filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Roper Technologies, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Roper Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of earnings, of comprehensive income, of stockholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded acquisitions completed in 2018 from its assessment of internal control over financial reporting as of December 31, 2018 because they were acquired by the Company in a purchase business combination during 2018. We have also excluded acquisitions completed in 2018 from our audit of internal control over financial reporting. These acquisitions are wholly-owned subsidiaries whose aggregate assets and aggregate revenues excluded from management’s assessment and our audit of internal control over financial reporting represent less than 1% and less than 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PricewaterhouseCoopers LLP
Tampa, Florida
February 25, 2019
We have served as the Company’s auditor since 2002.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(in millions, except per share data)
| 2018 | 2017 | ||||||
| Assets | |||||||
| Cash and cash equivalents | $ | 364.4 | $ | 671.3 | |||
| Accounts receivable, net | 700.8 | 641.7 | |||||
| Inventories, net | 190.8 | 204.9 | |||||
| Income taxes receivable | 21.7 | 24.4 | |||||
| Unbilled receivables | 169.4 | 143.6 | |||||
| Other current assets | 80.0 | 73.5 | |||||
| Current assets held for sale | 83.6 | — | |||||
| Total current assets | 1,610.7 | 1,759.4 | |||||
| Property, plant and equipment, net | 128.7 | 142.5 | |||||
| Goodwill | 9,346.8 | 8,820.3 | |||||
| Other intangible assets, net | 3,842.1 | 3,475.2 | |||||
| Deferred taxes | 52.2 | 30.7 | |||||
| Other assets | 101.1 | 88.3 | |||||
| Assets held for sale | 167.9 | — | |||||
| Total assets | $ | 15,249.5 | $ | 14,316.4 | |||
| Liabilities and Stockholders’ Equity | |||||||
| Accounts payable | $ | 165.3 | $ | 171.1 | |||
| Accrued compensation | 248.3 | 198.0 | |||||
| Deferred revenue | 677.9 | 566.4 | |||||
| Other accrued liabilities | 258.0 | 266.6 | |||||
| Income taxes payable | 58.3 | 26.4 | |||||
| Current portion of long-term debt, net | 1.5 | 800.9 | |||||
| Current liabilities held for sale | 38.9 | — | |||||
| Total current liabilities | 1,448.2 | 2,029.4 | |||||
| Long-term debt, net of current portion | 4,940.2 | 4,354.6 | |||||
| Deferred taxes | 931.1 | 829.6 | |||||
| Other liabilities | 191.5 | 239.2 | |||||
| Total liabilities | 7,511.0 | 7,452.8 | |||||
| Commitments and contingencies (Note 12) | |||||||
| Stockholders’ equity: | |||||||
| Preferred stock, $0.01 par value per share; 1.0 shares authorized; none outstanding | — | — | |||||
| Common stock, $0.01 par value per share; 350.0 shares authorized; 105.2 shares issued and 103.4 outstanding at December 31, 2018 and 104.4 shares issued and 102.5 outstanding at December 31, 2017 | 1.1 | 1.0 | |||||
| Additional paid-in capital | 1,751.5 | 1,602.9 | |||||
| Retained earnings | 6,247.7 | 5,464.6 | |||||
| Accumulated other comprehensive loss | (243.3 | ) | (186.2 | ) | |||
| Treasury stock, 1.9 shares at December 31, 2018 and 1.9 shares at December 31, 2017 | (18.5 | ) | (18.7 | ) | |||
| Total stockholders’ equity | 7,738.5 | 6,863.6 | |||||
| Total liabilities and stockholders’ equity | $ | 15,249.5 | $ | 14,316.4 |
See accompanying notes to consolidated financial statements.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2018, 2017 and 2016
(Dollar and share amounts in millions, except per share data)
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net revenues | $ | 5,191.2 | $ | 4,607.5 | $ | 3,789.9 | |||||
| Cost of sales | 1,911.7 | 1,742.7 | 1,457.5 | ||||||||
| Gross profit | 3,279.5 | 2,864.8 | 2,332.4 | ||||||||
| Selling, general and administrative expenses | 1,883.1 | 1,654.6 | 1,277.8 | ||||||||
| Income from operations | 1,396.4 | 1,210.2 | 1,054.6 | ||||||||
| Interest expense, net | 182.1 | 180.6 | 111.6 | ||||||||
| Loss on extinguishment of debt | 15.9 | — | 0.9 | ||||||||
| Other income/(expense), net | — | 5.1 | (1.5 | ) | |||||||
| Earnings before income taxes | 1,198.4 | 1,034.7 | 940.6 | ||||||||
| Income taxes | 254.0 | 62.9 | 282.0 | ||||||||
| Net earnings | $ | 944.4 | $ | 971.8 | $ | 658.6 | |||||
| Earnings per share: | |||||||||||
| Basic | $ | 9.15 | $ | 9.51 | $ | 6.50 | |||||
| Diluted | $ | 9.05 | $ | 9.39 | $ | 6.43 | |||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | 103.2 | 102.2 | 101.3 | ||||||||
| Diluted | 104.4 | 103.5 | 102.5 |
See accompanying notes to consolidated financial statements.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2018, 2017 and 2016
(in millions)
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net earnings | $ | 944.4 | $ | 971.8 | $ | 658.6 | |||||
| Other comprehensive income, net of tax: | |||||||||||
| Foreign currency translation adjustments | (57.1 | ) | 138.5 | (111.9 | ) | ||||||
| Total other comprehensive income/(loss), net of tax | (57.1 | ) | 138.5 | (111.9 | ) | ||||||
| Comprehensive income | $ | 887.3 | $ | 1,110.3 | $ | 546.7 |
See accompanying notes to consolidated financial statements.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2018, 2017 and 2016
(in millions, except per share data)
| Common Stock | ||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Accumulated other comprehensive earnings | Treasury stock | Total stockholders’ equity | ||||||||||||||||||||
| Balances at December 31, 2015 | 100.9 | $ | 1.0 | $ | 1,419.3 | $ | 4,110.5 | $ | (212.8 | ) | $ | (19.1 | ) | $ | 5,298.9 | |||||||||||
| Net earnings | — | — | — | 658.6 | — | — | 658.6 | |||||||||||||||||||
| Stock option exercises | 0.4 | — | 28.0 | — | — | — | 28.0 | |||||||||||||||||||
| Treasury stock sold | — | — | 3.1 | — | — | 0.2 | 3.3 | |||||||||||||||||||
| Currency translation adjustments, net of $2.6 tax | — | — | — | — | (111.9 | ) | — | (111.9 | ) | |||||||||||||||||
| Stock based compensation | — | — | 77.9 | — | — | — | 77.9 | |||||||||||||||||||
| Restricted stock activity | 0.4 | — | (18.0 | ) | — | — | — | (18.0 | ) | |||||||||||||||||
| Stock option tax benefit, net of shortfalls | — | — | (8.1 | ) | — | — | — | (8.1 | ) | |||||||||||||||||
| Conversion of senior subordinated convertible notes | — | — | (13.1 | ) | — | — | — | (13.1 | ) | |||||||||||||||||
| Dividends declared ($1.25 per share) | — | — | — | (126.7 | ) | — | — | (126.7 | ) | |||||||||||||||||
| Balances at December 31, 2016 | 101.7 | $ | 1.0 | $ | 1,489.1 | $ | 4,642.4 | $ | (324.7 | ) | $ | (18.9 | ) | $ | 5,788.9 | |||||||||||
| Net earnings | — | — | — | 971.8 | — | — | 971.8 | |||||||||||||||||||
| Stock option exercises | 0.6 | — | 61.3 | — | — | — | 61.3 | |||||||||||||||||||
| Treasury stock sold | — | — | 4.0 | — | — | 0.2 | 4.2 | |||||||||||||||||||
| Currency translation adjustments, net of $4.9 tax | — | — | — | — | 138.5 | — | 138.5 | |||||||||||||||||||
| Stock based compensation | — | — | 81.3 | — | — | — | 81.3 | |||||||||||||||||||
| Restricted stock activity | 0.2 | — | (32.8 | ) | — | — | — | (32.8 | ) | |||||||||||||||||
| Dividends declared ($1.4625 per share) | — | — | — | (149.6 | ) | — | — | (149.6 | ) | |||||||||||||||||
| Balances at December 31, 2017 | 102.5 | $ | 1.0 | $ | 1,602.9 | $ | 5,464.6 | $ | (186.2 | ) | $ | (18.7 | ) | $ | 6,863.6 | |||||||||||
| Adoption of ASC 606 | — | — | — | 14.3 | — | — | 14.3 | |||||||||||||||||||
| Net earnings | — | — | — | 944.4 | — | — | 944.4 | |||||||||||||||||||
| Stock option exercises | 0.6 | 0.1 | 58.7 | — | — | — | 58.8 | |||||||||||||||||||
| Treasury stock sold | — | — | 5.2 | — | — | 0.2 | 5.4 | |||||||||||||||||||
| Currency translation adjustments, net of $7.2 tax | — | — | — | — | (57.1 | ) | — | (57.1 | ) | |||||||||||||||||
| Stock based compensation | — | — | 132.9 | — | — | — | 132.9 | |||||||||||||||||||
| Restricted stock activity | 0.3 | — | (48.2 | ) | — | — | — | (48.2 | ) | |||||||||||||||||
| Dividends declared ($1.70 per share) | — | — | — | (175.6 | ) | — | — | (175.6 | ) | |||||||||||||||||
| Balances at December 31, 2018 | 103.4 | $ | 1.1 | $ | 1,751.5 | $ | 6,247.7 | $ | (243.3 | ) | $ | (18.5 | ) | $ | 7,738.5 |
See accompanying notes to consolidated financial statements.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2018, 2017 and 2016
(in millions)
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 944.4 | $ | 971.8 | $ | 658.6 | |||||
| Adjustments to reconcile net earnings to cash flows from operating activities: | |||||||||||
| Depreciation and amortization of property, plant and equipment | 49.5 | 49.5 | 37.3 | ||||||||
| Amortization of intangible assets | 317.5 | 295.5 | 203.2 | ||||||||
| Amortization of deferred financing costs | 6.3 | 7.2 | 5.6 | ||||||||
| Non-cash stock compensation | 133.8 | 83.1 | 78.8 | ||||||||
| Loss on debt extinguishment | 15.9 | — | 0.9 | ||||||||
| Gain on sale of assets | — | (9.4 | ) | — | |||||||
| Changes in operating assets and liabilities, net of acquired businesses: | |||||||||||
| Accounts receivable | (83.5 | ) | (6.7 | ) | (20.7 | ) | |||||
| Unbilled receivables | (14.0 | ) | (13.5 | ) | (1.2 | ) | |||||
| Inventories | (21.8 | ) | (15.3 | ) | 6.3 | ||||||
| Accounts payable and accrued liabilities | 68.8 | 73.3 | 20.2 | ||||||||
| Deferred revenue | 86.6 | 74.9 | 25.2 | ||||||||
| Income taxes | (67.6 | ) | (257.0 | ) | (47.6 | ) | |||||
| Other, net | (5.8 | ) | (18.9 | ) | (2.8 | ) | |||||
| Cash provided by operating activities | 1,430.1 | 1,234.5 | 963.8 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions of businesses, net of cash acquired | (1,275.8 | ) | (153.7 | ) | (3,721.8 | ) | |||||
| Capital expenditures | (49.1 | ) | (48.8 | ) | (37.3 | ) | |||||
| Capitalized software expenditures | (9.5 | ) | (10.8 | ) | (2.8 | ) | |||||
| Proceeds from sale of assets | — | 10.6 | 0.9 | ||||||||
| Other, net | (0.7 | ) | (6.9 | ) | 8.1 | ||||||
| Cash used in investing activities | (1,335.1 | ) | (209.6 | ) | (3,752.9 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from senior notes | 1,500.0 | — | 1,200.0 | ||||||||
| Payment of senior notes | (1,300.0 | ) | (400.0 | ) | — | ||||||
| Borrowings/(payments) under revolving line of credit, net | (405.0 | ) | (660.0 | ) | 1,750.0 | ||||||
| Principal payments on convertible notes | — | — | (4.3 | ) | |||||||
| Debt issuance costs | (13.9 | ) | — | (17.3 | ) | ||||||
| Redemption premium for debt extinguishment | (15.5 | ) | — | — | |||||||
| Cash dividends to stockholders | (170.1 | ) | (142.8 | ) | (121.1 | ) | |||||
| Treasury stock sales | 5.4 | 4.2 | 3.3 | ||||||||
| Proceeds from stock based compensation, net | 10.6 | 28.5 | 10.0 | ||||||||
| Redemption premium on convertible debt | — | — | (14.2 | ) | |||||||
| Other | 0.4 | 0.1 | (1.1 | ) | |||||||
| Cash provided by/(used in) financing activities | (388.1 | ) | (1,170.0 | ) | 2,805.3 | ||||||
| Effect of exchange rate changes on cash | (13.8 | ) | 59.2 | (37.5 | ) | ||||||
| Net decrease in cash and cash equivalents | (306.9 | ) | (85.9 | ) | (21.3 | ) | |||||
| Cash and cash equivalents, beginning of year | 671.3 | 757.2 | 778.5 | ||||||||
| Cash and cash equivalents, end of year | $ | 364.4 | $ | 671.3 | $ | 757.2 | |||||
| Supplemental disclosures: | |||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | 169.0 | $ | 175.0 | $ | 104.9 | |||||
| Income taxes, net of refunds received | $ | 321.6 | $ | 320.2 | $ | 329.6 | |||||
| Noncash investing activities: | |||||||||||
| Net assets of businesses acquired: | |||||||||||
| Fair value of assets, including goodwill | $ | 1,505.1 | $ | 177.3 | $ | 4,433.1 | |||||
| Liabilities assumed | (229.3 | ) | (23.6 | ) | (711.3 | ) | |||||
| Cash paid, net of cash acquired | $ | 1,275.8 | $ | 153.7 | $ | 3,721.8 |
See accompanying notes to consolidated financial statements.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2018, 2017 and 2016
(Dollar and share amounts in millions unless specified, except per share data)
(1) Summary of Accounting Policies
Basis of Presentation - These financial statements present consolidated information for Roper Technologies, Inc. and its subsidiaries (“Roper,” the “Company,” “we,” “our” or “us”). All significant intercompany accounts and transactions have been eliminated.
