Fortive Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 27, 2020; comparative period ended March 29, 2019. Fortive is a diversified industrial technology company reporting Professional Instrumentation and Industrial Technologies. The proposed separation of Transportation Technologies and Franchise Distribution into Vontier remained subject to conditions; its timing and structure could be affected by COVID-19 and capital-market conditions.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $1,713.5 million | $1,592.9 million |
| Gross profit / margin | $875.8 million / 51.1% | $812.7 million / 51.0% |
| Operating profit / margin | $119.6 million / 7.0% | $217.3 million / 13.6% |
| Net earnings from continuing operations | $42.3 million | $164.0 million |
| Net earnings attributable to common stockholders | $24.6 million | $147.1 million |
| Diluted EPS | $0.07 | $0.43 |
| Operating cash flow | $191.0 million | $156.2 million |
- Total sales increased 7.6%, driven by acquisitions (13.0 percentage points); existing-business sales declined 3.8%, and currency reduced growth by 1.6 percentage points.
- Professional Instrumentation sales were $1,104.4 million, up 13.0%; existing-business sales declined 7.2%. Segment operating profit was $144.5 million, versus $142.7 million.
- Industrial Technologies sales were $609.1 million, down 1.0%; existing-business sales grew 1.6%. Segment operating loss was $1.5 million, versus $98.8 million operating profit, including an $85.3 million noncash Telematics goodwill impairment.
- Gross margin was nearly unchanged. Operating margin fell 660 basis points, reflecting the impairment, acquired-business dilution, and acquisition and proposed-separation costs; management cited 150 basis points of benefit from execution and cost actions.
- Net interest expense rose to $43.6 million from $25.3 million, primarily due to higher average debt following acquisitions. The effective tax rate was 40.8%, compared with 14.8%, mainly due to the nondeductible impairment and tax costs related to planned repatriation.
- Cash and equivalents were $1,040.5 million at quarter-end, down from $1,205.2 million at year-end 2019. Capital expenditures were $33.8 million; operating cash flow less capital expenditures was approximately $157 million. Cash used in investing activities was $44.2 million, and financing activities used $283.2 million.
- Total debt carrying value was $6,076.1 million, including $250.0 million current and $5,826.1 million long-term. The $2.0 billion revolving facility had no borrowings; approximately $1.2 billion of additional capacity was reported available after commercial-paper backstops. Fortive reported covenant compliance at March 27.
Outlook, risks and notable items
- Management expected COVID-19 to materially reduce revenue and net income in Q2 2020, with global demand contracting at least through the first half. It expected greater Q2 year-over-year impact in North America and Europe than in Q1; no numerical earnings or revenue guidance was provided.
- Fortive targeted at least $300 million of incremental 2020 savings from labor, discretionary spending, supply-chain and facility actions. Expected 2020 capital spending was approximately $80–$90 million, including about $20 million for ASP integration.
- Management said it had not experienced material supply or distribution constraints as of the filing date, but warned of possible later disruptions, weaker demand, order cancellations, delayed customer payments and increased credit losses. Q1 credit-loss provisions were not materially increased for COVID-19.
- After quarter-end, Fortive drew an additional $375 million under the 2021 term-loan facility in April, bringing that facility to $750 million outstanding, and refinanced commercial paper. On April 24, it amended credit agreements, temporarily relaxed leverage limits, increased certain borrowing costs and extended the $1.0 billion delayed-draw term loan maturity to May 30, 2021. The amendments incurred about $6.5 million in fees.
- The Telematics impairment used Level 3 valuation inputs and management forecasts; further deterioration or changed assumptions could result in additional impairment. Foreign-currency translation losses were $136.3 million for the quarter.
- The COVID-19 pandemic created substantial uncertainty for operations, customers, suppliers, financing access and the proposed Vontier separation. The filing also identifies competition, acquisition integration, debt, currency, tax, litigation, supply-chain and other risks.
Most important facts for investors to verify
- Whether Q2 and subsequent-period demand, margins and cash generation tracked management’s COVID-19 outlook and cost-saving plans.
- Whether Fortive maintained covenant compliance and adequate liquidity as commercial-paper markets and credit-facility terms evolved.
- Whether the Telematics reporting unit or other assets required further impairment as forecasts and valuation assumptions changed.
- Progress, costs and timing of the proposed Vontier separation, including the effects of market conditions.
- How acquisitions, including ASP, contributed to underlying growth, margins, amortization and debt service requirements.