Vontier Corporation — Q3 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended September 25, 2020; comparisons are with the quarter ended September 27, 2019. Vontier provides mobility technologies and diagnostics and repair products and services. These are carved-out financial statements from Fortive, where Vontier historically operated, and may not reflect its costs or results as a standalone company. Fortive completed the distribution of 80.1% of Vontier on October 9, 2020, after quarter-end.
Key financial metrics
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $746.7 | $714.4 | $1,889.6 | $2,028.8 |
| Gross profit | $331.3 | $308.0 | $825.4 | $865.2 |
| Gross margin | 44.4% | 43.1% | 43.7% | 42.6% |
| Operating profit | $178.6 | $154.9 | $290.4 | $400.3 |
| Operating margin | 23.9% | 21.7% | 15.4% | 19.7% |
| Net earnings | $141.0 | $121.0 | $205.2 | $310.3 |
| Diluted EPS | $0.84 | $0.72 | $1.22 | $1.84 |
| Operating cash flow | Not presented quarterly | $480.6 | $322.3 | |
| Capital expenditures | Not presented quarterly | $27.3 | $27.0 |
Performance, liquidity and debt
- Q3 sales increased 4.5% year over year; sales from existing businesses, a non-GAAP measure, rose 5.6%. North American fuel-management demand benefited from outdoor payment-card security requirements and Mexican regulation; diagnostics and repair also improved.
- Nine-month sales declined 6.9% and existing-business sales declined 4.7%, reflecting COVID-19 impacts. High-growth markets were particularly weak. The nine-month operating result includes an $85.3 million non-cash goodwill impairment.
- Q3 operating margin increased 220 basis points, while nine-month operating margin fell 430 basis points, including a 450-basis-point adverse impact from the impairment. Gross margin improved in both comparison periods.
- Nine-month operating cash flow rose $158.3 million to $480.6 million. Management attributed the improvement substantially to working-capital movements; operating cash flow included $104.4 million from the change in long-term financing receivables.
- At September 25, current assets were $756.3 million and current liabilities $705.4 million. Cash and cash equivalents were zero in the carved-out balance sheet; Fortive’s corporate cash and debt were not assigned to Vontier. Quarter-end borrowings were $12.9 million short-term and no long-term debt.
- After quarter-end, Vontier drew $1.8 billion under new term loans ($800 million three-year and $1.0 billion two-year) to fund separation-related payments to Fortive and retain cash. It also established a $750 million revolving facility, undrawn as of October 30. At separation, it reported approximately $287.9 million cash, of which approximately $84.1 million was repayable to Fortive within 90 days.
- The credit agreement requires a consolidated leverage ratio of 3.75:1 or lower and interest coverage of at least 3.50:1, subject to specified acquisition-related leverage relief. The filing reports no material liquidity or covenant impact from market volatility as of its filing date.
Outlook, risks and unusual items
- Management expected total sales and sales from existing businesses to grow year over year in Q4, without providing a numerical forecast. It noted uncertainty from COVID-19 and geopolitical conditions.
- All locations were open at quarter-end; management reported no significant supply shortages or distribution constraints. It continued to monitor customer and supplier financial health and anticipated using CARES Act payroll-tax relief during 2020.
- Management estimated incremental annual standalone public-company costs of approximately $35 million to $45 million, in addition to possible nonrecurring systems implementation costs. Historical allocations from Fortive may not represent future expenses.
- The $85.3 million goodwill impairment related to Telematics, following a revised forecast amid COVID-19-driven sales and profit declines. Valuation used significant unobservable inputs; further impairment remains a risk if assumptions or performance deteriorate.
- Expected credit-loss accounting adopted January 1, 2020 increased the opening allowance for trade and financing receivables by $22.1 million, with a $16.9 million after-tax reduction to opening equity. Management said it had not observed notable increases in loss rates or delinquencies, but further customer deterioration could require additional write-offs.
- Other disclosed exposures include asbestos liabilities of $51.0 million, partly offset by $20.3 million in projected insurance recoveries, and guarantees of approximately $69.3 million. The company said ordinary-course legal matters were not expected to have a material adverse effect.
- Other separation-related considerations include Fortive transition services and agreements, potential standalone cost changes, and risks relating to the new debt, variable interest rates, and the company’s first period as an independent public company.
Most important facts to verify
- Whether Q4 growth materialized and how demand recovered across regions and business lines.
- Actual standalone costs compared with the estimated $35 million to $45 million annual increase.
- Debt balances, interest expense, cash generation and compliance with leverage and interest-coverage covenants after the $1.8 billion term-loan draw.
- Whether customer credit performance and expected-loss allowances changed materially after September 25.
- Telematics performance and the assumptions supporting goodwill valuation, as well as any further impairment indicators.
- Cash available after separation-related payments, including repayment of the approximately $84.1 million due to Fortive.