Fortive Corporation — Q3 2019 Form 10-Q
Reporting period: Third quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Unless stated otherwise, amounts are in U.S. dollars. The filing reports Professional Instrumentation and Industrial Technologies as continuing segments; the Automation & Specialty businesses sold in October 2018 are presented as discontinued operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $1,860.0 million | $1,601.2 million | $5,317.6 million | $4,695.2 million |
| Operating profit | $242.1 million | $281.6 million | $708.9 million | $883.9 million |
| Net earnings from continuing operations | $207.3 million | $214.0 million | $546.6 million | $678.2 million |
| Diluted EPS from continuing operations | $0.56 | $0.55 | $1.46 | $1.86 |
| Gross margin | 49.9% | 51.6% | 49.7% | 51.6% |
| Operating margin | 13.0% | 17.6% | 13.3% | 18.8% |
- Growth: Q3 sales increased 16.2%; management attributed 15.3 percentage points to acquisitions, 2.1 points to existing businesses, and a 1.2-point reduction to currency. Nine-month sales rose 13.3%, including 2.6% growth from existing businesses.
- Segments: Q3 Professional Instrumentation sales were $1,116.2 million, up 24.8% reported but down 1.3% from existing businesses; operating margin was 10.6% versus 17.9%. Industrial Technologies sales were $743.8 million, up 5.2% reported and 6.5% from existing businesses; operating margin was 19.6% versus 20.0%.
- Earnings and margins: Q3 operating profit declined despite higher sales. Acquired businesses were the main source of margin dilution, alongside acquisition and planned-separation costs, unfavorable mix, and higher material costs, including tariff-related costs. Acquisition-related fair-value adjustments also weighed on gross margin. Q3 net earnings included a $41.2 million pre-tax gain on the Telestream combination.
- Cash flow: Nine-month operating cash flow was $796.0 million, versus $899.6 million; continuing-operations operating cash flow was $800.4 million versus $778.9 million. Investing activities used $3,467.3 million, mainly for acquisitions, including $79.6 million of capital expenditures. Cash was $1,060.5 million at quarter-end, down from $1,178.4 million at year-end 2018.
- Debt and liquidity: Debt carrying value totaled $6,015.6 million, compared with $3,430.3 million at December 31, 2018. The balance included $1,337.1 million of 0.875% convertible notes due 2022, a $1.0 billion term loan classified as current and due within 12 months, and commercial paper. Fortive had a $2.0 billion revolving facility with no direct borrowings; after supporting commercial paper, reported additional borrowing capacity was approximately $656 million. Management said expected liquidity was sufficient for foreseeable needs.
- Other metrics: Q3 and nine-month effective tax rates were 11.8% and 13.5%, respectively, versus 17.0% and 16.4% a year earlier. Common dividends were $0.07 per share per quarter. The filing adopted lease accounting in 2019, recognizing $210.2 million of operating-lease right-of-use assets and $217.5 million of lease liabilities at September 27.
Material developments and outlook
- Fortive acquired Johnson & Johnson’s Advanced Sterilization Products business (ASP) on April 1 for $2.7 billion. ASP contributed $334.4 million in sales from acquisition through September 27 and reported operating losses of $90.5 million, including amortization, purchase-accounting effects, and transaction and integration costs. The filing reports $166.6 million of such costs for the nine-month period.
- On July 20, Fortive combined its Tektronix Video business with Telestream, recognized a $41.2 million pre-tax gain, and retained a 33% equity stake.
- On September 4, Fortive announced a planned separation into two public companies: an industrial technology company retaining the Fortive name and a transportation- and mobility-focused company. Completion was expected in the second half of 2020, subject to conditions and final Board approval. Separation costs and execution risks were disclosed.
- Management expected total sales to continue growing year over year in the remainder of 2019, but expected sales from existing businesses to be relatively flat. It cited slowing macroeconomic conditions, particularly affecting Professional Instrumentation, and flagged uncertainty around international trade, U.S.–China relations, tariffs, and Brexit. 2019 capital spending was expected to be approximately $125–$135 million, including about $20 million related to ASP integration.
- Other stated risks include acquisition integration and valuation, competition, regulation, foreign exchange, indebtedness and interest rates, litigation, supply-chain and commodity pressures, and the possibility that the planned separation is delayed, costs more than expected, or does not deliver its intended benefits.
Most important facts for investors to verify
- Whether underlying sales stabilize as management projected, given Q3 existing-business growth was uneven and Professional Instrumentation declined.
- How ASP integration progresses, including the acquired business’s losses, purchase-accounting charges, and contribution to segment margins and cash needs.
- Debt repayment and refinancing plans, especially the $1.0 billion term loan due within 12 months, commercial-paper reliance, and remaining committed liquidity.
- Timing, approvals, costs, tax treatment, and expected benefits of the planned separation.
- Comparability of reported earnings: Q3 2018 and 2019 included discontinued-operation results of $31.3 million and negative $0.2 million, respectively; nine-month amounts were $123.3 million and negative $0.5 million.