Roper Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions except per-share data. Roper is a diversified technology company with software and engineered-products businesses across four reportable segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,366.1 | $1,354.5 | $4,021.8 | $3,972.0 |
| Gross profit | $875.9 | $873.6 | $2,576.4 | $2,534.2 |
| Income from operations | $367.6 | $385.2 | $1,050.4 | $1,100.0 |
| Net earnings | $234.4 | $277.5 | $693.9 | $896.8 |
| Diluted EPS | $2.21 | $2.64 | $6.57 | $8.54 |
| Operating cash flow | Not separately reported | Not separately reported | $950.9 | $995.6 |
Q3 revenue rose 0.9%, while organic revenue declined 2.4%; acquisitions contributed 2.8% and foreign exchange 0.5%. Gross margin was 64.1% versus 64.5%, operating margin 26.9% versus 28.4%, and net margin 17.2% versus 20.5%. Net interest expense increased to $62.3 from $48.8, including a $7.2 bridge-financing origination fee and higher average debt. The Q3 effective tax rate was 22.7% versus 17.9%, partly reflecting an $8.9 U.K. tax-rate-change impact.
For the first nine months, revenue increased 1.3%, with acquisition/divestiture contribution of 2.0% offset by a 0.6% organic decline and 0.1% adverse foreign exchange. Operating income declined 4.5%. Net earnings and EPS were also lower; 2019 included a $119.6 pretax gain on the Imaging business disposal. The nine-month tax rate was 22.2% versus 16.9%, with the prior period benefiting from a $41.0 discrete tax benefit.
Segments and operating trends
- Application Software: Q3 revenue increased 10% to $447.9; organic revenue declined 1%. Segment operating margin improved to 28.0% from 27.2%. Vertafore contributed after its September acquisition.
- Network Software & Systems: Q3 revenue increased 10% to $430.2, including 2% organic growth and 8% from acquisitions. Operating margin declined to 31.2% from 35.1%, primarily reflecting mix and acquired-intangible amortization.
- Measurement & Analytical Solutions: Q3 revenue declined 8% to $367.9, mainly due to the prior disposal of Gatan; organic revenue increased 2%. Operating margin rose to 33.3% from 31.9%.
- Process Technologies: Q3 revenue declined 25% to $120.1, entirely organic, with weakness led by upstream oil and gas. Operating margin fell to 26.2% from 34.8%. Nine-month results included $13.6 of restructuring charges.
Cash, debt and liquidity
- Cash and equivalents were $302.1 at September 30, down from $709.7 at December 31, 2019. Nine-month operating cash flow was $950.9; investing cash use was $5,693.0, primarily for acquisitions, and financing provided $4,336.4.
- Net cash used for acquisitions was $5,653.3. Capital expenditures were $23.0 and capitalized software expenditures were $9.8 for the nine-month period.
- Total debt, net of deferred financing costs, was $9,704.0, versus $5,275.3 at year-end; net debt was $9,401.9 versus $4,565.6. Net debt to total net capital increased to 48.1% from 32.5%.
- Roper had $1,160.0 drawn on its new $3,000.0 three-year revolving facility and $69.5 in outstanding letters of credit. It reported compliance with debt covenants; the facility requires a total-debt-to-total-capital ratio of 0.65:1 or less.
- Management said existing cash, operating cash generation and facility availability should be sufficient for foreseeable operating needs, dividends and a limited number of potential cash-funded acquisitions. Net working capital was negative $333.0; management described this as consistent with its asset-light model.
Material changes, outlook and risks
- Vertafore acquisition: Acquired September 3, 2020 for a purchase price of $5,398.6. The preliminary allocation included $3,229.1 of goodwill and $2,660.0 of identifiable intangibles; purchase accounting remained subject to final tax-related adjustments. Roper issued $2,700 of notes in September and used cash and revolving borrowings to fund the transaction. Five acquisitions were completed in the first nine months. A further $361.0 EPSi acquisition closed October 15, after quarter-end.
- COVID-19: Management reported limited operational disruption but lower demand in some industrial, energy, education and non-emergency medical markets, alongside increased demand in certain COVID-related medical businesses. Customer visits and on-site services were affected. The pandemic creates substantial uncertainty; management said 2020 operating expectations had been lowered, without providing a numeric forecast.
- Outlook: Management expects positive operating cash flows and intends to focus on reducing debt, while the pace depends on business performance, COVID-19 effects and acquisition requirements. The filing provides no specific earnings or revenue guidance. Remaining performance obligations were $3,997.5, with approximately 56% expected to be recognized within 12 months; reported backlog was $2,249.8, up 21% year over year.
- Debt and subsequent event: On October 9, Roper elected to redeem its $600.0 of 3.000% notes due 2020, with redemption set for November 15, 2020. Management’s debt-reduction plans and the impact of this redemption merit monitoring.
- Other risks and contingencies: Roper reported no COVID-related goodwill impairment trigger through September but planned its annual impairment analysis for Q4; a prolonged pandemic could affect future valuations. Ordinary-course litigation was not expected to materially affect results, but potential liability from asbestos claims could not be determined. The filing also highlights cybersecurity, privacy/data regulation, acquisition integration, indebtedness and economic risks.
Important facts for investors to verify
- Whether Vertafore integration, acquired growth and the preliminary purchase-price allocation develop as expected, including realization of approximately $120 of federal tax attributes by the end of 2022.
- Debt repayment progress, interest costs, covenant headroom and the effect of the November 2020 note redemption on liquidity.
- COVID-19-related demand, customer payment patterns and the performance of industrial, energy and medical end markets.
- Q4 goodwill and intangible-asset impairment analysis, especially given the enlarged goodwill and intangible balances after Vertafore.
- Whether backlog and remaining performance obligations convert to revenue on the expected schedule, and the outcome of asbestos and other legal matters.