Nature of the Business - Roper is a diversified technology company. The Company operates businesses that design and develop software (both license and software-as-a-service) and engineered products and solutions for a variety of niche end markets.
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 FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Any ASUs not listed below 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.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASC 606, which created a single, comprehensive revenue recognition model for all contracts with customers. The Company adopted the FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018 using the modified retrospective transition method for all contracts not substantially completed as of the date of adoption.
We recorded a net increase to opening retained earnings of $14.3 due to the cumulative impact of adopting ASC 606. The impact of adopting ASC 606 was not material to the Company’s results of operations for the year ended December 31, 2018.
The cumulative impact of the adoption of ASC 606 to the consolidated balance sheet as of January 1, 2018 was as follows:
| As reported | Adjusted | ||||||||||
| December 31, | Impact of | January 1, | |||||||||
| 2017 | ASC 606 Adoption | 2018 | |||||||||
| ASSETS: | |||||||||||
| Unbilled receivables | $ | 143.6 | $ | 2.8 | $ | 146.4 | |||||
| Other current assets | 73.5 | (1.0 | ) | 72.5 | |||||||
| Other assets | 88.3 | 3.2 | 91.5 | ||||||||
| LIABILITIES: | |||||||||||
| Deferred revenue | 566.4 | (13.5 | ) | 552.9 | |||||||
| Deferred taxes | 829.6 | 4.6 | 834.2 | ||||||||
| Other liabilities | 239.2 | (0.4 | ) | 238.8 | |||||||
| STOCKHOLDERS’ EQUITY: | |||||||||||
| Retained earnings | 5,464.6 | 14.3 | 5,478.9 |
Deferred Revenue & Unbilled Receivables
Certain of Roper’s businesses sell perpetual and term licenses of their software to customers in conjunction with other products and services, primarily PCS and implementation services. In some cases, under the previous revenue guidance, vendor-specific objective evidence (“VSOE”) was unavailable for perpetual and term licenses and associated implementation services, and revenue recognition was deferred until all elements were delivered, all services had been performed, or until fair value could be objectively determined. The revenues associated with these licenses and implementation was generally deferred over the contractual term of the PCS services. Under ASC 606, VSOE is no longer a requirement for a deliverable in a multiple-element software arrangement to be considered a separate performance obligation. The reduction in deferred revenues as well as the increase in unbilled receivables is due primarily to the acceleration of revenue recognition associated with certain perpetual and term licenses and associated implementation services as a result of the adoption of ASC 606.
Other Current Assets
The reduction in other current assets is due primarily to the recognition of previously deferred software licensing costs associated with the acceleration of revenue recognition associated with certain perpetual and term software licenses discussed above.
Other Assets
The increase in other assets is due primarily to the acceleration of revenue recognition for which we do not expect to bill customers within the next 12 months as well as deferred commissions previously expensed as incurred associated with our software sales. These deferred commissions are amortized on a straight-line basis over the period of contract performance or a longer period, generally the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission.
Income Taxes
The adoption of ASC 606 resulted in the acceleration of revenue recognition, which generated additional net deferred tax liabilities.
See the Company’s accounting policies below for details.
In March 2016, the FASB issued an update on stock compensation. The ASU simplifies several aspects of the accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for annual reporting periods beginning after December 15, 2016. The Company elected to early adopt this standard on a prospective basis in the quarter ended March 31, 2016. The impact of the early adoption resulted in the following:
| • | The Company recorded tax benefits of $15.3 within income tax expense for the year ended December 31, 2016 related to the excess tax benefit on share-based awards. Prior to adoption this amount would have been recorded as a reduction of additional paid-in capital. This change adds volatility to the Company’s effective tax rate. |
| • | The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the statement of cash flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted. |
| • | The Company elected not to change its policy on accounting for forfeitures and continued to estimate the total number of awards for which the requisite service period will not be rendered. |
| • | The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of its diluted earnings per share since adoption. This resulted in an increase in diluted weighted average common shares outstanding of 0.279 shares for the year ended December 31, 2016. |
Recently Released Accounting Pronouncements
In August 2018, the FASB issued an update which clarifies the accounting for implementation costs in cloud computing arrangements. This update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the update on its results of operations and financial condition.
In June 2016, the FASB issued an update which amends the measurement of credit losses on financial instruments by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This update is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact of the update on its results of operations and financial condition.
In February 2016, the FASB issued an update on lease accounting. This update, effective for annual reporting periods after December 15, 2018, including interim periods within those annual periods, provides amendments to current lease accounting. These amendments include the recognition of right-of-use lease assets and lease liabilities on the balance sheet and disclosing other key information about leasing arrangements. We are currently designing and implementing processes, policies, and controls to comply with the update on lease accounting. While we have not yet finalized our assessment, we currently believe the primary impact of adoption will be the recognition of a material right-of-use asset and an offsetting lease liability for our real estate leases. We will adopt this standard as of January 1, 2019 using the modified retrospective transition approach with a cumulative effect adjustment to the opening balance of retained earnings as of the date of adoption.
Cash and Cash Equivalents - Roper considers highly liquid financial instruments with remaining maturities at acquisition of three months or less to be cash equivalents. Roper had no cash equivalents at December 31, 2018 and December 31, 2017.
Contingencies - Management continually assesses the probability of any adverse judgments or outcomes to its potential contingencies. Disclosure of the contingency is made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred. In the assessment of contingencies as of December 31, 2018, management concluded that there were no matters for which there was a reasonable possibility of a material loss.
Earnings per Share - Basic earnings per share were calculated using net earnings and the weighted-average number of shares of common stock outstanding during the respective year. 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 year. Potentially dilutive common stock consisted of stock options and the premium over the conversion price on Roper’s senior subordinated convertible notes based upon the trading price of the Company’s common stock. Effective January 1, 2016, Roper adopted the provisions of an accounting standards update on a prospective basis which increased the number of potentially dilutive stock options as there is no longer a tax benefit in the calculation of dilutive stock options. See the caption “Recent Accounting Pronouncements” elsewhere in this Note for additional information regarding the ASU. The effects of potential common stock were determined using the treasury stock method:
| Years ended December 31, | ||||||||
| 2018 | 2017 | 2016 | ||||||
| Basic weighted-average shares outstanding | 103.2 | 102.2 | 101.3 | |||||
| Effect of potential common stock: | ||||||||
| Common stock awards | 1.2 | 1.3 | 1.1 | |||||
| Senior subordinated convertible notes | — | — | 0.1 | |||||
| Diluted weighted-average shares outstanding | 104.4 | 103.5 | 102.5 |
As of and for the years ended December 31, 2018, 2017 and 2016, there were 0.724, 0.478 and 1.144 outstanding stock options, respectively, that were not included in the determination of diluted earnings per share because doing so would have been antidilutive.
Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions - Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar were translated at the exchange rate in effect at the balance sheet date, and revenues and expenses were translated at average exchange rates for the period in which those entities were included in Roper’s financial results. Translation adjustments are reflected as a component of other comprehensive income. Foreign currency transaction gains and losses are recorded in the consolidated statement of earnings as other income/(expense). Foreign currency transaction gains/(losses) were $0.2, $(1.4) and $(2.9) for the years ended December 31, 2018, 2017 and 2016.
Goodwill and Other Intangibles - Roper accounts for goodwill in a purchase business combination as the excess of the cost over the estimated fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Goodwill, which is not amortized, is tested for impairment on an annual basis (or 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). When testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, then performance of the quantitative impairment test is required. The quantitative process utilizes both an income approach (discounted cash flows) and a market approach (consisting of a comparable public company earnings multiples methodology) to estimate the fair value of a reporting unit. To determine the reasonableness of the estimated fair values, the Company reviews the assumptions to ensure that neither the income approach nor the market approach provides significantly different valuations. If the estimated fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the estimated fair value, a non-cash impairment loss is recognized in the amount of that excess.
When performing the quantitative assessment, key assumptions used in the income and market methodologies are updated when the analysis is performed for each reporting unit. Various assumptions are utilized including forecasted operating results, strategic plans, economic projections, anticipated future cash flows, the weighted-average cost of capital, comparable transactions, market data and earnings multiples. The assumptions that have the most significant effect on the fair value calculations are the anticipated future cash flows, discount rates, and the earnings multiples. While the Company uses reasonable and timely information to prepare
its cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances.
