My brother and I both own stock in Roper Technologies ($ROP) and we jointly read the company’s annual reports for the past 15 years (2004-2019). We did some additional background research on the history of the company too. Here were our learnings (warning: long thread!):

1/ The company was founded in 1919 by George D. Roper and manufactured gas stoves and gear pumps. The pumps segment today still has its roots in this original business. The company was renamed Roper Industries in 1981 and went public in 1992.

2/ Shortly thereafter, they began an acquisition-led growth strategy, which continues to this day. Most early acquisitions through the 1990s and 2000s were purchases of manufacturers of highly engineered products, often in the fluid handling, industrial controls, and analytical

3/ analytical instrumentation (testing and measurement) industries.

Derrick Key was named VP of Roper Industries in June 1982. He’s an important figure in the history of the company, having formerly been a consultant for $JNJ, he applied his experience in marketing consumer

4/ products to work at Roper & introduced a product mgr system at the company. This pushed decisions down the ladder and introduced accountability & ownership at the product level. Each major product had its own manager, who oversaw development, production, sales and advertising.

5/ Derrick Key became President of Roper Pump Company in 1985 and President of the entire company in 1989. Sales approximated $35mm and earnings $2mm at the time. In his first 5 years, sales grew 4x and earnings grew 10x.

6/ The company went public in 1992 and struck a deal with Gazprom, a Russian nat gas company, to supply computerized control systems for Russia’s pipeline system. This was a 7 year contract valued at $350mm. But by 1994, problems inherent to doing business in Russia led to poor

7/ financial results. Installation delays and problems with financing in Russia were the culprits. In 1996, Roper was forced to stop shipments because of Congressional threats to block financing for shipments from the U.S. Export-Import Bank.

8/ In 1997, Derrick Key announced Gazprom would need to secure funds by the middle of 1998 or Roper would reduce its business or scuttle the deal altogether. Gazprom worked to arrange European bank financing to continue the relationship. The lesson?

9/ Doing business in Russia in the early 90s was difficult (of course), but the important lesson is to provide your customers with a product or service that is so mission-critical that the idea of doing without it would be untenable for them.

10/ In 1998, Gazprom agreed to purchase $128mm of additional turbomachinery controls. In 2000, Gazprom extended its deal with Roper and committed to $150mm of purchases over and above the original agreement through 2007.

11/ The unreliability of the Gazprom relationship in the early/mid-1990s required $ROP to seek stability elsewhere in the business. Roper acquired Integrated Designs in 1993 for $12mm, adding semiconductor manufacturing equipment capabilities.

12/ They also acquired Instrumentation Scientifique de Laboratoire (ISL) for $10.5mm, which made oil refinery lab testing equipment. ISL bolstered Roper’s position in the energy industry.

13/ Key was named CEO in 1991 and Chairman in 1994. By then, 50% of Roper’s $147mm sales were international. 60% came from the industrial controls segment, which was comprised of ISL, Compressor Controls, and Amot Controls. 40% came from the fluid handling business segment, which

14/ was comprised of Roger Pump Company, Cornell Pump Company, and Integrated Designs.

$ROP began expanding into the area of analytical instrumentation in 1997 with the acquisition of Gatan International (electron microscopy control systems), which was followed by the

15/ acquisitions of Acton Research (spectrographic systems and specialty optics) and Struers Holdings (material sample prep equipment).

16/ Brian Jellison became CEO in 2001 and Chairman in 2004. By then, Roper was describing itself in annual reports as “a diversified industrial growth company providing engineered products and solutions for global niche markets. We are an entrepreneurial organization with a

17/ disciplined strategy of re-investing our strong cash flow into existing businesses and acquiring new growth platforms.” The strategy remained focused on organic growth through innovation, channel leadership, sales effectiveness and market expansion. And underlying businesses

18/ acquired tended to have recurring revenues and high gross margins. While they preferred to deploy cash into attractive acquisitions, Jellison made a point to communicate to shareholders that Roper knew “when to invest and when to walk away. Due diligence should identify a

19/ strong customer value proposition, clear growth prospects, attractive financial returns and opportunities for Roper to add value.”

