10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on July 26, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One) |
|
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended: June 29, 2018 | |
Or | |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 1-37654 |
________________________________________________
Fortive Corporation
(Exact name of registrant as specified in its charter)
________________________________________________
Delaware |
47-5654583 |
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. employer
identification number)
|
|
6920 Seaway Blvd
Everett, WA
|
98203 |
|
(Address of principal executive offices) |
(Zip code) |
Registrant’s telephone number, including area code: (425) 446-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
|
Accelerated filer ¨
|
|||
Non-accelerated filer ¨
|
(Do not check if a smaller reporting company) |
Smaller reporting company ¨
|
||
Emerging growth company ¨
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of common stock outstanding at July 19, 2018 was 349,152,355.
FORTIVE CORPORATION
INDEX
FORM 10-Q
PART I - |
FINANCIAL INFORMATION |
Page |
Item 1. |
||
Item 2. |
||
Item 3. |
||
Item 4. |
||
PART II - |
OTHER INFORMATION |
|
Item 1A. |
||
Item 6. |
||
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except per share amounts)
As of |
|||||||
June 29, 2018 |
December 31, 2017 |
||||||
(unaudited) |
|||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and equivalents |
$ |
2,368.2 |
$ |
962.1 |
|||
Accounts receivable, net |
1,187.8 |
1,143.6 |
|||||
Inventories: |
|||||||
Finished goods |
223.2 |
217.2 |
|||||
Work in process |
107.9 |
78.9 |
|||||
Raw materials |
311.2 |
284.5 |
|||||
Total inventories |
642.3 |
580.6 |
|||||
Prepaid expenses and other current assets |
305.1 |
250.5 |
|||||
Total current assets |
4,503.4 |
2,936.8 |
|||||
Property, plant and equipment, net of accumulated depreciation of $1,114.9 and $1,086.8 at June 29, 2018 and December 31, 2017, respectively |
690.4 |
712.5 |
|||||
Other assets |
479.5 |
476.8 |
|||||
Goodwill |
5,081.9 |
5,098.5 |
|||||
Other intangible assets, net |
1,230.9 |
1,276.0 |
|||||
Total assets |
$ |
11,986.1 |
$ |
10,500.6 |
|||
LIABILITIES AND EQUITY |
|||||||
Current liabilities: |
|||||||
Current portion of long-term debt |
$ |
799.3 |
$ |
— |
|||
Trade accounts payable |
763.5 |
727.5 |
|||||
Accrued expenses and other current liabilities |
735.9 |
874.8 |
|||||
Total current liabilities |
2,298.7 |
1,602.3 |
|||||
Other long-term liabilities |
1,118.1 |
1,033.9 |
|||||
Long-term debt |
2,927.4 |
4,056.2 |
|||||
Equity: |
|||||||
5.0% Mandatory convertible preferred stock, series A: $0.01 par value, 15.0 million shares authorized; 1.4 million shares issued and outstanding at June 29, 2018; no shares issued or outstanding at December 31, 2017 |
— |
— |
|||||
Common stock: $0.01 par value, 2.0 billion shares authorized; 349.5 and 348.2 million issued; 349.0 and 347.8 million outstanding at June 29, 2018 and December 31, 2017, respectively |
3.5 |
3.5 |
|||||
Additional paid-in capital |
3,836.8 |
2,444.1 |
|||||
Retained earnings |
1,853.9 |
1,350.3 |
|||||
Accumulated other comprehensive income (loss) |
(69.6 |
) |
(7.6 |
) |
|||
Total Fortive stockholders’ equity |
5,624.6 |
3,790.3 |
|||||
Noncontrolling interests |
17.3 |
17.9 |
|||||
Total stockholders’ equity |
5,641.9 |
3,808.2 |
|||||
Total liabilities and equity |
$ |
11,986.1 |
$ |
10,500.6 |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
3
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Sales |
$ |
1,856.0 |
$ |
1,628.8 |
$ |
3,596.7 |
$ |
3,164.0 |
|||||||
Cost of sales |
(917.1 |
) |
(823.7 |
) |
(1,787.0 |
) |
(1,614.9 |
) |
|||||||
Gross profit |
938.9 |
805.1 |
1,809.7 |
1,549.1 |
|||||||||||
Operating costs: |
|||||||||||||||
Selling, general and administrative expenses |
(445.5 |
) |
(356.9 |
) |
(869.2 |
) |
(709.1 |
) |
|||||||
Research and development expenses |
(111.0 |
) |
(99.1 |
) |
(219.9 |
) |
(195.3 |
) |
|||||||
Operating profit |
382.4 |
349.1 |
720.6 |
644.7 |
|||||||||||
Non-operating expenses: |
|||||||||||||||
Interest expense, net |
(25.3 |
) |
(22.7 |
) |
(49.9 |
) |
(45.3 |
) |
|||||||
Other non-operating expenses |
(1.1 |
) |
(0.8 |
) |
(1.8 |
) |
(1.5 |
) |
|||||||
Earnings before income taxes |
356.0 |
325.6 |
668.9 |
597.9 |
|||||||||||
Income taxes |
(61.0 |
) |
(85.5 |
) |
(112.7 |
) |
(158.1 |
) |
|||||||
Net earnings |
295.0 |
240.1 |
556.2 |
439.8 |
|||||||||||
Mandatory convertible preferred stock cumulative dividends |
(0.2 |
) |
— |
(0.2 |
) |
— |
|||||||||
Net earnings attributable to common stockholders |
$ |
294.8 |
$ |
240.1 |
$ |
556.0 |
$ |
439.8 |
|||||||
Net earnings per common share: |
|||||||||||||||
Basic |
$ |
0.84 |
$ |
0.69 |
$ |
1.59 |
$ |
1.27 |
|||||||
Diluted |
$ |
0.83 |
$ |
0.68 |
$ |
1.57 |
$ |
1.25 |
|||||||
Average common stock and common equivalent shares outstanding: |
|||||||||||||||
Basic |
349.2 |
