Fortive Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter results are included. Unless noted, annual operating results below are from continuing operations.
Business context
Fortive is a diversified industrial technology company with two reportable segments: Professional Instrumentation and Industrial Technologies. On October 1, 2018, Fortive completed the split-off of most of its Automation & Specialty business to Altra. That business is reported as discontinued operations for all periods presented, affecting comparisons.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Sales, continuing operations | $6.453 billion | $5.756 billion |
| GAAP sales growth | 12.1% | 7.0% |
| Sales growth from existing businesses | 4.1% | 4.2% |
| Operating profit | $1.178 billion | $1.143 billion |
| Operating margin | 18.3% | 19.9% |
| Gross margin | 51.5% | 50.8% |
| Net earnings from continuing operations | $918.3 million | $884.3 million |
| Diluted EPS from continuing operations | $2.52 | $2.51 |
| Operating cash flow from continuing operations | $1.201 billion | $1.020 billion |
| Cash and cash equivalents at year-end | $1.178 billion | $962.1 million |
| Total debt, including current portion | $3.430 billion | $4.056 billion |
Acquisitions contributed 7.6 percentage points to 2018 sales growth, while currency contributed 0.4 points. Professional Instrumentation sales rose 16.4% to $3.655 billion, including 3.9% growth from existing businesses; Industrial Technologies sales rose 6.9% to $2.798 billion, including 4.4% growth from existing businesses. Interest expense increased to $97 million from $88.7 million.
Fortive reported total net earnings of $2.914 billion, including $1.996 billion from discontinued operations. The latter included a $1.9 billion after-tax gain on the A&S split-off; it should not be interpreted as recurring operating earnings. Fourth-quarter sales were $1.758 billion, operating profit was $294.5 million, and earnings from continuing operations were $240.1 million. Fourth-quarter total net earnings of $2.112 billion included $1.872 billion from discontinued operations.
Investing cash use from continuing operations was $2.970 billion, chiefly reflecting $2.815 billion of net acquisition spending; capital expenditures were $112 million. Fortive ended the year with $3.4 billion of debt and $1.18 billion of cash. Its $2.0 billion revolving facility had approximately $1.34 billion of capacity after backing outstanding commercial paper. Management said operating cash flow and other liquidity sources should support operations, investment, acquisitions, debt service and dividends.
Material changes and unusual items
- Fortive acquired Accruent for approximately $2.0 billion and Gordian for $778 million, both net of acquired cash. The acquisitions drove much of reported growth and increased goodwill and amortization; the two businesses together contributed $115 million of revenue and $51 million of operating losses in 2018.
- Operating margin fell 160 basis points. Management cited acquisition dilution and transaction/restructuring costs, partly offset by price, volume, cost savings and currency. SG&A rose to 26.8% of sales from 24.5%, including acquisition costs and growth investments.
- The A&S split-off generated total consideration of $2.7 billion, including cash, an exchange of Fortive shares for Altra shares, and a debt exchange. Fortive retired approximately 15.8 million of its common shares in the exchange.
- Fortive issued $1.34 billion net proceeds of 5.0% mandatory convertible preferred stock in June 2018. Those shares are scheduled to convert automatically in July 2021, subject to the stated conversion terms.
- Effective tax rate was 14.8%, compared with 17.6% in 2017, with the Tax Cuts and Jobs Act affecting both periods. Fortive stated it expected the law to benefit results and U.S. liquidity, while noting further tax guidance could affect accounting.
Outlook, commentary and risks
Management expected sales from existing businesses to continue growing year over year in 2019. It cited demand in Professional Instrumentation and expected EMV-related demand for fuel dispensers and payment systems to continue. Planned 2019 capital spending was approximately $120–$130 million, excluding the pending acquisition.
Fortive had agreed to acquire Johnson & Johnson’s Advanced Sterilization Products business for approximately $2.7 billion in cash, with closing expected after the first quarter of 2019, subject to customary conditions. In February 2019, after year-end, Fortive issued $1.437 billion of 0.875% convertible senior notes, intending to use proceeds toward the acquisition.
Key disclosed risks include economic and market cyclicality, trade tensions and tariffs (including U.S.–China relations), foreign exchange movements, competition and pricing pressure, acquisition integration and goodwill impairment, cybersecurity and data privacy, supply constraints and input costs, regulatory and environmental matters, tax audits and guidance, and debt service and covenant compliance. At year-end, Fortive reported compliance with its credit agreement covenants. Management and the auditor concluded internal control over financial reporting was effective, but the assessment excluded recently acquired Gordian and Accruent, together representing less than 30% of assets and less than 5% of revenue.
Important facts for investors to verify
- Assess recurring growth separately from acquisitions, currency and the discontinued A&S business; verify the continuing-operations basis used in comparisons.
- Track post-acquisition performance, integration costs, operating losses and whether Accruent and Gordian meet expected growth and margin objectives.
- Confirm the timing, funding and closing conditions for the ASP acquisition, including the use and terms of the 2019 convertible notes.
- Monitor margin recovery against acquisition dilution, transaction costs, tariffs, input inflation and ongoing growth investments.
- Review debt maturities, commercial-paper refinancing capacity, leverage covenant headroom and the preferred stock’s 2021 conversion and dividend obligations.
- Evaluate the sustainability of earnings excluding the $1.9 billion split-off gain and the effect of future tax guidance or audits.