Roper has 33 reporting units with individual goodwill amounts ranging from zero to $2.4 billion. In 2018, the Company performed its annual impairment test in the fourth quarter for all reporting units. The Company conducted its analysis qualitatively and assessed whether it was more likely than not that the respective fair value of these reporting units was less than the carrying amount. The Company determined that impairment of goodwill was not likely in 30 of its reporting units and thus was not required to perform a quantitative analysis for these reporting units. For the remaining three reporting units, the Company performed its quantitative analysis and concluded that the fair value of each of these three reporting units was substantially in excess of its carrying value, with no impairment indicated as of October 1, 2018.
Recently acquired reporting units generally represent a higher inherent risk of impairment, which typically decreases as the businesses are integrated into the enterprise. Negative industry or economic trends, disruptions to its business, actual results significantly below expected results, unexpected significant changes or planned changes in the use of the assets, divestitures and market capitalization declines may have a negative effect on the fair value of Roper’s reporting units.
The following events or circumstances, although not comprehensive, would be considered to determine whether interim testing of goodwill would be required:
| • | a significant adverse change in legal factors or in the business climate; |
| • | an adverse action or assessment by a regulator; |
| • | unanticipated competition; |
| • | a loss of key personnel; |
| • | a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; |
| • | the testing for recoverability under the Impairment or Disposal of Long-Lived Assets of a significant asset group within a reporting unit; and |
| • | recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. |
Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Trade names that are determined to have an indefinite useful economic life are not amortized, but separately tested for impairment during the fourth quarter of the fiscal year or on an interim basis if an event occurs that indicates the fair value is more likely than not below the carrying value. Roper first qualitatively assesses whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of an indefinite-lived trade name is less than its carrying amount. If necessary, Roper conducts a quantitative review using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these assets. The fair value of each trade name is determined by applying a royalty rate to a projection of net revenues discounted using a risk adjusted rate of capital. Each royalty rate is determined based on the profitability of the trade name to which it relates and observed market royalty rates. Revenue growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches or other variables. Trade names resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into Roper’s enterprise. The Company performed a quantitative analysis over the fair values of four of its trade names and concluded that the fair value exceeded its carrying value, with no impairment indicated as of October 1, 2018.
The assessment of fair value for impairment purposes requires significant judgments to be made by management. Although forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management uses to operate the underlying businesses, there is significant judgment in determining the expected results attributable to the reporting units. Changes in estimates or the application of alternative assumptions could produce significantly different results. No impairment resulted from the annual testing performed in 2018.
The most significant identifiable intangible assets with definite useful economic lives recognized from our acquisitions are customer relationships. The fair value for customer relationships is determined as of the acquisition date using the excess earnings method. Under this methodology the fair value is determined based on the estimated future after-tax cash flows arising from the acquired customer relationships over their estimated lives after considering customer attrition and contributory asset charges. When testing customer relationship intangible assets for potential impairment, management considers historical customer attrition rates and projected revenues and profitability related to customers that existed at acquisition. In evaluating the amortizable life for customer relationship intangible assets, management considers historical customer attrition patterns.
Roper evaluates whether there has been an impairment of identifiable intangible assets with definite useful economic lives, or of the remaining life of such assets, when certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost or remaining period of amortization of any asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value or a revision in the remaining amortization period is required.
Impairment of Long-Lived Assets - The Company determines whether there has been an impairment of long-lived assets, excluding goodwill and identifiable intangible assets that are determined to have indefinite useful economic lives, when certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost or life of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value or revision to remaining life is required. Future adverse changes in market conditions or poor operating results of underlying long-lived assets could result in losses or an inability to recover the carrying value of the long-lived assets that may not be reflected in the assets’ current carrying value, thereby possibly requiring an impairment charge or acceleration of depreciation or amortization expense in the future.
Income Taxes - The Company recognizes in the consolidated financial statements only those tax positions determined to be “more likely than not” of being sustained upon examination based on the technical merits of the positions. Interest and penalties related to unrecognized tax benefits are classified as a component of income tax expense.
The Company records a valuation allowance to reduce its deferred tax assets if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some portion or all of such deferred tax assets will not be realized. Available evidence which is considered in determining the amount of valuation allowance required includes, but is not limited to, the Company’s estimate of future taxable income and any applicable tax-planning strategies.
Certain assets and liabilities have different bases for financial reporting and income tax purposes. Deferred income taxes have been provided for these differences at the enacted tax rates expected to be paid. See Note 7 for information regarding income taxes.
Interest Rate Risk - The Company manages interest rate risk by maintaining a combination of fixed-rate and variable-rate debt, which may include interest rate swaps to convert fixed-rate debt to variable-rate debt, or to convert variable-rate debt to fixed-rate debt. Interest rate swaps are recorded at fair value in the balance sheet as an asset or liability, and the changes in fair values of both the swap and the hedged item are recorded as interest expense in current earnings. There were no interest rate swaps outstanding at December 31, 2018 or December 31, 2017.
Inventories - Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.
Other Comprehensive Income - Comprehensive income includes net earnings and all other non-owner sources of changes in a company’s net assets.
Product Warranties - The Company sells certain of its products to customers with a product warranty that allows customers to return a defective product during a specified warranty period following the purchase in exchange for a replacement product, repair at no cost to the customer or the issuance of a credit to the customer. The Company accrues its estimated exposure to warranty claims based upon current and historical product sales data, warranty costs incurred and any other related information known to the Company.
Property, Plant and Equipment and Depreciation and Amortization - Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for using principally the straight-line method over the estimated useful lives of the assets as follows:
| Buildings | 20-30 years |
| Machinery | 8-12 years |
| Other equipment | 3-5 years |
Research and Development - Research and development (“R&D”) costs include salaries and benefits, rents, supplies, and other costs related to products under development. Research and development costs are expensed in the period incurred and totaled $316.8, $281.1 and $195.4 for the years ended December 31, 2018, 2017 and 2016, respectively.
Revenue Recognition - The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method for all contracts not substantially completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance, while the reported results for 2017 and 2016 were prepared under the guidance of ASC Topic 605, Revenue Recognition. The adoption of ASC 606 represents a change in accounting principle that is intended to more closely align revenue recognition with the transfer of control of the Company’s products and services to the customer. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these products and/or services. To achieve this principle, the Company applies the following five steps:
| • | identify the contract with the customer; |
| • | identify the performance obligations in the contract; |
| • | determine the transaction price; |
| • | allocate the transaction price to performance obligations in the contract; and |
| • | recognize revenue when or as the Company satisfies a performance obligation. |
Disaggregated Revenue - We disaggregate our revenues into two categories: (i) software and related services; and (ii) engineered products and related services. Software and related services revenues are primarily derived from our RF Technology and Medical & Scientific Imaging reportable segments. Engineered products and related services revenues are derived from all of our reportable segments and comprise substantially all of the revenues generated in our Energy Systems & Controls and Industrial Technology reportable segments. See details in the table below.
| Year ended December 31, 2018 | ||||
| Software and related services | $ | 2,165.9 | ||
| Engineered products and related services | 3,025.3 | |||
| Net revenues | $ | 5,191.2 |
Software and related services
Software-as-a-Service (“SaaS”) - SaaS subscriptions and ongoing related support are generally accounted for as a single performance obligation and recognized ratably over the contractual term. In addition, SaaS arrangements may include implementation services which are accounted for as a separate performance obligation and recognized over time, using the input method. Payment is generally required within 30 days of the commencement of the SaaS subscription period, which is primarily offered to customers over a one-year timeframe.
Licensed Software - Performance obligations in our customer contracts may include:
| – | Perpetual or time-based (“term”) software licenses |
| – | Post contract support (“PCS”) |
| – | Implementation/installation services |
Software licenses may be combined with implementation/installation services as a single performance obligation if the implementation/installation significantly modifies or customizes the functionality of the software license.
We recognize revenue over time or at a point in time depending on our evaluation of when the customer obtains control over the promised products or services. For software arrangements that include multiple performance obligations, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.
Payment for software licenses is generally required within 30 to 60 days of the transfer of control. Payment for PCS is generally required within 30 to 60 days of the commencement of the service period, which is primarily offered to customers over a one-year timeframe. Payment terms do not contain a significant financing component. Payment for implementation/installation services that are recognized over time are typically commensurate with milestones defined in the contract, or billable hours incurred.
Engineered products and related services
Revenue from product sales is recognized when control transfers to the customer, which is generally when the product is shipped.
Non-project-based installation and repair services are performed by certain of our businesses for which revenue is recognized upon completion.
Payment terms are generally 30 to 60 days from the transfer of control. Payment terms do not contain a significant financing component.
Preventative maintenance service revenues are recognized over time using the input method. If we determine our efforts or inputs are expended evenly throughout the performance period, we generally recognize revenue on a straight-line basis. Payment for preventative maintenance services are typically commensurate with milestones defined in the contract.
We offer customers return rights and other credits subject to certain restrictions. We estimate variable consideration generally based on historical experience to arrive at the transaction price, or the amount to which we ultimately expect to be entitled from the customer.
Revenues from our project-based businesses, including toll and traffic systems and control systems, are generally recognized over time using the input method, primarily utilizing the ratio of costs incurred to total estimated costs, as the measure of performance. For these projects, payment is typically commensurate with certain performance milestones defined in the contract. Retention and down payments are also customary in these contracts. Estimated losses on any projects are recognized as soon as such losses become probable and reasonably estimable. The impact on revenues due to changes in estimates was immaterial for the year ended December 31, 2018. The Company recognized revenues of $245.9, $249.3 and $241.3 for the years ended December 31, 2018, 2017 and 2016, respectively, using this method.
Accounts receivable, net - Accounts receivable, net includes amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances of $23.1 and $12.7 at December 31, 2018 and 2017, respectively. Outstanding accounts receivable balances are reviewed periodically, and allowances are provided at such time that management believes it is probable that an account receivable is uncollectible.
Unbilled receivables - Our unbilled receivables include unbilled amounts typically resulting from sales under project-based contracts when the input method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not solely due to the passage of time. Amounts may not exceed their net realizable value.
Deferred revenues - We record deferred revenues when cash payments are received or due in advance of our performance. Our deferred revenues relate primarily to software and related services. In most cases, we recognize these deferred revenues ratably over time as the SaaS or PCS performance obligation is satisfied. The non-current portion of deferred revenue is included in “Other liabilities” in our consolidated balance sheets.
Our unbilled receivables and deferred revenues are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify these balances as current or non-current based on the timing of when we expect to recognize revenue.
Deferred commissions - Our incremental direct costs of obtaining a contract, which consist of sales commissions primarily for our software sales, are deferred and amortized on a straight-line basis over the period of contract performance or a longer period, depending on facts and circumstances. We classify deferred commissions as current or non-current based on the timing of when we expect to recognize the expense. The current and non-current portions of deferred commissions are included in “Other current assets” and “Other assets,” respectively, in our consolidated balance sheets. At December 31, 2018 and January 1, 2018, we had $28.0 and $20.7 of deferred commissions, respectively. We recognized $24.5 of expense related to deferred commissions in the year ended December 31, 2018.
Remaining performance obligations - Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $2,818.7. We expect to recognize revenue on approximately 60% of our remaining performance obligations over the next 12 months, with the remainder to be recognized thereafter.
