Fortive Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Fortive operates in Professional Instrumentation and Industrial Technologies. It separated from Danaher on July 2, 2016; therefore, the prior-year comparative results are combined pre-separation results and may not represent a fully stand-alone comparison.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $1,628.8 million | $1,555.1 million | $3,164.0 million | $3,029.8 million |
| Gross profit | $805.1 million | $768.1 million | $1,549.1 million | $1,463.3 million |
| Operating profit | $348.3 million | $322.1 million | $643.2 million | $585.1 million |
| Net earnings | $240.1 million | $238.9 million | $439.8 million | $420.9 million |
| Diluted EPS | $0.68 | $0.69 | $1.25 | $1.22 |
| Gross margin | 49.4% | 49.4% | 49.0% | 48.3% |
| Operating margin | 21.4% | 20.7% | 20.3% | 19.3% |
Q2 sales grew 4.7% year over year; management reported 5.4% growth from existing businesses, with acquisition/Separation effects adding 0.4% and currency reducing growth by 1.1%. For the first half, sales rose 4.4%, including 5.2% growth from existing businesses. Management attributed improved operating margins mainly to higher sales volumes, restructuring and productivity savings, and lower intangible amortization; growth investments, stand-alone company costs and currency partly offset the gains.
- Segments, Q2: Professional Instrumentation sales were $759.0 million (+4.8%); operating profit was $184.9 million and margin 24.4%, up 200 basis points. Industrial Technologies sales were $869.8 million (+4.7%); operating profit was $181.5 million and margin 20.9%, unchanged.
- Cash flow, first half: Operating cash flow was $394.0 million, down from $487.8 million. Capital expenditures were $55.6 million; investing cash outflow was $58.6 million. Financing used $200.1 million, including $158.8 million of net debt repayments and $48.6 million of dividends.
- Balance sheet at June 30: Cash and equivalents were $968.4 million; long-term debt was $3,208.1 million; total assets were $8,467.1 million; current assets and current liabilities were $2,701.7 million and $1,370.8 million, respectively.
Changes, outlook and key disclosures
- Interest expense was $22.7 million in Q2 and $45.3 million in the first half, versus $2.7 million in the comparable 2016 periods, primarily reflecting debt issued in connection with the separation. This contributed to Q2 diluted EPS declining from $0.69 to $0.68 despite higher net earnings.
- Operating cash flow declined by about 19% year over year. The filing cites less favorable working-capital movements and higher cash use for accrued liabilities and other assets, including timing of tax and employee-related payments.
- Management expected sales from existing businesses to grow year over year during the remainder of 2017. It cited continued EMV-related demand for payment and dispenser systems over the next several years, while noting macroeconomic and geopolitical uncertainties. No specific full-year revenue or earnings guidance is provided.
- Management expected 2017 capital spending of $125 million to $135 million, subject to business conditions. It stated that operating cash flow, cash and other available liquidity were sufficient for anticipated needs.
- The $1.5 billion revolving credit facility had no direct borrowings; about $224 million supported outstanding commercial paper, leaving approximately $1.3 billion of additional facility capacity. The company reported compliance with debt covenants. Substantially all of its $968 million cash balance was held outside the United States; repatriation may incur U.S. tax.
- On July 27, 2017, after quarter-end, Fortive agreed to acquire Industrial Scientific Corporation for approximately $600 million in cash, subject to customary closing conditions, including regulatory approval. The company expected the acquisition to close in 2017.
- Principal disclosed risks include economic and market cyclicality, competition, acquisition execution and integration, foreign exchange, regulation, litigation, product and cybersecurity risks, debt obligations, and matters related to the Danaher separation. Management reported no material risk-factor changes during the quarter and said disclosure controls were effective.
Important facts for investors to verify
- How much of reported and expected growth reflects sustained demand versus currency, acquisitions and EMV-related activity.
- Whether the decline in operating cash flow reverses, particularly as working capital and accrued-liability payments normalize.
- Debt refinancing needs, commercial-paper access, interest costs and the availability of offshore cash for U.S. requirements.
- The purchase price, financing, closing conditions and subsequent integration costs for the Industrial Scientific acquisition.
- The effect of the 2018 revenue-recognition standard; Fortive expected most contract revenue recognition to remain substantially unchanged but was still assessing impacts to certain contracts, commissions and warranties.