VONTIER CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of our financial statements
with a narrative from the perspective of management and is intended to help the
reader understand the results and operations and financial condition of the
Company. Our MD&A should be read in conjunction with the MD&A and Consolidated
and Combined Financial Statements included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2021 (the "2021 Annual Report on Form 10-K").
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to theSecurities and Exchange Commission ("SEC"), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are "forward-looking statements" within the meaning ofthe United States federal securities laws. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date of the Report, document, press release, webcast, call, materials or other communication in which they are made. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following: •The ongoing effects of the COVID-19 pandemic on our global operations and the operations of our customers, suppliers, and vendors is having, and is expected to continue to have, a significant impact on our business and results of operations. •Changes in, or status of implementation of, industry standards and governmental regulations, including interpretation or enforcement thereof, may reduce demand for our products or services, increase our expenses or otherwise adversely impact our business model. •Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation. •The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities. •Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation. •International economic, political, war or hostility, legal, compliance, supply chain, epidemic and business factors could negatively affect our financial statements. •We may be required to recognize impairment charges for our goodwill and other intangible assets. •We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows. •Our restructuring actions could have long-term adverse effects on our business. •As of the date of this quarterly report, we have outstanding indebtedness of approximately$2.6 billion and the ability to incur an additional$736.0 million of indebtedness under the Revolving Credit Facility, as defined above, and in the future we may incur additional indebtedness. This indebtedness could adversely affect our businesses and our ability to meet our obligations and pay dividends. •We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. •Any inability to consummate acquisitions at our historical rates and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price. •Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements. •Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. 32 -------------------------------------------------------------------------------- •Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements. •Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations. •If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies. •Potential indemnification liabilities to Fortive pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows. In addition, there can be no assurance that Fortive's performance of its indemnity obligations to us under the separation agreement regarding certain liabilities will be sufficient. •If there is a determination that the distribution, together with certain related transactions, is taxable forU.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying Fortive's private letter ruling from theIRS or tax opinion are incorrect or for any other reason, then Fortive and its stockholders could incur significantU.S. federal income tax liabilities, and we could also incur significant liabilities. •We may be affected by significant restrictions, including on our ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities. •Fortive may compete with us. •We may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect our businesses. See "Item 1.A. Risk Factors" in our 2021 Annual Report on Form 10-K and Part II - Item 1A. Risk Factors" in this Form 10-Q for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise. OVERVIEW GeneralVontier Corporation ("Vontier ," the "Company," "we," "us," or "our") is a global industrial technology company that focuses on critical technical equipment, components, and software and services for manufacturing, repair and servicing in the mobility infrastructure industry worldwide. We supply a wide range of solutions spanning advanced environmental sensors; fueling equipment; field payment hardware; point-of-sale; workflow and monitoring software; vehicle tracking and fleet management; software solutions for traffic light control; and vehicle mechanics' and technicians' equipment. We market our products and services to retail and commercial fueling operators, convenience store and in-bay car wash operators, tunnel car wash businesses, commercial vehicle repair businesses, municipal governments and public safety entities and fleet owners/operators on a global basis. Our research and development, manufacturing, sales, distribution, service and administrative operations are located in more than 30 countries acrossNorth America ,Asia Pacific ,Europe andLatin America . In addition, we sell our products in these countries and multiple other markets in these regions. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure, which includeEastern Europe , theMiddle East ,Africa ,Latin America , andAsia , with the exception ofJapan andAustralia . 33 --------------------------------------------------------------------------------
