Roper Technologies 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2023

or

For the transition period from to .

Commission File Number: 1-12273

ROPER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(941) 556-2601

(Registrant’s telephone number, including area code)

6901 Professional Parkway, Suite 200

Sarasota, Florida 34240

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares outstanding of the registrant’s common stock as of October 27, 2023 was 106,822,117.

ROPER TECHNOLOGIES, INC.

REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Roper Technologies, Inc.

Condensed Consolidated Statements of Earnings (unaudited)

(in millions, except per share data)

See accompanying notes to Condensed Consolidated Financial Statements.

Roper Technologies, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

See accompanying notes to Condensed Consolidated Financial Statements.

Roper Technologies, Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions)

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

Information About Forward-Looking Statements

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

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

• general economic conditions;

• difficulty making acquisitions and successfully integrating acquired businesses;

• any unforeseen liabilities associated with future acquisitions;

• failure to effectively mitigate cybersecurity threats, including any litigation arising therefrom;

• failure to comply with new data privacy laws and regulations, including any litigation arising therefrom;

• risks and costs associated with our international sales and operations;

• rising interest rates;

• limitations on our business imposed by our indebtedness;

• product liability, litigation, and insurance risks;

• future competition;

• reduction of business with large customers;

• risks associated with government contracts;

• changes in the supply of, or price for, labor, energy, raw materials, parts, and components, including as a result of impacts from the current inflationary environment, supply chain constraints, or additional or ongoing impacts of the COVID-19 pandemic;

• potential write-offs of our goodwill and other intangible assets;

• our ability to successfully develop new products;

• failure to protect our intellectual property;

• unfavorable changes in foreign exchange rates;

• difficulties associated with exports/imports and risks of changes to tariff rates;

• increased warranty exposure;

• environmental compliance costs and liabilities;

• the effect of, or change in, government regulations (including tax);

• risks associated with the use of artificial intelligence;

• economic disruption caused by armed conflicts (such as the war in Ukraine and the conflict in the Middle East), terrorist attacks, health crises (such as the COVID-19 pandemic), or other unforeseen geopolitical events; and

• the factors discussed in other reports we file with the SEC from time to time.

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

Overview

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

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

Discontinued Operations

Roper has completed the divestitures of TransCore, Zetec, CIVCO Radiotherapy (“2021 Divestitures”), and the majority stake in its industrial businesses (“Indicor”). The financial results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, discussion within Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional information on discontinued operations.

Critical Accounting Policies

Other than the changes described in Note 9 of the Notes to Condensed Consolidated Financial Statements with respect to our equity investment in Indicor, there were no material changes during the nine months ended September 30, 2023 to the items that we disclosed as our critical accounting policies and estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Recently Issued Accounting Standards

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

Results of Continuing Operations

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

Percentages may not sum due to rounding.

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

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Net revenues for the three months ended September 30, 2023 increased by 15.8% as compared to the three months ended September 30, 2022. The components of revenue growth for the three months ended September 30, 2023 were as follows:

In our Application Software segment, revenues were $803.4 in the third quarter of 2023 as compared to $644.0 in the third quarter of 2022. The growth of 4.5% in organic revenues was broad-based across the segment led by our businesses serving the property and casualty insurance, government contracting, and legal markets. Gross margin increased to 69.4% in the third quarter of 2023 as compared to 68.4% in the third quarter of 2022 due primarily to operating leverage on higher organic revenues combined with revenue mix. Selling, general and administrative (“SG&A”) expenses as a percentage of net revenues increased to 43.7% in the third quarter of 2023 as compared to 41.4% in the third quarter of 2022 due primarily to higher amortization of acquired intangibles from acquisitions, most notably Frontline and Syntellis. In addition, we incurred $8.6 of restructuring-related expenses in connection with the integration of the Syntellis acquisition. The resulting operating margin was 25.8% in the third quarter of 2023 as compared to 27.0% in the third quarter of 2022.

In our Network Software segment, revenues were $364.1 in the third quarter of 2023 as compared to $346.6 in the third quarter of 2022. The growth of 4.6% in organic revenues was led by our network software businesses serving the freight match, alternate site healthcare, and life insurance markets, partially offset by a decline in our business serving the media and entertainment market. Gross margin increased to 85.3% in the third quarter of 2023 as compared to 84.8% in the third quarter of 2022 due to operating leverage on higher organic revenues, partially offset by revenue mix. SG&A expenses as a percentage of net revenues decreased to 40.2% in the third quarter of 2023 as compared to 42.1% in the third quarter of 2022 due primarily to expense reductions resulting from cost structure rationalization at our businesses serving the freight match market and operating leverage on higher organic revenues. As a result, operating margin was 45.2% in the third quarter of 2023 as compared to 42.7% in the third quarter of 2022.

In our Technology Enabled Products segment, revenues were $395.9 in the third quarter of 2023 as compared to $359.7 in the third quarter of 2022. The growth of 9.9% in organic revenues was led by our water meter technology and access management businesses. Gross margin remained relatively flat at 57.6% in the third quarter of 2023 as compared to 57.7% in the third quarter of 2022. SG&A expenses as a percentage of net revenues increased to 22.9% in the third quarter of 2023 as compared to 22.6% in the third quarter of 2022 due primarily to higher incentive compensation, partially offset by operating leverage. The resulting operating margin was 34.6% in the third quarter of 2023 as compared to 35.2% in the third quarter of 2022.

