Fortive Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Fortive provides connected-workflow technologies, products, software and services across Intelligent Operating Solutions (IOS), Precision Technologies (PT) and Advanced Healthcare Solutions (AHS). This unaudited filing covers the three months ended April 1, 2022; comparisons are with the three months ended April 2, 2021. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Prior-year period |
|---|---|---|
| Sales | $1,376.5 million | $1,259.2 million |
| Gross profit / margin | $792.0 million / 57.5% | $711.9 million / 56.5% |
| Operating profit / margin | $212.3 million / 15.4% | $197.6 million / 15.7% |
| Continuing-operations earnings | $165.1 million | $111.7 million |
| Net earnings attributable to common stockholders | $165.1 million | $92.9 million |
| Diluted EPS | $0.45 | $0.27 |
| Operating cash flow | $214.8 million | $152.0 million |
Sales increased 9.3% year over year: existing businesses grew 5.3%, acquisitions contributed 5.5%, and currency reduced growth by 1.5%. Gross margin expanded 100 basis points, while operating margin declined 30 basis points. Higher pricing and volumes helped gross profit; elevated acquisition amortization and costs, freight, logistics, materials and compensation weighed on operating margins. Net interest expense fell to $18.8 million from $27.7 million. The effective tax rate was 13.5%, versus 5.9%.
Segment sales and operating profit: IOS sales were $587.6 million and operating profit was $107.0 million (18.2% margin); PT sales were $462.4 million and operating profit was $101.4 million (21.9%); AHS sales were $326.5 million and operating profit was $28.0 million (8.6%). Sales grew 15.0% in IOS, 3.4% in PT and 8.5% in AHS. Segment margins moved differently: IOS declined 300 basis points, PT improved 50 basis points and AHS improved 230 basis points.
Liquidity, debt and capital
Cash and equivalents were $684.3 million at April 1, down from $819.3 million at year-end 2021; approximately 90% was held outside the United States. Gross debt was $3.739 billion, comprising $1.296 billion of commercial paper, a $999.8 million delayed-draw term loan due 2022, and senior notes. The $1.2 billion convertible notes were repaid at maturity in February, with funding partly offset by $930.7 million of net commercial-paper proceeds. The $2.0 billion revolving credit facility had no borrowings outstanding.
Operating activities provided $214.8 million; investing activities used $17.9 million, including $18.8 million of capital expenditures; financing activities used $332.6 million. The company expects 2022 capital spending of approximately $80–$100 million and stated it expects sufficient liquidity for the foreseeable future. It repurchased 1.0 million shares for about $64 million and had 19.0 million shares remaining under its repurchase authorization. The quarterly common dividend was $0.07 per share.
Material changes and unusual items
- Year-over-year earnings comparisons reflect unusual prior-period items: Q1 2021 included a $104.9 million debt-extinguishment loss and a $57.0 million gain on the Vontier investment, as well as a $1.5 million discontinued-operations loss and mandatory preferred dividends. These items affect comparisons with Q1 2022.
- Fortive adopted ASU 2020-06 on January 1, 2022, changing accounting for its convertible notes; it recorded adjustments to additional paid-in capital, debt and retained earnings. The notes were subsequently repaid at maturity.
- Provation and ServiceChannel, acquired in 2021, contributed to reported growth. Their combined Q1 2022 revenue was $67.3 million and their attributed operating loss was $23.4 million, including $19.5 million of intangible amortization and $20.4 million of transaction and integration costs.
- Backlog increased from December 31, 2021 as demand exceeded shipments. Inventory rose to $553.3 million from $512.7 million.
Outlook, commentary and risks
Management expects strong demand to continue through 2022. It projected revenue growth of 5.0%–8.0% for Q2 and 9.5%–12.0% for full-year 2022; expected growth from existing businesses was 2.0%–5.0% and 6.0%–8.5%, respectively. The filing provides no clear full-year earnings or EPS guidance.
Management said supply-chain, logistics and inflationary pressures were expected to persist through 2022. Price increases exceeded inflation in purchased materials during Q1, but availability of electronic components, production costs and logistics remained challenges. COVID-19 restrictions in China reduced production and shipments; management warned further or extended shutdowns could materially adversely affect future results. China sales from existing businesses declined at a low-double-digit rate. Fortive temporarily suspended commercial operations in Russia except for certain ASP sterilization-product sales; Russia and Ukraine together represented less than 1% of 2021 revenue, and Russian net assets were approximately $15 million. The filing states the eventual financial impact of the pandemic and Russia-Ukraine conflict could not be quantified.
Other identified risks include demand and market cyclicality, supply dependence, competition, foreign exchange, geopolitical and trade developments, acquisition integration, cybersecurity, regulatory and legal matters, taxes, and significant debt. Management reported no material change to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether Fortive can convert its elevated backlog into shipments amid component shortages, China restrictions and logistics constraints.
- How much reported growth and future profitability depend on acquisitions, and whether acquired businesses improve margins as integration costs and amortization evolve.
- Commercial-paper refinancing needs and debt maturity timing, particularly the delayed-draw term loan due 2022, alongside cash and facility availability.
- Whether pricing continues to offset inflation and whether full-year revenue guidance remains achievable under the stated geopolitical and operating risks.