Fortive Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with periods ended October 1, 2021. Fortive provides connected-workflow technologies, products, software and services through Intelligent Operating Solutions (IOS), Precision Technologies (PT) and Advanced Healthcare Solutions (AHS).
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $1,456.0m | $1,301.0m | $4,295.8m | $3,879.9m |
| Gross profit | $845.4m | $745.7m | $2,470.9m | $2,213.1m |
| Operating profit | $251.9m | $202.3m | $696.5m | $611.2m |
| Net earnings from continuing operations | $189.9m | $152.6m | $528.0m | $446.3m |
| Diluted EPS from continuing operations | $0.53 | $0.42 | $1.46 | $1.18 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $839.0m | $705.9m |
- Reported sales increased 11.9% in Q3 and 10.7% year to date. Management attributed growth to existing businesses and acquisitions, partly offset by currency translation. Existing-business sales grew 12.1% in Q3 and 8.8% year to date; foreign exchange reduced sales growth by 4.0% and 2.9%, respectively.
- Gross margin was 58.1% in Q3 versus 57.3%; year-to-date gross margin was 57.5% versus 57.0%. Operating margin was 17.3% versus 15.5% in Q3 and 16.2% versus 15.8% year to date.
- Q3 segment sales and operating margins: IOS $613.7m and 21.5% (prior-year margin 17.0%); PT $523.7m and 25.2% (22.2%); AHS $318.6m and 5.4% (11.2%). AHS margin fell amid lower existing-business volume, higher costs, receivable reserves, FX impacts and acquisition-related expenses.
- Nine-month operating cash flow rose 19% year over year. Capital spending was $59.7m; operating cash flow less capital spending was $779.3m, compared with $677.9m a year earlier.
- Cash and equivalents were $705.3m at September 30, 2022, down from $819.3m at year-end 2021. Total debt carrying value was $3,558.9m, including $999.9m current debt; cash less total debt implies net debt of approximately $2,853.6m. Commercial paper outstanding was $747.3m, with a 3.19% annual effective rate and 29-day weighted average remaining maturity. No borrowings were outstanding under the $2.0bn revolving facility at quarter-end.
Material changes and notable items
- Q3 growth and margin improvement reflected pricing, volume and productivity, partly offset by higher compensation, freight, logistics and material costs, and unfavorable currency. Price increases exceeded inflationary increases in purchased materials, according to management.
- Russia exit and wind-down charges were $17.3m for the first nine months ($1.1m in Q3); the company expected total costs of $18.4m. The charges include asset and currency-translation write-offs and severance and legal provisions. Russia and Ukraine represented less than 1% of 2021 revenue.
- Other Q3 items included an $8.1m impairment of an equity investment and a $2.3m pretax gain from selling the Therapy Physics product line. The sale consideration was $9.6m; the product line was not treated as a discontinued operation.
- Prior-year nine-month results included a $104.9m debt-extinguishment loss, a $57.0m Vontier investment gain and a $26.0m litigation-resolution gain, which affect year-over-year comparability.
- Foreign-currency translation reduced nine-month comprehensive income; accumulated other comprehensive loss was $453.7m at September 30, versus $185.0m at December 31, 2021.
- Fortive repurchased 6.0m shares for approximately $376m through September 30, leaving 14.0m shares authorized. It paid $74.8m in common dividends year to date.
Outlook, liquidity and risks
- Management projected year-over-year sales growth of approximately 8.5% for Q4 and 10.0% for full-year 2022; corresponding existing-business growth projections were approximately 11.0% and 9.5%. No profit or EPS guidance is provided in the supplied filing text.
- Management expected supply-chain and inflation pressures to persist through 2022, backlog to remain elevated, and foreign exchange to remain unfavorable. It cited COVID-19 disruptions, electronic-component availability, Russia-Ukraine developments, European energy disruption, end-market conditions and elective-surgery rates as outlook risks.
- Management said available cash, operating cash generation, commercial paper and credit facilities should meet foreseeable liquidity needs. Capital spending was expected to be approximately $80m–$100m for 2022.
- After quarter-end, Fortive extended its $2.0bn revolving facility to October 2027 and entered into a $1.0bn delayed-draw term facility intended to refinance the $1.0bn term loan maturing in December 2022. The amended revolver includes a net-leverage covenant below 3.5-to-1.0, with a temporary 4.0-to-1.0 limit following certain large acquisitions.
- Principal risks discussed include supply-chain and commodity constraints, macroeconomic and market cyclicality, COVID-19, currency movements, competition, acquisitions and integration, regulation, litigation, cybersecurity, and debt and interest-rate exposure. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether reported growth and margins remain resilient as supply, inflation, foreign-exchange and acquisition-related pressures evolve—particularly AHS profitability.
- Delivery against full-year sales outlook and the assumptions behind management’s FX, demand and supply-chain expectations.
- Debt refinancing and liquidity after the October 2022 facilities, including floating-rate exposure, commercial-paper reliance and covenant headroom.
- Cash conversion and working-capital trends, including the year-to-date inventory cash use, and the planned level of capital spending and share repurchases.
- Final costs and remaining exposures associated with the Russia exit, and performance and integration costs of the Provation and ServiceChannel acquisitions.