COMPANY PERFORMANCE AND OUTLOOK
Company performance
On an overall basis, sales of our hardware and software products and services increased during the three and nine months endedSeptember 30, 2022 . As compared to the comparable periods of 2021, aggregate year-over-year total sales increased 2.5% and 5.1% for the three and nine months endedSeptember 30, 2022 , respectively. Sales from existing businesses decreased 1.9% and 0.2% during the three and nine months endedSeptember 30, 2022 , respectively, as compared to the comparable periods in 2021. The increase in total sales during the three months endedSeptember 30, 2022 was primarily driven by our acquisition ofDRB Systems, LLC ("DRB"), which is part of our mobility technologies platform, as well as our diagnostics and repair portfolio, which experienced strong demand across most product categories. The Company saw strong demand for our compressed natural gas technology within our alternative energy solutions and aftermarket within our mobility technologies platform, but was impacted by the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the Europay, Mastercard andVisa ("EMV") global standards. Changes in foreign currency exchange rates negatively impacted our sales growth by 3.3% during the three months endedSeptember 30, 2022 compared to the comparable period in 2021. The increase in total sales during the nine months endedSeptember 30, 2022 was primarily driven by our acquisition of DRB. Our mobility technologies platform had strong demand for alternative energy but was impacted by the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the Europay, Mastercard andVisa ("EMV") global standards as well as the end ofMexico fiscal regulation upgrades. Additionally, total sales increased due to our diagnostics and repair technologies platform, which experienced strong demand across most product categories, most notably specialty tools and diagnostics as well as the impact of price increases by the Company across its portfolio. Changes in foreign currency exchange rates negatively impacted our sales growth by 2.5% during the nine months endedSeptember 30, 2022 compared to the comparable period in 2021. In developed markets, year-over-year total sales increased at a rate in the mid single digits and sales from existing businesses declined at rate in the low single digits for the three months endedSeptember 30, 2022 . The increase in total sales was primarily due to an increase inNorth America related to the impact of our acquisition of DRB and strong demand for our compressed natural gas technology within our alternative energy solutions which was partially offset by declines inWestern Europe . In high growth markets, total sales and sales from existing businesses for the three months endedSeptember 30, 2022 declined at a rate in the low double digits and low single digits, respectively. The decline in total sales was primarily due to timing for dispenser and environmental deliveries inIndia and the negative impact of foreign exchange rates. In developed markets, year-over-year total sales increased at a rate in the high single digits for the nine months endedSeptember 30, 2022 . Sales from existing businesses for the nine months endedSeptember 30, 2022 were up slightly. The increase in total sales was primarily due to an increase inNorth America related to the impact of our acquisition of DRB and strong demand for our compressed natural gas technology within our alternative energy solutions which was partially offset by declines inWestern Europe . In high growth markets total sales and sales from existing businesses decreased at a rate in the low double digits and mid single digits, respectively, driven by declines inLatin America due to the end ofMexico fiscal regulation upgrades and theMiddle East andAfrica .
Outlook
We expect overall sales and sales from existing businesses to grow on a year-over-year basis in 2022. Additionally, this outlook is subject to various assumptions and risks, including but not limited to the resilience and durability of the economies ofthe United States and other critical regions, ongoing challenges with global logistics and supply chain including the availability of electronic components, the impact of the COVID-19 pandemic, the impact of the Russia Ukraine Conflict, market conditions in key end product segments, and the impact of energy disruption inEurope .
Our outlook is subject to the factors below and other uncertainties as identified in the “Information Regarding Forward-Looking Statements” section above.
We anticipate that supply chain and inflationary pressures will persist throughout 2022 and that although our backlog may decline compared to 2021, it may remain elevated compared to historical levels. At the end of August, one of our key electronic suppliers for multiple boards that are part of every dispenser shipped inthe United States , suffered a cyberattack that brought down all their manufacturing capability for approximately three weeks, which impacted our Greensboro factory while we mitigated the issue. We will continue to deploy the Vontier Business System to actively manage production challenges, 34 --------------------------------------------------------------------------------
work with customers and suppliers to minimize disruptions and use price increases and other countermeasures to offset inflationary pressures.
