Fortive Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; Q4 figures are noted separately. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
Fortive provides industrial, precision-measurement and healthcare workflow technologies through Intelligent Operating Solutions, Precision Technologies and Advanced Healthcare Solutions. The company reported continuing operations separately from Vontier, spun off in October 2020. Approximately 49% of 2021 sales came from outside the United States.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $5.255 billion | $4.634 billion |
| Gross profit / margin | $3.007 billion / 57.2% | $2.609 billion / 56.3% |
| Operating profit / margin | $812.8 million / 15.5% | $539.4 million / 11.6% |
| Continuing-operations net earnings | $614.2 million | $1.452 billion |
| Diluted EPS, continuing operations | $1.65 | $4.05 |
| Operating cash flow, continuing operations | $992.9 million | $977.7 million |
| Capital expenditures | $50.0 million | $75.7 million |
| Cash and equivalents at year-end | $819.3 million | $1.825 billion |
| Debt carrying value at year-end | $3.959 billion | $4.230 billion |
FY2021 revenue increased 13.4%; sales from existing businesses grew 9.5%, acquisitions contributed 2.4% and currency 1.5%. The company reported a 15.5% operating margin, up 390 basis points year over year. Q4 2021 revenue was $1.375 billion and operating profit was $201.6 million; continuing-operations earnings were $167.9 million and basic continuing-operations EPS was $0.47.
Segment revenue and operating margins were: Intelligent Operating Solutions, $2.169 billion and 18.8%; Precision Technologies, $1.849 billion and 22.1%; Advanced Healthcare Solutions, $1.236 billion and 8.2%. Advanced Healthcare Solutions’ operating margin rose from 0.2% in 2020.
Material changes and unusual items
- Revenue and margins recovered broadly from pandemic-affected 2020 levels. Price increases contributed to growth, while supply constraints, freight and logistics costs, and workforce challenges remained.
- Net earnings from continuing operations fell to $614.2 million from $1.452 billion. The comparison is heavily affected by the $1.119 billion unrealized gain on retained Vontier shares recognized in 2020. In 2021, Fortive recorded a $57 million Vontier investment gain, a $104.9 million debt-extinguishment loss and $29.9 million in litigation-resolution gains.
- Fortive acquired ServiceChannel for approximately $1.2 billion and Provation for approximately $1.4 billion. The acquisitions generated $2.6 billion of net cash consideration and approximately $1.843 billion of preliminary goodwill, which is not tax deductible. The acquired businesses contributed $46.4 million of revenue and a $60.9 million operating loss in 2021, including transaction and integration costs.
- Operating cash flow remained near $1.0 billion, but acquisition spending drove $2.616 billion of investing cash outflow. Inventory increased amid safety-stock measures and supply-chain constraints.
Liquidity, debt and capital allocation
At year-end, cash was $819.3 million and the company had $2.0 billion available under its revolving credit facility, with no borrowings outstanding under that facility. Fortive reported compliance with its financial covenants. A $1.0 billion variable-rate delayed-draw term loan was drawn in December 2021 and was due December 15, 2022. The $1.2 billion convertible notes due February 2022 were repaid in cash on February 15, 2022. The company paid $97.7 million in common dividends during 2021; the preferred stock converted into common shares in July 2021. In February 2022, the Board authorized repurchases of up to 20 million common shares, with timing and amounts at management’s discretion.
Outlook, management commentary and risks
Management forecast 2022 revenue growth of 9.0%–12.0%, including 5.5%–8.5% growth from existing businesses. It expected strong demand to continue, but also anticipated persistent supply-chain and inflationary pressures and potentially elevated backlog. The outlook depends on, among other factors, component availability, the ability to convert backlog, workforce levels, manufacturing capacity, end-market demand and elective-surgery activity. Expected 2022 capital spending was approximately $80 million–$100 million.
Key risks include continuing COVID-19 effects; component, labor and logistics constraints; inflation and limited ability to pass through cost increases; market cyclicality and competition; China-U.S. trade uncertainty; foreign-exchange exposure; cybersecurity and data privacy; regulatory requirements, including medical-device rules; acquisition integration and goodwill impairment; tax audits and separation-related tax obligations; and legal, environmental and product-liability contingencies. Management said existing legal proceedings were not expected to have a material adverse effect, based on information available. Environmental reserves were $6 million at year-end. No continuing-operations goodwill impairment was recorded; total goodwill was $9.152 billion.
The company and its auditor reported effective internal control over financial reporting; however, controls at ServiceChannel and Provation, together representing 1% of year-end assets and 1% of 2021 revenue, were excluded from the assessment.
Investor verification points
- Assess how much of 2022 growth guidance depends on acquisitions, backlog conversion, and sustained demand, and whether supply and inflation pressures affect margins.
- Review near-term debt repayment and refinancing needs, including the December 2022 term loan maturity, alongside cash, commercial paper access and the revolving facility.
- Track integration, profitability and purchase-accounting outcomes for ServiceChannel and Provation, including the substantial goodwill and intangible assets recorded.
- Separate recurring operating performance from unusual gains and losses, particularly the 2020 Vontier gain and 2021 debt-extinguishment and litigation items.
- Monitor tax exposures, separation-related obligations, legal and environmental contingencies, and the completion of acquired-business control integration.