Fortive Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016; the filing also reports nine-month results. Fortive operates Professional Instrumentation and Industrial Technologies businesses. It completed its separation from Danaher on July 2, 2016. Accordingly, 2016 nine-month results combine pre-separation carved-out results with post-separation consolidated results; prior-period figures are carved-out Danaher businesses and may not be directly comparable or indicative of Fortive’s standalone results.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $1,567.4 million | $1,524.6 million | $4,597.2 million | $4,603.0 million |
| Operating profit | $323.2 million | $301.8 million | $908.3 million | $931.6 million |
| Net earnings | $226.9 million | $196.6 million | $647.8 million | $627.7 million |
| Diluted EPS | $0.65 | $0.57 | $1.87 | $1.82 |
| Gross margin | 49.3% | 49.0% | 48.6% | 48.7% |
- Sales increased 2.8% in Q3, including 2.7% growth from existing businesses, a 0.6% acquisition/Separation contribution, and a 0.5% currency headwind. Nine-month sales declined 0.1%.
- Operating margin was 20.6% in Q3 versus 19.8%; nine-month margin was 19.8% versus 20.2%. Q3 improvement reflected volume, pricing and cost savings, partly offset by growth investments and Separation-related costs.
- Effective tax rates were 24.3% in Q3 and 26.6% for nine months, down from 34.9% and 32.6%, respectively, primarily due to income mix and tax benefits.
- Nine-month operating cash flow was $819.4 million, up from $621.1 million. Investing cash outflow was $276.3 million, including $190.6 million for acquisitions and $90.0 million of capital spending. Financing cash flow was $180.8 million.
- At September 30, cash and equivalents were $724.8 million; current assets were $2,359.2 million and current liabilities $1,369.0 million. Substantially all cash was held outside the United States.
- Debt carrying value was $3,509.1 million, including $526.6 million of commercial paper, a $500 million term loan, and senior notes. The $1.5 billion revolver was undrawn; about $0.5 billion supported commercial paper, leaving approximately $1.0 billion of additional capacity. The company reported covenant compliance.
Material changes versus comparable periods
- Q3 net earnings rose about 15%; nine-month net earnings rose about 3%. Q3 operating profit increased, while nine-month operating profit declined.
- Professional Instrumentation sales were nearly flat in Q3 but down 3.8% for nine months; Industrial Technologies sales rose 5.1% in Q3 and 3.3% for nine months. Q3 existing-business sales returned to growth in Professional Instrumentation.
- Fortive established standalone financing, issued $2.5 billion in notes and borrowed $500 million under a term facility, helping fund a $3.0 billion Separation dividend to Danaher. It ended the period with substantial cash and new debt, unlike the prior-year carved-out balance sheet.
- Fortive acquired three businesses for $190.6 million, with aggregate pre-acquisition annual sales of approximately $47 million. Goodwill increased to $4,048.0 million.
Outlook, commentary, risks and unusual items
- Management expected year-over-year growth in sales from existing businesses in Q4 2016, while citing macroeconomic and geopolitical uncertainty. It forecast Q4 effective tax rate of approximately 27.9%, excluding discrete items, and full-year capital spending of $110–$130 million. No full-year revenue or earnings guidance is provided in the filing.
- Transportation Technologies benefited from payment-system upgrades tied to EMV requirements; management expected outdoor-payment-system demand to support growth at least through 2017, while indoor EMV-related demand was decelerating. Automation & Specialty Components faced weakness in engine retarders and the North American truck market.
- Key stated risks include economic and market cyclicality, competition, acquisition execution, foreign exchange, regulation, litigation, product and technology risks, debt and access to commercial-paper markets, and the loss of benefits previously available as part of Danaher.
- Prior-period carved-out earnings statements were revised for immaterial allocation errors; operating profit and net earnings were unchanged. The filing also records approximately $30 million of net Separation-related “wrong-pockets” adjustments in Q3. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Danaher contractually assumed and indemnified Fortive for pre-Separation joint tax filings; Fortive remains responsible for certain separate filings. The company cites its prior annual filing for litigation and other contingencies and reports no material quarterly change to disclosed risk factors.
Important facts for investors to verify
- Assess comparability of carved-out pre-Separation results and the effect of standalone costs and transition services on future margins.
- Review debt maturities, refinancing of short-term commercial paper, interest-rate exposure, covenant headroom and access to credit markets.
- Verify the persistence of Q3 sales recovery, especially EMV-related demand and weakness in instrumentation, automation and truck-related markets.
- Monitor cash location and potential tax costs of repatriation, as well as the expected tax rate and tax contingencies.
- Follow acquisition integration, goodwill and intangible-asset valuations, Separation adjustments, and any developments in litigation or other contingencies.