347.2 |
348.9 |
347.1 |
|||||||||||
Diluted |
355.0 |
352.2 |
354.7 |
351.8 |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
4
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Net earnings |
$ |
295.0 |
$ |
240.1 |
$ |
556.2 |
$ |
439.8 |
|||||||
Other comprehensive income, net of income taxes: |
|||||||||||||||
Foreign currency translation adjustments |
(99.8 |
) |
45.2 |
(63.4 |
) |
88.8 |
|||||||||
Pension adjustments |
0.7 |
0.9 |
1.4 |
1.7 |
|||||||||||
Total other comprehensive income, net of income taxes |
(99.1 |
) |
46.1 |
(62.0 |
) |
90.5 |
|||||||||
Comprehensive income |
$ |
195.9 |
$ |
286.2 |
$ |
494.2 |
$ |
530.3 |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
5
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
Common Stock |
Preferred Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated
Other
Comprehensive
Income (Loss)
|
Noncontrolling
Interests
|
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||
Balance, December 31, 2017 |
347.8 |
$ |
3.5 |
— |
$ |
— |
$ |
2,444.1 |
$ |
1,350.3 |
$ |
(7.6 |
) |
$ |
17.9 |
||||||||||||||
Adoption of accounting standards |
— |
— |
— |
— |
— |
(3.9 |
) |
— |
— |
||||||||||||||||||||
Balance, January 1, 2018 |
347.8 |
3.5 |
— |
— |
2,444.1 |
1,346.4 |
(7.6 |
) |
17.9 |
||||||||||||||||||||
Net earnings for the period |
— |
— |
— |
— |
— |
556.2 |
— |
— |
|||||||||||||||||||||
Dividends to shareholders |
— |
— |
— |
— |
— |
(48.7 |
) |
— |
— |
||||||||||||||||||||
Separation related adjustments |
— |
— |
— |
— |
10.9 |
— |
— |
— |
|||||||||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
— |
— |
(62.0 |
) |
— |
||||||||||||||||||||
Common stock-based award activity |
1.2 |
— |
— |
— |
44.8 |
— |
— |
— |
|||||||||||||||||||||
Issuance of mandatory convertible preferred stock |
— |
— |
1.4 |
— |
1,337.0 |
— |
— |
— |
|||||||||||||||||||||
Change in noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
(0.6 |
) |
||||||||||||||||||||
Balance, June 29, 2018 |
349.0 |
$ |
3.5 |
1.4 |
$ |
— |
$ |
3,836.8 |
$ |
1,853.9 |
$ |
(69.6 |
) |
$ |
17.3 |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
6
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
Six Months Ended |
|||||||
June 29, 2018 |
June 30, 2017 |
||||||
Cash flows from operating activities: |
|||||||
Net earnings |
$ |
556.2 |
$ |
439.8 |
|||
Noncash items: |
|||||||
Depreciation |
69.1 |
47.2 |
|||||
Amortization |
49.1 |
26.6 |
|||||
Stock-based compensation expense |
26.5 |
25.3 |
|||||
Change in accounts receivable, net |
(54.0 |
) |
(20.7 |
) |
|||
Change in inventories |
(68.4 |
) |
(7.9 |
) |
|||
Change in trade accounts payable |
41.0 |
(28.8 |
) |
||||
Change in prepaid expenses and other assets |
(42.0 |
) |
(8.3 |
) |
|||
Change in accrued expenses and other liabilities |
(64.7 |
) |
(79.2 |
) |
|||
Net cash provided by operating activities |
512.8 |
394.0 |
|||||
Cash flows from investing activities: |
|||||||
Cash paid for acquisitions |
(9.3 |
) |
— |
||||
Payments for additions to property, plant and equipment |
(58.7 |
) |
(55.6 |
) |
|||
All other investing activities |
3.9 |
(3.0 |
) |
||||
Net cash used in investing activities |
(64.1 |
) |
(58.6 |
) |
|||
Cash flows from financing activities: |
|||||||
Net repayments of borrowings (maturities of 90 days or less) |
(326.0 |
) |
(158.8 |
) |
|||
Proceeds from issuance of mandatory convertible preferred stock net of $36 million of issuance costs |
1,338.2 |
— |
|||||
Payment of dividends |
(48.7 |
) |
(48.6 |
) |
|||
All other financing activities |
15.3 |
7.3 |
|||||
Net cash provided (used) by financing activities |
978.8 |
(200.1 |
) |
||||
Effect of exchange rate changes on cash and equivalents |
(21.4 |
) |
29.9 |
||||
Net change in cash and equivalents |
1,406.1 |
165.2 |
|||||
Beginning balance of cash and equivalents |
962.1 |
803.2 |
|||||
Ending balance of cash and equivalents |
$ |
2,368.2 |
$ |
968.4 |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
7
FORTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW
Fortive Corporation (“Fortive”, the “Company,” “we,” “us,” or “our”) is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.
We prepared the unaudited consolidated condensed financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe the disclosures are adequate to make the information presented not misleading. The consolidated condensed financial statements included herein should be read in conjunction with the audited annual consolidated financial statements as of and for the year ended December 31, 2017 and the footnotes (“Notes”) thereto included within our 2017 Annual Report on Form 10-K.
In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present our financial position as of June 29, 2018 and December 31, 2017, and our results of operations and cash flows for the three and six months ended June 29, 2018 and June 30, 2017. Reclassification of certain prior year amounts have been made to conform to current year presentation.