20/ By 2004, the composition of the business was as follows:

30% in Industrial Technology, which produces water meter and automatic meter reading products/systems, industrial pumps, flow measurement and metering equipment and industrial valves and controls

21/ (end markets include water/wastewater, general industrial, commercial refridgeration, O&G, power generation)

27% in RF Technology, which includes proprietary radio frequency identification tags and readers, satellite-based communication hardware and accessories, software and

22/ services (end markets include electronic tolling, intelligent traffic solutions, web-based freight matching, asset tracking, and security)

17% in Instrumentation, which offers equipment and consumables for materials analysis, fluid properties testing and industrial leak

23/ testing (end markets include O&G, General industrial, Auto, Medical, Research and Semiconductors).

14% in Scientific & Industrial Imaging, which offers high performance digital imaging products and software and handheld computers and software (end markets include physical

24/ science research, auto, semiconductor, and life science research)

12% in Energy Systems & Controls, which produces control systems, machinery vibration and other non-destructive inspection and measurement products and solutions (end markets include (O&G and power generation)

25/ Roper acquired Neptune around this time, which provides measurement products and automatic meter reading (AMR) solutions in for water companies in the U.S. Automation helped these companies become more efficient in reading meters, billing and invoicing customers – Neptune

26/ acts as the cash register for water companies. This is common role that many Roper companies play for customers. TransCore was acquired in 2004 for $600mm and was similar in this respect. TransCore’s RF (radio frequency) products had tolling and traffic applications, which

27/ serves as a cash register for municipalities.

Instrumentation and testing companies had the best gross margins at 58%, whereas RF companies had 40% gross margins. Instrumentation, Industrial Tech, and Energy Systems/Controls had 20% operating margins and RF companies were

28/ breakeven. Corporate level net profit margins were 10% at the time, but the company grew sales, earnings and cash flow at a 24% CAGR since 1992.

29/ Other learnings from annual reports:
“Begin with the end in mind.” To generate compelling growth rates, Roper would look for markets that themselves possess compelling growth attributes. The philosophy starts with positioning the company in advantageous markets, identifying

30/ growing opportunities within those markets and capturing market share by creating valuable customer solutions. They would work closely with customers to determine what they really need. “Creating customer value is the foundation of our strategy to generate cash and create

31/ value for shareholders.” If they did this successfully, it would result in high Cash Returns on Investment (“CRI”), and compensation packages were tied to this.

Sales grew 50% to $1.5bn in 2005 and operating cash flow grew 71% to $280mm. “We keep it simple” – a focus on

32/ profitability recurring revenues, cash flow and broad customer bases. “Once we acquire a new company, our approach is one of ‘preservation and stimulation.’ We preserve what the business does well but stimulate operations in order to create new value. Management continuity is

33/ a priority and we link incentives to clear commitments and expectations.”

Roper was still making sub-$50mm enterprise value acquisitions in 2006 but began entering the software application market in a bigger way. They acquired Dynisco for $250mm, a leading global supplier

34/ of software and sensor technology, and IntelliTrans for $41mm, which developed track and trace software for logistics in the rail industry – a tangential area to their RF businesses.

Roper generated sales of $1.7bn in 2006 (24% yoy growth) and operating cash flow of $263mm.

35/ The company invested in 5 more companies representing $350mm of capital. The 2007 report retiterated their focus on asset light business models. “We are firm believers that less often equals more and simpler is always better.” The company grew sales 24% to $2.1bn in 2007

36/ and EBITDA margins increased to 25%.

Roper grew sales 10% in 2008 and operating profits for all their segments, including RF Technologies, were north of 20%. The business generated $2.3mm of sales and EBITDA of $593mm.