Capitalized Software - The Company accounts for capitalized software under applicable accounting guidance which, among other provisions, requires capitalization of certain internal-use software costs once certain criteria are met. Overhead, general and
administrative and training costs are not capitalized. Capitalized software balances, net of accumulated amortization, were $22.0 and $14.0 at December 31, 2018 and 2017, respectively.
Stock-Based Compensation - The Company recognizes expense for the grant date fair value of its employee stock awards on a straight-line basis (or, in the case of performance-based awards, on a graded basis) over the employee’s requisite service period (generally the vesting period of the award). The fair value of option awards is estimated using the Black-Scholes option valuation model.
(2) Business Acquisitions and Assets and Liabilities Held for Sale
Roper completed seven business acquisitions in the year ended December 31, 2018, with an aggregate purchase price of $1,279.0, net of cash acquired. The results of operations of the acquired businesses are included in Roper’s consolidated results of operations since the date of each acquisition. Supplemental pro forma information has not been provided as the acquisitions did not have a material impact on Roper’s consolidated results of operations individually or in aggregate.
The results of the following acquisitions are reported in the RF Technology segment:
Roper completed three business acquisitions which provide software solutions that support the development of cost estimates in the construction industry: Quote Software, PlanSwift Software, and Smartbid.
Acquisition of PowerPlan - On June 4, 2018, Roper acquired 100% of the shares of PowerPlan, a provider of financial and compliance management software and solutions to large complex companies in asset-intensive industries, for a purchase price of $1,111.4, net of cash acquired.
Acquisition of ConceptShare - On June 7, 2018, Roper acquired 100% of the shares of ConceptShare, a provider of cloud-based software for marketing agencies, marketing departments and other creative teams to streamline the review and approval of online work and content.
Acquisition of BillBlast - On July 10, 2018, Roper acquired 100% of the shares of BillBlast, a provider of software and ancillary services for the automation of invoicing and reporting for law firms.
Acquisition of Avitru - On December 31, 2018, Roper acquired 100% of the shares of Avitru, a provider of software that supports the design, development and/or delivery of construction specification solutions and related services.
The Company initially recorded $717.5 in goodwill and $711.3 of other identifiable intangibles in connection with the acquisitions; however, purchase price allocations are preliminary pending final tax-related adjustments. The majority of the goodwill is not expected to be deductible for tax purposes. The amortizable intangible assets include customer relationships of $635.1 (19 year weighted average useful life) and technology of $48.6 (7 year weighted average useful life).
Assets and Liabilities Held for Sale
During the second quarter of 2018, Roper and Thermo Fisher Scientific, Inc. (“Thermo Fisher”) entered into a definitive agreement under which Thermo Fisher will acquire 100% of the shares of Gatan, Inc. (“Gatan”), a wholly-owned subsidiary of Roper, for approximately $925.0 in cash. The transaction, which is expected to be completed in 2019, is subject to customary closing conditions, including regulatory approvals.
During the fourth quarter of 2018, Roper and Teledyne Technologies Incorporated (“Teledyne”) entered into a definitive agreement under which Teledyne will acquire Roper’s remaining scientific imaging businesses for $225.0 in cash. These businesses include primarily Princeton Instruments, Photometrics and Lumenera, as well as other brands (collectively, the “Imaging” businesses).
At December 31, 2018, the assets and liabilities of Gatan and the Imaging businesses (collectively, the “Scientific Imaging” businesses) were reclassified as held for sale on Roper’s consolidated balance sheet. The Scientific Imaging businesses are reported in the Medical & Scientific Imaging segment.
The Company recognized a deferred tax liability of $10.0 associated with the excess of book basis over tax basis in the shares of Gatan during the second quarter of 2018. The Company recognized a deferred tax asset of $1.8 associated with the excess of tax basis over book basis in the shares of the Imaging businesses during the fourth quarter of 2018.
The Company closed on its sale of the Imaging businesses to Teledyne on February 5, 2019.
2017 Acquisitions – During the year ended December 31, 2017, Roper completed four business acquisitions, with an aggregate purchase price of $152.0, net of cash acquired. The results of operations of the acquired businesses did not have a material impact on Roper’s consolidated results of operations.
Acquisition of Phase Technology - On June 21, 2017, Roper acquired the assets of Phase Technology, a business engaged in the design, manufacture, marketing and sales of test instruments. Phase Technology is reported in the Energy Systems & Controls segment.
The results of the following acquisitions are reported in the RF Technology segment:
Acquisition of Handshake Software, Inc. - On August 4, 2017, Roper acquired 100% of the shares of Handshake Software, Inc., a provider of search products, portals and services for legal professionals.
Acquisition of Workbook Software A/S - On September 15, 2017, Roper acquired 100% of the shares of Workbook Software A/S, a provider of software solutions for customer relationship management, project management and finance/accounting.
Acquisition of Onvia, Inc. - On November 17, 2017, Roper acquired 100% of the outstanding shares of Onvia, Inc. (“Onvia”) common stock for $9.00 per share in an all-cash tender offer. Onvia provides enterprise, mid-market and small business customers with sales lead generation technologies into federal, state and local government markets.
The Company recorded $82.7 in goodwill and $85.0 of other identifiable intangibles in connection with the acquisitions. The amortizable intangible assets include primarily customer relationships of $68.0 (15 year weighted average useful life) and technology of $13.0 (6 year weighted average useful life).
Sale of Product Line - On May 15, 2017, Roper completed the sale of a product line in our Energy Systems & Controls segment for $10.4. The pretax gain on the sale was $9.4, which is reported in Other income/(expense), net in the consolidated statements of earnings.
2016 Acquisitions – During the year ended December 31, 2016, Roper completed six business combinations. Roper acquired the businesses to both expand and complement its existing technologies. The results of operations of the acquired companies have been included in Roper’s consolidated results since the date of each acquisition.
The largest of the 2016 acquisitions was Deltek Inc., a global provider of enterprise software and information solutions for government contractors, professional services firms and other project-based businesses. Roper acquired 100% of the shares of Project Diamond Holdings Corp. (the parent company of Deltek) on December 27, 2016, in a $2,800.0 all-cash transaction. Deltek is reported in the RF Technology segment.
The Company expensed transaction costs of $4.3 related to the Deltek acquisition as corporate general and administrative expenses, as incurred.
Roper’s results for the year ended December 31, 2016 included results from Deltek between December 28, 2016 and December 31, 2016. In that period, Deltek contributed $7.9 in revenue and $0.8 of earnings to Roper’s results. The following unaudited pro forma summary presents consolidated information as if the acquisition of Deltek had occurred on January 1, 2016:
| Pro forma Year ended December 31, | |||
| 2016 | |||
| Net revenues | $ | 4,268.1 | |
| Net income | 656.4 | ||
| Earnings per share, basic | 6.48 | ||
| Earnings per share, diluted | 6.41 |
Pro forma earnings were adjusted by $47.4 for the year ended December 31, 2016 for non-recurring acquisition and other costs. Adjustments were also made for recurring changes in amortization, interest expense and taxes related to the acquisition.
During the year ended December 31, 2016, Roper completed five other acquisitions which were immaterial. The aggregate purchase price of these acquisitions totaled $920.0 of cash. The Company recorded $372.0 in other identifiable intangibles and $642.0 in
goodwill in connection with these acquisitions. Supplemental pro forma information has not been provided as the acquisitions did not have a material impact on Roper’s consolidated results of operations individually or in aggregate.
The results of the following acquisitions are reported in the Medical & Scientific Imaging segment:
| – | Clinisys - On January 7, 2016, Roper acquired 100% of the shares of CliniSys Group Ltd. (“CliniSys”), a provider of clinical laboratory software headquartered in the United Kingdom. |
| – | PCI Medical - On March 17, 2016, Roper acquired the assets of PCI Medical Inc., a provider of medical probe and scope disinfection products. |
| – | GeneInsight - On April 1, 2016, the Company acquired 100% of the shares of GeneInsight Inc., a provider of software for managing the analysis, interpretation and reporting of genetic tests. |
| – | UNIConnect - On November 10, 2016, Roper acquired the assets of UNIConnect LC, a provider of process management software for molecular laboratories. |
ConstructConnect - On October 31, 2016, Roper acquired 100% of the shares of iSqFt Holdings Inc. (d/b/a ConstructConnect), a provider of cloud-based data, collaboration, and workflow automation solutions to the commercial construction industry. ConstructConnect is reported in the RF Technology segment.
The Company expensed transaction costs of $4.2 related to the acquisitions as corporate general and administrative expenses, as incurred.
(3) Inventories
The components of inventories at December 31 were as follows:
| 2018 | 2017 | ||||||
| Raw materials and supplies | $ | 120.3 | $ | 133.0 | |||
| Work in process | 26.2 | 27.6 | |||||
| Finished products | 74.6 | 82.4 | |||||
| Inventory reserves | (30.3 | ) | (38.1 | ) | |||
| $ | 190.8 | $ | 204.9 |
(4) Property, Plant and Equipment
The components of property, plant and equipment at December 31 were as follows:
| 2018 | 2017 | ||||||
| Land | $ | 2.2 | $ | 2.5 | |||
| Buildings | 76.7 | 90.7 | |||||
| Machinery and other equipment | 218.0 | 226.3 | |||||
| Computer equipment | 79.4 | 77.5 | |||||
| Software | 64.4 | 62.4 | |||||
| 440.7 | 459.4 | ||||||
| Accumulated depreciation | (312.0 | ) | (316.9 | ) | |||
| $ | 128.7 | $ | 142.5 |
Depreciation and amortization expense related to property, plant and equipment was $49.5, $49.5 and $37.3 for the years ended December 31, 2018, 2017 and 2016, respectively.
(5) Goodwill and Other Intangible Assets
The carrying value of goodwill by segment was as follows:
| RF Technology | Medical & Scientific Imaging | Industrial Technology | Energy Systems & Controls | Total | |||||||||||||||
| Balances at December 31, 2016 | $ | 4,687.7 | $ | 3,185.0 | $ | 364.0 | $ | 410.4 | $ | 8,647.1 | |||||||||
| Goodwill acquired | 63.5 | — | — | 19.2 | 82.7 | ||||||||||||||
| Currency translation adjustments | 19.3 | 17.6 | 13.5 | 8.4 | 58.8 | ||||||||||||||
| Reclassifications and other | 28.4 | 3.3 | — | — | 31.7 | ||||||||||||||
| Balances at December 31, 2017 | $ | 4,798.9 | $ | 3,205.9 | $ | 377.5 | $ | 438.0 | $ | 8,820.3 | |||||||||
| Goodwill acquired | 717.5 | — | — | — | 717.5 | ||||||||||||||
| Goodwill related to assets held for sale | — | (156.2 | ) | — | — | (156.2 | ) | ||||||||||||
| Currency translation adjustments | (14.7 | ) | (12.5 | ) | (6.6 | ) | (5.9 | ) | (39.7 | ) | |||||||||
| Reclassifications and other | 4.9 | — | — | — | 4.9 | ||||||||||||||
| Balances at December 31, 2018 | $ | 5,506.6 | $ | 3,037.2 | $ | 370.9 | $ | 432.1 | $ | 9,346.8 |
Reclassifications and other during the year ended December 31, 2018 were due primarily to tax adjustments for 2017 acquisitions. See Note 2 for information regarding acquisitions.
