Fortive Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to the three months ended April 1, 2022 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Fortive provides connected-workflow technologies, software, products, and services through Intelligent Operating Solutions (IOS), Precision Technologies (PT), and Advanced Healthcare Solutions (AHS). It reported consolidated sales of $1,460.7 million, up 6.1% year over year. Sales from existing businesses increased 8.8%; acquisitions and divestitures reduced growth by 0.4 percentage points and foreign exchange reduced it by 2.3 points.
- Products and software sales were $1,236.6 million; service sales were $224.1 million.
- IOS sales were $632.1 million (+7.6%); operating profit was $133.5 million and margin was 21.1%, up from 18.2%.
- PT sales were $515.5 million (+11.5%); operating profit was $122.7 million and margin was 23.8%, up from 21.9%.
- AHS sales were $313.1 million (-4.1%); operating profit was $16.3 million and margin was 5.2%, down from 8.6%.
Financial performance, cash flow, and liquidity
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Gross profit / margin | $848.2 million / 58.1% | $792.0 million / 57.5% |
| Operating profit / margin | $240.4 million / 16.5% | $212.3 million / 15.4% |
| Net earnings | $173.6 million | $165.1 million |
| Diluted EPS | $0.49 | $0.45 |
| Net cash from operating activities | $174.4 million | $214.8 million |
| Capital expenditures | $24.8 million | $18.8 million |
Net interest expense increased to $32.1 million from $18.8 million, primarily due to higher rates on floating-rate debt despite lower overall debt balances. The effective tax rate was 15.7%, compared with 13.5%.
At March 31, 2023, cash and equivalents were $672.8 million, current assets were $2,455.3 million, and current liabilities were $2,630.1 million. Debt carrying value totaled $3,094.4 million, including $999.8 million classified as current; principal debt was $3,101.5 million. Commercial paper outstanding was approximately $245 million, with a 4.98% annual effective rate and 30-day weighted average maturity. The $2.0 billion revolving credit facility had no borrowings outstanding. Cash declined by $36.4 million during the quarter.
Operating cash flow fell 19% year over year. Management attributed the decline mainly to working-capital and timing effects, including changes in receivables, inventory, payables, accrued expenses, and other liabilities. The company paid $24.7 million in dividends and made no share repurchases during the quarter.
Material changes and management commentary
Price increases and higher sales volumes, along with productivity gains, supported gross profit and operating margin expansion. Price contributed 4.6% to overall sales growth and exceeded inflation impacts on purchased materials. Management cited continuing supply-chain, logistics, material-availability, and absenteeism challenges. AHS was comparatively weak: sterilization-product volumes declined in North America and China, and quality-assurance equipment supply issues and lower demand for system-design services weighed on results.
Fortive began an operational-efficiency restructuring plan expected to finish by December 31, 2023. It recorded $17.6 million of charges in Q1, primarily employee severance, and expects total charges of approximately $25–$30 million. Accrued restructuring costs were $13.4 million at quarter-end. The filing reports no impairment charges in the quarter.
Outlook, risks, and contingencies
Management forecast Q2 2023 revenue growth of 1.5%–3.5% and full-year 2023 growth of 3.0%–4.5%. Expected growth from existing businesses was 2.5%–4.5% for Q2 and 4.0%–5.5% for the full year. It anticipated volatile foreign exchange rates, potentially unfavorable versus 2022, and identified economic resilience, logistics and supply-chain constraints, electronic-component availability, inflation, geopolitical conflict, key-market conditions, and elective-surgery rates as outlook risks. Management expected capital spending of approximately $90–$110 million for 2023 and stated that available liquidity should meet cash needs for the foreseeable future.
The filing refers readers to the 2022 Form 10-K for litigation and other contingencies and reports no material change to previously disclosed risk factors. It also identifies risks involving competition, technology, supply concentration, cyber and operational disruptions, international trade and currency, regulation, taxes, impairment, and debt costs.
Most important facts for investors to verify
- Whether AHS sales and margins recover, given its Q1 revenue decline and lower operating margin.
- Whether the Q2 and full-year growth outlook is achieved, especially if foreign exchange and supply constraints remain adverse.
- The timing and funding of the $1.0 billion debt classified as current and due in 2023, and the effect of refinancing costs.
- Whether restructuring charges remain within the $25–$30 million estimate and deliver the intended efficiencies.
- Whether operating cash flow improves as working-capital and payment timing effects normalize.
- Any developments in litigation, tax matters, or other contingencies described in the company’s annual filing.