Fortive Corporation — Q1 2018 Form 10-Q
Business context and period: Fortive is a diversified industrial company reporting Professional Instrumentation and Industrial Technologies segments. This summary covers the three months ended March 30, 2018, compared with the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2017. Figures are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Prior-year period | Change / context |
|---|---|---|---|
| Sales | $1,740.7 million | $1,535.2 million | +13.4%; existing-business growth 2.6%, acquisitions 7.3%, currency 3.5% |
| Gross profit / margin | $870.8 million / 50.0% | $744.0 million / 48.5% | Margin increased 150 basis points |
| Operating profit / margin | $338.2 million / 19.4% | $295.6 million / 19.3% | Margin increased 10 basis points |
| Net earnings | $261.2 million | $199.7 million | Up $61.5 million |
| Diluted EPS | $0.74 | $0.57 | Up $0.17 |
| Effective tax rate | 16.5% | 26.7% | Lower primarily due to the U.S. tax law change and other tax benefits |
| Operating cash flow | $171.0 million | $148.3 million | Up about 15% |
| Capital expenditures | $31.4 million | $26.8 million | Full-year 2018 estimate: $125–$135 million |
Segments
- Professional Instrumentation: Sales were $871.7 million, up 21.7% (existing businesses +5.5%); operating profit was $206.4 million and margin was 23.7%, up 160 basis points. Growth was broad-based, with strength in field solutions, sensing and product realization, alongside some weaker service and energetic-materials demand.
- Industrial Technologies: Sales were $869.0 million, up 6.1% (existing businesses flat); operating profit was $158.3 million and margin was 18.2%, down 50 basis points. Automation & Specialty Components grew strongly, while Transportation Technologies declined, principally due to the extension of the U.S. EMV credit-card liability shift.
Financial position and liquidity
- At March 30, cash and equivalents were $1,015.7 million, versus $962.1 million at year-end. Current assets were $3,079.7 million and current liabilities $1,461.4 million.
- Long-term debt was $3,996.9 million, down from $4,056.2 million at year-end. Cash less reported long-term debt was approximately $2,981 million of net debt; commercial paper is included in long-term debt on the balance sheet.
- Commercial paper outstanding totaled about $880.6 million. The $1.5 billion revolving credit facility had no direct borrowings; approximately $881 million backed commercial paper, leaving about $0.6 billion of additional facility capacity. Fortive reported compliance with debt covenants.
- Operating cash flow was $171.0 million; investing activities used $39.0 million and financing activities used $94.2 million. Cash flow benefited from higher earnings but was partly offset by working-capital and other liability outflows. Cash increased by $53.6 million, including a positive $15.8 million foreign-exchange effect.
- Cash dividends paid were $24.3 million; a $0.07-per-share quarterly dividend was declared for payment in June 2018. Substantially all cash was held outside the United States.
Material changes, outlook and risks
- Management expected existing-business sales to continue growing year over year during the remainder of 2018. No specific full-year revenue or earnings guidance was provided in the supplied filing text.
- On March 7, 2018, Fortive agreed to combine four Automation & Specialty businesses with Altra Industrial Motion in a tax-efficient Reverse Morris Trust transaction. Fortive expected approximately $1.4 billion in cash and debt retirement, while shareholders were to receive 35 million Altra shares, representing about 54% of Altra after closing. The businesses generated approximately $907 million of 2017 revenue. Closing was expected by year-end 2018, subject to approvals and other conditions; completion and expected benefits were not assured.
- Management attributed overall growth to demand, sales initiatives and new products, with existing-business growth in both developed and high-growth markets. It cited macroeconomic and geopolitical uncertainty, including possible changes in trade policy, as ongoing considerations.
- The transaction, international operations and trade restrictions, competition, acquisition integration, debt, foreign exchange, taxes, litigation, product risks and potential goodwill or intangible-asset impairment were among the risks identified. Management said liquidity should be sufficient for foreseeable needs. The company repatriated $75 million during the quarter and expected to repatriate another $200 million in 2018, subject to estimated foreign remittance taxes.
- Fortive adopted Topic 606 revenue recognition on January 1, 2018 using the modified retrospective method; the opening retained-earnings adjustment and quarterly revenue impact were immaterial. Favorable adjustments to provisional Tax Cuts and Jobs Act estimates reduced Q1 tax expense by $4.2 million.
Important facts for investors to verify
- Whether the Altra transaction closed on the expected timeline, its final cash and debt-retirement consideration, and the resulting ownership and tax treatment.
- How much of reported sales growth is sustainable: Q1 total growth was 13.4%, while existing-business growth was 2.6%; acquisition and currency contributions were material.
- Whether Industrial Technologies’ flat existing-business sales and Transportation Technologies weakness persist, and whether Professional Instrumentation growth and margin gains continue.
- Cash conversion and working-capital trends, including the effects of foreign-held cash, planned repatriations and debt refinancing through commercial paper.
- Future tax expense as TCJA estimates are finalized, and progress against the $125–$135 million 2018 capital-spending estimate.