Roper Technologies Inc: Form 10-Q for the period ended Mar 31, 2024

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, 2023 (“Annual Report”) as filed on February 22, 2024 with the U.S. Securities and Exchange Commission (“SEC”) and the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

Information About Forward-Looking Statements

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,” “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.

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:

• general economic conditions;
• difficulty making acquisitions and successfully integrating acquired businesses;
• any unforeseen liabilities associated with future acquisitions;
• failure to effectively mitigate cybersecurity threats, including any litigation arising therefrom;
• failure to comply with new data privacy laws and regulations, including any litigation arising therefrom;
• risks and costs associated with our international sales and operations;
• rising interest rates;
• limitations on our business imposed by our indebtedness;
• product liability, litigation, and insurance risks;
• future competition;
• reduction of business with large customers;
• risks associated with government contracts;
• changes in the supply of, or price for, labor, energy, raw materials, parts, and components, including as a result of impacts from the current inflationary environment, or supply chain constraints;
• potential write-offs of our goodwill and other intangible assets;
• our ability to successfully develop new products;
• failure to protect our intellectual property;
• unfavorable changes in foreign exchange rates;
• difficulties associated with exports/imports and risks of changes to tariff rates;
• increased warranty exposure;
• environmental compliance costs and liabilities;
• the effect of, or change in, government regulations (including tax);
• risks associated with the use of artificial intelligence;
• economic disruption caused by armed conflicts (such as the war in Ukraine and the conflict in the Middle East), terrorist attacks, health crises (such as the COVID-19 pandemic), or other unforeseen geopolitical events; and
• the factors discussed in other reports we file with the SEC from time to time.

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.

Overview

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.

In 2022, Roper completed the divestiture of a majority equity stake in its industrial businesses (“Indicor”). The financial results related to Indicor are reported as discontinued operations for all periods presented.

Refer to Note 9 of the Notes to Condensed Consolidated Financial Statements for information regarding Roper’s minority equity interest in Indicor.

Unless otherwise noted, discussion within Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations.

Critical Accounting Policies

There were no material changes during the three months ended March 31, 2024 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.

Recently Issued Accounting Standards

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:

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Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023

Net revenues for the three months ended March 31, 2024 were $1,680.7 as compared to $1,469.7 for the three months ended March 31, 2023, an increase of 14.4%. The components of revenue growth for the three months ended March 31, 2024 were as follows:

In our Application Software segment, net revenues in the first quarter of 2024 were $895.2 as compared to $761.4 in the first quarter of 2023. The growth of 5.7% in organic revenues was broad-based across the segment led by our businesses serving the property and casualty insurance, project-based private sector, acute healthcare, and legal markets. Gross margin increased to 69.9% in the first quarter of 2024 as compared to 68.4% in the first quarter of 2023 due primarily to operating leverage on higher organic revenues. Selling, general and administrative (“SG&A”) expenses as a percentage of net revenues increased marginally to 43.1% in the first quarter of 2024 as compared to 43.0% in the first quarter of 2023 due primarily to higher amortization of acquired intangibles from the acquisitions of Syntellis and Procare, almost entirely offset by operating leverage on higher organic revenues. The resulting operating margin was 26.8% in the first quarter of 2024 as compared to 25.4% in the first quarter of 2023.

In our Network Software segment, net revenues in the first quarter of 2024 were $370.8 as compared to $354.5 in the first quarter of 2023. The growth of 4.5% in organic revenues was led by our network software businesses serving the alternate site healthcare, life insurance/financial services, and construction markets, partially offset by a decline in our businesses serving the media and entertainment and freight match markets. Gross margin increased to 85.3% in the first quarter of 2024 as compared to 84.5% in the first quarter of 2023 due primarily to operating leverage on higher organic revenues. SG&A expenses as a percentage of net revenues decreased to 40.3% in the first quarter of 2024 as compared to 42.8% in the first quarter of 2023 due primarily to expense reductions resulting from cost structure rationalization at our businesses serving the freight match market and operating leverage on higher organic revenues. As a result, operating margin was 45.0% in the first quarter of 2024 as compared to 41.6% in the first quarter of 2023.

In our Technology Enabled Products segment, net revenues in the first quarter of 2024 were $414.7 as compared to $353.8 in the first quarter of 2023. The growth of 17.1% in organic revenues was led by our medical products businesses and water meter technology business. Gross margin increased to 57.6% in the first quarter of 2024 as compared to 56.2% in the first quarter of 2023 due primarily to operating leverage on higher organic revenues. SG&A expenses as a percentage of net revenues increased to 24.8% in the first quarter of 2024 as compared to 23.5% in the first quarter of 2023 due primarily to higher compensation expense associated with medical claims. The resulting operating margin was 32.8% in the first quarter of 2024 as compared to 32.6% in the first quarter of 2023.

Corporate expenses increased to $61.5, or 3.7% of net revenues, in the first quarter of 2024 as compared to $55.2, or 3.8% of net revenues, in the first quarter of 2023. The dollar increase was due primarily to higher stock-based compensation.

Interest expense, net, increased to $53.2 for the first quarter of 2024 as compared to $37.4 for the first quarter of 2023 due to borrowings on our unsecured credit facility and less interest income earned on our cash and cash equivalents, partially offset by lower weighted average fixed-rate debt balances.

Equity investments (gain) loss, net, was a gain of $57.0 for the first quarter of 2024 due primarily to $64.4 associated with the change in fair value of our equity investment in Indicor, partially offset by the proportionate share of net loss associated with our investment in Certinia of $7.6 in accordance with the equity method of accounting. Equity investments (gain) loss, net, was a loss of $1.2 for the first quarter of 2023 related to our equity investment in Indicor.

