Fortive Corporation — Q2 2016 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended July 1, 2016. Fortive operates Professional Instrumentation and Industrial Technologies businesses. It completed its separation from Danaher on July 2, 2016, with Fortive shares beginning regular-way trading on July 5. Historical statements are carve-out financials derived from Danaher’s records; allocated costs and financing may not reflect what Fortive would have incurred as a standalone company.
Financial performance and position
| Metric | Three months ended July 1, 2016 | Six months ended July 1, 2016 |
|---|---|---|
| Sales | $1,555.1 million, versus $1,564.9 million | $3,029.8 million, versus $3,078.4 million |
| Gross profit / margin | $768.1 million / 49.4%, versus $764.8 million / 48.9% | $1,463.3 million / 48.3%, versus $1,495.5 million / 48.6% |
| Operating profit / margin | $322.1 million / 20.7%, versus $335.7 million / 21.5% | $585.1 million / 19.3%, versus $629.8 million / 20.5% |
| Net earnings | $238.9 million, versus $227.4 million | $420.9 million, versus $431.1 million |
| Diluted EPS | $0.69, versus $0.66 | $1.22, versus $1.25 |
- Cash flow: Six-month operating cash flow was $487.8 million, up from $384.8 million. Investing cash outflow was $69.8 million, including $61.4 million of capital expenditures and $12.8 million for acquisitions. Financing provided $69.2 million, after borrowings, a $3.0 billion dividend to Danaher, and net transfers to Danaher.
- Liquidity and debt: At July 1, cash and equivalents were $487.2 million, current assets $2.162 billion, and current liabilities $1.350 billion. Long-term debt was $3.375 billion, including $392.9 million of commercial paper and a $500 million term loan. The company had no revolver borrowings and reported approximately $1.1 billion of additional borrowing capacity. It was in compliance with applicable debt covenants.
- Debt terms: Fortive issued $2.5 billion of senior notes with maturities from 2019 through 2046, and entered a $1.5 billion revolving facility expiring in 2021. The credit agreement requires net leverage below 3.50:1 and interest coverage above 3.50:1, beginning with the quarter ending September 30, 2016.
Material changes versus the prior comparable periods
- Reported sales declined approximately 0.5% in the quarter and 1.5% for the half-year. Existing-business sales declined 0.5% and 1.0%, respectively; currency reduced sales by 0.5% and 1.0%, while acquisitions added 0.5% in each period.
- Professional Instrumentation sales fell 5.0% in the quarter and 5.5% year to date; Industrial Technologies sales grew 3.5% and 2.5%, respectively. Transportation Technologies benefited from demand for dispenser and point-of-sale systems, including U.S. upgrades tied to EMV payment-security deadlines.
- Operating margins fell as lower volumes, the strong U.S. dollar, growth investments, and stand-alone-company preparation costs outweighed pricing and productivity savings. Gross margin improved 50 basis points in the quarter but declined 30 basis points year to date.
- Net earnings rose in the quarter despite lower operating profit, alongside a lower effective tax rate. The six-month effective tax rate was 27.7%, versus 31.5% in 2015; the filing attributes the decrease partly to benefits from resolution of worldwide uncertain tax positions.
- The financing and balance-sheet profile changed substantially in connection with the separation: Fortive raised approximately $3.4 billion of net proceeds and paid Danaher a $3.0 billion dividend. The July 1 cash balance was subject to a final separation-related adjustment.
Outlook, commentary, and risks
- Management expected existing-business sales to grow year over year during the remainder of 2016, while noting macroeconomic and geopolitical uncertainty. The filing does not provide a specific full-year revenue or earnings forecast.
- Expected 2016 capital spending was $110 million to $130 million, subject to business conditions. Management forecast an approximately 30% effective tax rate for the second half of 2016, excluding discrete items.
- Management said operating cash flow and other liquidity sources should support investment, acquisitions, interest payments, and capital structure needs. Most reported cash was held outside the United States; repatriation of some foreign cash could incur U.S. tax.
- Key disclosed exposures include weak or cyclical end markets, competition, currency movements, debt and refinancing access, tax matters, litigation, regulation, product and environmental liabilities, and the risks of operating independently from Danaher. Management reported no material change in the risk factors referenced in the Information Statement.
- Other notable items: $72.3 million related to the separation cash adjustment was reported in prepaid expenses with a corresponding liability to Danaher; warranty liability was $59.7 million. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How post-separation costs, transition-service arrangements, and standalone expenses compare with the historical Danaher allocations in these carve-out statements.
- The final separation-related cash adjustment and the amount of cash available for general corporate use.
- Debt refinancing, commercial-paper access, covenant headroom, and interest costs as Fortive operates independently.
- Whether Professional Instrumentation demand stabilizes and Industrial Technologies’ EMV-related growth persists, alongside the stated 2016 outlook.
- The durability of the lower reported tax rate, including discrete tax benefits and liabilities retained or shared under the tax matters agreement.