Vontier Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2021. Vontier is a global industrial technology company serving mobility infrastructure, fueling, vehicle diagnostics and repair, fleet management, and related markets. The prior-year comparison includes carved-out results from before Vontier’s October 2020 separation from Fortive, so the periods are not fully like-for-like.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Sales | $724.6 million | $533.7 million | $1,432.0 million | $1,142.9 million |
| Gross profit | $318.5 million | $231.0 million | $630.3 million | $494.1 million |
| Operating profit | $121.0 million | $90.0 million | $253.9 million | $111.8 million |
| Net earnings | $82.3 million | $68.4 million | $173.3 million | $64.2 million |
| Diluted EPS | $0.48 | $0.41 | $1.02 | $0.38 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $216.5 million | $234.7 million |
Q2 sales increased 35.8% year over year; sales from existing businesses rose 32.7%, with currency adding 3.1 percentage points. First-half sales increased 25.3%, including 22.8% growth from existing businesses and 2.5 percentage points from currency. Management attributed growth to broad portfolio demand and the effects of COVID-19 on the prior-year comparison.
Gross margin was 44.0% in Q2, up 70 basis points year over year, and 44.0% for the first half, up 80 basis points. Price increases and favorable mix more than offset material-cost inflation. Q2 operating margin was 16.7%, down 20 basis points; first-half operating margin was 17.7%, versus 9.8% a year earlier. The first-half comparison benefited substantially from the prior-year $85.3 million goodwill impairment charge. Higher public-company costs, prior-year cost-reduction comparisons, and inflation weighed on operating margins.
First-half investing cash outflow was $29.3 million, including $21.7 million of capital spending. Cash and cash equivalents were $703.4 million at July 2, 2021, compared with $380.5 million at year-end 2020. Debt comprised $1,982.5 million of long-term debt, net of discounts and issuance costs, and $5.5 million of short-term borrowings. The company reported $2.0 billion of principal long-term debt and no borrowings on its $750 million revolving facility. It was in compliance with debt covenants.
Changes, outlook, and notable items
- Q2 demand strengthened across mobility technologies and diagnostics and repair. Management cited retail and environmental solutions, North American fuel-management systems, and demand for tools, tool storage, and diagnostics. Price increases contributed 2.0% to Q2 and 1.5% to first-half sales growth.
- Management expected sales and sales from existing businesses to grow year over year in 2021, while monitoring COVID-19, geopolitical, and regulatory uncertainties. No numerical growth target was provided.
- In March, Vontier issued $1.6 billion of senior notes due 2026, 2028, and 2031 at coupon rates of 1.800%, 2.400%, and 2.950%, respectively, and used proceeds in part to repay $1.4 billion of term loans. A subsequent credit-agreement amendment extended maturities and reduced variable borrowing spreads.
- After quarter-end, Vontier agreed to acquire DRB Systems for approximately $965 million in cash, subject to customary conditions including regulatory approval. It also entered into a $600 million delayed-draw term loan, undrawn at signing, with proceeds planned to help fund the acquisition.
- The board authorized up to $500 million of share repurchases; none of that authorization had been used as of July 2, 2021. A quarterly dividend of $0.025 per share was paid.
- Asbestos-related liabilities were $68.6 million, with projected insurance recoveries of $35.1 million. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting uncertainty around claims and insurance recoveries. Outstanding guarantees were approximately $94.2 million.
- Other risks highlighted include COVID-19 effects, inflation and supply availability, regulatory change, impairment risk, indebtedness and debt-service capacity, acquisition execution, tax matters, and separation-related indemnification obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the DRB acquisition closed on expected terms and how it was financed, including resulting debt, interest costs, and covenant headroom.
- Whether demand growth persists after the unusually weak COVID-affected comparison period, and how inflation, pricing, and supply constraints affect margins.
- Cash conversion and working-capital trends: first-half operating cash flow declined year over year despite higher earnings.
- The adequacy and timing of insurance recoveries against asbestos liabilities, and any changes in litigation exposure.
- Capital allocation plans for the $500 million buyback authorization, dividends, and acquisition-related borrowing.