Accumulated Other Comprehensive Income (Loss)—Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions):
Foreign
currency
translation
adjustments
|
Pension
adjustments
|
Total |
|||||||||
For the Three Months Ended June 29, 2018: |
|||||||||||
Balance, March 30, 2018 |
$ |
100.4 |
$ |
(70.9 |
) |
$ |
29.5 |
||||
Other comprehensive income (loss) before reclassifications, net of income taxes |
(99.8 |
) |
— |
(99.8 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
— |
0.9 |
(a) |
0.9 |
|||||||
Income tax impact |
— |
(0.2 |
) |
(0.2 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
— |
0.7 |
0.7 |
||||||||
Net current period other comprehensive income (loss), net of income taxes |
(99.8 |
) |
0.7 |
(99.1 |
) |
||||||
Balance, June 29, 2018 |
$ |
0.6 |
$ |
(70.2 |
) |
$ |
(69.6 |
) |
|||
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).
|
8
Foreign
currency
translation
adjustments
|
Pension adjustments |
Total |
|||||||||
For the Three Months Ended June 30, 2017: |
|||||||||||
Balance, March 31, 2017 |
$ |
(29.0 |
) |
$ |
(72.4 |
) |
$ |
(101.4 |
) |
||
Other comprehensive income (loss) before reclassifications, net of income taxes |
45.2 |
— |
45.2 |
||||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
— |
1.1 |
(a) |
1.1 |
|||||||
Income tax impact |
— |
(0.2 |
) |
(0.2 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
— |
0.9 |
0.9 |
||||||||
Net current period other comprehensive income (loss), net of income taxes |
45.2 |
0.9 |
46.1 |
||||||||
Balance, June 30, 2017 |
$ |
16.2 |
$ |
(71.5 |
) |
$ |
(55.3 |
) |
|||
For the Six Months Ended June 29, 2018: |
|||||||||||
Balance, December 31, 2017 |
$ |
64.0 |
$ |
(71.6 |
) |
$ |
(7.6 |
) |
|||
Other comprehensive income (loss) before reclassifications, net of income taxes |
(63.4 |
) |
— |
(63.4 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
— |
1.8 |
(a) |
1.8 |
|||||||
Income tax impact |
— |
(0.4 |
) |
(0.4 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
— |
1.4 |
1.4 |
||||||||
Net current period other comprehensive income (loss) |
(63.4 |
) |
1.4 |
(62.0 |
) |
||||||
Balance, June 29, 2018 |
$ |
0.6 |
$ |
(70.2 |
) |
$ |
(69.6 |
) |
|||
For the Six Months Ended June 30, 2017: |
|||||||||||
Balance, December 31, 2016 |
$ |
(72.6 |
) |
$ |
(73.2 |
) |
$ |
(145.8 |
) |
||
Other comprehensive income (loss) before reclassifications, net of income taxes |
88.8 |
— |
88.8 |
||||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
— |
2.2 |
(a) |
2.2 |
|||||||
Income tax impact |
— |
(0.5 |
) |
(0.5 |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
— |
1.7 |
1.7 |
||||||||
Net current period other comprehensive income (loss) |
88.8 |
1.7 |
90.5 |
||||||||
Balance, June 30, 2017 |
$ |
16.2 |
$ |
(71.5 |
) |
$ |
(55.3 |
) |
|||
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).
|
Recently Issued Accounting Standards—In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. This standard is effective for us beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. The standard also requires lessees and lessors to disclose the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from the current standard. This standard is effective for us beginning January 1, 2019 (with early adoption permitted) using a modified retrospective transition approach and provides for certain practical expedients. In September 2017, the FASB issued
9
ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provided additional implementation guidance on the previously issued ASU. We are in the process of assessing the impact of the standard and designing related internal control procedures. Based on our efforts to date, we expect the recognition of the right-of-use asset and lease liability for our real estate and equipment leases will have a material impact on the Consolidated Balance Sheets. We do not expect this standard to have a material impact on our future Consolidated Statements of Earnings.
NOTE 2. ACQUISITIONS AND DIVESTITURES
For a description of our material acquisition activity, refer to Note 3 of our 2017 Annual Report on Form 10-K.
We continually evaluate potential acquisitions and divestitures that align with our portfolio strategy and expedite the evolution of our portfolio into new and attractive business areas. We have completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each business reflects a number of factors including the future earnings and cash flow potential of the business, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which we acquired the business, the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses, and the complementary strategic fit and resulting synergies the business brings to existing operations.
We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact in connection with certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
Pending Acquisitions
Advanced Sterilization Products
On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. The transaction is expected to close no later than early 2019 and is subject to customary closing conditions, including regulatory approvals.
ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.
Gordian
On July 2, 2018, we entered into a definitive agreement to acquire TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service. The purchase price for the acquisition is $775 million and the transaction is expected to close in the third quarter of 2018. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to be financed with available cash.
Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facilities metrics databases via a subscription-based model.
10
Planned Divestiture of A&S Business
On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp (“Altra”) in a tax-efficient Reverse Morris Trust transaction. In the transaction, we will receive approximately $1.4 billion in cash and debt retirement, and our shareholders will receive in the aggregate 35 million shares of Altra, representing approximately 54% of outstanding shares of Altra common stock immediately following the transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems, and generated approximately $907 million in revenue for the year ended December 31, 2017. The transaction is expected to close by the end of 2018, subject to customary closing conditions, including receipt of certain regulatory approvals, Altra shareholder approval, and our receipt of confirmation of the tax treatment of certain matters. Upon closing of the transaction, we will classify the historical results of the A&S Business as discontinued operations in our financial statements.
NOTE 3. GOODWILL
The following is a rollforward of our goodwill ($ in millions):
Balance, December 31, 2017 |
$ |
5,098.5 |
|
Attributable to 2018 acquisitions |
1.8 |
||
Foreign currency translation & other |
(18.4 |
) |
|
Balance, June 29, 2018 |
$ |
5,081.9 |
The carrying value of goodwill by segment is summarized as follows ($ in millions):
June 29, 2018 |
December 31, 2017 |
||||||
Professional Instrumentation |
$ |
3,321.1 |
$ |
3,331.0 |
|||
Industrial Technologies |
1,760.8 |
1,767.5 |
|||||
Total goodwill |
$ |
5,081.9 |
$ |
5,098.5 |
We have not identified any “triggering” events which would have indicated a potential impairment of goodwill in the six months ended June 29, 2018.
