Fortive Corporation — Q3 2023 Form 10-Q
Business context and reporting period. Fortive provides connected-workflow technologies, software, products and services through Intelligent Operating Solutions (IOS), Precision Technologies (PT) and Advanced Healthcare Solutions (AHS). This unaudited report covers the quarter and nine months ended September 29, 2023; comparisons are with the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $1,494.5m | $1,456.0m | $4,481.6m | $4,295.8m |
| Gross profit | $893.0m | $845.4m | $2,646.6m | $2,470.9m |
| Operating profit | $291.1m | $251.9m | $822.8m | $696.5m |
| Net earnings | $218.0m | $189.9m | $600.6m | $528.0m |
| Diluted EPS | $0.61 | $0.53 | $1.69 | $1.46 |
| Gross margin | 59.8% | 58.1% | 59.1% | 57.5% |
| Operating margin | 19.5% | 17.3% | 18.4% | 16.2% |
- Q3 sales rose 2.6%; sales from existing businesses increased 2.5%. For the nine months, sales rose 4.3% and existing-business sales increased 5.5%. Price contributed 4.2% and 4.6% to sales growth, respectively.
- Q3 operating margin improved 220 basis points. Management attributed gains chiefly to pricing and productivity, partly offset by higher compensation and lower volume. Year-to-date margin also improved 220 basis points; restructuring costs were a significant offset.
- Segment sales in Q3: IOS $644.3m, PT $530.6m and AHS $319.6m. IOS and PT operating profit increased; AHS operating profit rose in Q3 but declined for the nine-month period.
- Net interest expense increased to $29.8m in Q3 and $95.0m year to date, from $26.4m and $66.2m, respectively, mainly due to higher rates on floating-rate debt despite lower overall debt.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $906.8m, up from $839.0m. Capital expenditures were $73.7m; operating cash flow less capital expenditures was approximately $833m. Investing activities used $124.2m, including $57.7m net cash for acquisitions.
- Cash and equivalents were $714.1m at September 29, 2023, compared with $709.2m at December 31, 2022; approximately 87% was held outside the U.S.
- Total debt carrying value was $2,732.0m, comprising $749.9m current and $1,982.1m long-term. Fortive repaid $250m of its delayed-draw term loan in August; the remaining $750m principal was due December 14, 2023. Commercial paper outstanding was approximately $151m, with a 5.54% annual effective rate and 18-day weighted-average maturity.
- No borrowings were outstanding under the $2.0bn revolving credit facility, which supports the commercial paper programs and expires in October 2027. Management said available cash, operating cash flow and financing access should meet liquidity needs for the foreseeable future.
- Nine-month share repurchases were approximately $208m for 3m shares; dividends paid were $73.9m. The quarterly dividend was $0.07 per share.
Material changes, outlook and risks
- Q3 existing-business volume contracted, particularly in PT and AHS, while year-to-date volume increased across many end markets. Q3 high-growth-market sales declined low single digits, with China down low double digits; North America growth supported developed markets.
- Fortive recorded $29.2m of restructuring charges in the first nine months, primarily for targeted workforce reductions. The plan was amended in Q3; the company expects total 2023 charges of approximately $60m–$65m. Accrued restructuring costs were $10m at quarter-end.
- Three acquisitions in IOS were completed for $59m aggregate cash consideration. On October 22, 2023, Fortive agreed to acquire EA Elektro-Automatik for approximately $1.665bn cash, subject to customary conditions and regulatory approvals, with closing expected early in Q1 2024.
- Management forecast Q4 2023 revenue growth of 1.5%–3.0% and full-year growth of approximately 4.0%; corresponding existing-business growth expectations were 1.5%–3.0% and approximately 5.0%. No EPS guidance is provided in the supplied filing text.
- In early October, a cybersecurity incident disrupted network infrastructure. As of October 24, management said operations remained substantially unaffected, while investigation and remediation continued.
- Risks highlighted include macroeconomic and market conditions, supply-chain and component availability, inflation and pricing, foreign exchange volatility, interest rates, China and other geopolitical developments, cybersecurity, competition, acquisitions, regulation and litigation. The filing reports no material change to previously disclosed risk factors and no material impairment charges in the period.
Most important facts for investors to verify
- Progress and final impact of the cybersecurity investigation and remediation.
- Funding, regulatory approval, closing timing and integration implications of the proposed $1.665bn EA Elektro-Automatik acquisition.
- Actual restructuring charges against the $60m–$65m estimate and resulting cost savings.
- Repayment or refinancing of the $750m term loan due in December 2023, alongside commercial-paper rates and overall interest expense.
- Whether Q4 and full-year growth expectations hold amid softer Q3 volume, China weakness, supply constraints and currency volatility.