Fortive Corp annual report, FY2017

Business context and reporting period

Fortive Corporation’s Form 10-K covers the fiscal year ended December 31, 2017. The company operates in two segments: Professional Instrumentation, which represented 47% of sales, and Industrial Technologies, which represented 53%. Its products, software and services serve instrumentation, sensing, transportation, automation and specialty-component, and franchise-distribution markets. The filing also provides unaudited fourth-quarter results.

Financial performance and liquidity

Sales increased 6.9% year over year: 4.5% from existing businesses, 2.1% from acquisitions and Separation-related effects, and 0.3% from currency. Fourth-quarter sales were $1,806.7 million, operating profit $355.8 million and net earnings $336.9 million; diluted EPS was $0.95.

Capital expenditures were $136.1 million. Cash and equivalents were $962.1 million at year-end, while long-term debt was $4,056.2 million; the resulting net debt was approximately $3.1 billion. The company generated $1,669.7 million of net cash used in investing, primarily reflecting $1,556.6 million paid for acquisitions. It had $1.5 billion of revolving-credit capacity, of which approximately $948 million backed commercial paper, leaving about $551 million available. Fortive reported compliance with debt covenants.

By segment, Professional Instrumentation sales were $3,139.1 million and operating margin 22.6%; Industrial Technologies sales were $3,516.9 million and operating margin 20.4%. The board declared and paid dividends of $0.28 per share for 2017.

Material changes versus the prior comparable period

• Sales growth accelerated from 0.7% in 2016 to 6.9% in 2017; existing-business growth increased from 1.0% to 4.5%.
• Operating margin rose 40 basis points, with higher volume, productivity and restructuring savings, lower amortization and currency effects partly offset by acquisition-related costs and dilution.
• Net earnings rose 19.7%; the effective tax rate fell to 18.7% from 27.1%, with a provisional net benefit of approximately $70 million from U.S. tax reform contributing to 2017 earnings.
• Operating cash flow increased about 3%, while cash acquisition spending rose sharply from $190.1 million to $1,556.6 million.
• Fortive acquired Landauer, Industrial Scientific and the remaining interest in Orpak. Acquired businesses contributed approximately $1.0 billion of goodwill; purchase-price allocations remained preliminary. Acquisition revenue and operating profit recorded in 2017 were described as immaterial.

Comparability is affected by the July 2016 Separation from Danaher. 2016 combines six months of standalone results with six months of carved-out results that included allocations from Danaher; pre-Separation allocations may not represent costs Fortive would have incurred as a standalone company.

Outlook, management commentary, risks and unusual items

• Management expected existing-business sales to grow year over year in 2018, while citing macroeconomic, geopolitical, monetary, fiscal and trade-policy uncertainty. Planned 2018 capital spending was approximately $125–$135 million.
• Management expected EMV-related demand to continue over several years but not to be a significant source of year-over-year growth in the first half of 2018. If year-end exchange rates prevailed through 2018, currency was estimated to add approximately 1.4% to sales versus 2017.
• The Tax Cuts and Jobs Act accounting was provisional at year-end. Fortive recorded a $135 million estimated transition-tax liability, expected to elect payment over eight years, and estimated a $205 million deferred-tax revaluation benefit. The company expected to repatriate about $275 million of foreign cash, with estimated foreign remittance taxes of $6 million.
• Key risks include economic and end-market cyclicality, competition and pricing pressure, acquisition integration and goodwill impairment, foreign-exchange exposure, debt-service and commercial-paper refinancing risk, regulatory and data-privacy compliance, cybersecurity, supply-chain disruption, litigation and environmental liabilities, and tax audits or further tax-law guidance. Fortive reported $8 million in environmental reserves and stated that pending litigation was not expected to have a material adverse effect.
• Management’s internal-control assessment was effective, but controls at the three 2017 acquisitions were excluded from the assessment; those businesses represented less than 20% of assets and less than 5% of revenue.

Most important facts an investor should verify

• How much 2018 growth came from existing businesses versus acquisitions, currency and EMV-related demand.
• Whether acquisition integration, preliminary purchase accounting and the substantial goodwill added in 2017 deliver expected performance without impairments.
• The final tax-reform accounting, transition-tax payments, foreign-cash repatriation and resulting effective tax rate and cash flows.
• Debt maturities, commercial-paper refinancing access, available revolving-credit capacity and covenant headroom.
• Whether reported earnings and margins remain strong after considering the provisional tax benefit and the non-comparable pre- and post-Separation periods.