NOTE 4. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
• |
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
• |
Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation. |
• |
Level 3 inputs are unobservable inputs based on our assumptions. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. |
Below is a summary of financial liabilities that are measured at fair value on a recurring basis ($ in millions):
Quoted Prices
in Active
Market
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total |
||||||||||||
June 29, 2018 |
|||||||||||||||
Deferred compensation liabilities |
$ |
— |
$ |
21.7 |
$ |
— |
$ |
21.7 |
|||||||
December 31, 2017 |
|||||||||||||||
Deferred compensation liabilities |
$ |
— |
$ |
20.9 |
$ |
— |
$ |
20.9 |
11
Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are as follows ($ in millions):
June 29, 2018 |
December 31, 2017 |
||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Current portion of long-term debt |
$ |
799.3 |
$ |
796.4 |
$ |
— |
$ |
— |
|||||||
Long-term debt, net of current maturities |
$ |
2,927.4 |
$ |
2,823.9 |
$ |
4,056.2 |
$ |
4,051.8 |
As of June 29, 2018 and December 31, 2017, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.
The fair values of the current portion of long-term debt and long-term debt were based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing. The fair value of cash and cash equivalents, accounts receivable, net and trade accounts payable approximates their carrying amount due to the short-term maturities of these instruments.
NOTE 5. FINANCING AND CAPITAL
Financing
The carrying value of the components of our long-term debt were as follows ($ in millions):
June 29, 2018 |
December 31, 2017 |
||||||
U.S. dollar-denominated commercial paper |
$ |
339.8 |
$ |
665.1 |
|||
Euro-denominated commercial paper |
275.2 |
282.7 |
|||||
U.S. dollar variable interest rate term loan due 2019 |
500.0 |
500.0 |
|||||
Yen variable interest rate term loan due 2022 |
124.5 |
122.4 |
|||||
1.80% senior unsecured notes due 2019 |
299.3 |
298.9 |
|||||
2.35% senior unsecured notes due 2021 |
746.5 |
745.9 |
|||||
3.15% senior unsecured notes due 2026 |
891.5 |
891.0 |
|||||
4.30% senior unsecured notes due 2046 |
546.8 |
546.8 |
|||||
Other long-term debt |
3.1 |
3.4 |
|||||
Long-term debt |
3,726.7 |
4,056.2 |
|||||
Less: current portion of long-term debt |
799.3 |
— |
|||||
Long-term debt, net of current maturities |
$ |
2,927.4 |
$ |
4,056.2 |
Unamortized debt discounts, premiums and issuance costs of $16.1 million and $18.2 million as of June 29, 2018 and December 31, 2017, respectively, are netted against the aggregate principal amounts of the components of debt table above. Refer to Note 9 of our 2017 Annual Report on Form 10-K for further details of our debt financing.
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Credit support for the Commercial Paper Programs is provided by a five-year $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (the “Revolving Credit Facility”) which can also be used for working capital and other general corporate purposes. As of June 29, 2018, no borrowings were outstanding under the Revolving Credit Facility.
12
The details of our Commercial Paper Programs as of June 29, 2018 are as follows ($ in millions):
Carrying value |
Annual effective rate |
Weighted average remaining maturity (in days) |
||||||
U.S. dollar-denominated commercial paper |
$ |
339.8 |
2.39 |
% |
9 |
|||
Euro-denominated commercial paper |
$ |
275.2 |
(0.10 |
)% |
76 |
We classified our borrowings outstanding under the Commercial Paper Programs as long-term debt in the accompanying Consolidated Condensed Balance Sheets as we had the intent and ability, as supported by availability under the Revolving Credit Facility referenced above, to refinance these borrowings for at least one year from the balance sheet date.
As of June 29, 2018, we were in compliance with all of our covenants.
Capital
On June 29, 2018, we issued 1,380,000 shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received $1.34 billion in proceeds from the issuance of the MCPS, net of $36 million of issuance costs. We will use the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures. We expect to pay up to an additional $1.5 million in issuance costs in the third quarter of 2018.
Each outstanding share of MCPS will convert automatically on July 1, 2021 (“the mandatory conversion date”) into between 10.8554 and 13.2979 common shares, subject to anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the average volume weighted average price per share of our common stock over the 20 consecutive trading day period preceding the mandatory conversion date. At any time prior to July 1, 2021, holders may elect to convert each share of the MCPS into shares of common stock at the rate of 10.8554, subject to anti-dilution adjustments. In the event of a fundamental change, the MCPS will convert at the fundamental change rates specified in the certificate of designations, and the holders of MCPS would be entitled to a fundamental change make-whole dividend.
We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock in January, April, July and October of each year, commencing on October 1, 2018 and ending on July 1, 2021. Dividends that are declared will be payable on the dividend payment dates to holders of record on the immediately preceding March 15, June 15, September 15 and December 15 (each a “record date”), whether or not such holders convert their shares, or such shares are automatically converted, after the corresponding record date.
Dividends on our MCPS are payable on a cumulative basis when, as and if declared by our Board, at an annual rate of 5.0% of the liquidation preference of $1,000 per share (equivalent to $50.00 annually per share). The dividend on the MCPS for the first dividend period will be $12.78 per share and will be payable, when, as and if declared, on October 1, 2018 to the holders of record at the close of business on September 15, 2018. No dividends on our MCPS were declared as of June 29, 2018.
Subsequent Event
On July 20, 2018, we prepaid $325 million of our outstanding U.S variable interest rate term loan due in 2019. There were no prepayment penalties associated with this payment.
NOTE 6. SALES
On January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policy under ASC Topic 605 Revenue Recognition. We recorded an immaterial transition adjustment to opening retained earnings as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact to sales as a result of applying Topic 606 was immaterial for the three and six months ended June 29, 2018.