Corporate expenses increased to $62.3, or 4.0% of net revenues, in the third quarter of 2023 as compared to $55.2, or 4.1% of net revenues, in the third quarter of 2022. The dollar increase was due primarily to higher compensation expense.

Interest expense, net, increased to $42.4 for the third quarter of 2023 as compared to $41.3 for the third quarter of 2022 due to borrowings on our unsecured credit facility, partially offset by lower weighted average fixed-rate debt balances and higher interest income earned on our cash and cash equivalents. Interest income was $10.3 for the third quarter of 2023 as compared to $9.3 for the third quarter of 2022.

Equity investment activity, net, was a gain of $33.9 for the third quarter of 2023 due primarily to $20.1 associated with the change in fair value of our equity investment in Indicor and $13.2 of dividend distributions received.

Other income, net, of $5.0 for the third quarter of 2023 was composed primarily of a gain on the sale of non-operating assets and foreign exchange gains at our non-U.S. based subsidiaries. Other income, net, of $3.6 for the third quarter of 2022 was composed primarily of foreign exchange gains at our non-U.S. based subsidiaries.

Income taxes as a percentage of pretax earnings remained relatively consistent at 21.9% for the third quarter of 2023 as compared to 22.1% for the third quarter of 2022.

Backlog is equal to our remaining performance obligations expected to be recognized as revenue within the next 12 months as discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements. Backlog increased 20% to $2,913.7 at September 30, 2023 as compared to $2,420.9 at September 30, 2022. Acquisitions contributed 16% and organic growth in backlog was 4%.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Net revenues for the nine months ended September 30, 2023 increased by 15.8% as compared to the nine months ended September 30, 2022. The components of revenue growth for the nine months ended September 30, 2023 were as follows:

In our Application Software segment, revenues were $2,335.1 in the nine months ended September 30, 2023 as compared to $1,899.7 in the nine months ended September 30, 2022. The growth of 5.6% in organic revenues was broad-based across the segment led by our businesses serving the property and casualty insurance, government contracting, and acute healthcare markets. Gross margin remained relatively consistent at 68.9% in the nine months ended September 30, 2023 as compared to 68.8% in the nine months ended September 30, 2022. SG&A expenses as a percentage of net revenues increased to 43.2% in the nine months ended September 30, 2023 as compared to 41.9% in the nine months ended September 30, 2022 due primarily to higher amortization of acquired intangibles from the Frontline acquisition. The resulting operating margin was 25.8% in the nine months ended September 30, 2023 as compared to 26.9% in the nine months ended September 30, 2022.

In our Network Software segment, revenues were $1,076.7 in the nine months ended September 30, 2023 as compared to $1,028.0 in the nine months ended September 30, 2022. The growth of 5.1% in organic revenues was broad-based across the segment led by our businesses serving the freight match, alternate site healthcare, and life insurance markets. Gross margin increased to 84.9% in the nine months ended September 30, 2023 as compared to 84.4% in the nine months ended September 30, 2022 due to operating leverage on higher organic revenues and cost synergies resulting from an acquisition completed by our business serving the construction market. SG&A expenses as a percentage of net revenues decreased to 41.7% in the nine months ended September 30, 2023 as compared to 43.4% in the nine months ended September 30, 2022 due primarily to operating leverage on higher organic revenues combined with revenue mix. As a result, operating margin was 43.2% in the nine months ended September 30, 2023 as compared to 41.1% in the nine months ended September 30, 2022.

In our Technology Enabled Products segment, revenues were $1,152.5 in the nine months ended September 30, 2023 as compared to $1,013.2 in the nine months ended September 30, 2022. The growth of 14.0% in organic revenues was broad-based across the segment led by our water meter technology and medical products businesses. Gross margin increased to 57.2% in the nine months ended September 30, 2023 as compared to 56.9% in the nine months ended September 30, 2022 due to operating leverage on higher organic revenues, partially offset by revenue mix. SG&A expenses as a percentage of net revenues decreased to 23.2% in the nine months ended September 30, 2023 as compared to 23.5% in the nine months ended September 30, 2022 due to operating leverage on higher organic revenues. The resulting operating margin was 34.0% in the nine months ended September 30, 2023 as compared to 33.3% in the nine months ended September 30, 2022.

Corporate expenses increased to $175.6, or 3.8% of net revenues, in the nine months ended September 30, 2023 as compared to $159.0, or 4.0% of net revenues, in the nine months ended September 30, 2022. The dollar increase was due primarily to higher compensation and acquisition-related expenses.

Interest expense, net, decreased to $114.6 for the nine months ended September 30, 2023 as compared to $138.6 for the nine months ended September 30, 2022 due to higher interest income earned on our cash and cash equivalents and lower weighted average debt balances. Interest income was $36.2 for the nine months ended September 30, 2023 as compared to $17.2 for the nine months ended September 30, 2022.

