Roper (ROP) 10-Q2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

ROPER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(941) 556-2601

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

The number of shares outstanding of the registrant’s common stock as of April 28, 2023 was 106,592,234.

REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

(in millions, except per share data)

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(in millions)

See accompanying notes to Condensed Consolidated Financial Statements.

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited) - Continued

(in millions)

See accompanying notes to Condensed Consolidated Financial Statements.

Roper Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

(in millions)

See accompanying notes to Condensed Consolidated Financial Statements.

Roper Technologies, Inc. and Subsidiaries

All currency and share amounts are in millions, except per share data

1.    Basis of Presentation

The accompanying Condensed Consolidated Financial Statements for the three months ended March 31, 2023 and 2022 are unaudited. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the financial position, results of operations, comprehensive income and cash flows of Roper Technologies, Inc. and its subsidiaries (“Roper,” the “Company,” “we,” “our” or “us”) for all periods presented. The December 31, 2022 financial position data included herein was derived from the audited consolidated financial statements included in the Company’s 2022 Annual Report on Form 10-K (“Annual Report”) filed on February 27, 2023 with the Securities and Exchange Commission (“SEC”) but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”).

Roper’s management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Condensed Consolidated Financial Statements in conformity with GAAP. Actual results could differ from those estimates.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year. You should read these unaudited Condensed Consolidated Financial Statements in conjunction with Roper’s audited consolidated financial statements and the notes thereto included in its Annual Report. Certain prior period amounts have been reclassified to conform to current period presentation.

Discontinued Operations

Roper has completed the divestitures of TransCore, Zetec, CIVCO Radiotherapy (“2021 Divestitures”), and the majority stake in its industrial businesses (“Indicor”). The financial results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, discussion within these notes to the Condensed Consolidated Financial Statements relates to continuing operations. Refer to Note 4 for additional information on discontinued operations.

2.    Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) establishes changes to accounting principles under GAAP in the form of accounting standards updates (“ASUs”) to the Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. Any recent ASUs were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s results of operations, financial position or cash flows.

3.    Weighted Average Shares Outstanding

Basic earnings per share were calculated using net earnings and the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share were calculated using net earnings and the weighted average number of shares of common stock and potential common stock outstanding during the respective period. Potentially dilutive common stock consisted of stock options based upon the trading price of Roper’s common stock. The effects of potential common stock were determined using the treasury stock method. 

Weighted average shares outstanding are shown below:

For the three months ended March 31, 2023, there were 1.150 outstanding stock options, respectively, that were not included in the determination of diluted earnings per share because doing so would have been antidilutive, as compared to 0.840 outstanding stock options that would have been antidilutive in the respective 2022 period.

4.    Discontinued Operations

The Company concluded that the 2021 Divestitures and the sale of a majority 51% stake in Indicor each represented a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the financial results related to these transactions are presented in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented.

The following transactions closed in the first quarter of 2022:

The following table summarizes the major classes of revenue and expenses constituting net income from discontinued operations attributable to the TransCore and Zetec businesses:

The following table summarizes the major classes of revenue and expenses constituting net income from discontinued operations attributable to Indicor:

5.    Stock Based Compensation

The Roper Technologies, Inc. 2021 Incentive Plan is a stock-based compensation plan used to grant incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights or equivalent instruments to Roper’s employees, officers, directors and consultants.

The following table provides information regarding the Company’s stock-based compensation expense:

Roper records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. Historical data is used to estimate the expected price volatility, the expected dividend yield, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.

The following weighted average assumptions were used to estimate the fair value of options granted during current and prior year periods using the Black-Scholes option-pricing model:

Cash received from option exercises for the three months ended March 31, 2023 and 2022 was $24.6 and $38.7, respectively.

During the three months ended March 31, 2023, 0.082 restricted shares vested with a weighted average grant date fair value of $376.74 per restricted share and a weighted average vest date fair value of $435.75 per restricted share.

During the three months ended March 31, 2023 and 2022, participants in the ESPP purchased 0.012 and 0.013 shares of Roper’s common stock for total consideration of $4.7 and $5.5, respectively. All shares were purchased from Roper’s treasury shares.

6.    Inventories

The components of inventory were as follows:

7.    Goodwill and Other Intangible Assets

The carrying value of goodwill by segment was as follows:

Other relates primarily to purchase accounting adjustments for acquisitions completed in 2022.