Our significant accounting policies are detailed in Note 2 of our 2017 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below and have been applied prospectively from the adoption date of January 1, 2018:
13
Revenue Recognition—We derive revenues primarily from the sale of Professional Instrumentation and Industrial Technologies products and services. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.
Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract; these allowances and rebates are reflected as a reduction in the contract transaction price. Significant judgment is exercised in determining product returns, customer allowances and rebates, and are estimated based on historical experience and known trends.
Most of our sales contracts contain standard terms and conditions. We evaluate contracts to identify distinct goods and services promised in the contract (performance obligations). Sometimes this evaluation involves judgment to determine whether the goods or services are highly dependent on or highly interrelated with one another, or whether such goods or services significantly modify or customize one another. Certain customer arrangements include multiple performance obligations, typically hardware, installation, training, consulting, services and/or post contract support (“PCS”). Generally, these elements are delivered within the same reporting period, except PCS or other services. We allocate the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation sometimes requires significant judgment.
Our principal terms of sale are FOB Shipping Point, or equivalent, and, as such, we primarily record revenue upon shipment as we have transferred control to the customer at that point and our performance obligations are satisfied. We evaluate contracts with delivery terms other than FOB Shipping Point and recognize revenue when we have transfered control and satisfied our performance obligations. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation, other services noted above or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Further, revenue related to separately priced extended warranty and product maintenance agreements is deferred when appropriate and recognized as revenue over the term of the agreement.
Contract Assets — In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. Contract assets were immaterial as of June 29, 2018.
Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions. Deferred sales-related commissions are generally not capitalized as the amortization period is one year or less, and we elected to use the practical expedient to expense these sales commissions as incurred.
Impairment losses recognized on our contract-related assets were immaterial in the three and six months months ended June 29, 2018.
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to PCS and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets.
Our contract liabilities consisted of the following ($ in millions):
June 29, 2018 |
December 31, 2017 |
||||||
Deferred revenue - current |
$ |
210.5 |
$ |
213.4 |
|||
Deferred revenue - noncurrent |
91.8 |
86.9 |
|||||
Total contract liabilities |
$ |
302.3 |
$ |
300.3 |
14
In the three and six months ended June 29, 2018, we recognized $21 million and $64 million of revenue related to our contract liabilities at January 1, 2018, respectively. The change in our contract liabilities from December 31, 2017 to June 29, 2018 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from June 29, 2018, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.
The aggregate performance obligations attributable to each of our segments is as follows ($ in millions):
June 29, 2018 |
|||
Professional Instrumentation |
$ |
117.0 |
|
Industrial Technologies |
453.2 |
||
Total |
$ |
570.2 |
The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 40 percent within the next two years, approximately 70 percent within the next three years and substantially all within four years.
15
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by geographic location, major product group and end market for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three months ended June 29, 2018 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Geographic: |
|||||||||||
United States |
$ |
993.5 |
$ |
435.9 |
$ |
557.6 |
|||||
China |
161.7 |
101.0 |
60.7 |
||||||||
Germany |
84.3 |
32.0 |
52.3 |
||||||||
All other (each country individually less than 5% of total sales) |
616.5 |
320.1 |
296.4 |
||||||||
Total |
$ |
1,856.0 |
$ |
889.0 |
$ |
967.0 |
|||||
Major Products Group: |
|||||||||||
Professional tools and equipment |
$ |
1,245.9 |
$ |
719.8 |
$ |
526.1 |
|||||
Industrial automation, controls and sensors |
333.5 |
104.8 |
228.7 |
||||||||
Franchise distribution |
152.2 |
— |
152.2 |
||||||||
All other |
124.4 |
64.4 |
60.0 |
||||||||
Total |
$ |
1,856.0 |
$ |
889.0 |
$ |
967.0 |
|||||
End markets: |
|||||||||||
Direct sales: |
|||||||||||
Retail fueling (a)
|
$ |
460.9 |
$ |
— |
$ |
460.9 |
|||||
Industrial & Manufacturing |
175.4 |
97.2 |
78.2 |
||||||||
Vehicle repair (a)
|
137.7 |
— |
137.7 |
||||||||
Utilities & Power |
46.6 |
46.0 |
0.6 |
||||||||
Other |
541.4 |
331.8 |
209.6 |
||||||||
Total direct sales |
1,362.0 |
475.0 |
887.0 |
||||||||
Distributors(a)
|
494.0 |
414.0 |
80.0 |
||||||||
Total |
$ |
1,856.0 |
$ |
889.0 |
$ |
967.0 |
|||||
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended June 29, 2018 was $858.4 million. |
16
Disaggregation of revenue for the three months ended June 30, 2017 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Geographic: |
|||||||||||
United States |
$ |
888.9 |
$ |
353.7 |
$ |
535.2 |
|||||
China |
134.2 |
91.9 |
42.3 |
||||||||
Germany |