Other intangible assets were comprised of:
| Cost | Accum. amort. | Net book value | |||||||||
| Assets subject to amortization: | |||||||||||
| Customer related intangibles | $ | 3,355.2 | $ | (913.7 | ) | $ | 2,441.5 | ||||
| Unpatented technology | 544.1 | (207.7 | ) | 336.4 | |||||||
| Software | 184.7 | (84.8 | ) | 99.9 | |||||||
| Patents and other protective rights | 26.1 | (22.7 | ) | 3.4 | |||||||
| Trade names | 6.6 | (1.7 | ) | 4.9 | |||||||
| Assets not subject to amortization: | |||||||||||
| Trade names | 587.7 | — | 587.7 | ||||||||
| In process research and development | 1.4 | — | 1.4 | ||||||||
| Balances at December 31, 2017 | $ | 4,705.8 | $ | (1,230.6 | ) | $ | 3,475.2 | ||||
| Assets subject to amortization: | |||||||||||
| Customer related intangibles | $ | 3,926.8 | $ | (1,083.6 | ) | $ | 2,843.2 | ||||
| Unpatented technology | 504.0 | (199.5 | ) | 304.5 | |||||||
| Software | 172.0 | (93.2 | ) | 78.8 | |||||||
| Patents and other protective rights | 9.7 | (7.5 | ) | 2.2 | |||||||
| Trade names | 7.3 | (2.8 | ) | 4.5 | |||||||
| Assets not subject to amortization: | |||||||||||
| Trade names | 608.9 | — | 608.9 | ||||||||
| Balances at December 31, 2018 | $ | 5,228.7 | $ | (1,386.6 | ) | $ | 3,842.1 |
Amortization expense of other intangible assets was $316.5, $294.3, and $201.4 during the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense is expected to be $330 in 2019, $316 in 2020, $304 in 2021, $300 in 2022 and $269 in 2023.
(6) Accrued Liabilities
Accrued liabilities at December 31 were as follows:
| 2018 | 2017 | ||||||
| Interest | $ | 26.9 | $ | 20.1 | |||
| Customer deposits | 22.3 | 29.2 | |||||
| Commissions | 7.7 | 8.3 | |||||
| Warranty | 9.3 | 10.6 | |||||
| Accrued dividend | 48.5 | 42.9 | |||||
| Rebates | 29.1 | 30.0 | |||||
| Billings in excess of revenues | 13.9 | 23.3 | |||||
| Other | 100.3 | 102.2 | |||||
| $ | 258.0 | $ | 266.6 |
(7) Income Taxes
Earnings before income taxes for the years ended December 31, 2018, 2017 and 2016 consisted of the following components:
| 2018 | 2017 | 2016 | |||||||||
| United States | $ | 924.2 | $ | 783.6 | $ | 721.0 | |||||
| Other | 274.2 | 251.1 | 219.6 | ||||||||
| $ | 1,198.4 | $ | 1,034.7 | $ | 940.6 |
Components of income tax expense for the years ended December 31, 2018, 2017 and 2016 were as follows:
| 2018 | 2017 | 2016 | |||||||||
| Current: | |||||||||||
| Federal | $ | 155.4 | $ | 316.0 | $ | 239.2 | |||||
| State | 56.2 | 29.8 | 21.8 | ||||||||
| Foreign | 105.1 | 89.9 | 54.9 | ||||||||
| Deferred: | |||||||||||
| Federal | (24.2 | ) | (358.3 | ) | (26.8 | ) | |||||
| State | (25.8 | ) | (3.7 | ) | 0.2 | ||||||
| Foreign | (12.7 | ) | (10.8 | ) | (7.3 | ) | |||||
| $ | 254.0 | $ | 62.9 | $ | 282.0 |
Reconciliations between the statutory federal income tax rate and the effective income tax rate for the years ended December 31, 2018, 2017 and 2016 were as follows:
| 2018 | 2017 | 2016 | ||||||
| Federal statutory rate | 21.0 | % | 35.0 | % | 35.0 | % | ||
| Foreign rate differential | 0.3 | (2.6 | ) | (3.2 | ) | |||
| R&D tax credits | (0.9 | ) | (0.8 | ) | (0.7 | ) | ||
| State taxes, net of federal benefit | 2.4 | 1.9 | 1.9 | |||||
| Section 199 deduction | — | (1.3 | ) | (1.5 | ) | |||
| Stock-based compensation | (3.1 | ) | (3.9 | ) | (1.6 | ) | ||
| Tax Cuts and Jobs Act of 2017 - enactment date and measurement period adjustments | (1.2 | ) | (20.8 | ) | — | |||
| Global intangible low taxed income (GILTI) inclusion | 1.1 | — | — | |||||
| Foreign-derived intangible income (FDII) deduction | (1.2 | ) | — | — | ||||
| Tax on planned remittances of foreign earnings | 1.3 | — | — | |||||
| Other, net | 1.5 | (1.4 | ) | 0.1 | ||||
| 21.2 | % | 6.1 | % | 30.0 | % |
The deferred income tax balance sheet accounts arise from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.
Components of the deferred tax assets and liabilities at December 31 were as follows:
| 2018 | 2017 | ||||||
| Deferred tax assets: | |||||||
| Reserves and accrued expenses | $ | 156.5 | $ | 121.5 | |||
| Inventories | 4.5 | 5.1 | |||||
| Net operating loss carryforwards | 67.9 | 71.8 | |||||
| R&D credits | 6.1 | 9.6 | |||||
| Valuation allowance | (26.4 | ) | (25.7 | ) | |||
| Outside basis difference on investments held for sale | 2.7 | — | |||||
| Total deferred tax assets | $ | 211.3 | $ | 182.3 | |||
| Deferred tax liabilities: | |||||||
| Reserves and accrued expenses | $ | 14.3 | $ | 39.6 | |||
| Amortizable intangible assets | 1,043.0 | 935.9 | |||||
| Plant and equipment | 6.6 | 5.7 | |||||
| Accrued tax on unremitted foreign earnings | 16.3 | — | |||||
| Outside basis difference on investments held for sale | 10.0 | — | |||||
| Total deferred tax liabilities | $ | 1,090.2 | $ | 981.2 |
As of December 31, 2018, the Company had approximately $19.7 of tax-effected U.S. federal net operating loss carryforwards. Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2021 if not utilized. The majority of the U.S. federal net operating loss carryforwards are subject to limitation under the Internal Revenue Code of 1986, as amended (“IRC”) Section 382; however, the Company expects to utilize such losses in their entirety prior to expiration. The U.S. federal net operating loss carryforwards decreased from 2017 to 2018 primarily due to current year utilization. The Company has approximately $32.2 of tax-effected state net operating loss carryforwards (without regard to federal benefit of state). Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized. The state net operating loss carryforwards are primarily related to Florida and New Jersey, but the Company has smaller net operating losses in various other states. The Company has approximately $22.8 of tax-effected foreign net operating loss carryforwards. Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized. Additionally, the Company has $8.0 of U.S. federal and state research and development tax credit carryforwards (without regard to federal benefit of state). Some of these research and development credit carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized.
As of December 31, 2018, the Company determined that a total valuation allowance of $26.4 was necessary to reduce U.S. federal and state deferred tax assets by $9.1 and foreign deferred tax assets by $17.3, where it was more likely than not that all of such
deferred tax assets will not be realized. As of December 31, 2018, the Company believes it is more likely than not that the remaining net deferred tax assets will be realized based on the Company’s estimates of future taxable income and any applicable tax-planning strategies within various tax jurisdictions.
The Company recognizes in the consolidated financial statements only those tax positions determined to be “more likely than not” of being sustained upon examination based on the technical merits of the positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2018 | 2017 | 2016 | |||||||||
| Beginning balance | $ | 52.2 | $ | 38.7 | $ | 26.1 | |||||
| Additions for tax positions of prior periods | 2.4 | 24.8 | 3.5 | ||||||||
| Additions for tax positions of the current period | 6.9 | 4.2 | 9.0 | ||||||||
| Additions due to acquisitions | 4.4 | — | 5.1 | ||||||||
| Reductions for tax positions of prior periods | (0.4 | ) | (11.2 | ) | (1.2 | ) | |||||
| Reductions attributable to settlements with taxing authorities | — | (1.5 | ) | (0.6 | ) | ||||||
| Reductions attributable to lapses of applicable statute of limitations | (1.9 | ) | (2.8 | ) | (3.2 | ) | |||||
| Ending balance | $ | 63.6 | $ | 52.2 | $ | 38.7 |
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $62.0. Interest and penalties related to unrecognized tax benefits were $1.7 in 2018 and are classified as a component of income tax expense. Accrued interest and penalties were $6.9 at December 31, 2018 and $5.1 at December 31, 2017. During the next twelve months, it is reasonably possible that the unrecognized tax benefits may decrease by a net $2.3, mainly due to anticipated statute of limitations lapses in various jurisdictions.
The Company and its subsidiaries are subject to examinations for U.S. federal income tax as well as income tax in various state, city and foreign jurisdictions. The Company’s federal income tax returns for 2015 through the current period remain open to examination and the relevant state, city and foreign statutes vary. The Company does not expect the assessment of any significant additional tax in excess of amounts reserved.
The Tax Act was signed into U.S. law on December 22, 2017. The Tax Act contains provisions which impact the Company’s income taxes including a reduction in the U.S. federal corporate income tax rate from 35% to 21%, a one-time deemed mandatory repatriation tax imposed on all undistributed foreign earnings, and the introduction of a modified territorial taxation system.
The SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017 to provide guidance where the accounting under ASC 740, Income Taxes, is incomplete for certain income tax effects of the Tax Act upon issuance of financial statements for the reporting period in which the Tax Act was enacted. SAB 118 provides that if a company could determine a reasonable estimate, that estimate should be reported as a provisional amount and adjusted during a measurement period. If a company is unable to determine a reasonable estimate, no related provisional amounts would be recorded until a reasonable estimate can be determined, within the measurement period. The measurement period extends until all necessary information has been obtained, prepared, and analyzed, but no longer than 12-months from the date of enactment of the Tax Act.
As of December 22, 2018, the Company has completed the accounting for all income tax effects of the Tax Act. The total impact is a one-time benefit of $229.5, of which $215.4 benefit was recorded as a provisional amount in 2017 and $14.1 benefit was recorded during the measurement period.
The reduction in the U.S. federal corporate income tax rate from 35% to 21% and certain immaterial changes in tax basis required a remeasurement of the Company’s deferred taxes. The impact of this remeasurement was a one-time benefit of $379.0, of which the entirety was recorded as a provisional amount in 2017 with no adjustment recorded during the measurement period.
The one-time deemed mandatory repatriation tax on all undistributed foreign earnings resulted in a one-time charge of $102.4, of which $110.7 charge was recorded as a provisional amount in 2017 and $8.3 benefit was recorded during the measurement period. The Company has elected to pay this liability over 8 years.
