Roper Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions, except per-share data. Roper is a diversified technology company providing software and engineered products in niche markets. Its four reportable segments are Application Software, Network Software & Systems, Measurement & Analytical Solutions, and Process Technologies; prior periods were recast after a 2019 segment realignment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenues | $1,354.5 | $1,318.7 | $3,972.0 | $3,814.9 |
| Gross profit | $873.6 | $840.0 | $2,534.2 | $2,406.4 |
| Income from operations | $385.2 | $377.5 | $1,100.0 | $1,032.0 |
| Net earnings | $277.5 | $247.6 | $896.8 | $687.3 |
| Diluted EPS | $2.64 | $2.37 | $8.54 | $6.58 |
| Cash from operating activities | — | — | $995.6 | $966.0 |
- Q3 revenue rose 2.7%: organic growth of 1.8% and net acquisition/divestiture contribution of 1.5% were partly offset by 0.6% unfavorable foreign exchange. Nine-month revenue increased 4.1%, with 3.4% organic growth, a 1.6% net acquisition/divestiture contribution, and 0.9% unfavorable FX.
- Gross margin was 64.5% in Q3 versus 63.7%; operating margin was 28.4% versus 28.6%. Nine-month gross margin was 63.8% versus 63.1%, and operating margin was 27.7% versus 27.1%.
- Q3 segment revenue increased in Application Software (7%) and Network Software & Systems (14%); it declined in Measurement & Analytical Solutions (7%) and Process Technologies (6%). Management cited upstream oil and gas weakness, industrial declines, and the Imaging divestiture among the pressures.
- Q3 software and related-services revenue was $637.3 versus $561.1; engineered-products and related-services revenue was $717.2 versus $757.6.
Cash, debt and liquidity
- Cash and equivalents were $323.0 at September 30, 2019, down from $364.4 at December 31, 2018. Nine-month operating cash flow was $995.6; investing used $2,183.8, principally for acquisitions, and financing provided $1,152.1.
- Total debt was $6,198.0, up from $4,941.7 at year-end; net debt was $5,875.0 versus $4,577.3. Net debt to total net capital increased to 40.7% from 37.2%. Long-term debt, net of current portion, was $6,195.1.
- Roper issued $1,200.0 of senior notes in August—$500.0 at 2.35% due 2024 and $700.0 at 2.95% due 2029—to fund part of the iPipeline acquisition. It had $925.0 outstanding on its $2,500.0 unsecured credit facility and reported compliance with debt covenants.
- Management said cash, operating cash generation, credit-facility availability and expected capital-market access should fund operating requirements for the foreseeable future. Net working capital was negative $201.6, which management attributed partly to deferred revenue and the company’s asset-light model.
Material changes and unusual items
- Roper completed three acquisitions in the first nine months, including Foundry, ComputerEase and iPipeline; aggregate purchase price was $2,352.5, net of cash acquired. Acquisition-related goodwill and intangibles increased materially. The iPipeline purchase-price allocation remained preliminary, and most related goodwill was not expected to be tax deductible.
- The Imaging businesses were sold in February 2019 for approximately $225.0, producing a pretax gain of $119.6 and related income-tax expense of $32.2. The gain boosted nine-month pretax earnings. A separate $41.0 discrete tax benefit from a foreign restructuring and a $10.0 reversal of a deferred tax liability also reduced the nine-month effective tax rate to 16.9% from 21.9%.
- Gatan, classified as held for sale at quarter-end, was sold to AMETEK for approximately $925.0 on October 29, 2019, after the reporting date. Roper said the sale gain and associated tax expense were still being calculated.
- Q3 backlog was $1,865.7, up 10% year over year, reflecting 5% organic growth and 7% acquisition contribution, partly offset by the Imaging disposal. Remaining performance obligations were $3,133.3; approximately 60% was expected to be recognized over the next 12 months.
- ASC 842 lease accounting was adopted January 1, 2019, adding operating lease right-of-use assets and liabilities; management reported no impact on earnings or cash flow. The company expected to adopt the new expected-credit-loss standard on January 1, 2020 and anticipated earlier recognition of some credit losses.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management expected positive operating cash flow and planned debt reduction, but said the pace would depend on acquisitions and operating performance. It expected remaining-year capital expenditures and capitalized software spending to be comparable with prior years as a percentage of revenue. Management cited geopolitical and economic uncertainty and risks including acquisition integration, indebtedness, FX, cybersecurity, tariffs, competition, cyclical markets, customer concentration, litigation, and potential goodwill or intangible-asset write-offs.
Roper reported ordinary-course product-liability and employment claims, asbestos litigation for which potential liability could not be determined, and a settled shareholder derivative action. Management believed existing provisions and insurance were adequate for claims it assessed, and did not expect the matters to materially adversely affect consolidated results. The Gatan sale and its final accounting were pending at the filing date.
Important facts for investors to verify
- Final gain, tax expense, and cash proceeds from the October 2019 Gatan sale.
- Acquired-business performance and integration, including final iPipeline purchase accounting and the resulting amortization burden.
- Whether organic growth and backlog convert to revenue, especially given declines in Measurement & Analytical Solutions and Process Technologies.
- Debt-reduction progress, interest expense, facility availability, and covenant headroom after acquisition financing.
- Sustainability of earnings growth excluding the Imaging gain and discrete tax benefits.