Other intangible assets were comprised of:

Amortization expense of other intangible assets was $170.4 and $143.3 during the three months ended March 31, 2023 and 2022, respectively.

An evaluation of the carrying value of goodwill and indefinite-lived intangibles is required to be performed on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. There have been no events or changes in circumstances which indicate an interim impairment review is required in 2023. The Company will perform the annual analysis during the fourth quarter of 2023.

8.    Fair Value

Financial assets and liabilities are valued using market prices on active markets (Level 1), less active markets (Level 2) and little or no market activity (Level 3). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. Level 3 instrument valuations typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The fair values of the senior notes are based on the trading prices of each series of notes, which the Company has determined to be Level 2 in the FASB fair value hierarchy.

On April 26, 2023, Indicor announced its planned divestiture of its Compressor Controls business unit to Honeywell International Inc. for approximately $670. This transaction will be contemplated in our assessment of the fair value of our equity investment in the second quarter.

9.    Contingencies

Roper, in the ordinary course of business, is party to various pending or threatened legal actions, including product liability, intellectual property, antitrust, data privacy and employment practices that, in general, are of a nature consistent with those over the past several years. After analyzing the Company’s contingent liabilities on a gross basis and, based upon past experience with resolution of such legal claims and the availability and limits of the primary, excess, and umbrella liability insurance coverages with respect to pending claims, management believes that adequate provision has been made to cover any potential liability not covered by insurance, and that the ultimate liability, if any, arising from these actions should not have a material adverse effect on Roper’s consolidated financial position, results of operations or cash flows. However, no assurances can be given in this regard.

Roper’s subsidiary, Vertafore, Inc., had been named in three putative class actions, all of which are now dismissed: two in the U.S. District Court for the Southern District of Texas (Allen, et al. v. Vertafore, Inc., Case 4:20-cv-4139, filed December 4, 2020) and Masciotra, et al. v. Vertafore, Inc. (originally filed on December 8, 2020 as Case 1:20-cv-03603 in the U.S. District Court for the District of Colorado and subsequently transferred)), and one in the U.S. District Court for the Northern District of Texas (Mulvey, et al. v. Vertafore, Inc., Case 3:21-cv-00213-E, filed January 31, 2021). In July 2021, the court granted Vertafore’s motion to dismiss the Allen Case, with the dismissal affirmed by the U.S. Fifth Circuit Court of Appeals, effectively concluding the litigation. In July 2021, the plaintiff in the Masciotra case voluntarily dismissed his action without prejudice. In February 2023, the court granted Vertafore’s motion to dismiss the Mulvey case, and Plaintiff failed to appeal the dismissal effectively concluding the matter. Both the Allen and Mulvey cases purported to represent approximately 27.7 million individuals who held Texas driver’s licenses prior to February 2019. In November 2020, Vertafore announced that as a result of

human error, three data files were inadvertently stored in an unsecured external storage service that appears to have been accessed without authorization. The files, which included driver information for licenses issued before February 2019, contained Texas driver license numbers, as well as names, dates of birth, addresses and vehicle registration histories. The files did not contain any Social Security numbers or financial account information. These cases sought recovery under the Driver’s Privacy Protection Act, 18 U.S.C. § 2721. As set forth above, all of these matters have now been dismissed.

Roper’s subsidiary, Verathon, Inc. (“Verathon”), was a defendant in a patent infringement action pending in the United States District Court for the Western District of Washington (Berall v. Verathon, Inc., Case No. 2:2021mc00043). The plaintiff claimed that video laryngoscopes and certain accessories sold by Verathon and other manufacturers from approximately 2004 through 2016 infringed U.S. Patent 5,827,178 (the “178 Patent”). Verathon and the plaintiff agreed to settle the matter for $45.0 which was fully concluded and cash settled in the first quarter of 2023.

10.    Business Segments

The following table presents selected financial information by reportable segment:

*Segment operating profit is before unallocated corporate general and administrative and enterprise-wide stock-based compensation expenses. These expenses were $55.2 and $52.9 for the three months ended March 31, 2023 and 2022, respectively.

11.    Revenues from Contracts

The change in our net contract assets/(liabilities) from December 31, 2022 to March 31, 2023 was due primarily to the timing of payments and invoicing relating to SaaS and post contract support (“PCS”) contracts, driven largely by the renewal cycle of our Frontline business which primarily occurs in the third quarter.