The introduction of a modified territorial taxation system resulted in a change to the Company’s indefinite reinvestment assertion with respect to its unremitted foreign earnings, including those unremitted foreign earnings that were taxed in the U.S. as part of the one-time deemed mandatory repatriation tax. The Company now intends to distribute all historical unremitted foreign earnings up to the amount of excess foreign cash, as well as all future foreign earnings that can be repatriated without incremental U.S.
federal tax cost. Any remaining outside basis differences relating to the Company’s investments in foreign subsidiaries are no longer expected to be material and will be indefinitely reinvested. As a result of this change in assertion, the Company recorded a one-time charge of $22.8, of which $28.7 charge was recorded as a provisional amount in 2017 and $5.8 benefit was recorded during the measurement period. This charge represents the future U.S. state and foreign tax cost of repatriation. The Company also incurred a one-time charge of $24.2 resulting from the write-off of indirect benefits associated with uncertain tax positions. The entirety of this charge was recorded as a provisional amount in 2017 with no adjustment recorded during the measurement period.
In January 2018, the FASB released guidance on accounting for taxes on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The guidance provides that a company can, subject to an accounting policy election, either record the tax impacts of GILTI inclusions as a period cost, or account for GILTI in deferred taxes. The Company has now finalized its election and will account for the tax impacts of GILTI inclusions as a period cost.
(8) Long-Term Debt
On September 23, 2016, Roper entered into a five-year $2.5 billion unsecured credit facility (the “2016 Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders, which replaced its previous $1.85 billion unsecured credit facility dated as of July 27, 2012, as amended as of October 28, 2015 (the “2012 Facility”). The 2016 Facility comprises a five year $2.5 billion revolving credit facility, which includes availability of up to $150 for letters of credit. Roper may also, subject to compliance with specified conditions, request term loans or additional revolving credit commitments in an aggregate amount not to exceed $500. At December 31, 2018, there were $865 of outstanding borrowings under the 2016 Facility.
The 2016 Facility contains affirmative and negative covenants which, among other things, limit Roper’s ability to incur new debt, enter into certain mergers and acquisitions, sell assets and grant liens, make restricted payments (including the payment of dividends on our common stock) and capital expenditures, or change its line of business. Roper is also subject to financial covenants which require the Company to limit its consolidated total leverage ratio and to maintain a consolidated interest coverage ratio. The most restrictive covenant is the consolidated total leverage ratio which is limited to 3.5 to 1.
On December 2, 2016, Roper amended the 2016 Facility to allow the consolidated total leverage ratio be increased, no more than twice during the term of the 2016 Facility, to 4.0 to 1 for a consecutive four quarter fiscal period per increase (or, for any portion of such four quarter fiscal period in which the maximum would be 4.25 to 1 pursuant to the 2016 facility amendment, 4.25 to 1). In conjunction with the Deltek acquisition (see Note 2), the Company increased the maximum consolidated total leverage ratio covenant to 4.25 to 1 through June 30, 2017 and 4.00 to 1 through December 31, 2017.
The Company was in compliance with its debt covenants throughout the years ended December 31, 2018 and 2017.
On August 28, 2018, the Company completed a public offering of $700 aggregate principal amount of 3.65% senior unsecured notes due September 15, 2023 and $800 aggregate principal amount of 4.20% senior unsecured notes due September 15, 2028 (the “2018 Offering”). The notes bear interest at a fixed rate of 3.65% and 4.20% per year, respectively, payable semi-annually in arrears on March 15 and September 15 of each year, beginning March 15, 2019.
On December 19, 2016, the Company completed a public offering of $500 aggregate principal amount of 2.80% senior unsecured notes due December 15, 2021 and $700 aggregate principal amount of 3.80% senior unsecured notes due December 15, 2026. The notes bear interest at a fixed rate of 2.80% and 3.80% per year, respectively, payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2017.
On December 7, 2015, the Company completed a public offering of $600 aggregate principal amount of 3.00% senior unsecured notes due December 15, 2020 and $300 aggregate principal amount of 3.85% senior unsecured notes due December 15, 2025. The notes bear interest at a fixed rate of 3.00% and 3.85% per year, respectively, payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2016.
On June 6, 2013, the Company completed a public offering of $800 aggregate principal amount of 2.05% senior unsecured notes due October 1, 2018. The notes bear interest at a fixed rate of 2.05% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning October 1, 2013.
On November 21, 2012, the Company completed a public offering of $500 aggregate principal amount of 3.125% senior unsecured notes due November 15, 2022. The notes bear interest at a fixed rate of 3.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning May 15, 2013.
In September 2009, the Company completed a public offering of $500 aggregate principal amount of 6.25% senior unsecured notes due September 1, 2019 (the “2019 Notes”). The 2019 Notes bear interest at a fixed rate of 6.25% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning March 1, 2010.
On October 1, 2018, $800 of 2.05% senior unsecured notes matured and were repaid using cash on hand and revolver borrowings from the 2016 Facility.
A portion of the net proceeds of the 2018 Offering were used to redeem all of the $500 of outstanding 2019 Notes. The Company incurred a debt extinguishment charge in connection with the redemption of the 2019 Notes of $15.9, which represents the make-whole premium and unamortized deferred financing costs.
Roper may redeem some or all of these notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities.
The Company’s senior notes are unsecured senior obligations of the Company and rank equally in right of payment with all of Roper’s existing and future unsecured and unsubordinated indebtedness. The notes are effectively subordinated to any of its existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The notes are not guaranteed by any of Roper’s subsidiaries and are effectively subordinated to all existing and future indebtedness and other liabilities of Roper’s subsidiaries.
Total debt at December 31 consisted of the following:
| 2018 | 2017 | ||||||
| 2016 Facility | $ | 865.0 | $ | 1,270.0 | |||
| $800 2.050% senior notes due 2018 | — | 800.0 | |||||
| $500 6.250% senior notes due 2019 | — | 500.0 | |||||
| $600 3.000% senior notes due 2020 | 600.0 | 600.0 | |||||
| $500 2.800% senior notes due 2021 | 500.0 | 500.0 | |||||
| $500 3.125% senior notes due 2022 | 500.0 | 500.0 | |||||
| $700 3.650% senior notes due 2023 | 700.0 | — | |||||
| $300 3.850% senior notes due 2025 | 300.0 | 300.0 | |||||
| $700 3.800% senior notes due 2026 | 700.0 | 700.0 | |||||
| $800 4.200% senior notes due 2028 | 800.0 | — | |||||
| Other | 3.0 | 3.1 | |||||
| Less unamortized debt issuance costs | (26.3 | ) | (17.6 | ) | |||
| Total debt | 4,941.7 | 5,155.5 | |||||
| Less current portion | 1.5 | 800.9 | |||||
| Long-term debt | $ | 4,940.2 | $ | 4,354.6 |
The 2016 Facility and Roper’s $4.1 billion senior notes provide substantially all of Roper’s daily external financing requirements. The interest rate on the borrowings under the 2016 Facility is calculated based upon various recognized indices plus a margin as defined in the credit agreement. At December 31, 2018, Roper’s fixed debt consisted of $4.1 billion of senior notes, $3.0 of other debt in the form of capital leases, several smaller facilities that allow for borrowings or the issuance of letters of credit in foreign locations to support Roper’s non-U.S. businesses and $78.7 of outstanding letters of credit at December 31, 2018.
Future maturities of total debt during each of the next five years ending December 31 and thereafter were as follows:
| 2019 | $ | 1.5 | |
| 2020 | 601.5 | ||
| 2021 | 1,365.0 | ||
| 2022 | 500.0 | ||
| 2023 | 700.0 | ||
| Thereafter | 1,800.0 | ||
| Total | $ | 4,968.0 |
(9) Fair Value
Roper’s debt at December 31, 2018 included $4,100 of fixed-rate senior notes with the following fair values:
| $600 3.000% senior notes due 2020 | 599 | |
| $500 2.800% senior notes due 2021 | 490 | |
| $500 3.125% senior notes due 2022 | 488 | |
| $700 3.650% senior notes due 2023 | 697 | |
| $300 3.850% senior notes due 2025 | 295 | |
| $700 3.800% senior notes due 2026 | 682 | |
| $800 4.200% senior notes due 2028 | 793 |
The fair values of the senior notes are based on the trading prices of the notes, which the Company has determined to be Level 2 in the FASB fair value hierarchy. Most of Roper’s other borrowings at December 31, 2018 were at various interest rates that adjust relatively frequently under its credit facility. The estimated fair value for these borrowings at December 31, 2018 approximated the carrying value of these borrowings.
(10) Retirement and Other Benefit Plans
Roper maintains four defined contribution retirement plans under the provisions of Section 401(k) of the IRC covering substantially all U.S. employees. Roper partially matches employee contributions. Costs related to all such plans were $31.2, $27.6 and $23.7 for 2018, 2017 and 2016, respectively.
Roper also maintains various defined benefit retirement plans covering employees of non-U.S. and certain U.S. subsidiaries and a plan that supplements certain employees for the contribution ceiling applicable to the Section 401(k) plans. The costs and accumulated benefit obligations associated with each of these plans were not material.
(11) Stock-Based Compensation
The Roper Technologies, Inc. 2016 Incentive Plan (“2016 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 and directors. At December 31, 2018, 6.019 shares were available to grant under the 2016 Plan.
Under the Roper Technologies, Inc., Employee Stock Purchase Plan (“ESPP”), all employees in the U.S. and Canada are eligible to designate up to 10% of eligible earnings to purchase Roper’s common stock at a 5% discount to the average closing price of its common stock at the beginning and end of a quarterly offering period. Common stock sold to the employees may be either treasury stock, stock purchased on the open market, or newly issued shares.
Stock based compensation expense for the years ended December 31, 2018, 2017 and 2016 was as follows:
| 2018 | 2017 | 2016 | |||||||||
| Stock based compensation | $ | 133.8 | $ | 83.1 | $ | 78.8 | |||||
| Tax benefit recognized in net earnings | 28.1 | 29.1 | 27.6 |
In 2018, this expense included $29.4 associated with accelerated vesting due to the passing of our former executive chairman.
Stock Options – Stock options are typically granted at prices not less than 100% of market value of the underlying stock at the date of grant. Stock options typically vest over a period of three to five years from the grant date and expire ten years after the grant date. The Company recorded $23.2, $18.3, and $20.1 of compensation expense relating to outstanding options during 2018, 2017 and 2016, respectively, as a component of general and administrative expenses, primarily at corporate.
