Fortive Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 28, 2019. Figures are in millions of dollars except per-share data. Fortive operates Professional Instrumentation and Industrial Technologies. The 2018 comparison includes the A&S business as discontinued operations following its October 2018 split-off; results below generally refer to continuing operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $1,864.7 | $1,601.8 | $3,457.6 | $3,094.0 |
| Gross profit | $904.0 | $830.8 | $1,716.7 | $1,597.1 |
| Gross margin | 48.5% | 51.9% | 49.7% | 51.6% |
| Operating profit | $249.5 | $324.4 | $466.8 | $602.3 |
| Operating margin | 13.4% | 20.3% | 13.5% | 19.5% |
| Net earnings from continuing operations | $175.3 | $250.2 | $339.3 | $464.2 |
| Diluted EPS from continuing operations | $0.47 | $0.70 | $0.90 | $1.31 |
| Net cash from operating activities | Not separately stated | Not separately stated | $415.0 | $512.9 |
- Q2 sales rose 16.4%; management attributed 16.5 percentage points to acquisitions, while existing-business sales grew 2.0% and currency reduced growth by 2.1 points. First-half sales rose 11.8%, with 2.8% existing-business growth, 11.5% acquisition contribution and a 2.5% currency headwind.
- Q2 Professional Instrumentation sales increased 27.5% to $1,133.3 million, but segment operating margin fell to 10.8% from 24.4%. Industrial Technologies sales grew 2.6% to $731.4 million and operating margin improved to 20.9% from 18.9%.
- Q2 net earnings attributable to common stockholders were $157.4 million, or $0.46 diluted EPS, versus $294.8 million, or $0.83, a year earlier. The 2018 quarter included $44.8 million of discontinued-operation earnings; 2019 had a $0.7 million discontinued-operation loss. Mandatory preferred dividends were $17.2 million in Q2 2019.
Cash, debt and liquidity
- Cash and equivalents were $1,092.1 million at June 28, 2019, down from $1,178.4 million at year-end 2018. First-half operating cash from continuing operations was $421.4 million, nearly level with $423.1 million a year earlier.
- Investing activities used $3,285.6 million, primarily reflecting $3,237.1 million of acquisition spending. Financing activities provided $2,776.4 million; net cash declined $86.3 million over the half-year.
- Debt carrying value totaled $6,196.5 million, including $1,000 million classified as current and $5,196.5 million long-term. Debt was $3,430.3 million at December 31, 2018. Cash less carrying-value debt implies roughly $5.1 billion of net debt.
- Fortive had $2.0 billion available under its revolving credit facility, with approximately $1.6 billion supporting commercial paper; reported additional borrowing capacity was $449 million. The company said it was compliant with debt covenants and expected liquidity to meet foreseeable needs. Approximately 85% of cash was held outside the United States.
Material changes and unusual items
- Fortive acquired Johnson & Johnson’s Advanced Sterilization Products business on April 1 for $2.7 billion. ASP generated approximately $800 million in 2018 revenue. It contributed $164.9 million of Q2 revenue and a $63.9 million operating loss, including amortization and transaction costs. Fortive also completed a $537.1 million acquisition in Q2.
- Acquisition-related amortization, fair-value adjustments and transaction costs weighed on margins. Fortive cited acquisition and divestiture-related transaction costs, including about $25 million in Q2 and $51 million in the first half for ASP. Management said acquisition-related fair-value adjustments to deferred revenue and inventory would continue to affect margins during the rest of 2019.
- Interest expense increased to $44.4 million in Q2 from $23.9 million, and to $69.7 million for the first half from $47.2 million, primarily due to higher average debt used to fund acquisitions.
- Fortive issued $1.4 billion of 0.875% convertible notes due 2022 and drew a $1.0 billion variable-rate delayed-draw term loan to help fund ASP. The convertible notes have an initial conversion price of $106.64 per share; the term loan bore 3.16% interest at quarter-end and is scheduled to mature within 12 months.
- Adoption of lease accounting in 2019 added operating lease right-of-use assets of $197.6 million and lease liabilities; the company reported no impact on net earnings or cash flows.
Outlook, commentary and risks
- Management expected existing-business sales to continue growing year over year during the remainder of 2019. It forecast full-year capital spending of approximately $150–$160 million, including about $35 million of one-time ASP integration capital expenditures. No EPS or full-year revenue target is stated in the supplied filing text.
- Management cited demand growth in developed markets and Industrial Technologies, including demand related to the U.S. EMV payment-security liability shift. It also flagged weakness in some high-growth markets and Western Europe, and mixed demand in certain instrumentation and sensing product lines.
- Risks highlighted include global economic and market conditions, U.S.–China trade uncertainty and tariffs, foreign exchange, acquisition integration and valuation, competition, regulation, international operations, litigation, product and cybersecurity issues, and potential impairment of goodwill and intangibles. The filing newly discusses potential borrowing-cost effects from the planned LIBOR phase-out.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ASP integration and the acquired businesses deliver the anticipated sales and profitability, and how long acquisition-related margin dilution persists.
- How the $1.0 billion term loan due within 12 months will be repaid or refinanced, and the company’s capacity to manage commercial paper and total debt.
- Underlying organic growth and segment trends apart from acquisitions and currency, particularly in Professional Instrumentation and high-growth markets.
- Cash conversion and working-capital needs, including management’s expectation that ASP will continue investing in working capital during 2019.
- Final purchase-price allocations for ASP and the other acquisitions, including goodwill and intangible valuations, and any associated impairment or tax implications.