Other expense, net, of $1.2 and $2.3 for the three months ended March 31, 2024 and 2023, respectively, were both composed primarily of foreign exchange losses at our non-U.S. based subsidiaries.

Income taxes as a percentage of pretax earnings remained relatively consistent at 21.1% for the first quarter of 2024 as compared to 21.0% for the first quarter of 2023.

Backlog is equal to our remaining performance obligations expected to be recognized as revenue within the next 12 months as discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements. Backlog increased 2% to $2,932.4 at March 31, 2024 as compared to $2,872.5 at March 31, 2023 due primarily to acquisitions, partially offset by a decrease in our Technology Enabled Products segment.

Financial Condition, Liquidity, and Capital Resources

All currency amounts are in millions

Selected cash flows for the three months ended March 31, 2024 and 2023 were as follows:

Operating activities – Net cash provided by operating activities from continuing operations increased by 14% to $531.5 in the three months ended March 31, 2024 as compared to $464.9 in the three months ended March 31, 2023 primarily due to higher net earnings from continuing operations net of non-cash expenses.

Investing activities – Cash used in investing activities from continuing operations during the three months ended March 31, 2024 was primarily for the acquisition of Procare. Cash used in investing activities from continuing operations during the three months ended March 31, 2023 was primarily for capitalized software expenditures and capital expenditures.

Financing activities – Cash provided by financing activities during the three months ended March 31, 2024 was primarily from net borrowings on our unsecured credit facility to fund the acquisition of Procare, partially offset by dividend payments. Cash used in financing activities during the three months ended March 31, 2023 was primarily for dividend payments.

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 agreement. At March 31, 2024, we had $1,750.0 of borrowings outstanding under our unsecured credit facility and $7.4 of outstanding letters of credit.

In relation to our total cash and cash equivalents, amounts held at our foreign subsidiaries represented 76.3% or $151.3 at March 31, 2024 as compared to 69.2% or $148.3 at December 31, 2023. The dollar increase was due primarily to the cash generated at our foreign subsidiaries during the three months ended March 31, 2024, partially offset by cash repatriation of $81.2. We intend to repatriate substantially all historical and future earnings.

We expect existing cash balances, together with cash generated by our operations and amounts available under our credit facility, will be sufficient to fund our operating requirements for the foreseeable future.

We were in compliance with all debt covenants related to our unsecured credit facility throughout the three months ended March 31, 2024.

Net working capital (total current assets, excluding cash, less total current liabilities, excluding debt) was negative $1,182.5 at March 31, 2024 as compared to negative $1,196.6 at December 31, 2023 primarily driven by payments for accrued compensation, the reduction in deferred revenue predominantly due to the timing of SaaS renewals associated with Frontline, and payment timing associated with prepaid expenses included within other current assets, partially offset by changes in income tax-related balances and a decrease in accounts receivable. Total debt, net of deferred financing costs was $7,722.0 at March 31, 2024 as compared to $6,330.1 at December 31, 2023. Our leverage on a continuing operations basis is presented in the following table:

Capital expenditures were $9.3 for the three months ended March 31, 2024 as compared to $9.8 for the three months ended March 31, 2023. Capitalized software expenditures were $9.6 for the three months ended March 31, 2024 as compared to $9.9 for the three months ended March 31, 2023. We expect the aggregate of capital expenditures and capitalized software expenditures for 2024 to be relatively comparable to prior years as a percentage of net revenues.

Outlook

Current geopolitical and economic uncertainties, including the current inflationary environment, supply chain disruptions, and labor shortages, could adversely affect our business prospects. An armed conflict (such as the ongoing war in Ukraine, as well as the conflict in the Middle East), significant terrorist attack, other global conflict, or public health crisis could cause changes in world economies that would adversely affect us. It is impossible to isolate each of these potential factor’s future effects on current economic conditions or any of our businesses. It is also impossible to predict with any reasonable degree of certainty what or when any additional events may occur that also would similarly disrupt the economy and have an adverse impact on our businesses.

We maintain an active acquisition program; however, future acquisitions will be dependent on numerous factors and it is not feasible to reasonably estimate if or when any such acquisitions will occur and what the impact will be on our business, financial condition, and results of operations. Such acquisitions may be financed by the use of existing credit agreements, future cash flows from operations, future divestitures, the proceeds from the issuance of new debt or equity securities, or any combination of these methods, the terms and availability of which will be subject to market and economic conditions generally.

We anticipate that our businesses will generate positive cash flows from operating activities, and that these cash flows will permit the reduction of currently outstanding debt in accordance with the repayment schedule. However, the rate at which we can reduce our debt (and reduce the associated interest expense) will be affected by, among other things, the financing and operating requirements of any new acquisitions, the financial performance of our existing companies, and the impact of the aforementioned geopolitical and economic uncertainties and the financial markets generally. None of these factors can be predicted with certainty.

See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report. There were no material changes during the three months ended March 31, 2024.

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q (“Evaluation Date”). This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation as of the Evaluation Date, these officers have concluded that the design and operation of our disclosure controls and procedures are effective.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes to our internal controls during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Information regarding risk factors can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Information About Forward-Looking Statements,” in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our 2023 Annual Report on Form 10-K. There have been no material changes during the three months ended March 31, 2024 to the risk factors reported in our 2023 Annual Report on Form 10-K.