Fortive Corporation — Q3 2017 Form 10-Q
Business context and period. Fortive is a diversified industrial company with Professional Instrumentation and Industrial Technologies segments. This filing covers the three and nine months ended September 29, 2017. The comparable 2016 nine-month results include six months of carved-out Danaher business activity before Fortive’s July 2016 separation, so periods are not fully like-for-like.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $1,685.3m | $1,567.4m | $4,849.3m | $4,597.2m |
| Gross profit / margin | $839.4m / 49.8% | $772.9m / 49.3% | $2,388.5m / 49.3% | $2,236.2m / 48.6% |
| Operating profit / margin | $355.9m / 21.1% | $323.2m / 20.6% | $999.1m / 20.6% | $908.3m / 19.8% |
| Net earnings | $267.8m | $226.9m | $707.6m | $647.8m |
| Diluted EPS | $0.76 | $0.65 | $2.01 | $1.87 |
| Operating cash flow | Not separately provided for the quarter | $713.0m | $819.4m |
Growth and segments. Q3 sales increased 7.5% year over year: 4.8% from existing businesses, 1.8% from acquisitions and Separation-related effects, and 0.9% from currency. Nine-month sales increased 5.5%, including 5.1% from existing businesses, 0.8% from acquisitions and Separation-related effects, and a 0.4% currency headwind. Q3 Professional Instrumentation sales were $786.8m, up 8.7%; Industrial Technologies sales were $898.5m, up 6.5%.
Q3 margin expansion reflected sales volume, restructuring and productivity savings, lower amortization, and currency effects. Acquisition transaction costs and acquired-business dilution partly offset improvement. Net earnings also benefited from a $15.3m acquisition remeasurement gain. Effective tax rate was 23.1% in Q3 and 25.2% for nine months, down from 24.3% and 26.6%, respectively.
Financial position and liquidity
- At September 29, cash and equivalents were $910.9m, total assets $9,327.0m, current liabilities $1,379.3m, and long-term debt $3,671.9m. Debt less cash was approximately $2,761m.
- Nine-month operating cash flow was $713.0m, down $106m year over year. Working capital movements were a significant use of cash; operating cash flow also reflects timing of tax and employee-related payments.
- Investing cash outflow was $888.3m, including $802.1m for acquisitions and $87.7m of capital expenditures. Financing provided $240.8m; dividends paid were $72.8m.
- The $1.5bn revolving credit facility had no direct borrowings outstanding; approximately $564m backed commercial paper, leaving about $0.9bn of additional facility capacity. Commercial paper totaled about $564m. The company reported compliance with debt covenants.
- Substantially all cash was held outside the United States; repatriation may incur U.S. taxes or be subject to local restrictions. Management stated available liquidity was sufficient for expected needs.
Material changes, outlook, and risks
- Fortive acquired two businesses during Q3 for $802m net cash, including the remaining 80% interest in a previously partly owned business. Their combined prior-year annual sales were approximately $246m; preliminary goodwill recorded was $576m. Purchase-price valuations remained preliminary. Landauer Inc. was acquired on October 19, 2017, after quarter-end, for $67.25 per share.
- Management expected existing-business sales to grow year over year during the remainder of 2017. It forecast full-year capital spending of $125m–$135m. No specific earnings or EPS guidance is stated in the provided filing text.
- Management cited demand growth across most businesses and geographies, with stronger growth in high-growth markets and China. It noted that EMV-related payment-system demand was expected to continue over several years but not to be a significant year-over-year growth driver in the next several quarters.
- Key stated risks include macroeconomic and geopolitical uncertainty, competition and cyclicality, acquisition execution and integration, regulation, foreign exchange, debt, litigation, product and supply-chain issues, cybersecurity, and potential goodwill or intangible impairment. The filing reported no material quarter-over-quarter change in risk factors and no goodwill impairment trigger identified for the nine-month period.
- Accrued warranty liability was $68.3m at quarter-end. The filing does not provide a clear quantified amount for other litigation or contingent exposures.
- Fortive expected to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It expected most contracts’ revenue recognition to remain substantially unchanged, while identifying potential changes involving certain over-time contracts, commission deferrals, and warranty-related revenue and costs.
Most important facts for investors to verify
- Assess comparability of 2016 nine-month results, given pre-separation carve-out accounting and financing differences.
- Track whether underlying sales growth, margin gains, and operating cash conversion continue, particularly after acquisitions and working-capital outflows.
- Review the final purchase-price allocations and acquired-business performance, including the post-quarter Landauer acquisition.
- Monitor commercial-paper refinancing, debt levels, and the accessibility and tax implications of cash held overseas.
- Confirm the eventual effects of revenue-standard adoption and monitor EMV-related demand, macroeconomic conditions, and other stated risks.