[ROP] Roper Technologies
Hi everyone, I embedded audio of me reading this post (below the paywall line). Let me know what you think. If enough people are into this feature, I will include it in future write-ups. These recordings won't be word-for-word translations (I'll summarize here and there) but pretty close. You'll notice that I confuse "Vertafore" and "Vertafone" several times in today's audio. Long night, please ignore.
A heavy industrial that evolved over decades into a collection of capital-light business units, Roper will sound familiar to those who read my Teledyne and AMETEK write-ups. In 1919, George D. Roper launched the Geo. D. Roper Corporation to house the various businesses he came to own over the preceding decades. The company manufactured heavy industrial equipment but was best known for its gas kitchen stoves. In the late-1950s, these two incongruent segments went their separate ways, as the latter was merged into Florence Stove Company, a wood-burning stove manufacturer whose origins date back to the 1870s.
The combined stove company got most of its sales from Sears, who in 1964 acquired and merged it with a division that manufactured electric ranges, lawn equipment, and other household appliances. In the late ‘80s, the home appliances line of Roper Corp, as the enlarged Sears subsidiary came to be called, was sold to General Electric, while the lawn and garden line went to Electrolux. Meanwhile, Roper Industries, the industrial pump manufacturing segment of Geo. D. Roper, was LBO’ed in 1981. Derrick Key, a former consultant who joined Roper Industries as a Vice President in 1982 and ascended to CEO in 1991, assigned P&L ownership of each product line to a single manager, presaging the autonomous business unit structure that scaffolds the company today (I relied heavily on Wikipedia, Zippia, and Encyclopedia.com for information on Roper’s pre-1992 history).
After returning to the public markets in 1992, Roper Industries made a series of acquisitions over the next 9 years, most of them sized in the $10s of millions. At first, these targets reinforced or fell closely adjacent to Roper’s existing presence in pumps, valves, and industrial controls systems for turbines and compressors, in large part serving the oil and gas industry. But as the decade progressed, a growing mix of capital was allocated to testing, measurement, and digital imaging companies with #1 or #2 positions in niche, oligopolistic markets. Where Roper once tried to sell commoditized industrial products in high volume through distributors, it was now spreading into domains where product performance and intimate customer relationships took precedence over scale.
This pivot expressed itself in the purchases of Gatan (’96, $50mn, electron microscopes); Petroleum Analyzer1 (’99, $36mn, instruments that measure chemical properties of petroleum products); Photometrics, MASD2 and Redlake Imaging (’98-’99, $97mn, high speed/resolution cameras used in scientific research and industrial production lines); Acton Research (’98, $11mn, optical components and instruments, used by scientific researchers to isolate and evaluate light wavelengths reflected off surfaces); and Antek Instruments (’00, $25mn, instruments that measure sulfur and nitrogen content in petroleum products). Cap-stoning its migration toward businesses with greater engineered content and higher gross margins, in 2001 Roper paid $151mn for Struers and Logitech, its largest deal to date. Stuers made cutting, grinding, mounting, and polishing tools used by researchers and manufacturers to prepare solid materials for quality inspection and failure analysis. Logitech sold equipment that the semiconductor and opto-electronics industries used to precisely cut and shape materials.
These acquisitions, while each tiny against the broader context of Roper’s history, were collectively transformative at the time, largely responsible for the 8x increase in revenue, from ~$70mn to $587mn, that the company experienced from 1992 to 2001. By 2001, when Derrick Key stepped down as CEO, Roper’s business mix had changed rather dramatically:
Industrial Controls (34% of revenue, 35% of EBITDA, and 23% EBITDA margins in 2001) was comprised of compressors, turbines, valves, vibration sensors, as well as panels and control systems that adjust turbine speeds, assess production throughput at refineries, measure energy consumption, and otherwise manage and optimize the use of heavy machinery. 60% of revenue came from oil & gas, 14% from refrigeration, and 10% from power generation.
Fluid Handling (21%, 25%, 26%) housed industrial pumps (2/3 of segment revenue), flow measurement instruments, and equipment used to precisely dispense chemicals onto semiconductor wafers. 21% of segment revenue was derived from general industrial use cases, 17% from semiconductors, 14% from water and wastewater treatment.
Analytical Instruments (45%, 40%, 20%), which wasn’t even around at IPO, had become Roper’s largest by revenue and profits. It included the high speed cameras, microscopy, and fluid and materials testing equipment that I called out earlier, with digital imaging products contributing just over half of revenue, fluid properties testing another 24%. 41% of revenue came from scientific and industrial applications, 21% from oil & gas, 13% from automotive.
