Fortive Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended April 1, 2016. Fortive operates Professional Instrumentation and Industrial Technologies businesses. The prior-year period reflects combined, pre-separation results allocated from Danaher; those results may not represent Fortive as a standalone company. Fortive separated from Danaher on July 2, 2016.
Financial results
| Metric | Q1 2017 | Prior comparable period |
|---|---|---|
| Sales | $1,535.2 million | $1,474.7 million |
| Gross profit / margin | $744.0 million / 48.5% | $695.2 million / 47.1% |
| Operating profit / margin | $294.9 million / 19.2% | $263.0 million / 17.8% |
| Net earnings | $199.7 million | $182.0 million |
| Diluted EPS | $0.57 | $0.53 |
| Operating cash flow | $148.3 million | $177.2 million |
Sales increased 4.1% reported and 4.9% from existing businesses; acquisitions and separation-related effects contributed 0.2%, while currency reduced growth by 1.0%. The effective tax rate declined to 26.7% from 30.8%. Q1 interest expense was $22.6 million; the prior period had no reported interest expense, as Fortive was then part of Danaher’s centralized financing arrangements.
At March 31, 2017, cash and equivalents were $817.6 million and long-term debt was $3,262.7 million, implying net debt of about $2.45 billion. Debt decreased from $3,358.0 million at December 31, 2016. Current assets were $2,517.4 million and current liabilities $1,401.0 million. Fortive reported compliance with debt covenants, no revolver borrowings, and $1.5 billion available under its revolving credit facility, with approximately $279 million supporting commercial paper.
Changes and operating performance
- Professional Instrumentation sales rose 2.7% to $716.1 million; operating profit increased to $158.0 million and margin rose to 22.1% from 20.9%.
- Industrial Technologies sales rose 5.4% to $819.1 million; operating profit increased to $152.6 million and margin rose to 18.6% from 16.8%.
- Company operating margin improved 140 basis points, attributed mainly to higher volumes, prior-year restructuring and productivity savings, and lower amortization, partly offset by growth investments and currency effects.
- Operating cash flow fell about 16% year over year. Management cited working-capital movements, including cash use from receivables, inventories and payables, as well as timing of tax and other payments.
Outlook, risks and notable items
- Management expected existing-business sales to grow year over year in Q2 2017, while cautioning about macroeconomic and geopolitical uncertainty.
- Full-year 2017 capital spending was expected to be $125–$135 million, subject to business conditions. Management expected significant tax payments in Q2.
- Management said U.S. EMV-related outdoor payment-system upgrades should continue to support Transportation Technologies growth for several years.
- Risks highlighted include economic and market cyclicality, competition and pricing, acquisition execution and integration, product and technology development, foreign exchange, debt, tax exposure, litigation, regulation, cybersecurity, supply constraints, and separation-related indemnification and tax matters. The filing reported no material change in risk factors during the quarter.
- Fortive declared a $0.07-per-share quarterly dividend, paid March 31, 2017, and declared another $0.07 dividend payable June 30, 2017.
- Cash was substantially held outside the United States; repatriation of some foreign cash could be restricted or subject to U.S. tax. No goodwill impairment trigger was identified during the quarter.
Important facts for investors to verify
- Assess comparability carefully: Q1 2016 was a Danaher-era combined period, while Q1 2017 was consolidated Fortive reporting.
- Review the drivers and sustainability of margin expansion, including productivity savings, lower amortization, and ongoing growth-investment costs.
- Monitor working-capital conversion and cash flow, which declined despite higher earnings.
- Track debt, commercial-paper refinancing access, interest costs, and the availability of the revolving credit facility.
- Confirm progress on the expected Q2 tax payments, 2017 capital-spending range, and adoption plans for revenue-recognition and other accounting standards.