71.7 |
27.5 |
44.2 |
||||||||
All other (each country individually less than 5% of total sales) |
534.0 |
285.9 |
248.1 |
||||||||
Total |
$ |
1,628.8 |
$ |
759.0 |
$ |
869.8 |
|||||
Major Products Group: |
|||||||||||
Professional tools and equipment |
$ |
1,055.0 |
$ |
593.3 |
$ |
461.7 |
|||||
Industrial automation, controls and sensors |
305.6 |
98.5 |
207.1 |
||||||||
Franchise distribution |
149.5 |
— |
149.5 |
||||||||
All other |
118.7 |
67.2 |
51.5 |
||||||||
Total |
$ |
1,628.8 |
$ |
759.0 |
$ |
869.8 |
|||||
End markets: |
|||||||||||
Direct sales: |
|||||||||||
Retail fueling (a)
|
$ |
401.5 |
$ |
— |
$ |
401.5 |
|||||
Industrial & Manufacturing |
103.6 |
57.5 |
46.1 |
||||||||
Vehicle repair (a)
|
135.6 |
— |
135.6 |
||||||||
Utilities & Power |
59.3 |
57.9 |
1.4 |
||||||||
Other |
498.7 |
288.2 |
210.5 |
||||||||
Total direct sales |
1,198.7 |
403.6 |
795.1 |
||||||||
Distributors(a)
|
430.1 |
355.4 |
74.7 |
||||||||
Total |
$ |
1,628.8 |
$ |
759.0 |
$ |
869.8 |
|||||
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended June 30, 2017 was $774.2 million. |
17
Disaggregation of revenue for the six months ended June 29, 2018 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Geographic: |
|||||||||||
United States |
$ |
1,910.3 |
$ |
844.3 |
$ |
1,066.0 |
|||||
China |
318.1 |
209.3 |
108.8 |
||||||||
Germany |
170.8 |
67.9 |
102.9 |
||||||||
All other (each country individually less than 5% of total sales) |
1,197.5 |
639.2 |
558.3 |
||||||||
Total |
$ |
3,596.7 |
$ |
1,760.7 |
$ |
1,836.0 |
|||||
Major Products Group: |
|||||||||||
Professional tools and equipment |
$ |
2,366.0 |
$ |
1,426.3 |
$ |
939.7 |
|||||
Industrial automation, controls and sensors |
661.3 |
209.4 |
451.9 |
||||||||
Franchise distribution |
325.1 |
— |
325.1 |
||||||||
All other |
244.3 |
125.0 |
119.3 |
||||||||
Total |
$ |
3,596.7 |
$ |
1,760.7 |
$ |
1,836.0 |
|||||
End markets: |
|||||||||||
Direct sales: |
|||||||||||
Retail fueling (a)
|
$ |
809.6 |
$ |
— |
$ |
809.6 |
|||||
Industrial & Manufacturing |
331.6 |
187.8 |
143.8 |
||||||||
Vehicle repair (a)
|
296.4 |
— |
296.4 |
||||||||
Utilities & Power |
102.7 |
101.5 |
1.2 |
||||||||
Other |
1,059.3 |
632.6 |
426.7 |
||||||||
Total direct sales |
2,599.6 |
921.9 |
1,677.7 |
||||||||
Distributors(a)
|
997.1 |
838.8 |
158.3 |
||||||||
Total |
$ |
3,596.7 |
$ |
1,760.7 |
$ |
1,836.0 |
|||||
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the six months ended June 29, 2018 was $1,647.3 million. |
18
Disaggregation of revenue for the six months ended June 30, 2017 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Geographic: |
|||||||||||
United States |
$ |
1,735.7 |
$ |
684.1 |
$ |
1,051.6 |
|||||
China |
264.1 |
182.4 |
81.7 |
||||||||
Germany |
141.3 |
56.2 |
85.1 |
||||||||
All other (each country individually less than 5% of total sales) |
1,022.9 |
552.4 |
470.5 |
||||||||
Total |
$ |
3,164.0 |
$ |
1,475.1 |
$ |
1,688.9 |
|||||
Major Products Group: |
|||||||||||
Professional tools and equipment |
$ |
2,016.6 |
$ |
1,151.9 |
$ |
864.7 |
|||||
Industrial automation, controls and sensors |
596.3 |
194.6 |
401.7 |
||||||||
Franchise distribution |
321.2 |
— |
321.2 |
||||||||
All other |
229.9 |
128.6 |
101.3 |
||||||||
Total |
$ |
3,164.0 |
$ |
1,475.1 |
$ |
1,688.9 |
|||||
End markets: |
|||||||||||
Direct sales: |
|||||||||||
Retail fueling (a)
|
$ |
748.0 |
$ |
— |
$ |
748.0 |
|||||
Industrial & Manufacturing |
213.5 |
122.6 |
90.9 |
||||||||
Vehicle repair (a)
|
293.5 |
— |
293.5 |
||||||||
Utilities & Power |
111.9 |
109.6 |
2.3 |
||||||||
Other |
959.2 |
549.9 |
409.3 |
||||||||
Total direct sales |
2,326.1 |
782.1 |
1,544.0 |
||||||||
Distributors(a)
|
837.9 |
693.0 |
144.9 |
||||||||
Total |
$ |
3,164.0 |
$ |
1,475.1 |
$ |
1,688.9 |
|||||
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the six months ended June 30, 2017 was $1,521.1 million. |
19
NOTE 7. PENSION PLANS
For a full description of our noncontributory defined benefit pension plans, including the U.S. plan acquired in 2017, refer to Note 10 of our 2017 Annual Report on Form 10-K.
The following sets forth the components of our net periodic pension costs associated with our noncontributory defined benefit pension plans ($ in millions):
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
U.S. Pension Benefits: |
|||||||||||||||
Interest cost |
$ |
0.3 |
$ |
— |
$ |
0.6 |
$ |
— |
|||||||
Expected return on plan assets |
(0.3 |
) |
— |
(0.7 |
) |
— |
|||||||||
Net periodic pension cost |
$ |
— |
$ |
— |
$ |
(0.1 |
) |
$ |
— |
||||||
Non-U.S. Pension Benefits: |
|||||||||||||||
Service cost |
$ |
0.4 |
$ |
1.0 |
$ |
0.9 |
$ |
2.0 |
|||||||
Interest cost |
1.5 |
1.5 |
3.0 |
2.9 |
|||||||||||
Expected return on plan assets |
(1.8 |
) |
(1.8 |
) |
(3.7 |
) |
(3.6 |
) |
|||||||
Amortization of net loss |
0.9 |
1.1 |
1.8 |
2.2 |
|||||||||||
Net curtailment and settlement loss recognized |
0.6 |
— |
0.6 |
— |
|||||||||||
Net periodic pension cost |
$ |
1.6 |
$ |
1.8 |
$ |
2.6 |
$ |
3.5 |
On January 1, 2018, we retrospectively adopted ASU No. 2017-07, Compensation–Retirement Benefits (Topic 715). Accordingly, we have included all components of net periodic pension costs, with the exception of service costs, in other non-operating expenses as a component of non-operating income in the accompanying Consolidated Condensed Statements of Earnings. Service costs continue to be included in cost of sales and selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings according to the classification of the participant’s compensation. This reclassification of prior year pension cost increased operating income by $0.8 million and $1.5 million for the three and six months ended June 30, 2017, respectively.
