Fortive Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Unless noted, financial figures are for continuing operations.
Business context
Fortive is a diversified industrial technology company with two reportable segments: Professional Instrumentation and Industrial Technologies. On September 4, 2019, it announced plans to separate Transportation Technologies and Franchise Distribution into a new public company, Vontier, while retaining its other businesses under Fortive. The separation was expected in the second half of 2020, subject to approvals and other conditions.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Sales | $7,320.0 million | $6,452.7 million |
| Gross profit / margin | $3,680.3 million / 50.3% | $3,321.3 million / 51.5% |
| Operating profit / margin | $1,004.1 million / 13.7% | $1,178.4 million / 18.3% |
| Net earnings from continuing operations | $725.4 million | $918.3 million |
| Diluted continuing-operations EPS | $1.93 | $2.52 |
| Operating cash flow from continuing operations | $1,284.9 million | $1,201.3 million |
| Cash and equivalents at year-end | $1,205.2 million | $1,178.4 million |
| Long-term debt, including current portion | $6,328.4 million | $3,430.3 million |
- Reported sales grew 13.4%; growth from existing businesses was 2.0%, acquisitions contributed 13.2%, and currency reduced growth by 1.8%.
- Professional Instrumentation sales rose 21.1% to $4,427.8 million, principally reflecting acquisitions; existing-business sales declined 0.4%. Segment operating margin fell to 12.4% from 20.4%.
- Industrial Technologies sales rose 3.4% to $2,892.2 million; existing-business sales grew 5.2%. Segment operating margin increased to 19.2% from 18.8%.
- Interest expense, net, increased to $164.2 million from $97.0 million, reflecting higher average debt. Capital expenditures were $112.5 million; management expected approximately $160–$170 million in 2020, excluding the pending separation’s impact.
- Year-end current assets were $3,688.8 million and current liabilities were $3,467.2 million. Fortive reported $2.0 billion of revolving-credit capacity, of which about $1.1 billion supported commercial paper, leaving approximately $851 million available.
Fourth-quarter snapshot and material changes
Q4 2019 sales were $2,002.4 million versus $1,757.5 million in Q4 2018. Operating profit was $295.2 million versus $294.5 million; continuing-operations earnings were $178.8 million versus $240.1 million. Q4 2019 diluted EPS from continuing operations was $0.48 versus $0.66. Q4 discontinued-operations earnings were $14.0 million in 2019; Q4 2018 included a substantial portion of the A&S divestiture gain.
- Annual operating profit declined despite higher sales, with the filing citing acquired-business dilution, amortization and purchase-accounting adjustments, restructuring, and acquisition and separation transaction costs. Margin comparisons also reflected unfavorable mix, higher material costs and tariffs, partly offset by pricing and productivity savings.
- Net earnings from continuing operations fell 21% year over year. Total net earnings were $738.9 million in 2019 versus $2,913.8 million in 2018, but the comparison is distorted by the $1.9 billion after-tax gain on the 2018 A&S Business split-off.
- Acquisition spending was $3,943.9 million, net of cash acquired, versus $2,815.1 million in 2018. Major 2019 purchases included ASP for approximately $2.7 billion and other businesses for approximately $1.2 billion.
Outlook, risks and unusual items
- Management expected existing-business sales to continue growing year over year in 2020, while monitoring macroeconomic and geopolitical uncertainty, trade policy, U.S.–China relations, and the coronavirus outbreak. No specific 2020 revenue or earnings target was provided in the filing.
- Fortive cited the planned separation’s execution, timing, cost and anticipated benefits as uncertain. Other key exposures include economic cyclicality, competition and pricing, tariffs and supply constraints, foreign exchange, regulation, cyber risk, acquisitions and integration, and litigation and environmental matters.
- 2019 included a $40.8 million pretax gain from combining the Tektronix Video Business with Telestream; Fortive retained a 33% equity stake. The company also recorded $56.6 million of restructuring charges, compared with $7.0 million in 2018.
- At year-end, $1.5 billion of principal payments were due in 2020. The company said it believed available cash and other liquidity sources would meet its needs; it had extended the $1.0 billion delayed-draw term loan maturity to August 2020 after year-end and prepaid $250 million of another term loan in February 2020.
- The financial-statement audit opinion was unqualified. Management and the auditor excluded the newly acquired businesses from the 2019 internal-control assessment; these businesses represented less than 25% of assets and less than 10% of revenue.
Most important facts for investors to verify
- Progress, final approvals, costs, tax treatment and financing implications of the planned Fortive–Vontier separation.
- Whether underlying growth and margins improve, particularly in Professional Instrumentation, and how acquisition-related amortization and integration costs evolve.
- Debt repayment and refinancing plans, covenant headroom, and the effect of near-term maturities and variable interest rates on liquidity.
- Realized performance and purchase-accounting assumptions for 2019 acquisitions, including ASP, and whether goodwill and acquired intangibles remain recoverable.
- Actual effects of macroeconomic conditions, tariffs, trade tensions and the coronavirus on orders, supply chains and 2020 results.