Fortive Corporation — Q2 2022 Form 10-Q
Business context and period. Fortive provides connected-workflow technologies, software, products and services through Intelligent Operating Solutions, Precision Technologies and Advanced Healthcare Solutions. This unaudited filing covers the quarter and six months ended July 1, 2022; comparisons are to periods ended July 2, 2021. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $1,463.3m | $1,319.7m | $2,839.8m | $2,578.9m |
| Gross profit / margin | $833.5m / 57.0% | $755.5m / 57.2% | $1,625.5m / 57.2% | $1,467.4m / 56.9% |
| Operating profit / margin | $232.3m / 15.9% | $211.3m / 16.0% | $444.6m / 15.7% | $408.9m / 15.9% |
| Net earnings | $173.0m | $180.9m | $338.1m | $291.1m |
| Diluted EPS | $0.48 | $0.48 | $0.93 | $0.75 |
| Operating cash flow | — | $509.2m | $443.0m |
Q2 sales rose 10.9% year over year, comprising 8.9% growth from existing businesses, 5.0% from acquisitions and a 3.0% foreign-exchange headwind. Six-month sales increased 10.1%, including 7.1% existing-business growth, 5.3% acquisition contribution and a 2.3% currency headwind. Price increases contributed 5.0% to Q2 and 4.1% to six-month sales growth.
Q2 operating profit increased, but operating margin edged down 10 basis points. Higher existing-business price and volume helped, while acquired businesses and related amortization, Russia exit costs, and cost pressures weighed on margin. Six-month net earnings benefited from comparison with 2021, which included a $104.9m debt-extinguishment loss and was partly offset by a $57.0m Vontier investment gain and $26.0m litigation gain.
Segment Q2 sales were $630.1m for Intelligent Operating Solutions (up 16.3%), $499.1m for Precision Technologies (up 5.8%) and $334.1m for Advanced Healthcare Solutions (up 9.2%). Segment operating margins were 20.6%, 23.1% and 8.4%, respectively.
Liquidity, debt and capital
- At July 1, 2022, cash and equivalents were $682.9m, down from $819.3m at December 31, 2021; about 85% was held outside the United States. Current assets were $2,445.3m versus current liabilities of $2,611.3m.
- Total debt carrying value was $3,682.1m, including $847.0m of commercial paper and $999.9m of current debt; long-term debt, net of current maturities, was $2,682.2m. Cash less total debt implies approximately $3.0bn net debt. The $2.0bn revolving credit facility had no borrowings outstanding.
- Operating cash flow was $509.2m for the first half, versus $443.0m. Investing activities used $38.7m, including $37.1m in capital expenditures; financing activities used $582.9m. Cash outflows included repayment of $1.16bn of convertible notes, $242.9m of share repurchases and $50.0m of dividends. Management estimated 2022 capital spending at $80m–$100m.
- Fortive repaid its 0.875% convertible notes at maturity in February 2022 and raised funds through commercial paper and new yen- and euro-denominated term loans due 2025. The company repurchased 4.0m shares for about $243m in the first half; 16.0m shares remained authorized.
Outlook, commentary and risks
Management forecast year-over-year sales growth of 10.0%–12.0% for Q3 2022 and 10.0%–11.0% for full-year 2022. Existing-business sales growth was projected at 9.0%–11.5% for Q3 and 8.0%–9.5% for the year. These are sales-growth forecasts; the filing provides no comparable earnings or EPS guidance. Management expected foreign exchange to remain unfavorable, supply-chain and inflationary pressures to persist, and backlog to remain elevated. It stated that available cash, operating cash flow and credit access should meet foreseeable liquidity needs.
Management cited robust demand but said shipments remained constrained by supply-chain and logistics challenges, particularly electronic-component availability; demand outpaced shipments and backlog increased sequentially. COVID-19 continued to affect logistics, materials and absenteeism. China containment measures disrupted production, shipments and cash flow in the first half, though shipments began normalizing late in Q2. Price increases exceeded inflation in purchased materials during the periods.
Fortive exited most Russian operations in Q2, retaining certain exempt humanitarian sterilization-product activity. It recorded $16.2m of pre-tax exit and wind-down costs, including about $9.2m of noncash charges, and expected total exit costs of $18.4m. Russia and Ukraine represented less than 1% of 2021 revenue and less than 0.2% of 2021 assets. Other material risks discussed include global economic and geopolitical conditions, U.S.–China trade relations, currency changes, supply concentration, competition, acquisitions and integration, regulation, litigation, cybersecurity, and debt.
Investor verification points
- Check whether sales guidance and existing-business growth assumptions were achieved, and whether backlog converted into shipments and cash.
- Monitor currency effects, pricing versus input-cost inflation, electronic-component supply and China/COVID-related disruption.
- Review debt maturities, commercial-paper refinancing capacity and liquidity, particularly alongside the revolving facility’s November 2023 expiration.
- Assess acquisition-related amortization, integration costs and profitability, including the effects of Provation and ServiceChannel.
- Track final Russia exit costs and any related legal contingencies; also compare reported earnings with prior-year unusual items.