Roper Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in millions, except per-share data. Roper is a diversified technology company focused on vertical software and technology-enabled products. Results are presented for continuing operations unless noted; discontinued businesses include TransCore, Zetec, and the majority stake in Indicor.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,563.4 | $1,350.3 | $4,564.3 | $3,940.9 |
| Gross profit | $1,096.3 | $941.8 | $3,182.0 | $2,750.5 |
| Income from operations | $446.1 | $393.2 | $1,282.4 | $1,112.0 |
| Net earnings from continuing operations | $345.6 | $276.9 | $990.9 | $738.3 |
| Diluted continuing-operations EPS | $3.21 | $2.59 | $9.23 | $6.91 |
- Revenue increased 15.8% in both comparison periods. Q3 growth comprised 6.0% organic growth, 9.4% acquisition/divestiture impact, and 0.4% foreign-exchange benefit; nine-month growth comprised 7.6% organic growth, 8.4% acquisition/divestiture impact, and a 0.2% foreign-exchange headwind.
- Q3 gross margin was 70.1%, versus 69.7%; operating margin was 28.5%, versus 29.1%; and continuing-operations net margin was 22.1%, versus 20.5%. Nine-month gross margin was 69.7%, versus 69.8%; operating margin was 28.1%, versus 28.2%; and continuing-operations net margin was 21.7%, versus 18.7%.
- Q3 segment revenue: Application Software $803.4 (+24.8%), Network Software $364.1 (+5.0%), and Technology Enabled Products $395.9 (+10.1%). Organic growth was 4.5%, 4.6%, and 9.9%, respectively. Application Software growth included material acquisition contribution.
- Q3 net interest expense was $42.4, compared with $41.3; nine-month expense was $114.6, compared with $138.6. Q3 included $33.9 of net equity investment activity, primarily a $20.1 Indicor fair-value gain and $13.2 of dividends.
- Total net earnings were $347.2 for Q3 and $995.2 for nine months. The 2022 nine-month comparison of $2,616.3 was substantially elevated by after-tax gains on discontinued-business disposals, including TransCore and Zetec; it is not directly comparable with continuing-operations earnings.
Cash flow, balance sheet, and liquidity
- Nine-month cash from continuing operating activities was $1,415.7, versus $550.2. The prior-year comparison included substantial cash taxes related to the 2021 divestitures; 2023 cash flow also benefited from higher earnings and lower cash taxes, partly offset by the $45.0 Verathon litigation settlement.
- Nine-month cash used in continuing investing activities was $2,010.7, primarily for acquisitions; cash provided by continuing financing activities was $103.3. Cash and equivalents were $299.5 at September 30, down from $792.8 at year-end 2022.
- Debt, net of financing costs, was $6,878.3, versus $6,661.7 at year-end; net debt was $6,578.8. Net debt to total net capital was 27.9%, compared with 26.8%. Debt included $6,000 of fixed-rate senior notes and $910 outstanding under a $3,500 unsecured credit facility. The $700 of 2023 notes due at maturity was repaid using facility borrowings.
- Management said cash, operating cash generation, and available credit are expected to fund operating requirements for the foreseeable future; Roper was in compliance with credit-facility covenants. Management expects positive operating cash flow to permit debt reduction, subject to acquisition needs and business and market conditions.
- Remaining performance obligations were $4,321.4, with $2,913.7 (about 67%) expected to be recognized over the next 12 months. The latter amount, or backlog, rose 20% year over year, including 16% acquisition contribution and 4% organic growth.
Material changes, outlook, and risks
- Roper acquired Syntellis for $1,381 and Replicon for $447.5 in August 2023, plus Promium for $16.5 in May. The acquisitions were integrated into Application Software. The company recorded $1,137.8 of goodwill and $792.7 of identifiable intangible assets from the three acquisitions. Q3 Application Software included $8.6 of Syntellis integration restructuring expense and higher acquired-intangible amortization.
- Application Software operating margin declined to 25.8% from 27.0% in Q3, primarily reflecting acquired-intangible amortization and restructuring costs. Network Software margin improved to 45.2% from 42.7%; Technology Enabled Products margin eased to 34.6% from 35.2%.
- Management provided no specific quantified earnings or revenue guidance in this filing. It expects 2023 capital expenditures plus capitalized software costs to be comparable to prior years as a percentage of revenue. The company described continued acquisitions as part of its strategy but said timing and effects cannot be reasonably estimated.
- Outlook risks cited include inflation, supply-chain disruption, labor shortages, geopolitical conflict and public-health events, rising interest rates, indebtedness, acquisition integration, competition, cybersecurity and privacy issues, litigation, and potential goodwill or intangible-asset write-offs.
- PowerPlan faces an antitrust and related claims action seeking damages in excess of $66, plus potential treble and punitive damages and other relief. Both sides moved for summary judgment; if unresolved, trial was anticipated in the second half of 2024. Management said it believes provisions for ordinary-course contingencies are adequate and does not expect pending matters to materially affect the company, but gave no assurance. Verathon’s $45.0 patent settlement was paid in Q1 2023.
- Indicor’s fair value is a Level 3 estimate requiring significant management judgment. Q3 equity investment income included its fair-value increase and distributions; changes in assumptions could materially change the valuation.
Important facts for investors to verify
- How much future growth and margin performance depends on Syntellis, Replicon, and other acquisitions, including integration costs and acquired-intangible amortization.
- Whether the $2,913.7 near-term backlog converts to revenue as expected, and the organic contribution to that conversion.
- Debt repayment capacity, facility borrowing costs, cash availability, and the effect of further acquisitions on leverage.
- The assumptions behind Indicor’s Level 3 valuation and the sustainability of related equity investment gains and distributions.
- Developments in the PowerPlan litigation and any other legal or contingency exposure.
- The unusually large year-over-year difference in reported 2022 earnings and cash flows attributable to discontinued operations and divestiture-related gains and taxes.