Employer Contributions
During 2018, our cash contribution requirements for our non-U.S. defined benefit pension plans are expected to be approximately $10 million. We do not expect to make contributions to the U.S. plan during 2018. The actual amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors.
NOTE 8. INCOME TAXES
Our effective tax rates for the three and six months ended June 29, 2018 were 17.1% and 16.8%, respectively, as compared to 26.3% and 26.4% for the three and six months ended June 30, 2017, respectively. The decrease for both the three and six month periods is due primarily to favorable impacts in 2018 resulting from a lower statutory tax rate in the United States and foreign-derived intangible income tax benefits, partially offset by the loss of the United States domestic production activities deduction, all of which are a result of the Tax Cuts and Jobs Act (“TCJA”), and other federal and international tax benefits.
20
Our effective tax rates for 2018 and 2017 differ from the U.S. federal statutory rate of 21% and 35%, respectively, due primarily to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law and the effect of favorable adjustments to the provisional estimates recorded in 2017 related to the TCJA as permitted under SEC Staff Accounting Bulletin No. 118 (“SAB 118”). We recorded an adjustment of $1.9 million to our provisional estimates during the three months ended June 29, 2018, which decreased tax expense and decreased our effective tax rate by 50 basis points, and was attributable to transition taxes, specifically from a decrease in foreign remittance taxes. We recorded an adjustment of $6.1 million to our provisional estimates during the six months ended June 29, 2018, which decreased tax expense and decreased our effective tax rate by 90 basis points, and was related to a $15.1 million decrease from revaluation of certain deferred tax assets and liabilities, a $1.9 million decrease related to transition taxes, specifically from decrease in foreign remittance taxes, and an offsetting $10.9 million increase from a reduction of foreign tax credits. We will continue to evaluate the effects of the TCJA on the 2017 provisional estimates through the end of the SAB 118 allowable measurement period. Refer to Note 11 of our 2017 Annual Report on Form 10-K for further details including disclosures pursuant to SAB 118 interpretive guidance, and provisional estimates for all TCJA effects.
On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 715): Intra-entity Transfers of Assets Other Than Inventory using the modified retrospective method, and recorded an immaterial adjustment to opening retained earnings as of January 1, 2018.
NOTE 9. STOCK-BASED COMPENSATION
Our stock-based compensation program (the “Stock Plan”) provides for the grant of stock appreciation rights, performance stock units, restricted stock units, restricted stock awards and performance stock awards (collectively, “Stock Awards”), stock options or any other stock-based award. As of June 29, 2018, approximately 22 million shares of our common stock were available for subsequent issuance under the Stock Plan. For a full description of our stock-based compensation program refer to Note 15 of our 2017 Annual Report on Form 10-K.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of selling, general & administrative expenses in the accompanying Consolidated Condensed Statements of Earnings based on the portion of the awards that are ultimately expected to vest.
The following summarizes the components of our stock-based compensation expense under the Stock Plan ($ in millions):
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Stock Awards: |
|||||||||||||||
Pretax compensation expense |
$ |
8.5 |
$ |
8.0 |
$ |
15.6 |
$ |
15.4 |
|||||||
Income tax benefit |
(1.8 |
) |
(3.1 |
) |
(3.3 |
) |
(5.6 |
) |
|||||||
Stock Award expense, net of income taxes |
6.7 |
4.9 |
12.3 |
9.8 |
|||||||||||
Stock options: |
|||||||||||||||
Pretax compensation expense |
6.1 |
5.3 |
10.9 |
9.9 |
|||||||||||
Income tax benefit |
(1.3 |
) |
(1.8 |
) |
(2.3 |
) |
(3.4 |
) |
|||||||
Stock option expense, net of income taxes |
4.8 |
3.5 |
8.6 |
6.5 |
|||||||||||
Total stock-based compensation: |
|||||||||||||||
Pretax compensation expense |
14.6 |
13.3 |
26.5 |
25.3 |
|||||||||||
Income tax benefit |
(3.1 |
) |
(4.9 |
) |
(5.6 |
) |
(9.0 |
) |
|||||||
Total stock-based compensation expense, net of income taxes |
$ |
11.5 |
$ |
8.4 |
$ |
20.9 |
$ |
16.3 |
21
The following summarizes the unrecognized compensation cost for the Stock Plan awards as of June 29, 2018. This compensation cost is expected to be recognized over a weighted average period of approximately two years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
Stock Awards |
$ |
59.6 |
|
Stock options |
56.0 |
||
Total unrecognized compensation cost |
$ |
115.6 |
NOTE 10. COMMITMENTS AND CONTINGENCIES
For a description of our litigation and contingencies, refer to Notes 13 and 14 of our 2017 Annual Report on Form 10-K.
Our operating leases extend for varying periods of time up to twenty years and, in some cases, contain renewal options that would extend existing terms beyond twenty years. Minimum rental payments for all operating leases having initial or remaining noncancelable lease terms in excess of one year for 2018 through 2022 and thereafter are: $48 million in 2018, $42 million in 2019, $31 million in 2020, $20 million in 2021, $16 million in 2022 and $20 million thereafter.
