Fortive Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2020. Amounts are in U.S. dollars; financial figures are in millions except per-share amounts. Fortive reported two segments: Professional Instrumentation and Industrial Technologies.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $1,571.2 | $1,864.7 | $3,284.7 | $3,457.6 |
| Gross profit | $814.3 | $904.0 | $1,690.1 | $1,716.7 |
| Gross margin | 51.8% | 48.5% | 51.5% | 49.7% |
| Operating profit | $191.1 | $249.5 | $310.7 | $466.8 |
| Operating margin | 12.2% | 13.4% | 9.5% | 13.5% |
| Net earnings | $130.0 | $174.6 | $171.9 | $339.0 |
| Diluted EPS | $0.33 | $0.46 | $0.40 | $0.90 |
- Q2 sales declined 15.7% year over year; sales from existing businesses fell 16.8%, with acquisitions contributing 2.7 percentage points and currency reducing growth by 1.6 points. For the first half, sales declined 5.0%; existing-business sales fell 10.8%.
- Q2 net earnings attributable to common stockholders were $112.8 million, after $17.2 million of mandatory preferred dividends. Six-month common earnings were $137.4 million.
- Operating cash flow was $670.2 million for the first half, compared with $415.0 million a year earlier. Capital expenditures were $59.5 million, and net cash used in investing activities was $65.2 million.
- Cash and equivalents were $1,063.0 million at June 26, 2020, versus $1,205.2 million at year-end 2019. Total debt carrying value was $5,685.0 million, including $998.8 million classified as current; the company reported $2.0 billion available under its revolving credit facility and no outstanding borrowings under it.
- Current assets were $3,250.4 million and current liabilities were $2,876.4 million at quarter-end.
Material changes and notable items
- COVID-19 reduced demand across geographies and end markets. Q2 segment sales were $1,037.5 million for Professional Instrumentation, down 11.0%, and $533.7 million for Industrial Technologies, down 23.7% year over year on a GAAP basis.
- Professional Instrumentation’s Q2 operating margin increased to 13.1% from 11.1%, supported by acquisition-related comparisons and cost reductions. Industrial Technologies’ margin fell to 15.5% from 20.7%, reflecting volume and mix pressure and Vontier separation costs.
- First-half operating profit included an $85.3 million non-cash goodwill impairment for the Telematics reporting unit, recorded in Q1 and attributed to COVID-related deterioration in its forecast. The impairment reduced six-month operating margin by a reported 250 basis points.
- Fortive adopted the expected-credit-loss standard on January 1, 2020, increasing the allowance for credit losses by $40.0 million and reducing opening retained earnings by $31.3 million after tax.
- Fortive continued its proposed separation of Transportation Technologies and Franchise Distribution into Vontier. Separation timing and structure depend in part on capital markets and the pandemic; Vontier businesses remained in continuing operations in this filing.
Outlook, risks and liquidity
- Management expected Q3 2020 year-over-year sales to decline 5%–8%, with operating profit decrementals of approximately 35%. It anticipated sequential sales improvement in each significant geography, with North America and Asia improving faster than Europe. The filing did not provide full-year earnings or sales guidance.
- Management cited recurring-revenue software, healthcare, and businesses with longer cycles and strong backlogs as relatively more resilient. Short-cycle industrial businesses were expected to remain more challenged.
- Fortive reported more than $100 million of savings from cost actions in Q2 and planned continued labor, discretionary-spending, supply-chain, and facility cost reductions, while emphasizing cash generation.
- Commercial-paper market disruption led Fortive to replace outstanding commercial paper with term borrowing. April credit amendments relaxed leverage limits temporarily, raised certain borrowing-rate floors and margins, and extended the $1.0 billion delayed-draw loan maturity to May 2021. Fortive said it was in compliance with covenants at quarter-end.
- Management said liquidity was sufficient for the foreseeable future, while identifying risks from pandemic duration and severity, customer demand and collections, supply-chain disruption, capital-market access, and the timing or completion of the Vontier separation. It had not experienced significant supply constraints as of the report date but warned disruptions could arise.
- Fortive expected 2020 capital spending of approximately $80 million–$100 million. It also expected CARES Act provisions to provide short-term liquidity, including deferred payroll taxes; the company deferred about $15 million of payroll taxes and $10 million of estimated federal income tax payments during Q2.
Important facts for investors to verify
- Whether demand recovery supports the Q3 sales and decremental outlook, particularly in short-cycle industrial markets and Vontier-related businesses.
- Whether cost savings can offset lower volumes without materially affecting operations, growth investment, or customer service.
- Telematics goodwill valuation assumptions and whether further deterioration could trigger additional impairment charges.
- Refinancing and repayment plans for near-term debt, covenant headroom, and the effect of separation timing on liquidity and leverage.
- Whether customers’ ability to pay worsens; the filing reports a $125.1 million allowance for credit losses at June 26, 2020, including the $40.0 million adoption adjustment.
- Progress, costs, timing, and expected benefits of the proposed Vontier separation, which remain subject to uncertainty.