The Company estimates the fair value of its option awards using the Black-Scholes option valuation model. The stock volatility for each grant is measured using the weighted-average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected life of the grant. The expected term of options granted is derived from historical data to estimate option exercises and employee forfeitures, and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The weighted-average fair value of options granted in 2018, 2017 and 2016 were calculated using the following weighted-average assumptions:
| 2018 | 2017 | 2016 | ||||||
| Weighted-average fair value ($) | 57.75 | 40.87 | 34.57 | |||||
| Risk-free interest rate (%) | 2.65 | 2.03 | 1.44 | |||||
| Average expected option life (years) | 5.32 | 5.26 | 5.20 | |||||
| Expected volatility (%) | 18.05 | 18.74 | 21.35 | |||||
| Expected dividend yield (%) | 0.59 | 0.67 | 0.70 |
The following table summarizes the Company’s activities with respect to its share-based compensation plans for the years ended December 31, 2018 and 2017:
| Number of shares | Weighted-average exercise price per share | Weighted-average contractual term | Aggregate intrinsic value | |||||||||
| Outstanding at January 1, 2017 | 3.420 | $ | 121.31 | |||||||||
| Granted | 0.609 | 210.56 | ||||||||||
| Exercised | (0.645 | ) | 95.14 | |||||||||
| Canceled | (0.188 | ) | 170.75 | |||||||||
| Outstanding at December 31, 2017 | 3.196 | 140.68 | 6.09 | $ | 368.6 | |||||||
| Granted | 0.723 | 279.10 | ||||||||||
| Exercised | (0.650 | ) | 90.43 | |||||||||
| Canceled | (0.064 | ) | 211.57 | |||||||||
| Outstanding at December 31, 2018 | 3.205 | 180.69 | 6.58 | $ | 284.0 | |||||||
| Exercisable at December 31, 2018 | 1.627 | $ | 129.39 | 4.71 | $ | 223.1 |
The following table summarizes information for stock options outstanding at December 31, 2018:
| Outstanding options | Exercisable options | |||||||||||||||
| Exercise price | Number | Average exercise price | Average remaining life (years) | Number | Average exercise price | |||||||||||
| $41.78 - $60.80 | 0.121 | $ | 48.49 | 0.8 | 0.121 | $ | 48.49 | |||||||||
| $60.80 - $91.21 | 0.149 | 72.06 | 2.2 | 0.149 | 72.06 | |||||||||||
| $91.21 - $121.61 | 0.359 | 107.23 | 3.5 | 0.359 | 107.23 | |||||||||||
| $121.61 - $152.01 | 0.436 | 136.54 | 5.1 | 0.436 | 136.54 | |||||||||||
| $152.01 - $182.41 | 0.783 | 169.01 | 6.8 | 0.498 | 167.63 | |||||||||||
| $182.41 - $212.81 | 0.534 | 201.40 | 8.1 | 0.055 | 186.22 | |||||||||||
| $212.81 - $243.22 | 0.097 | 230.02 | 8.5 | 0.008 | 227.94 | |||||||||||
| $243.22 - $273.62 | 0.027 | 258.82 | 9.0 | 0.001 | 260.01 | |||||||||||
| $273.62 - $304.02 | 0.699 | 279.24 | 9.2 | — | — | |||||||||||
| $41.78 - 304.02 | 3.205 | $ | 180.69 | 6.6 | 1.627 | $ | 129.39 |
At December 31, 2018, there was $45.4 of total unrecognized compensation expense related to nonvested options granted under the Company’s share-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total intrinsic value of options exercised in 2018, 2017 and 2016 was $124.6, $90.6 and $38.9, respectively. Cash received from option exercises under all plans in 2018 and 2017 was $58.8 and $61.3, respectively.
Restricted Stock Grants - During 2018 and 2017, the Company granted 0.410 and 0.410 shares, respectively, of restricted stock to certain employee and director participants under its share-based compensation plans. Restricted stock grants generally vest over a period of 1 to 4 years. The Company recorded $109.7, $63.0 and $57.8 of compensation expense related to outstanding shares of restricted stock held by employees and directors during 2018, 2017 and 2016, respectively. In 2018, this expense included $29.4
associated with accelerated vesting due to the passing of our former executive chairman. A summary of the Company’s nonvested shares activity for 2018 and 2017 is as follows:
| Number of shares | Weighted-average grant date fair value | |||||
| Nonvested at December 31, 2016 | 0.953 | $ | 164.62 | |||
| Granted | 0.410 | 205.88 | ||||
| Vested | (0.387 | ) | 155.95 | |||
| Forfeited | (0.117 | ) | 173.53 | |||
| Nonvested at December 31, 2017 | 0.859 | $ | 187.01 | |||
| Granted | 0.410 | 278.29 | ||||
| Vested | (0.492 | ) | 204.24 | |||
| Forfeited | (0.038 | ) | 191.51 | |||
| Nonvested at December 31, 2018 | 0.739 | $ | 225.93 |
At December 31, 2018, there was $86.6 of total unrecognized compensation expense related to nonvested awards granted to both employees and directors under the Company’s share-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.1 years. Unrecognized compensation expense related to nonvested shares of restricted stock grants is recorded as a reduction to additional paid-in capital in stockholder’s equity at December 31, 2018.
Employee Stock Purchase Plan - During 2018, 2017 and 2016, participants of the ESPP purchased 0.020, 0.020 and 0.019 shares, respectively, of Roper’s common stock for total consideration of $5.4, $4.2, and $3.3, respectively. All of these shares were purchased from Roper’s treasury shares.
(12) Contingencies
Roper, in the ordinary course of business, is the subject of, or a party to, various pending or threatened legal actions, including product liability and employment practices that, in general, are based upon claims of the kind that have been customary over the past several years and which the Company is vigorously defending. After analyzing the Company’s contingent liabilities on a gross basis and, based upon past experience with resolution of its product liability and employment practices claims and the limits of the primary, excess, and umbrella liability insurance coverages that are available 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.
Roper or its subsidiaries have been named defendants along with numerous industrial companies in asbestos-related litigation claims in certain U.S. states. No significant resources have been required by Roper to respond to these cases and Roper believes it has valid defenses to such claims and, if required, intends to defend them vigorously. Given the state of these claims it is not possible to determine the potential liability, if any. In April 2018, a stockholder derivative complaint was filed in Sarasota County, Florida against the Company, nominally, and its directors and former chairman & chief executive officer (“CEO”), alleging the directors breached their fiduciary duties and were unjustly enriched by the compensation earned by the nonexecutive directors and the CEO in 2015 and 2016. A motion to dismiss the complaint is pending.
Roper’s rent expense was $61.7, $58.6 and $44.9 for 2018, 2017 and 2016, respectively. Roper’s future minimum property lease commitments are as follows:
| 2019 | $ | 53.2 | |
| 2020 | 48.5 | ||
| 2021 | 42.2 | ||
| 2022 | 33.7 | ||
| 2023 | 27.4 | ||
| Thereafter | 82.8 | ||
| Total | $ | 287.8 |
A summary of the Company’s warranty accrual activity is presented below:
| 2018 | 2017 | 2016 | |||||||||
| Balance, beginning of year | $ | 10.6 | $ | 10.5 | $ | 10.2 | |||||
| Additions charged to costs and expenses | 10.6 | 10.8 | 15.9 | ||||||||
| Deductions | (10.3 | ) | (11.2 | ) | (15.5 | ) | |||||
| Warranty related to liabilities held for sale | (1.5 | ) | — | — | |||||||
| Other | (0.1 | ) | 0.5 | (0.1 | ) | ||||||
| Balance, end of year | $ | 9.3 | $ | 10.6 | $ | 10.5 |
Other included warranty balances at acquired businesses at the dates of acquisition, the effects of foreign currency translation adjustments, reclassifications and other.
As of December 31, 2018, Roper had $78.7 of letters of credit issued to guarantee its performance under certain services contracts or to support certain insurance programs and $582.6 of outstanding surety bonds. Certain contracts, primarily those involving public sector customers, require Roper to provide a surety bond as a guarantee of its performance of contractual obligations.
(13) Segment and Geographic Area Information
Roper’s operations are reported in four segments around common customers, markets, sales channels, technologies and common cost opportunities. The segments are: RF Technology, Medical & Scientific Imaging, Industrial Technology and Energy Systems & Controls. The RF Technology segment provides comprehensive application management software, software-as-a-service applications and products and systems that utilize RFID communication technology. The Medical & Scientific Imaging segment offers medical products and software and high performance digital imaging products and software. Products included within the Industrial Technology segment are water and fluid handling pumps, flow measurement and metering equipment, industrial valves and controls, materials analysis equipment and consumables and industrial leak testing. The Energy Systems & Controls segment’s products include control systems, equipment and consumables for fluid properties testing, vibration sensors and other non-destructive inspection and measurement products and services. Roper’s management structure and internal reporting are aligned consistently with these four segments.
Prior to the end of the first quarter of 2019, Roper’s management expects to finalize the realignment of the Company’s reportable segments. Roper’s management believes the new reporting structure continues to provide a transparent view into the operations of the Company while more closely aligning the structure with management’s view given the evolution the Company’s portfolio has undergone in recent years. The Company expects to report the first quarter 2019 interim financial statements under the new segment structure with prior periods recasted to reflect the change.
There were no material transactions between Roper’s business segments during 2018, 2017 and 2016. Sales between geographic areas are primarily of finished products and are accounted for at prices intended to represent third-party prices. Operating profit by business segment and by geographic area is defined as net revenues less operating costs and expenses. These costs and expenses do not include unallocated corporate administrative expenses. Items below income from operations on Roper’s statement of earnings are not allocated to business segments.
Operating assets are those assets used primarily in the operations of each business segment or geographic area. Corporate assets are principally comprised of cash and cash equivalents, deferred tax assets, recoverable insurance claims, deferred compensation assets and property and equipment.
Selected financial information by business segment for 2018, 2017 and 2016 follows:
| RF Technology | Medical & Scientific Imaging | Industrial Technology | Energy Systems & Controls | Corporate | Total | ||||||||||||||||||
| 2018 | |||||||||||||||||||||||
| Net revenues | $ | 2,168.4 | $ | 1,522.4 | $ | 900.0 | $ | 600.4 | $ | — | $ | 5,191.2 | |||||||||||
| Operating profit | 613.8 | 521.0 | 284.3 | 180.8 | (203.5 | ) | 1,396.4 | ||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Operating assets | 622.7 | 266.2 | 202.9 | 171.7 | 6.1 | 1,269.6 | |||||||||||||||||
| Intangible assets, net | 7,881.1 | 4,300.7 | 483.8 | 523.3 | — | 13,188.9 | |||||||||||||||||
| Other 1 | 163.8 | 368.2 | 49.4 | 106.3 | 103.3 | 791.0 | |||||||||||||||||
| Total | 15,249.5 | ||||||||||||||||||||||
| Capital expenditures | 23.3 | 15.4 | 6.6 | 3.7 | 0.1 | 49.1 | |||||||||||||||||
| Capitalized software expenditures | 9.4 | 0.1 | — | — | — | 9.5 | |||||||||||||||||
| Depreciation and other amortization | 218.1 | 115.5 | 16.9 | 15.7 | 0.8 | 367.0 | |||||||||||||||||
| 2017 | |||||||||||||||||||||||
| Net revenues | $ | 1,862.1 | $ | 1,410.4 | $ | 783.7 | $ | 551.3 | $ | — | $ | 4,607.5 | |||||||||||
| Operating profit | 479.3 | 486.6 | 235.0 | 151.1 | (141.8 | ) | 1,210.2 | ||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Operating assets | 518.4 | 309.2 | 195.4 | 175.8 | 7.4 | 1,206.2 | |||||||||||||||||
| Intangible assets, net | 6,660.9 | 4,590.7 | 499.5 | 544.4 | — | 12,295.5 | |||||||||||||||||
| Other | 192.1 | 131.1 | 76.2 | 196.5 | 218.8 | 814.7 | |||||||||||||||||
| Total | 14,316.4 | ||||||||||||||||||||||
| Capital expenditures | 20.1 | 18.8 | 5.7 | 3.2 | 1.0 | 48.8 | |||||||||||||||||
| Capitalized software expenditures | 10.0 | 0.8 | — | — | — | 10.8 | |||||||||||||||||
| Depreciation and other amortization | 191.9 | 118.6 | 17.1 | 16.8 | 0.6 | 345.0 | |||||||||||||||||
| 2016 | |||||||||||||||||||||||
| Net revenues | $ | 1,210.3 | $ | 1,362.8 | $ | 706.6 | $ | 510.2 | $ | — | $ | 3,789.9 | |||||||||||
| Operating profit | 372.5 | 477.5 | 202.5 | 129.6 | (127.5 | ) | 1,054.6 | ||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Operating assets | 487.9 | 282.4 | 182.4 | 164.4 | 11.8 | 1,128.9 | |||||||||||||||||
| Intangible assets, net | 6,635.0 | 4,660.3 | 493.9 | 513.8 | — | 12,303.0 | |||||||||||||||||
| Other | 156.4 | 154.8 | 88.1 | 135.0 | 358.7 | 893.0 | |||||||||||||||||
| Total | 14,324.9 | ||||||||||||||||||||||
| Capital expenditures | 11.5 | 16.1 | 6.6 | 2.2 | 0.9 | 37.3 | |||||||||||||||||
| Capitalized software expenditures | — | 2.8 | — | — | — | 2.8 | |||||||||||||||||
| Depreciation and other amortization | 82.7 | 119.2 | 18.6 | 19.7 | 0.3 | 240.5 |
1 Includes Operating assets of $91.8 and Intangible assets, net of $159.4 associated with the Scientific Imaging businesses classified as held for sale. See Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.
