Business context and reporting period
Roper Technologies, Inc. is a diversified technology company operating software and engineered-products businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Unless noted, figures are in millions of dollars and reflect continuing operations; the income statement’s total net earnings also include discontinued operations.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,462.8 | $1,198.2 | $4,265.5 | $3,518.6 |
| Operating income | $403.5 | $330.5 | $1,159.6 | $930.5 |
| Net earnings from continuing operations | $259.8 | $207.0 | $782.7 | $600.5 |
| Total net earnings | $289.5 | $234.4 | $864.8 | $693.9 |
| Diluted EPS, continuing operations | $2.43 | $1.95 | $7.36 | $5.69 |
| Diluted EPS, total | $2.71 | $2.21 | $8.13 | $6.57 |
- Q3 revenue grew 22.1%, including 12.0% organic growth; nine-month revenue grew 21.2%, including 7.3% organic growth. Reported continuing-operations gross margin was 68.1% in Q3 (67.6% prior year) and 68.0% for nine months (67.4%). Operating margin was 27.6% in Q3 (unchanged) and 27.2% for nine months (26.4%).
- Q3 net interest expense was $58.2, down from $62.2; nine-month expense was $178.2, up from $154.8, principally reflecting higher average debt balances. Nine-month other income included a $27.1 gain on sale of a minority investment.
- Nine-month operating cash flow was $1,432.4, including $1,319.3 from continuing operations; cash and cash equivalents ended the period at $352.5. Cash flow from operations increased 51% year over year, aided by higher earnings and the non-recurrence of $201.9 in prior-year cash taxes related to the Gatan disposal.
- At September 30, total debt was $8,329.1, net debt $7,976.6, and net debt/total net capital 41.3% versus 46.9% at year-end 2020. Cash was $352.5; the $3,000 credit facility had $380.0 drawn and $60.3 of letters of credit outstanding. The company reported compliance with debt covenants and expects cash, operating cash generation, and credit availability to fund foreseeable requirements.
Material changes and business developments
- All four reportable segments grew Q3 revenue: Application Software 34.7%, Network Software & Systems 19.2%, Measurement & Analytical Solutions 9.9%, and Process Technologies 17.4%. Application Software growth included acquisition contributions; reported Q3 organic growth was broad-based, led by Application Software at 9.9%, Network Software & Systems at 17.0%, Measurement & Analytical Solutions at 9.2%, and Process Technologies at 16.0%.
- Measurement & Analytical Solutions faced lower gross and operating margins, attributed to mix, supply-chain costs, and reduced Verathon demand compared with unusually high COVID-related demand in 2020. Process Technologies margins improved, partly because the prior-year period included $13.6 of restructuring charges.
- Roper classified TransCore, Zetec, and CIVCO Radiotherapy as discontinued operations after agreeing to divest them, citing a strategic shift toward higher-margin, recurring-revenue businesses and lower working-capital needs. Zetec was agreed to be sold for approximately $350 cash, with closing expected in Q4 2021; TransCore for approximately $2,680 cash, with closing expected in Q1 2022; and CIVCO for approximately $120 cash. CIVCO’s sale closed November 1, 2021; its gain and tax expense had not yet been determined in the filing.
- Discontinued operations contributed Q3 revenue of $158.6 and net earnings of $29.7; nine-month revenue was $472.1 and net earnings $82.1. At September 30, assets held for sale were $833.6 and current liabilities held for sale were $168.6.
- Remaining performance obligations were $3,349.7; the company expected to recognize approximately 65% over the next 12 months. Backlog expected to convert within 12 months was $2,191.5, up 24% year over year.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management expected positive operating cash flow and debt reduction, but said the pace would depend on acquisitions, operating performance, COVID-19, and financial-market conditions. Planned capital and capitalized software spending for the rest of 2021 was expected to be comparable to prior years as a percentage of revenue.
- Management cited ongoing uncertainty from COVID-19, variants and vaccine mandates, geopolitical and economic conditions, supply-chain and labor costs, interest rates, foreign exchange, acquisitions, competition, and cybersecurity and data-privacy risks.
- Vertafore faces a Texas driver-data privacy class action alleging exposure of driver information; a related Texas Attorney General investigation was also disclosed. Roper said it was defending the case. Other disclosed matters include ordinary-course litigation and asbestos claims; management did not expect these matters to materially affect consolidated results, though asbestos exposure could not be determined.
- On October 8, 2021, Roper elected to redeem $500 of 2.800% notes due 2021, with redemption set for November 15, 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Zetec and TransCore divestitures closed on the anticipated timelines, and final proceeds, taxes, and gains or losses—particularly the CIVCO disposal accounting.
- How organic growth, acquisition contributions, backlog conversion, and segment margins develop, especially amid supply-chain pressures and normalization of COVID-related demand.
- Cash generation, debt repayments, interest costs, and liquidity after the divestitures and the scheduled note redemption.
- Developments in the Vertafore litigation and Texas Attorney General investigation, and any resulting financial or reputational exposure.