37/ They took advantage of the 2009 period by focusing on the basics: “High gross margins + compelling cash flow + asset light businesses = performance made simple.” Each of Roper’s businesses generated cash to ensure they were self-sufficient while still generating excess cash

38/ to allow Roper to deploy $355mm into two strategic acquisitions. United Toll Systems (UTS), was a bolt-on to Roper’s RF business segment and included software and in-lane hardware systems to improve tolling and traffic management. Verathon was a medical device company, which

39/ provided a platform for new growth in medical end markets. Verathon made a non-invasive BladderScan instrument, which was the standard of care for portable ultrasound bladder volume measurement, and the GildeScope Video Laryngoscope, which improves intubation success for

40/ ERs, ORs, and EMS and military applications.

Roper continued making larger acquisitions in 2010 such as iTradeNetwork, which was purchased for over $500mm and is the leading global provider of SaaS-based trading network and business intelligence solutions to the food

41/ industry. They allow their distributor, manufacturer, and retail customers to reduce supply chain costs, grow revenue, and strengthen trading partner relationships.

In 2012, Roper dramatically expanded their exposure to SaaS application markets through $1.4bn acquisition of

42/ Sunquest Info Systems, a provider of diagnostic and lab software solutions to hospitals.

The 2013 report was the first time the company description included “software information networks” as a key area for the company. Roper was now described as a “diversified technology

43/ company.” Correspondingly, gross margins continued to improve to 58% and EBITDA margin expanded to 32% given the attractive financial characteristics of the companies they were buying.

The 2015 report outlines critical questions they try to answer during a diligence

44/ process: 1) is the business a leader in its niche market? 2) Does it have sustainable competitive advantages? 3) Does the business create value for the customers it serves? 4) Does it have a long runway to continue its growth? And 5) Is the management team committed to

45/ building the business? These seem like basic questions but the reiteration year after year ensures the people at Roper continue to focus on the basics and don’t get sidetracked into complex situations that are misaligned with the companies goals and objectives.

46/ 6 of the 8 acquisitions ($1.8bn deployed) in 2015 were of software companies. Aderant (mission critical solutions for law firms), Data Innovations (largest clinical and blood lab middleware provider), and Softwriters (long term care pharmacy enterprise software) were the 3

47/ largest.

In 2016, 50% of EBITDA came from high value software and network businesses – this was the first time in the company’s history that this occurred. Most of the software applications served customers in end-markets that Roper already worked in for many years.

48/ In 2017, sales grew 23% to $4.6bn with gross margins of 63% and EBITDA of $1.6bn. Operating cash flow grew 23% to $1.2bn.

Roper operated 45 businesses as of 2018 and, tragically, Brian Jellison died that year. Neill Hunn replaced him in the CEO role and the company

49/ continued its growth path, growing sales 11% to $5.2bn with various segment level operating margins in the 30%+ range. EBITDA grew 13% to $1.8bn (35% margin).

It was difficult to segment out which companies were performing better than others, given the limited transparency

50/ the company provides. But Peter Kaufman once told me, “Where there’s mystery, there’s margin.” Berkshire Hathaway can effectively shield the real profitability of some of their best businesses from the prying eyes of interested competitors (and customers!) as a result of

51/ their consolidated reporting too. Roper takes a similar long term mindset as owners of acquired businesses, but is far more involved in setting strategy and helping them improve than Berkshire. Moreover, Roper has historically sold companies when it made sense, such as Gatan

52/ and Scientific Imaging in 2018, which is something that Berkshire doesn’t do.

The most interesting part of this process for us though, was to see just how powerful the consistent application of some simple core beliefs can be when building an acquisition-led growth company.

53/ And how those core beliefs can manifest in different types of business, such as their transition away from highly engineered manufactured products towards vertical enterprise software applications, while still remaining entirely true to who they are as a business. <<END>>