Income taxes as a percentage of pretax earnings decreased to 21.8% for the nine months ended September 30, 2023 as compared to 24.2% for the nine months ended September 30, 2022. The 2022 rate was unfavorably impacted by the recognition of a net tax expense associated with an internal restructuring related to the sale of a majority stake in Indicor.

Financial Condition, Liquidity, and Capital Resources

All currency amounts are in millions

Selected cash flows for the nine months ended September 30, 2023 and 2022 were as follows:

Operating activities – Net cash provided by operating activities from continuing operations increased by 157% to $1,415.7 in the nine months ended September 30, 2023 as compared to $550.2 in the nine months ended September 30, 2022 primarily due to (i) cash taxes paid in the prior period in connection with the 2021 Divestitures, (ii) higher net earnings from continuing operations net of non-cash expenses, and (iii) lower cash taxes paid primarily due to tax benefits associated with the Frontline acquisition. These items were partially offset by the cash payment of $45.0 related to the settlement of the Berall v. Verathon patent litigation matter.

Investing activities – Cash used in investing activities from continuing operations during the nine months ended September 30, 2023 was primarily for business acquisitions, most notably Syntellis and Replicon. Cash used in investing activities from continuing operations during the nine months ended September 30, 2022 was primarily for business acquisitions, most notably viGlobal and MGA Systems.

Financing activities – Cash provided by financing activities from continuing operations during the nine months ended September 30, 2023 was primarily from net borrowings on our unsecured credit facility and net proceeds from stock-based compensation, partially offset by repayment at maturity of our $700.0 senior notes and dividend payments. Cash used in financing activities during the nine months ended September 30, 2022 was primarily for repayments of certain senior notes totaling $800.0, repayments on our unsecured credit facility, and dividend payments, partially offset by net proceeds from stock-based compensation.

Discontinued operations – Cash provided by discontinued operations during the nine months ended September 30, 2022 was primarily due to proceeds received from the sales of TransCore and Zetec.

Total debt consisted of the following:

The interest rate on borrowings under the $3,500.0 unsecured credit facility is calculated based upon various recognized indices plus a margin as defined in the credit agreement. At September 30, 2023, we had $910.0 of outstanding borrowings under our unsecured credit facility and $6.5 of outstanding letters of credit.

In relation to our total cash and cash equivalents, amounts held at our foreign subsidiaries represented 84.7% or $253.8 at September 30, 2023 as compared to 29.5% or $234.0 at December 31, 2022. The dollar increase was due primarily to the cash generated at our foreign subsidiaries during the nine months ended September 30, 2023, partially offset by cash repatriation of $100.0. We intend to repatriate substantially all historical and future earnings.

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

We were in compliance with all debt covenants related to our unsecured credit facility throughout the nine months ended September 30, 2023.

Net working capital (total current assets, excluding cash less total current liabilities, excluding debt) was negative $1,108.4 at September 30, 2023 as compared to negative $1,053.7 at December 31, 2022 primarily driven by the increase in deferred revenue due to the timing of SaaS renewals associated with Frontline, negative net working capital profiles assumed with the Syntellis and Replicon acquisitions, and an increase in income taxes payable, partially offset by the cash payment related to the settlement of the Berall v. Verathon patent litigation matter. Total debt, net of deferred financing costs was $6,878.3 at September 30, 2023 as compared to $6,661.7 at December 31, 2022. Our leverage on a continuing operations basis is presented in the following table:

Capital expenditures were $37.8 for the nine months ended September 30, 2023 as compared to $30.0 for the nine months ended September 30, 2022. Capitalized software expenditures were $28.7 for the nine months ended September 30, 2023 as compared to $21.9 for the nine months ended September 30, 2022. We expect the aggregate of capital expenditures and capitalized software expenditures for 2023 to be comparable to prior years as a percentage of net revenues.

On September 15, 2023, $700.0 of 3.650% senior notes due 2023 were repaid at maturity using borrowings under our unsecured credit facility.

Off-Balance Sheet Arrangements

At September 30, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Outlook

Current geopolitical and economic uncertainties, including the current inflationary environment, supply chain disruptions, and labor shortages, could adversely affect our business prospects. An armed conflict (such as the ongoing war in Ukraine, as well as the conflict in the Middle East), significant terrorist attack, other global conflict, or new or ongoing public health crisis (similar to the COVID-19 pandemic) could cause changes in world economies that would adversely affect us. It is impossible to isolate each of these potential factor’s future effects on current economic conditions or any of our businesses. It is also impossible to predict with any reasonable degree of certainty what or when any additional events may occur that also would similarly disrupt the economy and have an adverse impact on our businesses.

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

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

See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report. There were no material changes during the nine months ended September 30, 2023.

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

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in Note 10 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and is incorporated by reference herein.

Information regarding risk factors can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Information About Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q and in Part I - Item 1A of our 2022 Annual Report on Form 10-K. Other than as supplemented in Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, there have been no other material changes during the nine months ended September 30, 2023 to the risk factors reported in our 2022 Annual Report on Form 10-K.

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Roper Technologies, Inc.