Fortive Corporation — Q2 2023 Form 10-Q
Business context and period. Fortive provides connected-workflow technologies, products, software and services through Intelligent Operating Solutions (IOS), Precision Technologies (PT) and Advanced Healthcare Solutions (AHS). This unaudited report covers the three and six months ended June 30, 2023; comparisons are to the corresponding periods ended July 1, 2022. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|
| Sales | $1,526.4 | $1,463.3 | $2,987.1 | $2,839.8 |
| Gross profit | $905.4 | $833.5 | $1,753.6 | $1,625.5 |
| Operating profit | $291.3 | $232.3 | $531.7 | $444.6 |
| Net earnings | $209.0 | $173.0 | $382.6 | $338.1 |
| Diluted EPS | $0.59 | $0.48 | $1.07 | $0.93 |
| Gross margin | 59.3% | 57.0% | 58.7% | 57.2% |
| Operating margin | 19.1% | 15.9% | 17.8% | 15.7% |
| Net interest expense | $33.1 | $21.0 | $65.2 | $39.8 |
- Sales increased 4.3% in Q2 and 5.2% year to date. Management reported existing-business growth of 5.5% and 7.1%, respectively; price contributed 5.0% and 4.8%. Currency reduced reported growth by 0.9% and 1.5%, respectively.
- Q2 operating margin expanded 320 basis points, reflecting price, volume, productivity and favorable currency, partly offset by mix, compensation, selling costs and restructuring. The prior-year Russia exit charge and lower prior-year acquisition-related costs also benefited the comparison. Year-to-date margin increased 210 basis points.
- Cash flow, six months: Operating cash flow was $495.4 versus $509.2. Investing used $40.9, including $45.8 of capital expenditures; financing used $441.4. Cash increased $3.6 to $712.8. Operating cash flow less capital expenditures was approximately $449.6, compared with $472.1 in the prior period.
- Liquidity and debt, June 30: Cash was $712.8; total debt carrying value was approximately $2,978.1, including $999.9 classified current. The balance included a $1,000 delayed-draw term loan due 2023 and $135 of U.S. commercial paper. No borrowings were outstanding on the $2.0 billion revolving facility, which expires in 2027. Management stated it expects sufficient liquidity for the foreseeable future.
- Cash was approximately 91% held outside the United States. The company repurchased 2 million shares for $129.1 during the first half and paid $49.3 in dividends.
Segments and material changes
| Segment | Q2 sales (prior year) | Q2 operating profit (prior year) | Six-month sales (prior year) |
|---|
| IOS | $653.1 ($630.1) | $161.7 ($129.9) | $1,285.2 ($1,217.7) |
| PT | $537.4 ($499.1) | $136.3 ($115.3) | $1,052.9 ($961.5) |
| AHS | $335.9 ($334.1) | $25.9 ($28.1) | $649.0 ($660.6) |
- IOS growth reflected pricing and demand for gas detection, software and services, partly offset by lower test-and-measurement instrumentation volume. PT benefited from pricing and higher test-and-measurement and energetic-materials volumes, partly offset by lower sensing volume.
- AHS sales were nearly flat in Q2 and lower year to date. Q2 pricing and gains in sterilization, quality assurance, dosimetry and software were offset by declines in system design and related services. Year-to-date sales also faced volume declines in sterilization and system design.
- Net interest expense rose year over year as higher rates on floating-rate debt outweighed lower overall debt balances. The effective tax rate was 16.5% in Q2 and 16.1% year to date, versus 16.9% and 15.3% a year earlier.
Outlook, commentary and risks
- Management forecast Q3 2023 revenue growth of 3.5%–4.5% and full-year growth of 4.0%–5.0%; existing-business growth was forecast at 3.5%–4.5% for Q3 and 5.0%–6.0% for the year.
- Management cited lingering supply-chain constraints affecting output, but said pricing exceeded inflation impacts on purchased materials and that Fortive Business System initiatives were helping manage production challenges. Capital spending was expected to be approximately $90–$110 for 2023, subject to business conditions.
- A 2023 restructuring plan, primarily targeted workforce reductions in response to macroeconomic and external conditions, incurred $28.3 of charges in the first half ($10.7 in Q2); accrued costs were $14.2 at June 30. Full-year charges were estimated at $30–$35, with completion expected by year-end.
- Key stated uncertainties include macroeconomic and market conditions, inflation and interest rates, foreign exchange volatility, supply-chain and logistics disruptions, electronic-component availability, geopolitical and U.S.–China trade developments, and elective-surgery rates. The company reported no material changes to its previously disclosed risk factors and no material impairment charges in the period.
- The 2022 Russia exit was completed; no related charges were recorded in 2023. Q2 and first-half 2022 included $16.2 of Russia exit and wind-down costs.
Important facts for investors to verify
- How the $1.0 billion term loan due in 2023 was repaid, refinanced or otherwise addressed after the quarter-end reporting date.
- Whether forecast growth is achieved, particularly given supply constraints, currency exposure and uneven segment trends.
- Whether AHS margins and sales stabilize and whether the restructuring plan delivers expected cost benefits without impairing operations.
- How higher floating-rate borrowing costs affect interest expense, cash generation and the company’s debt-management plans.
- The timing and quality of working-capital cash flows, which management said were affected by timing of contract liabilities, tax payments and compensation and benefits.