But as much as Roper had evolved over the preceding decade, it still carried the financial profile and end market exposures of a classic industrial, with 20% of revenue tied up in working capital, its fortunes tethered to cyclical applications. Its largest end market, oil and gas, accounted for close to 1/3 of total revenue. Russian natural gas producer, Gazprom, to whom Roper supplied turbomachinery control systems under a 9-year commercial agreement, contributed about 8%. The Gazprom relationship was plagued by installation delays, financing issues, and contract revisions, which led to steep and unexpected order shortfalls that exacerbated broader capex reductions across the oil and gas industry in 1999 and 2000.
It was against this context that Brian Jellison, a graduate of GE’s management program who had spent 26 years at Ingersoll-Rand, where he oversaw $4bn of revenue across a range of businesses, succeeded Derrick Key as CEO of Roper. While Derrick initiated Roper’s transition from a heavy industrial to a capital light compounder, Brian Jellison accelerated the shift and steered the company to its end point in vertical software. For that reason, he is widely regarded as the architect of the Roper we know today.
The first decade of Brian’s tenure was not narrowly focused on software per se, even if many of the acquisitions he made had software components to them. But all were geared toward improving a newly introduced metric, “cash return on investment” (CROI), formally defined as cash earnings (net income + D&A - maintenance capex) divided by gross investment (net working capital + net PP&E + accumulated depreciation). Senior executives were instructed to make that number go up every year, which naturally led to a growing emphasis on asset light, technology-driven businesses with high incremental margins.
Neptune (’03, $482mn, 2.5x revenue) sold residential water meters, with an installed base that included 35% of US homes. Transcore (’04, $606mn) provided electronic toll collection systems (tags, readers, and related technology) to municipalities, though it also contained Dial-A-Truck (DAT) – the #1 freight matching subscription service, pairing truckers with shippers in the spot market – a hidden gem that management would years later claim was worth more than the rest of Transcore and was the real reason they bought the company. MEDTEC and CIVO (’05, $274mn) manufactured technologies and consumables related to radiation treatment and ultrasound procedures, respectively.
CBORD (’08, $375mn), Roper’s first pure software acquisition, provided card access systems and food service software to college, business, and senior living campuses. In 2009, Roper spent $353mn on United Toll Systems, which, like Transcore, supplied automated toll collection systems, and Verathon, which sold medical devices. A year later, they paid $523mn for iTrade, a provider of software that facilitates the trade of perishable goods between suppliers (farms, food service distributors) and purchasers (grocers and restaurant chains). Only one major acquisition, Dynisco (’06, $247mn) – a supplier pressure sensors, rheometers, and other testing instruments to the plastics industry – harkened back to Roper’s industrial-era origins.
So by 2010, Roper had evolved into this:
To put this in context, in 1992, the year of its IPO, Roper reported just $70mn of revenue and $14mn of EBITDA spread across 3 business units (Roper Pump, Cornell Pump, and AMOT Valve). In 2010, it had $2.4bn of revenue and $638mn of EBITDA spread across 25.
Energy Systems and Controls (valves, vibration sensors, fluid measurement instruments, controls systems) and Industrial Tech (50% industrial pumps, materials analysis equipment, flow measurement instruments; 50% water meters) combined to ~47% of revenue and, excluding water meters, bore the strongest resemblance to Roper’s industrial, cyclical past.
Medical & Scientific Imaging contained the digital imaging solutions (electron microscopes, high speed cameras geared toward life and materials science) that Roper began acquiring in the ‘90s3, plus the ultrasound and radiation oncology products from MEDTEC and CIVO.
RF Technology was created upon the acquisition of Transcore and 6 years later grew to become Roper’s largest segment. Its constituent business units leveraged software and RFID communication technology through: automated toll collection (Transcore, UTS), electronic truck brokerage (DAT, a subsidiary of Transcore), card access systems (CBORD), and matchmaking between suppliers and consumers of perishable food (iTrade). Around half of revenue came from tolling systems, whose sales were locked under long-term contracts, the other half from SaaS.
At this point, Roper was still best described as a “product” company. But they had taken some gateway drugs (Transcore, iTrade, CBORD, a few others) that primed them for the harder stuff, acquisitions with higher software purity. The evolution was only natural. Roper was specifically going after capital light targets with high margins, recurring revenue, and modest macro sensitivity, with the directive that each new acquisition should be better on those dimensions than the portfolio average. If the bar is ratcheted higher every year, then whether you originally meant to or not, you will eventually end up buying software companies. And that’s pretty much what Roper did for the next 13 years up to the present day.