Fortive Corporation — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Unless noted, financial results below are for continuing operations; Vontier and the previously divested A&S business are reported as discontinued operations.
Business context and reporting period
Fortive provides industrial, precision measurement, software, and healthcare technologies. Following the October 9, 2020 separation of its former Industrial Technologies segment into Vontier, Fortive reported three segments: Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. The company distributed 80.1% of Vontier and initially retained 19.9%.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $4.634 billion | $4.564 billion |
| Gross profit / margin | $2.609 billion / 56.3% | $2.483 billion / 54.4% |
| Operating profit / margin | $539 million / 11.6% | $444 million / 9.7% |
| Net earnings from continuing operations | $1.452 billion | $268 million |
| Diluted EPS from continuing operations | $4.05 | $0.59 |
| Operating cash flow from continuing operations | $978 million | $702 million |
| Capital expenditures | $76 million | $75 million |
| Cash and equivalents at year-end | $1.825 billion | $1.205 billion |
| Debt carrying value at year-end | $4.230 billion | $6.326 billion |
Sales rose 1.5% as reported, but sales from existing businesses declined 5.9%; acquisitions contributed 7.3 percentage points and currency 0.1 point. Recurring revenue represented about 40% of sales and increased approximately 11%, with SaaS sales from existing businesses growing at a mid-teens rate. The year-end cash and debt figures imply approximately $2.4 billion of net debt before subsequent debt repayments.
Quarterly sales improved through the year: Q4 sales were $1.325 billion versus $1.263 billion in Q4 2019. Q4 operating profit was $184 million versus $140 million. Q4 continuing-operations earnings were $1.252 billion, substantially affected by the Vontier share remeasurement described below.
Material changes versus the prior comparable period
- Reported sales increased modestly, but underlying existing-business sales fell 5.9% amid COVID-19 disruption. Management described sequential demand improvement after the Q2 low point and a slight existing-business sales increase in Q4.
- Operating margin expanded 190 basis points to 11.6%. Cost reductions, pricing, productivity actions, and lower acquisition-related charges supported the improvement; lower volumes remained a headwind.
- Net earnings from continuing operations included a $1.119 billion non-cash unrealized gain on retained Vontier shares. The gain, rather than operating performance alone, explains much of the year-over-year earnings increase; the effective tax rate was 3.7%, including the tax effect of this gain.
- Fortive completed the Vontier separation and changed its segment structure. In January 2021, it exchanged all retained Vontier shares for $1.1 billion of debt. It also repaid the remaining $316.8 million delayed-draw term loan and, in February 2021, repurchased $281 million of convertible notes.
Segments
| Segment | FY2020 sales | FY2020 operating profit / margin | Sales from existing businesses vs. 2019 |
|---|---|---|---|
| Intelligent Operating Solutions | $1.884 billion | $318 million / 16.9% | -7.2% |
| Precision Technologies | $1.651 billion | $322 million / 19.5% | -7.7% |
| Advanced Healthcare Solutions | $1.099 billion | $2 million / 0.2% | +0.6% |
Advanced Healthcare Solutions sales growth primarily reflected the full-year contribution from acquisitions, especially ASP, acquired in 2019. Its low reported margin reflected substantial amortization and acquisition-related costs, although the segment improved from a 2019 operating loss.
Outlook, risks, and unusual items
- Outlook: Management expected global demand for Fortive products and services to grow at a mid-single-digit rate in Q1 2021 and for full-year 2021. This is a demand outlook, not a stated revenue or earnings forecast. Management expected recurring-revenue, certain healthcare, and longer-cycle businesses to be relatively resilient, while short-cycle industrial businesses remained more exposed.
- COVID-19: The pandemic materially affected demand, operations, and customer activity; future effects remained uncertain and dependent on the pandemic, containment measures, and vaccination progress. Fortive reported no significant supply-chain constraint at the filing date but warned disruptions could arise.
- Debt and liquidity: Fortive reported $1.825 billion of cash, $4.230 billion of debt, and an undrawn $2.0 billion revolving credit facility at year-end; it said it was compliant with debt covenants. Approximately $1.4 billion of debt principal was scheduled within one year of December 31, 2020, before the disclosed 2021 repayments and exchange. Credit agreements had temporarily eased leverage limits and other terms through 2021.
- Other material exposures: Risks include slower industrial demand, competition and pricing pressure, China–U.S. trade conditions, foreign exchange, cybersecurity, regulation of medical devices and personal data, environmental matters, and acquisition or separation-related obligations. The company cautioned that the Vontier separation could be challenged as taxable despite a tax opinion and disclosed potential indemnification and tax-agreement obligations.
- Unusual items: The continuing-operations earnings gain from Vontier was non-cash and tied to market valuation. Separately, discontinued operations included an $85 million non-cash goodwill impairment in Vontier’s Telematics business, attributed largely to COVID-related forecast changes. The filing reported no legal proceedings expected to materially affect Fortive’s financial position, results, or cash flows.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill valuation and unrecognized tax benefits were identified as critical audit matters.
Important facts for investors to verify
- Assess underlying growth and recovery by segment, separating existing-business sales from acquisitions and the reported Vontier-related gain.
- Review the durability of recurring and SaaS revenue growth and the recovery in short-cycle industrial demand and elective-procedure-linked healthcare sales.
- Reconcile year-end debt and scheduled maturities with the subsequent $1.1 billion debt-for-equity exchange, term-loan repayment, and $281 million convertible-note repurchase.
- Review the terms and potential consequences of the Vontier separation, tax matters agreement, indemnities, and the mandatory conversion of Fortive’s preferred stock scheduled for July 2021.
- Monitor goodwill and intangible-asset balances, acquisition-related amortization, and the sensitivity of tax positions and estimates.