Fortive Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 1, 2021; comparisons are to periods ended September 25, 2020. Amounts are in U.S. dollars. Fortive provides connected-workflow technologies, software, products and services through Intelligent Operating Solutions, Precision Technologies and Advanced Healthcare Solutions. Vontier, separated in October 2020, is reported as a discontinued operation.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $1,299.5 million | $1,159.8 million | $3,878.4 million | $3,309.5 million |
| Gross profit / margin | $744.2 million / 57.3% | $651.6 million / 56.2% | $2,211.6 million / 57.0% | $1,846.4 million / 55.8% |
| Operating profit / margin | $200.8 million / 15.5% | $137.6 million / 11.9% | $609.7 million / 15.7% | $355.6 million / 10.7% |
| Continuing-operations net earnings | $151.1 million | $86.0 million | $444.8 million | $200.6 million |
| Net earnings attributable to common stockholders | $150.8 million | $208.5 million | $407.4 million | $345.9 million |
| Diluted EPS | $0.42 | $0.61 | $1.17 | $1.02 |
Q3 2020 common earnings and EPS included $139.8 million of discontinued-operations earnings; Q3 2021 discontinued operations recorded a $0.3 million loss. Nine-month 2021 results included a $104.9 million debt-extinguishment loss, a $57.0 million gain on Vontier shares and a $26.0 million litigation-dismissal gain. Effective tax rates were 13.2% for Q3 and 11.1% year to date.
- Sales and segments: Sales rose 12.0% in Q3 and 17.2% year to date. Existing-business sales grew 9.1% and 12.9%, respectively. Q3 segment sales were $535.4 million for Intelligent Operating Solutions, $455.7 million for Precision Technologies and $308.4 million for Advanced Healthcare Solutions.
- Cash flow: Nine-month operating cash flow from continuing operations was $705.9 million, versus $648.3 million; total operating cash flow, including discontinued operations, was $686.5 million versus $1,152.0 million. Investing cash used was $1,183.6 million, largely reflecting the ServiceChannel acquisition. Capital expenditures were $28.0 million. Cash declined to $838.4 million from $1,824.8 million at year-end 2020.
- Debt and liquidity: October 1 carrying debt was $2,585.3 million, including $1,143.2 million of current convertible notes and $1,442.1 million of long-term debt; commercial paper was $215.0 million. No revolver borrowings were outstanding under the $2.0 billion facility. The company reported $838.4 million of cash, about 80% held outside the U.S., and stated it expected sufficient liquidity for the foreseeable future.
- Other position metrics: Total assets were $14,976.1 million and stockholders’ equity was $9,322.8 million. Goodwill was $8,221.5 million, including $897.3 million preliminarily recorded for ServiceChannel.
Material changes and management commentary
- Sales and operating margins improved year over year, with growth across the portfolio and strong comparisons against pandemic-affected 2020 results. Management cited higher volumes, pricing, favorable mix and productivity actions; SG&A leverage also improved as sales grew faster than fixed costs.
- Advanced Healthcare Solutions’ operating margin rose to 11.2% in Q3 from 0.6%, and to 8.3% year to date from negative 2.0%. Lower acquisition-related costs versus the prior-year periods contributed materially to the comparison.
- Fortive acquired ServiceChannel on August 24, 2021 for approximately $1.2 billion net of acquired cash. It recorded $897.3 million of preliminary goodwill, which is not tax deductible. ServiceChannel contributed $10.1 million of revenue and a $19.5 million operating loss for the periods reported, including acquisition-related costs and amortization.
- Fortive exchanged its retained Vontier shares for $1.1 billion of debt principal in January 2021 and repurchased $281 million of convertible notes in February. Mandatory convertible preferred shares converted into approximately 19.4 million common shares in July.
Outlook, risks and contingencies
- Management forecast Q4 2021 year-over-year revenue growth of 6.5%–8.5% and full-year 2021 growth of 14%–14.5%, based on then-current assumptions. These are management expectations, not guarantees.
- Supply-chain shortages in labor, raw materials and components, port congestion and logistics constraints limited deliveries; order growth significantly outpaced revenue growth and backlog increased substantially. Management expected these issues and inflationary pressures to persist in Q4, and believed pricing and other actions would largely offset cost pressures.
- Risks cited include COVID-19 variants and changing restrictions, vaccine mandates’ potential effect on workforce and capacity, elective procedures remaining below pre-pandemic levels, geopolitical and U.S.-China trade uncertainty, and availability of electronic components. The filing said anticipated legislative and policy effects could not yet be quantified.
- Fortive expected approximately $50 million of 2021 capital spending. It also disclosed a $1.143 billion convertible-note balance due in February 2022 and ongoing commitments including dividends and pension funding.
- The company reported no material change in its previously disclosed risk factors and stated disclosure controls were effective. The filing text does not provide a clear quantified estimate for potential impacts of the cited geopolitical, legislative or vaccine-mandate uncertainties.
Important facts for investors to verify
- Whether backlog converts into revenue as expected, given component shortages, logistics constraints and customer demand.
- Whether price increases continue to offset material, freight and other inflationary costs without weakening demand.
- ServiceChannel integration, operating performance and purchase-price allocation, including the substantial, nondeductible goodwill recorded.
- Plans and funding for the February 2022 convertible-note maturity, and the effect of debt and commercial-paper financing on liquidity.
- Comparability of reported growth and earnings with 2020, given Vontier’s discontinued-operations presentation and unusual debt, investment and litigation items.