Roper Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions of dollars except per-share data. Roper is a diversified technology company focused on vertical software and technology-enabled products. The results below distinguish continuing operations from businesses classified as discontinued operations.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Continuing-operations revenue | $1,310.8 | $1,189.8 | $2,590.6 | $2,345.1 |
| Gross profit / margin | $911.5 / 69.5% | $839.2 / 70.5% | $1,808.7 / 69.8% | $1,655.5 / 70.6% |
| Income from operations / margin | $362.9 / 27.7% | $316.2 / 26.6% | $718.8 / 27.7% | $633.8 / 27.0% |
| Net earnings from continuing operations | $225.0 | $204.4 | $461.4 | $427.4 |
| Diluted EPS from continuing operations | $2.11 | $1.92 | $4.32 | $4.03 |
| Net earnings, including discontinued operations | $268.8 | $286.3 | $2,289.3 | $575.3 |
- Q2 revenue grew 10.2% reported and 10.5% organically; six-month revenue grew 10.5% reported and 10.4% organically. Foreign exchange reduced growth in both periods.
- Q2 net interest expense was $44.7 versus $59.5 a year earlier; the six-month amounts were $97.3 and $120.0. Management attributed the reductions to lower average debt and higher interest income on cash.
- Q2 effective tax rate was 29.0% versus 20.3%; the six-month rate was 25.4% versus 21.0%. Both were adversely affected by tax expense related to restructuring for the planned Industrial Businesses sale.
- Backlog expected to be recognized within 12 months was $2,467.7 at quarter-end, up 22% from $2,027.0 a year earlier; organic backlog growth was 21%.
Segment performance
- Application Software: Q2 revenue of $627.5, up 6.7% reported and 7.0% organically; operating margin was 26.3% versus 26.1%.
- Network Software: Q2 revenue of $342.9, up 15.1% reported and 15.3% organically; operating margin expanded to 40.0% from 37.3%.
- Technology Enabled Products: Q2 revenue of $340.4, up 11.9% reported and 12.9% organically; operating margin was 32.7% versus 33.6%. Gross margin fell to 56.3% from 59.8%, primarily due to higher material, component, and freight costs.
- Segment operating profit, before corporate expenses, was $413.8 in Q2, up 12.8%. Network Software led margin expansion; Technology Enabled Products faced cost pressure.
Cash flow, debt, and liquidity
- For the six months, continuing-operations operating cash flow was $331.0 versus $805.5 in 2021. Management cited cash taxes related to prior-year divestitures, higher cash taxes associated with Internal Revenue Code Section 174, and working-capital timing, including incentive compensation payments.
- Cash and cash equivalents were $2,879.1 at June 30, 2022, versus $351.5 at year-end 2021. The six-month cash increase primarily reflected $2,995.9 in proceeds from completed divestitures, partly offset by operating, investing, financing, and tax outflows. Cash tax paid for disposal gains was $377.9.
- Total debt, net of deferred financing costs, was $7,457.0, down from $7,921.8 at year-end. Net debt was $4,577.9 versus $7,570.3; net debt to total net capital improved to 25.0% from 39.6%. No borrowings were outstanding on the credit facility at quarter-end.
- Continuing-operations investing cash use was $287.6, including $258.9 for acquisitions. Financing cash use was $551.5, primarily debt repayments and dividends. Capital expenditures were $13.7 and capitalized software expenditures $15.0.
- Management said cash, operating cash flow, and available credit were expected to fund operating requirements for the foreseeable future. Roper was in compliance with debt covenants at quarter-end.
Material changes, transactions, and unusual items
- Roper completed the TransCore sale in March 2022 and Zetec sale in January 2022. Six-month results include $1,706.6 of after-tax gains on discontinued-operation dispositions; the TransCore and Zetec sales generated $2,995.9 of cash proceeds. These gains explain much of the rise in reported six-month net earnings and should not be confused with continuing-operations performance.
- In May 2022, Roper agreed to sell a 51% majority stake in its Industrial Businesses to CD&R for approximately $2,600 in upfront, pretax cash proceeds, while retaining a 49% interest. The agreement includes a potential earnout of up to $51 based on 2022 EBITDA and initially approximately $29 per year in cash payments to CD&R, or an equivalent transfer of equity interests. The sale was pending at quarter-end.
- Roper recast prior periods under three segments—Application Software, Network Software, and Technology Enabled Products—and presented the Industrial Businesses and 2021 divestitures as discontinued operations.
- Q2 discontinued operations included a $10.7 after-tax disposition loss; discontinued operations also contributed $54.5 of earnings from the Industrial Businesses. The filing reports Q2 total net earnings of $268.8, compared with $286.3 in 2021.
- Other expense for the first six months included a $4.1 one-time charge tied to transferring remaining asbestos-claim exposure. The filing also describes a net tax expense related to the planned industrial-business transaction.
- After quarter-end, Roper entered a new five-year $3,500 revolving credit facility on July 21, replacing its $3,000 facility, and set August 15, 2022 as the redemption date for $500 of 3.125% notes.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management expected positive operating cash flow and planned debt reduction, but noted the pace would depend on acquisitions, operating performance, the pandemic, and financial-market conditions.
- Management highlighted inflation, supply-chain disruption, labor shortages, COVID-19 impacts, geopolitical events including the war in Ukraine, interest rates, foreign exchange, acquisition integration, indebtedness, competition, and cybersecurity and data privacy as risks.
- Vertafore faces litigation relating to a 2020 exposure of Texas driver-license data; the Texas Attorney General was also investigating. A motion to dismiss one case was pending. Verathon is defending a patent-infringement action seeking unspecified damages. Roper stated ordinary-course legal matters were not expected to materially affect results, but gave no assurance.
- Management reported disclosure controls and procedures were effective at June 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Industrial Businesses transaction closes, the final proceeds and retained-interest economics, and any earnout or required ongoing payments.
- How continuing-operations organic growth, segment margins, and backlog convert into reported revenue and cash flow, particularly amid Technology Enabled Products cost pressures.
- The timing and cash-tax consequences of divestitures and the planned repayment or refinancing of debt, including the August 2022 notes redemption.
- Developments in the Vertafore data-privacy litigation and investigation, the Verathon patent case, and any material changes to other contingencies.
- Whether the company’s cash generation and stated debt-reduction plans remain on track given acquisition spending and economic, currency, and supply-chain risks.