The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance relating primarily to SaaS and PCS renewals. Revenue recognized from the deferred revenue balance on December 31, 2022 and 2021 was $589.9 and $489.3 for the three months ended March 31, 2023 and 2022, respectively. In order to determine revenues recognized in the period, we allocate revenue to the individual deferred revenue balance outstanding at the beginning of the year until the revenue exceeds that balance.

The current and non-current portions of deferred commissions are included in “Other current assets” and “Other assets,” respectively, in our Condensed Consolidated Balance Sheets. At March 31, 2023 and December 31, 2022, we had $64.5 and $64.8 of total deferred commissions, respectively.

You should read the following discussion in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on form 10-K for the year ended December 31, 2022 (“Annual Report”) as filed on February 27, 2023 with the U.S. Securities and Exchange Commission (“SEC”) and the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

This report includes “forward-looking statements” within the meaning of the federal securities laws. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the SEC or in connection with oral statements made to the press, potential investors or others. All statements that are not historical facts are “forward-looking statements.” Forward-looking statements may be indicated by words or phrases such as “anticipate,” “estimate,” “plans,” “expects,” “projects,” “should,” “will,” “believes” or “intends” and similar words and phrases. These statements reflect management’s current beliefs and are not guarantees of future performance. They involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Such risks and uncertainties include any ongoing impacts of the COVID-19 pandemic on our business, operations, financial results and liquidity, which will depend on numerous evolving factors that we cannot accurately predict or assess, including: any negative impact on global and regional markets, economies and economic activity, our customers, suppliers, and business partners, and how quickly and whether economies and demand for our products and services recover.

Examples of forward-looking statements in this report include but are not limited to statements regarding operating results, the success of our operating plans, our expectations regarding our ability to generate cash and reduce debt and associated interest expense, profit and cash flow expectations, the prospects for newly acquired businesses to be integrated and contribute to future growth and our expectations regarding growth through acquisitions. Important assumptions relating to the forward-looking statements include, among others, demand for our products, the cost, timing and success of product upgrades and new product introductions, raw material costs, expected pricing levels, expected outcomes of pending litigation, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include but are not limited to:

You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update any of these statements in light of new information or future events.

Roper is a diversified technology company. Roper has a proven, long-term, successful track record of compounding cash flow and shareholder value. We operate market leading businesses that design and develop vertical software and technology enabled products for a variety of defensible niche markets.

We pursue consistent and sustainable growth in revenue, earnings and cash flow by enabling continuous improvement in the operating performance of our businesses and by acquiring other businesses that offer high value-added software, services, technology-enabled products and solutions that we believe are capable of achieving growth and maintaining high margins.

Roper has completed the divestitures of TransCore, Zetec, CIVCO Radiotherapy (“2021 Divestitures”), and the majority stake in its industrial businesses (“Indicor” or “Indicor Transaction”). The financial results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, discussion within these notes to the Condensed Consolidated Financial Statements relates to continuing operations. Refer to Note 4 for additional information on discontinued operations.

There were no material changes during the three months ended March 31, 2023 to the items that we disclosed as our critical accounting policies and estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Information regarding new accounting pronouncements is included in Note 2 of the Notes to Condensed Consolidated Financial Statements.

Results of Continuing Operations

All currency amounts are in millions, percentages are of net revenues

Percentages may not sum due to rounding.

The following table sets forth selected information for the periods indicated.

Net revenues for the three months ended March 31, 2023 increased by 14.8% as compared to the three months ended March 31, 2022. The components of revenue growth for the three months ended March 31, 2023 were as follows:

In our Application Software segment, revenues were $761.4 in the three months ended March 31, 2023 as compared to $628.2 in the three months ended March 31, 2022. The growth of 5.9% in organic revenues was broad-based across the segment led by our businesses serving government contracting, higher education, legal and property and casualty insurance markets. Gross margin decreased to 68.4% in the three months ended March 31, 2023 as compared to 69.3% in the three months ended March 31, 2022 due primarily to headcount to support growth, and a higher mix of SaaS and professional service revenue across a number of businesses. SG&A expenses increased as a percentage of revenue to 43.0% in the three months ended March 31, 2023 as compared to 41.9% in the three months ended March 31, 2022 due primarily to higher amortization of acquired intangibles from the Frontline acquisition. The resulting operating margin was 25.4% in the three months ended March 31, 2023 as compared to 27.4% in the three months ended March 31, 2022.

