Vontier Corporation — Q2 2022 Form 10-Q
Business context and period: The filing covers the quarter and six months ended July 1, 2022. Vontier is a global industrial technology company serving mobility infrastructure markets, including fueling, retail solutions, environmental systems, vehicle diagnostics and repair, telematics, and traffic management. It reports one segment comprising mobility technologies and diagnostics and repair technologies.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total sales | $776.4 million | $724.6 million | $1,524.5 million | $1,432.0 million |
| Gross profit / margin | $348.1 million / 44.8% | $318.5 million / 44.0% | $683.4 million / 44.8% | $630.3 million / 44.0% |
| Operating profit / margin | $136.5 million / 17.6% | $121.0 million / 16.7% | $271.3 million / 17.8% | $253.9 million / 17.7% |
| Net earnings | $33.3 million | $82.3 million | $283.5 million | $173.3 million |
| Diluted EPS | $0.21 | $0.48 | $1.73 | $1.02 |
| Operating cash flow | Not provided separately for the quarter | Not provided separately for the quarter | $48.5 million | $216.5 million |
- Reported sales increased 7.2% in Q2 and 6.5% in the first half. Sales from existing businesses grew 1.6% and 0.8%, respectively; acquisitions added 8.2% and 7.7%, while currency reduced growth by 2.6% and 2.0%.
- Price increases contributed 5.7% to Q2 sales growth and 5.0% to first-half growth. Gross margin improved 80 basis points in both periods, reflecting pricing and DRB acquisition effects, partly offset by inflation.
- Q2 net earnings declined year over year, primarily reflecting an $80.0 million unrealized loss on equity securities. First-half earnings included an $83.0 million unrealized gain on equity securities and a $32.7 million noncash gain from remeasuring Vontier’s existing Driivz interest.
- First-half operating cash flow fell $168.0 million year over year. Receivables and long-term financing receivables used $31.8 million, versus providing $47.3 million in the prior-year period; other operating assets and liabilities used $165.4 million, primarily from timing and working-capital needs.
Balance sheet, debt and liquidity
- At July 1, 2022, cash and equivalents were $127.4 million, down from $572.6 million at December 31, 2021. Total assets were $4.22 billion.
- Long-term debt, net, was $2.60 billion, with $9.1 million of short-term borrowings. The company had $14.0 million outstanding under its $750 million revolving credit facility; approximately $736 million was therefore undrawn. Vontier reported compliance with its debt covenants.
- Six-month cash uses included $186.6 million for acquisitions, $26.5 million for capital expenditures, and $271.1 million for treasury-stock purchases. The company repurchased 10.0 million shares through an accelerated share repurchase and made additional open-market repurchases.
- Management said operating cash flow and other liquidity sources should be sufficient for operations, investment, acquisitions, debt service, and capital management. Cash flows can fluctuate with working capital and payment timing.
Material changes, outlook and risks
- Business mix and demand: DRB, acquired in 2021, was the principal driver of reported sales growth. Mobility technologies benefited from environmental and alternative-energy demand, while outdoor payment-system demand eased following EMV upgrades and Mexico fiscal-regulation upgrades ended. Q2 diagnostics and repair sales declined at a mid-single-digit rate as demand normalized and labor challenges constrained backlog reduction.
- Portfolio actions: Vontier acquired the remaining 81% of Driivz in February 2022 for $152.6 million, net of cash received. During Q2 it decided to exit Hennessy and Global Traffic Technologies; their assets of $150.3 million and liabilities of $50.3 million were classified as held for sale, not discontinued operations. On August 2, 2022, it agreed to acquire Invenco for $80 million plus contingent consideration, with closing expected in Q3 2022.
- Outlook: Management expected total sales and sales from existing businesses to grow year over year in 2022; no numerical growth or earnings guidance was provided in the filing. It expected supply-chain and inflationary pressures to persist, and backlog to remain elevated versus historical levels even if it declined from 2021. Pricing and operational measures were cited as responses.
- Risks and contingencies: The filing highlights ongoing supply-chain, logistics and inflation pressures; COVID-19 disruptions; foreign-exchange effects; regulation and technology adoption; acquisition and integration risks; and indebtedness. Vontier ceased sales and shipments in Russia; Russia and Ukraine represented less than 1% of 2021 revenue, and management did not consider the conflict material as of the filing date. Gross asbestos liabilities were $73.8 million, with $40.0 million of projected insurance recoveries. Management did not expect ordinary-course legal matters to have a material adverse effect, but recoveries and claim estimates remain uncertain.
- Unusual valuation items: Vontier’s publicly traded Tritium investment was carried at fair value; its reported value was $135.1 million at July 1, 2022. Changes in its share price affected earnings, including the Q2 unrealized loss.
Important facts for investors to verify
- Whether organic sales growth and pricing can offset inflation, currency headwinds, and softer demand in specific product markets.
- Whether first-half cash-flow weakness reverses as working-capital timing normalizes, given the substantial decline in cash balances.
- The future fair value of Tritium and the effect of valuation changes on reported earnings.
- Progress and financial effects of the Hennessy and Global Traffic Technologies exits, and the completion and terms of the Invenco acquisition.
- Debt-service capacity, covenant compliance, and the potential cash and earnings effects of asbestos claims and related insurance recoveries.