Fortive Corp. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K, dated June 16, 2016, details significant financing activities by Fortive Corporation, a wholly owned subsidiary of Danaher Corporation. The filings relate to the preparation for the planned separation of Fortive from Danaher. The primary events involve the issuance of senior unsecured notes and the establishment of a new credit facility to fund the asset contribution from Danaher and support general corporate purposes.
Key Financial Metrics and Capital Structure
The filing outlines a substantial increase in Fortive's debt capacity and obligations:
- Senior Unsecured Notes Issued: Total aggregate principal amount of $2.5 billion across four tranches:
- $300 million of 1.800% Notes due 2019.
- $750 million of 2.350% Notes due 2021.
- $900 million of 3.150% Notes due 2026.
- $550 million of 4.300% Notes due 2046.
- Credit Facility Established: A new Credit Agreement provides:
- $500 million Term Loan Facility (borrowed June 21, 2016).
- $1.5 billion Revolving Credit Facility (undrawn at closing).
- Guarantees: Danaher Corporation fully and unconditionally guarantees the Notes and the Credit Agreement obligations. These guarantees are set to terminate automatically upon the completion of the Separation.
- Financial Covenants: The Credit Agreement requires a Consolidated Net Leverage Ratio of 3.50 to 1.00 or less (increasing to 3.75 to 1.00 for four quarters post-acquisition) and a Consolidated Interest Coverage Ratio of 3.50 to 1.00 or more.
Material Changes and Unusual Items
The filing represents a material change in Fortive's capital structure, transitioning from a subsidiary with no independent public debt to an entity with $2.5 billion in public notes and a $2 billion credit facility. Key unusual items include:
- Special Mandatory Redemption: If the Separation is not completed by September 30, 2016, the Company must redeem the Notes at 101% of the aggregate principal amount plus accrued interest. Similarly, the Revolving Loan Facility would expire, and the Term Loan would become due on October 31, 2016.
- Registration Default Penalty: If the Company fails to file a registration statement for an exchange offer by August 14, 2017, the interest rate on the Notes will increase by 0.25% annually, with an additional 0.25% increase for each subsequent 90-day period of default.
- Change of Control: A change of control triggering event (defined as a Change of Control and a Rating Event) requires the Company to offer to purchase the Notes at 101% of principal plus accrued interest.
Guidance, Outlook, and Risks
Management intends to use the net proceeds from the Notes and the Term Loan Facility to pay Danaher for the contribution of assets in connection with the Separation, pay related fees, and for general corporate purposes. The Revolving Loan Facility is intended to support the commercial paper program.
Risks and Contingencies:
- Separation Timing Risk: The financing structure is contingent on the Separation occurring by September 30, 2016. Failure to meet this deadline triggers mandatory redemption of debt and acceleration of the Term Loan.
- Covenant Compliance: The Company must maintain specific leverage and interest coverage ratios, with testing beginning for the fiscal quarter ending September 30, 2016.
- Event of Default: Standard events of default include payment defaults, covenant breaches, cross-defaults on other indebtedness, and bankruptcy. Upon default, obligations may be accelerated.
Investor Verification Checklist
- Verify the status of the planned Separation from Danaher to ensure the September 30, 2016, deadline is met, avoiding mandatory debt redemption.
- Confirm the initial credit ratings assigned to the Notes and Credit Facility, as interest margins and facility fees are rating-dependent.
- Review the Consolidated Net Leverage Ratio and Interest Coverage Ratio calculations for the quarter ending September 30, 2016, to ensure covenant compliance.
- Monitor the filing status of the registration statement for the exchange offer to avoid the 0.25% annual interest rate penalty.
- Assess the impact of the $2.5 billion in new fixed-rate debt on the Company's future interest expense and cash flow requirements.