Summarized data for Roper’s U.S. and foreign operations (principally in Canada, Europe and Asia) for 2018, 2017 and 2016, based upon the country of origin of the Roper entity making the sale, was as follows:
| United States | Non-U.S. | Eliminations | Total | ||||||||||||
| 2018 | |||||||||||||||
| Sales to unaffiliated customers | $ | 4,176.2 | $ | 1,015.0 | $ | — | $ | 5,191.2 | |||||||
| Sales between geographic areas | 143.9 | 137.0 | (280.9 | ) | — | ||||||||||
| Net revenues | $ | 4,320.1 | $ | 1,152.0 | $ | (280.9 | ) | $ | 5,191.2 | ||||||
| Long-lived assets 1 | $ | 145.2 | $ | 30.0 | $ | — | $ | 175.2 | |||||||
| 2017 | |||||||||||||||
| Sales to unaffiliated customers | $ | 3,679.1 | $ | 928.4 | $ | — | $ | 4,607.5 | |||||||
| Sales between geographic areas | 133.2 | 187.7 | (320.9 | ) | — | ||||||||||
| Net revenues | $ | 3,812.3 | $ | 1,116.1 | $ | (320.9 | ) | $ | 4,607.5 | ||||||
| Long-lived assets | $ | 144.0 | $ | 31.4 | $ | — | $ | 175.4 | |||||||
| 2016 | |||||||||||||||
| Sales to unaffiliated customers | $ | 2,978.5 | $ | 811.4 | $ | — | $ | 3,789.9 | |||||||
| Sales between geographic areas | 137.3 | 109.4 | (246.7 | ) | — | ||||||||||
| Net revenues | $ | 3,115.8 | $ | 920.8 | $ | (246.7 | ) | $ | 3,789.9 | ||||||
| Long-lived assets | $ | 146.0 | $ | 21.0 | $ | — | $ | 167.0 |
1 Excludes Long-lived assets of $7.6 associated with the Scientific Imaging businesses classified as held for sale. See Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.
Export sales from the U.S. during the years ended December 31, 2018, 2017 and 2016 were $578, $513 and $460, respectively. In the year ended December 31, 2018, these exports were shipped primarily to Asia (34%), Europe (27%), Canada (16%), Middle East (13%) and other (10%).
Sales to customers outside the U.S. accounted for a significant portion of Roper’s revenues. Sales are attributed to geographic areas based upon the location where the product is ultimately shipped. Roper’s net revenues for the years ended December 31, 2018, 2017 and 2016 are shown below by region, except for Canada, which is presented separately as it is the only country in which Roper has had greater than 4% of total revenues for any of the three years presented:
| RF Technology | Medical & Scientific Imaging | Industrial Technology | Energy Systems & Controls | Total | |||||||||||||||
| 2018 | |||||||||||||||||||
| Canada | $ | 90.8 | $ | 19.2 | $ | 73.7 | $ | 27.6 | $ | 211.3 | |||||||||
| Europe | 152.2 | 284.9 | 102.4 | 140.5 | 680.0 | ||||||||||||||
| Asia | 14.9 | 129.8 | 65.2 | 140.0 | 349.9 | ||||||||||||||
| Middle East | 50.9 | 13.4 | 3.5 | 34.3 | 102.1 | ||||||||||||||
| Rest of the world | 30.9 | 27.5 | 24.4 | 52.0 | 134.8 | ||||||||||||||
| Total | $ | 339.7 | $ | 474.8 | $ | 269.2 | $ | 394.4 | $ | 1,478.1 | |||||||||
| 2017 | |||||||||||||||||||
| Canada | $ | 73.3 | $ | 23.5 | $ | 64.1 | $ | 26.2 | $ | 187.1 | |||||||||
| Europe | 140.4 | 244.0 | 92.4 | 119.4 | 596.2 | ||||||||||||||
| Asia | 10.2 | 119.2 | 58.3 | 137.7 | 325.4 | ||||||||||||||
| Middle East | 61.4 | 11.1 | 4.8 | 35.2 | 112.5 | ||||||||||||||
| Rest of the world | 26.2 | 22.7 | 21.5 | 49.6 | 120.0 | ||||||||||||||
| Total | $ | 311.5 | $ | 420.5 | $ | 241.1 | $ | 368.1 | $ | 1,341.2 | |||||||||
| 2016 | |||||||||||||||||||
| Canada | $ | 52.7 | $ | 22.0 | $ | 60.5 | $ | 22.4 | $ | 157.6 | |||||||||
| Europe | 71.7 | 228.1 | 89.2 | 119.0 | 508.0 | ||||||||||||||
| Asia | 12.0 | 111.8 | 52.1 | 126.8 | 302.7 | ||||||||||||||
| Middle East | 50.6 | 10.1 | 3.0 | 37.5 | 101.2 | ||||||||||||||
| Rest of the world | 17.0 | 21.6 | 20.7 | 46.2 | 105.5 | ||||||||||||||
| Total | $ | 204.0 | $ | 393.6 | $ | 225.5 | $ | 351.9 | $ | 1,175.0 |
(14) Concentration of Risk
Financial instruments which potentially subject the Company to credit risk consist primarily of cash, trade receivables and unbilled receivables.
The Company maintains cash with various major financial institutions around the world. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect to cash balances.
Trade and unbilled receivables subject the Company to the potential for credit risk with customers. To reduce credit risk, the Company performs ongoing evaluations of its customers’ financial condition.
(15) Contract Balances
Contract balances are set forth in the following table:
| Balance Sheet Account | December 31, 2018 | January 1, 2018 | Change | ||||||||
| Unbilled receivables - current | $ | 169.4 | $ | 149.1 | $ | 20.3 | |||||
| Contract liabilities - current (1) | (714.1 | ) | (605.5 | ) | (108.6 | ) | |||||
| Deferred revenue - non-current | (29.8 | ) | (31.8 | ) | 2.0 | ||||||
| Net contract assets/(liabilities) | $ | (574.5 | ) | $ | (488.2 | ) | $ | (86.3 | ) |
(1) Consists of “Deferred revenue,” billings in-excess of revenues (“BIE”) and customer deposits. BIE and customer deposits are reported in “Other accrued liabilities” in our consolidated balance sheets.
The change in our net contract assets/(liabilities) from January 1, 2018 to December 31, 2018 was due primarily to the timing of payments and invoicing relating to SaaS and PCS renewals, partially offset by revenues recognized in the year ended December 31, 2018 of $605.5, related to our contract liability balances at January 1, 2018. In addition, the impact of the 2018 business acquisitions increased net contract liabilities by $35.8, partially offset by the classification of our scientific imaging businesses as held for sale, which decreased net contract liabilities by $10.7.
In order to determine revenues recognized in the period from contract liabilities, we allocate revenue to the individual deferred revenue, BIE or customer deposit balance outstanding at the beginning of the year until the revenue exceeds that balance.
Impairment losses recognized on our accounts receivable and unbilled receivables were immaterial in the year ended December 31, 2018.
(16) Quarterly Financial Data (unaudited)
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2018 | |||||||||||||||
| Net revenues | $ | 1,202.5 | $ | 1,293.7 | $ | 1,318.7 | $ | 1,376.3 | |||||||
| Gross profit | 750.5 | 815.9 | 840.0 | 873.1 | |||||||||||
| Income from operations | 300.2 | 354.3 | 377.5 | 364.4 | |||||||||||
| Net earnings | 211.3 | 228.4 | 247.6 | 257.1 | |||||||||||
| Earnings per share: | |||||||||||||||
| Basic | $ | 2.05 | $ | 2.21 | $ | 2.39 | 2.49 | ||||||||
| Diluted | $ | 2.03 | $ | 2.19 | $ | 2.37 | 2.46 | ||||||||
| 2017 | |||||||||||||||
| Net revenues | $ | 1,086.3 | $ | 1,134.7 | $ | 1,159.9 | $ | 1,226.6 | |||||||
| Gross profit | 667.6 | 705.7 | 726.4 | 765.1 | |||||||||||
| Income from operations | 258.3 | 294.2 | 310.8 | 346.9 | |||||||||||
| Net earnings | 158.1 | 179.5 | 190.3 | 443.9 | |||||||||||
| Earnings per share: | |||||||||||||||
| Basic | $ | 1.55 | $ | 1.76 | $ | 1.86 | $ | 4.33 | |||||||
| Diluted | $ | 1.53 | $ | 1.74 | $ | 1.84 | $ | 4.27 |
The sum of the four quarters may not agree with the total for the year due to rounding.
ROPER TECHNOLOGIES, INC. AND SUBSIDIARIES
Schedule II – Consolidated Valuation and Qualifying Accounts
Years ended December 31, 2018, 2017 and 2016
| Balance at beginning of year | Additions charged to costs and expenses | Deductions | Other | Balance at end of year | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Allowance for doubtful accounts and sales allowances | |||||||||||||||||||
| 2018 | $ | 12.7 | $ | 11.9 | $ | (7.3 | ) | $ | 5.8 | $ | 23.1 | ||||||||
| 2017 | 14.5 | 4.3 | (5.9 | ) | (0.2 | ) | 12.7 | ||||||||||||
| 2016 | 12.4 | 1.8 | (2.8 | ) | 3.1 | 14.5 | |||||||||||||
| Reserve for inventory obsolescence | |||||||||||||||||||
| 2018 | $ | 38.1 | $ | 6.7 | $ | (4.5 | ) | $ | (10.0 | ) | $ | 30.3 | |||||||
| 2017 | 37.2 | 5.3 | (6.3 | ) | 1.9 | 38.1 | |||||||||||||
| 2016 | 34.0 | 10.1 | (6.6 | ) | (0.3 | ) | 37.2 |
Deductions from the allowance for doubtful accounts represented the net write-off of uncollectible accounts receivable. Deductions from the inventory obsolescence reserve represented the disposal of obsolete items.
Other included the allowance for doubtful accounts and reserve for inventory obsolescence of acquired businesses, the effects of foreign currency translation adjustments for those companies whose functional currency was not the U.S. dollar, reclassifications as held for sale and other.
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