Fortive Corporation — 2016 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2016. Fortive is a diversified industrial company with Professional Instrumentation and Industrial Technologies segments. It separated from Danaher on July 2, 2016 and became publicly traded. The 2016 statements combine pre-separation results with post-separation consolidated results; prior periods are carved out of Danaher and may not represent Fortive’s results as a standalone company.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Sales | $6,224.3 million | $6,178.8 million | +0.7% |
| Operating profit | $1,246.0 million | $1,269.7 million | -1.9% |
| Net earnings | $872.3 million | $863.8 million | +1.0% |
| Diluted EPS | $2.51 | $2.50 | +$0.01 |
| Gross margin | 48.7% | 48.6% | +10 bps |
| Operating margin | 20.0% | 20.5% | -50 bps |
| Operating cash flow | $1,136.9 million | $1,009.0 million | +12.7% |
- Sales growth included 1.0% growth from existing businesses, 0.7% from acquisitions and Separation-related effects, and a 1.0% adverse currency impact.
- Professional Instrumentation sales were $2,891.6 million (-2.8%); operating profit was $642.3 million and margin was 22.2% (down 120 bps). Industrial Technologies sales were $3,332.7 million (+4.0%); operating profit was $667.4 million and margin was 20.0% (up 70 bps).
- Cash and equivalents were $803.2 million; current assets were $2,488.7 million and current liabilities $1,466.5 million. Capital expenditures were $129.6 million. Cash used in investing activities was $310.8 million.
- Debt was $3,358.0 million at year-end. Fortive had $1.5 billion of revolving credit capacity, approximately $375 million of which supported commercial paper, leaving about $1.1 billion available. The company reported compliance with its debt covenants.
- 2016 dividends were $0.14 per share. No shares were repurchased in the fourth quarter.
Material changes versus prior comparable period
- Reported sales rose modestly, while operating profit declined and operating margin contracted. Management attributed pressure to standalone-company costs, growth investments, restructuring costs, currency and acquired-business dilution, partly offset by productivity savings and higher volumes.
- Industrial Technologies growth, led by transportation products and franchise distribution, more than offset weaker Professional Instrumentation sales. Professional Instrumentation demand stabilized and returned to growth in the second half.
- Operating cash flow increased by $127.9 million. Acquisitions used $190.1 million of cash, compared with $37.1 million in 2015.
- Fortive incurred $49.0 million of interest expense after establishing its own financing. It issued $2.5 billion of notes and borrowed $500 million under a term facility; approximately $3.0 billion of proceeds was paid to Danaher in connection with the Separation.
Outlook, commentary, risks and unusual items
- Management expected 2017 sales from existing businesses to grow year over year, while cautioning that macroeconomic and geopolitical uncertainty could affect results. It expected EMV-related demand to support moderate growth in 2017, at a slower pace than 2016, and remain a growth driver for several years.
- Expected 2017 capital spending was approximately $125 million to $135 million. If year-end 2016 exchange rates persisted, management estimated currency would reduce 2017 sales by about 1.6% relative to 2016.
- Key risks include economic and end-market cyclicality, competition and pricing pressure, acquisition integration, product innovation, foreign exchange, supply constraints, cybersecurity, regulatory and environmental matters, and approximately $3.4 billion of debt. Separation-related risks include indemnities and potential tax liabilities, and restrictions on certain corporate transactions during the two-year post-separation period.
- The 2016 effective tax rate was 27.1%, versus 32.0% in 2015, including benefits from releases of tax reserves. The Separation also substantially reduced reported unrecognized tax benefits because Danaher assumed responsibility for specified pre-separation joint tax filings. Fortive stated that litigation was not expected to have a material effect; it recorded a $9 million environmental reserve.
- Goodwill and other intangible assets totaled approximately $4.7 billion; annual goodwill testing found no impairment. The company recorded $4.8 million of intangible impairment charges in 2016, relating to certain Industrial Technologies trade names.
Important facts for investors to verify
- How standalone operating costs and transition from Danaher affect future margins and cash generation.
- Whether the 2017 growth outlook is achieved, particularly as EMV-related demand decelerates and Professional Instrumentation recovers.
- Debt maturities, commercial-paper refinancing capacity, covenant headroom and the use of cash held largely outside the United States.
- Potential exposure under the tax matters and separation agreements, including tax-free separation conditions and retained pre-separation liabilities.
- Acquisition returns, the carrying value of goodwill and intangibles, and the sensitivity of pension and environmental estimates to changing assumptions.