Roper Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars, except per-share data. Roper is a diversified technology company operating software, services and engineered-products businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,305.0 | $1,330.3 | $2,655.7 | $2,617.5 |
| Gross profit | $843.7 | $850.0 | $1,700.5 | $1,660.6 |
| Income from operations | $333.6 | $368.4 | $682.8 | $714.8 |
| Net earnings | $219.2 | $249.7 | $459.5 | $619.3 |
| Diluted EPS | $2.08 | $2.38 | $4.36 | $5.90 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $813.0 | $591.1 |
Q2 gross margin was 64.7%, up from 63.9%; operating margin was 25.6%, down from 27.7%. For the first half, gross margin was 64.0%, up from 63.4%, while operating margin was 25.7%, down from 27.3%. Q2 net margin was 16.8%, versus 18.8% a year earlier.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $1,870.8, compared with $709.7 at year-end 2019. Total debt was $5,866.4; net debt was $3,995.6, down from $4,565.6 at December 31, 2019. Net debt to total net capital fell to 28.8% from 32.5%.
- Roper had no borrowings outstanding on its $2.5 billion revolving credit facility and reported $69.3 of letters of credit. Management said cash, operating cash generation and credit availability should cover foreseeable needs, including dividends and certain acquisitions, for at least the next 12 months.
- First-half operating cash flow increased 37.5% year over year. The company attributed the increase partly to tax-payment deferrals, lower cash taxes on divestitures and improved working capital. The reported cash flow therefore includes timing benefits: approximately $123.9 of federal and state income taxes and $13.7 of employer payroll taxes were deferred from Q2.
- Investing cash outflow was $177.5, primarily for acquisitions. Financing cash inflow was $532.9, mainly reflecting the $600.0 senior-note issuance, partly offset by dividends. Capital expenditures were $15.5 and capitalized software spending was $5.2.
Changes versus comparable periods
- Q2 revenue declined 1.9%, reflecting a 2.8% organic decline and 0.5% negative foreign-exchange impact, partly offset by a 1.4% net acquisition/divestiture contribution. First-half revenue grew 1.5%: 0.4% organic growth and a 1.6% net acquisition/divestiture contribution, partly offset by 0.4% foreign exchange.
- Q2 segment results were mixed. Application Software revenue rose 2% and operating margin improved to 28.5%. Network Software & Systems revenue rose 15%, largely from acquisitions, but operating margin fell to 30.9%. Measurement & Analytical Solutions revenue fell 11%, while operating margin rose to 33.8%. Process Technologies revenue fell 27% and operating margin dropped to 14.0%.
- Process Technologies recorded a $13.6 restructuring charge for cost-reduction actions; lower demand, particularly in upstream oil and gas, also pressured results. The segment’s Q2 gross margin declined to 52.7% from 57.4%.
- First-half net earnings included no disposal gain, versus a $119.6 pretax gain from the Imaging-business sale in the first half of 2019. The prior-year period also benefited from a $41.0 discrete tax benefit; the effective tax rate was 21.9% in first-half 2020 versus 16.5% in 2019.
- Backlog was $2,044.3 at June 30, up 14% from a year earlier. Remaining performance obligations totaled $3,528.6; approximately 58% was expected to be recognized over the next 12 months.
Outlook, risks and notable items
- Management said COVID-19 had not materially affected overall Q2 results, but lowered 2020 operating expectations to reflect the changed economic environment. It provided no specific full-year revenue or earnings guidance in this filing.
- COVID-19 pressures included reduced hospital procedures, weaker industrial and energy demand, limits on customer visits and on-site services, and possible customer payment delays. Management said payment delays had not materially affected cash flow to date; businesses remained operational, with manufacturing facilities deemed essential.
- Roper completed two acquisitions for an aggregate purchase price of $150.0, net of cash acquired and debt assumed. FMIC and Team TSI were added to Network Software & Systems; purchase-price allocations remained preliminary.
- In June, Roper issued $600.0 of 2.00% senior notes due 2030 for general corporate purposes, including potential acquisitions. A credit-agreement amendment changed the leverage covenant to a net-debt basis and imposed a $1,250 cash cap after certain credit extensions through December 31, 2020. Roper reported covenant compliance.
- The filing identifies potential COVID-19, economic, acquisition-integration, indebtedness, cybersecurity, privacy, litigation and goodwill/intangible-asset impairment risks. Management found no goodwill or indefinite-lived-intangible impairment trigger in the first half, but said a prolonged pandemic could lead to a future interim review. Ordinary-course legal claims were not expected to materially affect the company; potential asbestos liability could not be determined.
Key facts for investors to verify
- Whether COVID-19-related weakness persists or deepens, especially in industrial, energy, healthcare and education end markets.
- How much of first-half operating cash flow reflects sustainable operations versus deferred tax payments and working-capital timing.
- Whether debt maturities, interest expense and the amended credit covenant constrain acquisitions or debt reduction.
- Whether Network Software & Systems can sustain growth while recovering margin, and whether Process Technologies improves after restructuring.
- Whether the two 2020 acquisitions meet expectations and whether future impairment reviews or litigation change the risk profile.