In our Network Software segment, revenues were $354.5 in the three months ended March 31, 2023 as compared to $338.5 in the three months ended March 31, 2022. The growth of 6.0% in organic revenues was led by our network software businesses serving the freight match, life insurance and alternate site healthcare markets. Gross margin increased to 84.5% in the three months ended March 31, 2023 as compared to 84.2% in the three months ended March 31, 2022 due to operating leverage on higher organic revenues. SG&A expenses decreased as a percentage of revenues at 42.8% in the three months ended March 31, 2023 as compared to 43.8% in the three months ended March 31, 2022 due to operating leverage on higher organic revenues combined with revenue mix. As a result, operating margin was 41.6% in the three months ended March 31, 2023 as compared to 40.4% in the three months ended March 31, 2022.

In our Technology Enabled Products segment, revenues were $353.8 in the three months ended March 31, 2023 as compared to $313.1 in the three months ended March 31, 2022. The growth of 13.7% in organic revenues was led by our water meter technology and medical products businesses. Gross margin decreased to 56.2% in the three months ended March 31, 2023 as compared to 56.5% in the three months ended March 31, 2022 due primarily to revenue mix partially offset by operating leverage on higher organic sales. SG&A expenses as a percentage of revenues decreased to 23.5% in the three months ended March 31, 2023 as compared to 24.7% in the three months ended March 31, 2022 due primarily to operating leverage on higher organic revenues. The resulting operating margin was 32.6% in the three months ended March 31, 2023 as compared to 31.8% in the three months ended March 31, 2022.

Corporate expenses increased to $55.2, or 3.8% of revenues, in the three months ended March 31, 2023 as compared to $52.9, or 4.1% of revenues, in the three months ended March 31, 2022. The dollar increase was due primarily to higher professional services expense partially offset by lower compensation expense.

Net interest expense decreased to $37.4 for the three months ended March 31, 2023 as compared to $52.6 for the three months ended March 31, 2022 due to higher interest income earned on our cash and cash equivalents and lower weighted average debt balances.

Equity investment activity, net was $1.2 for the three months ended March 31, 2023 due to non-cash stock compensation runoff expenses for Indicor employees which will not recur.

Other expense, net, of $2.3 for the three months ended March 31, 2023 was composed primarily of foreign exchange losses at our non-U.S. based subsidiaries. Other expense, net, of $2.1 for the three months ended March 31, 2022 was composed primarily of a one-time charge associated with a transaction to transfer the remainder of our exposure related to asbestos claims within the Indicor parameter to a third party, partially offset by foreign exchange gains at our non-U.S. based subsidiaries.

Selected cash flows for the three months ended March 31, 2023 and 2022 were as follows:

Operating activities - Net cash provided by operating activities from continuing operations increased by 5% to $464.9 in the three months ended March 31, 2023 as compared to $441.3 in the three months ended March 31, 2022, due to higher net income from continuing operations net of non-cash expenses. These cash inflows were partially offset by less cash provided by working capital primarily due to the timing of SaaS renewals primarily associated with Frontline and cash payment of $45.0 million related to the settlement of the Berall v. Verathon patent litigation matter.

Investing activities - Cash used in investing activities from continuing operations during the three months ended March 31, 2023 is primarily due to capitalized software expenditures and capital expenditures. Cash used in investing activities from continuing operations during the three months ended March 31, 2022 was due primarily to business acquisitions.

Financing activities - Cash used in financing activities from continuing operations for the three months ended March 31, 2023 was primarily due to dividend payments. Cash used in financing activities for the three months ended March 31, 2022 was primarily due to repayments on our unsecured credit facility and dividend payments.

Discontinued operations - Cash provided by discontinued operations during the three months ended March 31, 2022 was primarily due to proceeds received from the sale of TransCore and Zetec.

Total debt consisted of the following:

The interest rate on borrowings under the $3,500.0 unsecured credit facility is calculated based upon various recognized indices plus a margin as defined in the credit facility. At March 31, 2023, we had no outstanding borrowings under our unsecured credit facility and $19.1 of outstanding letters of credit.

Cash at our foreign subsidiaries at March 31, 2023 increased to $277.9 as compared to $234.0 at December 31, 2022 due primarily to the cash generated at our foreign subsidiaries during the three months ended March 31, 2023. We intend to repatriate substantially all historical and future earnings.