Fortive Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 2, 2021; comparative quarter ended June 26, 2020. Dollar amounts are in millions unless stated otherwise. Fortive provides connected-workflow technologies, products, software, and services through Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. Vontier, separated in October 2020, is reported as a discontinued operation; comparisons reflect continuing operations.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $1,319.7 | $1,041.6 | $2,578.9 | $2,149.7 |
| Gross profit / margin | $755.5 / 57.2% | $582.8 / 56.0% | $1,467.4 / 56.9% | $1,194.8 / 55.6% |
| Operating profit / margin | $211.3 / 16.0% | $102.6 / 9.9% | $408.9 / 15.9% | $218.0 / 10.1% |
| Continuing-operations net earnings | $182.0 | $59.8 | $293.7 | $114.6 |
| Net earnings attributable to common stockholders | $163.7 | $112.8 | $256.6 | $137.4 |
| Diluted EPS | $0.48 | $0.33 | $0.75 | $0.40 |
- Sales increased 26.7% in Q2 and 20.0% for the six months. Management attributed growth primarily to stronger existing-business demand, with contributions from acquisitions and currency. Existing-business sales rose 21.3% and 15.0%, respectively.
- Q2 segment sales and operating profit: Intelligent Operating Solutions $541.8 and $115.3; Precision Technologies $471.9 and $104.1; Advanced Healthcare Solutions $306.0 and $22.5. All segments increased sales year over year.
- Six-month operating cash from continuing operations was $443.0, versus $430.8. Net cash from all operating activities was $424.3, down from $670.3, reflecting discontinued-operations cash of negative $18.7 versus positive $239.5 in the prior period. Capital expenditures were $17.1 versus $45.5.
- Cash and equivalents were $1,565.8 at July 2, 2021, down from $1,824.8 at year-end 2020. Debt carrying value totaled $2,576.4, including $1,134.6 current and $1,441.8 long term. No commercial-paper or revolving-credit-facility borrowings were outstanding; the revolving facility provides $2.0 billion of capacity.
- Management said liquidity should be sufficient for foreseeable needs. It expected 2021 capital spending of approximately $60–$70.
Material changes and unusual items
- Results rebounded from pandemic-affected 2020 comparisons. Management reported broad-based demand recovery, with short-cycle industrial and SaaS businesses largely back to or above pre-pandemic demand levels.
- Operating margin expanded year over year. Management cited stronger volume, mix, pricing, cost savings, and lower acquisition-related transaction costs; higher compensation, freight, logistics, and growth investment partly offset these benefits. Comparisons were also affected by amortization and acquisition accounting.
- Q2 included a $26.0 gain after dismissal of litigation related to the acquired ASP business. For the six months, earnings also included a $57.0 gain on retained Vontier shares and a $104.9 loss on debt extinguishment, principally associated with the Vontier-share-for-debt exchange and debt repurchases.
- Fortive exchanged its remaining 33.5 million Vontier shares for $1.1 billion of debt principal in January and separately repurchased $281 million of convertible notes in February. The mandatory convertible preferred stock converted into approximately 19.4 million common shares on July 1, 2021.
- On July 8, after quarter-end, Fortive agreed to acquire ServiceChannel for $1.2 billion, including approximately $60 million of deferred compensation consideration; the deal was expected to close in Q3, subject to customary conditions, and was to be financed primarily with cash.
Outlook, commentary, and risks
- Management expected global demand for Fortive products and services to increase 11.5%–14.5% in Q3 2021 and 13.5%–15% for full-year 2021, year over year. These are demand-growth expectations, not a separately stated revenue or earnings forecast.
- Management expected recovery to continue, but at different rates by business; businesses requiring customer-site access could lag. It expected elective surgical procedure volumes to improve sequentially, after remaining below pre-pandemic levels in Q2.
- Supply-chain, port, labor, raw-material, and component constraints and inflation were expected to persist in the second half. Management believed pricing and other countermeasures would largely offset the added costs, but that outcome is uncertain.
- Other cited uncertainties included COVID-19 variants and changing restrictions, customer demand and site access, geopolitical and U.S.–China trade developments, foreign exchange, and potential changes in tax and investment policies. Management stated it could not quantify potential effects of certain policy developments.
- The filing reported no material changes to the risk factors from the 2020 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether the strong year-over-year growth persists when pandemic-affected 2020 comparisons become less favorable, and how much growth is organic versus acquisition- or currency-driven.
- Whether pricing and productivity actions offset continuing supply-chain, freight, labor, and material-cost inflation without impairing demand or margins.
- The sustainability and cash-conversion quality of earnings, including working-capital trends and the effects of noncash gains and debt-extinguishment charges.
- Near-term refinancing or conversion plans for the $1,134.6 of current debt, including the 0.875% convertible notes due in 2022, and the effect of the ServiceChannel purchase on cash and leverage.
- Progress and closing conditions for the announced ServiceChannel acquisition, and any subsequent changes to the stated demand outlook or key operating risks.