Fortive Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 29, 2019; comparisons are with the three months ended March 30, 2018. Fortive reports continuing operations in Professional Instrumentation and Industrial Technologies. The Automation & Specialty businesses split off in October 2018 are presented as discontinued operations.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $1,592.9 million | $1,492.2 million |
| Gross profit / margin | $812.7 million / 51.0% | $766.3 million / 51.4% |
| Operating profit / margin | $217.3 million / 13.6% | $277.9 million / 18.6% |
| Continuing-operations net earnings | $164.0 million | $214.0 million |
| Diluted continuing-operations EPS | $0.43 | $0.61 |
| Net cash from continuing operating activities | $161.2 million | $130.8 million |
| Capital expenditures | $24.0 million | $25.9 million |
Net earnings were $164.4 million, including $0.4 million from discontinued operations; Q1 2018 net earnings included $47.2 million from discontinued operations. Q1 2019 common-stockholder earnings also reflected $17.3 million of mandatory convertible preferred dividends. Gross margin fell 0.4 percentage points, while operating margin fell 5.0 points.
- Growth: Sales rose 6.7%; management attributed 3.7% to existing businesses, 5.8% to acquisitions, and negative 2.8% to currency.
- Segments: Professional Instrumentation sales were $947.3 million, up 8.7%; operating profit was $136.2 million versus $206.4 million. Industrial Technologies sales were $645.6 million, up 4.0%; operating profit was $105.3 million versus $94.2 million.
- Cash and debt: Cash and equivalents were $3,728.9 million at March 29. Debt carrying value totaled $5,783.7 million, including $1,055.4 million current and $4,728.3 million long-term. The company reported $1.1 billion of debt scheduled to mature within 12 months.
- Liquidity: The $2.0 billion revolving facility had no borrowings outstanding; approximately $1.1 billion supported commercial paper, leaving $902 million available. Management said liquidity was sufficient for foreseeable needs.
Material changes and notable items
- Operating profit declined $60.6 million year over year. Management cited acquisition-related dilution and transaction costs, including costs preparing for ASP integration, higher amortization, unfavorable mix, and higher materials costs associated partly with inflation and tariffs.
- SG&A increased to $486.4 million from $388.5 million, including ASP preparation and integration costs, acquisition-related amortization, and growth investment. Research and development expense rose to $109.0 million from $99.9 million.
- On February 22, Fortive issued $1.4 billion principal amount of 0.875% convertible notes due 2022; on March 20 it drew a $1.0 billion variable-rate delayed-draw loan. These financings were intended to fund part of the ASP acquisition. Fortive also repaid a $400 million 2019 delayed-draw loan.
- On April 1, after quarter-end, Fortive paid $2.7 billion to acquire Advanced Sterilization Products from Johnson & Johnson. At quarter-end, the reported cash balance preceded this payment.
- Operating lease accounting adoption added $166.4 million of right-of-use assets and $168.4 million of lease liabilities; the filing says adoption materially affected the balance sheet but not earnings or cash flows.
Outlook, risks, and contingencies
- Management expected existing-business sales to continue growing year over year during the remainder of 2019, while monitoring macroeconomic and geopolitical uncertainty, including Brexit and U.S.-China trade policy.
- Expected 2019 capital spending was approximately $150–$160 million, including about $35 million of one-time ASP integration capital expenditures.
- Management identified exposure to economic and market cyclicality, competition, tariffs and trade relations, currency movements, acquisitions and integration, regulation, litigation, supply constraints, cybersecurity, and potential goodwill or intangible-asset impairment.
- The company reported compliance with debt covenants, no material change to previously disclosed risk factors, and effective disclosure controls. No goodwill impairment triggering events were identified in the quarter.
Investor verification priorities
- Confirm the post-quarter-end ASP acquisition funding, integration costs, and resulting cash and debt position.
- Assess whether existing-business growth and the segment trends persist, particularly Professional Instrumentation’s margin pressure and Industrial Technologies’ growth.
- Track debt maturities, commercial-paper refinancing capacity, and the terms and potential dilution or cash-settlement effects of the convertible notes and preferred stock.
- Review the assumptions behind management’s 2019 growth and capital-spending outlook, including exposure to tariffs, trade uncertainty, and acquisition-related costs.