We continue to monitor the macroeconomic and geopolitical conditions which may impact our business, including the COVID-19 pandemic, monetary and fiscal policies, international trade and relations between theU.S. ,China and other nations, and investment and taxation policy initiatives being considered inthe United States and by theOrganization for Economic Co-operation and Development . We also continue to monitor the Russia Ukraine Conflict and the impact on our business and operations. As of the filing date of this report, we do not believe they are material. RESULTS OF OPERATIONS
Comparison of operating results
Three Months Ended Nine Months Ended ($ in millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Total sales $ 788.0$ 768.5 $ 2,312.5$ 2,200.5 Total cost of sales (428.1) (422.1) (1,269.2) (1,223.8) Gross profit 359.9 346.4 1,043.3 976.7 Operating costs: Selling, general and administrative expenses ("SG&A") (174.7) (147.8) (517.4) (458.1) Research and development expenses ("R&D") (35.0) (31.2) (104.4) (97.3) Operating profit $ 150.2$ 167.4 $ 421.5$ 421.3 Gross profit as a % of sales 45.7 % 45.1 % 45.1 % 44.4 % SG&A as a % of sales 22.2 % 19.2 % 22.4 % 20.8 % R&D as a % of sales 4.4 % 4.1 % 4.5 % 4.4 % Operating profit as a % of sales 19.1 % 21.8 % 18.2 % 19.1 % Components of Sales Growth % Change Three Months % Change Nine Months Ended September 30, 2022 Ended September 30, 2022 vs. Comparable 2021 vs. Comparable 2021 Period Period Total revenue growth (GAAP) 2.5 % 5.1 % Existing businesses (Non-GAAP) (1.9) % (0.2) % Acquisitions (Non-GAAP) 7.7 % 7.8 % Currency exchange rates (Non-GAAP) (3.3) % (2.5) % Total sales within our mobility technologies platform increased low single digits during the three months endedSeptember 30, 2022 as compared to the comparable period of 2021 which was primarily attributable to our acquisition of DRB. Our sales from existing businesses in our mobility technologies platform decreased low single digits primarily due to the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the EMV global standards which were partially offset by strong demand for our compressed natural gas technology within our alternative energy solutions. Total sales within our mobility technologies platform increased mid single digits during the nine months endedSeptember 30, 2022 as compared to the comparable period of 2021 which was primarily attributable to our acquisition of DRB. Our sales from existing businesses in our mobility technologies platform were down slightly primarily due to the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the EMV global standards as well as 35 --------------------------------------------------------------------------------
the end of
Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased low single digits during the three months endedSeptember 30, 2022 as compared to the comparable period in 2021 driven primarily by continued strong demand across most product categories, most notably hardline and powered tools. Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased low single digits during the nine months endedSeptember 30, 2022 as compared to the comparable period in 2021. The results of our diagnostics and repair technologies platform were driven primarily by continued strong demand across most product categories, most notably specialty and hardline tools. The impact on the Company of price increases are reflected as a component of the change in sales from existing businesses, and year-over-year price increases contributed 5.9% and 5.3% to sales growth during the three and nine months endedSeptember 30, 2022 versus the comparable periods in 2021. The impact of currency translation decreased reported sales 3.3% and 2.5% on a year-over-year basis during the three and nine month periods endedSeptember 30, 2022 , respectively, primarily due to the unfavorable impact of the strengthening of theU.S. dollar against most other major currencies in 2022 compared to the comparable periods of 2021. Cost of Sales Cost of sales increased$6.0 million for the three months endedSeptember 30, 2022 , as compared to the comparable period in 2021, which was due primarily to the impact of acquisitions as well as increased costs due to inflationary pressures.
The year-over-year increase of
Gross profit
Gross profit increased during the three months endedSeptember 30, 2022 , as compared to the comparable period in 2021, which was primarily due to the impact of the Company's price increases and the impact of the acquisition of DRB and was partially offset by the increased costs due to inflationary pressures. The year-over-year increase in gross profit for the nine months endedSeptember 30, 2022 as compared to the comparable period in 2021 is primarily due to the impact of the Company's price increases and the impact of the acquisition of DRB and was partially offset by the increased costs due to inflationary pressures. The 60 and 70 basis point increases in gross profit margin during the three and nine months endedSeptember 30, 2022 , respectively, as compared to the comparable periods in 2021 is primarily due to price increases and the impact of the DRB acquisition which were partially offset by increased costs due to inflationary pressures.
