million outstanding under the $2.5 billion unsecured credit facility.
- Current assets were $1,602.3 million and current liabilities $1,443.2 million. Management reported negative net working capital of $159.6 million, consistent with its asset-light business model. The company said it was in compliance with debt covenants and expected cash, operating cash flow, credit availability, and capital-market access to fund foreseeable operating requirements.
Material developments, outlook and risks
- Roper acquired Foundry on April 18 for $536.0 million net of cash acquired. Foundry’s results are included in Network Software & Systems from the acquisition date; purchase-price allocations remained preliminary.
- The planned sale of Gatan to Thermo Fisher was mutually terminated on June 10 after challenges obtaining U.K. regulatory approval. Gatan remained classified as held for sale; Roper said it remained committed to a sale and expected to reach an agreement with a buyer within 12 months.
- The Imaging businesses were sold on February 5 for approximately $225.0 million in cash, generating the $119.6 million pretax gain and $31.1 million of related income tax expense.
- Management provided no specific earnings or revenue guidance. It anticipated positive operating cash flow and debt reduction, but noted that acquisitions and business performance could affect the pace of deleveraging. Capital spending and capitalized software spending for the rest of 2019 were expected to be comparable to prior years as a percentage of revenue.
- Risks cited include economic and geopolitical uncertainty, acquisition and integration risks, indebtedness and interest rates, foreign exchange, cybersecurity, tariffs and trade disruption, market cyclicality, customer concentration, product liability, litigation, environmental obligations, and potential goodwill or intangible-asset impairment. Management reported no circumstances requiring an interim impairment review as of the filing.
- Ordinary-course legal claims, including product-liability and employment matters, were assessed by management as adequately provided for after considering insurance. Potential asbestos-related liability could not be determined. A stockholder derivative matter was settled in June, subject to court approval; terms include expanded compensation disclosures, a shareholder vote on a new director compensation plan in 2020, and plaintiff attorneys’ fees and expenses.
Important facts for investors to verify
- Whether Gatan is sold within the expected 12-month period, and at what terms.
- Underlying organic growth and margins by segment, particularly the softness in Process Technologies and the effect of the Imaging divestiture.
- Debt repayment, interest costs, acquisition spending, and ongoing ability to generate cash after dividends and investment needs.
- The extent to which first-half earnings benefited from the Imaging gain and discrete tax benefit versus recurring operations.
- Resolution of the derivative settlement and any developments in asbestos, product-liability, or other contingencies.