Operating costs and other expenses
SG&A expenses increased by$26.9 million , or 300 basis points as a percentage of sales, during the three months endedSeptember 30, 2022 , as compared to the comparable period in 2021, primarily due to the impact of the acquisition of DRB. SG&A expenses increased by$59.3 million , or 160 basis points as a percentage of sales, during the nine months endedSeptember 30, 2022 , as compared to the comparable period in 2021, primarily due to the impact of the acquisition of DRB. R&D expenses (consisting principally of internal and contract engineering personnel costs) increased$3.8 million and$7.1 million during the three and nine months endedSeptember 30, 2022 , respectively, as compared to the comparable periods in 2021, primarily due to the impact of our acquisitions of DRB and Driivz. R&D expense as a percentage of sales was relatively flat during the three and nine months endedSeptember 30, 2022 . 36 --------------------------------------------------------------------------------
Operating profit
Operating profit margin decreased by 270 basis points in the three months ended
Year-over-year operating profit margin comparisons were favorably impacted by:
•The year-over-year impacts of sales volumes, price, sales mix, other operating impacts and changes in foreign currency exchange rates - favorable 20 basis points •The year-over-year operating effect of our acquisitions, excluding amortization - favorable 50 basis points
Year-over-year operating profit margin comparisons were primarily impacted by the following adverse factors:
• Increase in costs due to inflationary pressures – 340 unfavorable basis points
Operating profit margin decreased by 90 basis points in the nine months ended
Year-over-year operating profit margin comparisons were favorably impacted by:
•The year-over-year impacts of sales volumes, price, sales mix, other operating impacts and changes in foreign currency exchange rates - favorable 190 basis points •The year-over-year operating effect of our acquisitions, excluding amortization - favorable 60 basis points
Year-over-year operating profit margin comparisons were primarily impacted by the following adverse factors:
• Increase in costs due to inflationary pressures – 340 unfavorable basis points
NON-GAAP FINANCIAL MEASURES
Sales of existing businesses
We define sales from existing businesses as total sales excluding (i) sales from acquired and divested businesses; (ii) the impact of currency translation; and (iii) certain other items. •References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations. •The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales from acquired businesses) and (b) the period-to-period change in sales, including foreign operations, (excluding sales from acquired businesses) after applying the current period foreign exchange rates to the prior year period. •The portion of sales attributable to other items is calculated as the impact of those items which are not directly correlated to sales from existing businesses which do not have an impact on the current or comparable period.
Sales by existing companies should be viewed as supplementing, not replacing or superior to, total sales, and may not be comparable to similarly titled measures reported by other companies.
Management believes that reporting the non-GAAP financial measure of sales from
existing businesses provides useful information to investors by helping identify
underlying growth trends in our business and facilitating easier comparisons of
our sales performance with our performance in prior and future periods and to
our peers. We exclude the effect of acquisitions and divestiture-related items
because the nature, size and number of such transactions can vary dramatically
from period to period and between us and our peers. We exclude the effect of
currency translation and certain other items from sales from existing businesses
because these items are either not under management's control or relate to items
not directly correlated to sales from existing businesses. Management believes
the exclusion of these items from sales from existing businesses may facilitate
assessment of underlying business trends and may assist in comparisons of
long-term performance. References to sales volume refer to the impact of both
price and unit sales.
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INCOME TAXES General Income tax expense and deferred tax assets and liabilities reflect management's assessment of future taxes expected to be paid on items reflected in our financial statements. Our effective tax rate can be affected by, among other items, changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws.
Comparison of the three and nine month periods ended
Our effective tax rate for the three and nine months endedSeptember 30, 2022 was 26.2% and 21.8%, respectively, as compared to 19.6% and 22.2% for the three and nine months endedOctober 1, 2021 . The year-over-year increase in the effective tax rate for the three months endedSeptember 30, 2022 as compared to the comparable period in the prior year was primarily due to the recording of our investment in Tritium at fair value. The year-over-year decrease in the effective tax rate for the nine months endedSeptember 30, 2022 as compared to the comparable period in the prior year was primarily due to an increase in non-taxable income related to our previously held equity interest in Driivz and a decrease in state taxes. Our effective tax rate for both periods in 2022 and 2021 differs from theU.S. federal statutory rate of 21% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from theU.S. federal statutory rate, which for the nine months endedSeptember 30, 2022 , was offset by the increase in non-taxable income related to our previously held equity interest in Driivz. COMPREHENSIVE INCOME Comprehensive income decreased by$115.1 million during the three months endedSeptember 30, 2022 as compared to the comparable period in 2021 primarily due to unfavorable changes in foreign currency adjustments of$37.7 million and net earnings that were lower by$77.2 million . Comprehensive income decreased by$65.3 million during the nine months endedSeptember 30, 2022 as compared to the comparable period in 2021 primarily due to net earnings that were higher by$33.0 million and unfavorable changes in foreign currency adjustments of$98.2 million .
CASH AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity will be sufficient to allow us to continue to invest in existing businesses, consummate strategic acquisitions, make interest payments on our outstanding indebtedness, and manage our capital structure on a short and long-term basis.
Financing and capital operations 2022
In the nine months ended
• Entry and settlement of a
• Repurchased 1.6 million shares on the open market which are held as
Stock.
Our long-term debt requires, among others, that we maintain certain financial covenants, and we were in compliance with all of these covenants as ofSeptember 30, 2022 .
See also Note 5. Funding to the condensed consolidated financial statements for more information.
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