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of our accrued warranty liability ($ in millions):
Balance, December 31, 2017 |
$ |
69.4 |
|
Accruals for warranties issued during the period |
37.2 |
||
Settlements made |
(39.4 |
) |
|
Effect of foreign currency translation |
(0.2 |
) |
|
Balance, June 29, 2018 |
$ |
67.0 |
22
NOTE 11. NET EARNINGS PER SHARE
Basic net earnings per share (“EPS”) is calculated by dividing net earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans under the treasury stock method, except where the inclusion of such shares would have an anti-dilutive impact. There were 1.5 million anti-dilutive options to purchase shares excluded from the diluted EPS calculation for both the three and six months ended June 29, 2018. The anti-dilutive options to purchase shares excluded from the diluted EPS calculation were immaterial for the three and six months ended June 30, 2017.
The dilutive impact from our MCPS issued on June 29, 2018 is calculated under the if-converted method.
Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts):
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Numerator |
|||||||||||||||
Net earnings |
$ |
295.0 |
$ |
240.1 |
$ |
556.2 |
$ |
439.8 |
|||||||
Mandatory convertible preferred stock cumulative dividends |
(0.2 |
) |
— |
(0.2 |
) |
— |
|||||||||
Net earnings attributable to common stockholders |
$ |
294.8 |
$ |
240.1 |
$ |
556.0 |
$ |
439.8 |
|||||||
Denominator |
|||||||||||||||
Weighted average common shares outstanding used in basic earnings per share |
349.2 |
347.2 |
348.9 |
347.1 |
|||||||||||
Incremental common shares from: |
|||||||||||||||
Assumed exercise of dilutive options and vesting of dilutive Stock Awards |
5.6 |
5.0 |
5.7 |
4.7 |
|||||||||||
Assumed conversion of outstanding mandatory convertible preferred stock |
0.2 |
— |
0.1 |
— |
|||||||||||
Weighted average common shares outstanding used in diluted earnings per share |
355.0 |
352.2 |
354.7 |
351.8 |
|||||||||||
Net earnings per common share - Basic |
$ |
0.84 |
$ |
0.69 |
$ |
1.59 |
$ |
1.27 |
|||||||
Net earnings per share - Diluted |
$ |
0.83 |
$ |
0.68 |
$ |
1.57 |
$ |
1.25 |
We declared and paid cash dividends per share during the periods presented as follows:
Dividend Per
Common Share
|
Amount
($ in millions)
|
||||||
2018: |
|||||||
First quarter |
$ |
0.07 |
$ |
24.3 |
|||
Second quarter |
0.07 |
24.4 |
|||||
Total |
$ |
0.14 |
$ |
48.7 |
|||
2017: |
|||||||
First quarter |
$ |
0.07 |
$ |
24.3 |
|||
Second quarter |
0.07 |
24.3 |
|||||
Total |
$ |
0.14 |
$ |
48.6 |
As of June 29, 2018, no dividends have been declared on our MCPS.
23
NOTE 12. SEGMENT INFORMATION
We report our results in two separate business segments consisting of Professional Instrumentation and Industrial Technologies. When determining the reportable segments, we aggregated operating segments based on their similar economic and operating characteristics. Operating profit amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance. As of June 29, 2018, there have been no material changes in total assets or liabilities by segment since December 31, 2017. Segment results are shown below ($ in millions):
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Sales: |
|||||||||||||||
Professional Instrumentation |
$ |
889.0 |
$ |
759.0 |
$ |
1,760.7 |
$ |
1,475.1 |
|||||||
Industrial Technologies |
967.0 |
869.8 |
1,836.0 |
1,688.9 |
|||||||||||
Total |
$ |
1,856.0 |
$ |
1,628.8 |
$ |
3,596.7 |
$ |
3,164.0 |
|||||||
Operating Profit: |
|||||||||||||||
Professional Instrumentation |
$ |
219.4 |
$ |
185.5 |
$ |
425.8 |
$ |
344.0 |
|||||||
Industrial Technologies |
200.9 |
181.7 |
359.2 |
334.5 |
|||||||||||
Other |
(37.9 |
) |
(18.1 |
) |
(64.4 |
) |
(33.8 |
) |
|||||||
Total Operating Profit |
382.4 |
349.1 |
720.6 |
644.7 |
|||||||||||
Interest expense |
(25.3 |
) |
(22.7 |
) |
(49.9 |
) |
(45.3 |
) |
|||||||
Other non-operating expenses |
(1.1 |
) |
(0.8 |
) |
(1.8 |
) |
(1.5 |
) |
|||||||
Earnings before income taxes |
$ |
356.0 |
$ |
325.6 |
$ |
668.9 |
$ |
597.9 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fortive Corporation (“Fortive”, the “Company,” “we,” “us,” or “our”) is a diversified industrial growth company comprised of Professional Instrumentation and Industrial Technologies segments and encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management. The following discussion should be read in conjunction with the MD&A and consolidated and combined financial statements included in our 2017 Annual Report on Form 10-K. Our MD&A is divided into five sections:
• |
Information Relating to Forward-Looking Statements |
• |
Overview |
• |
Results of Operations |
• |
Liquidity and Capital Resources |
• |
Critical Accounting Estimates |
24
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; impact on changes to tax laws; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.
Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:
• |
Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and financial statements. Furthermore, significant uncertainties related to changes in governmental policies toward international trade currently exist, and depending on how such uncertainties are resolved, could have a material adverse effect on our financial results. |
• |
Potential changes in international trade relations between China and the United States could have a material adverse effect on our business and financial statements. |
• |
Our growth could suffer if the markets into which we sell our products, software and services decline, do not grow as anticipated or experience cyclicality. |
• |
We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products, software and services. |
• |
Changes in industry standards, governmental regulations and applicable laws may reduce demand for our products, software or services or increase our expenses. |
• |
Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price. |
• |
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products, software and services based on technological innovation. |
• |
Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners. |
• |
Our acquisition of businesses, joint ventures and strategic relationships could negatively impact our financial statements. |
• |
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities. |
• |
Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we have sold could adversely affect our financial statements. |
25
• |
We are pursuing a plan to combine four operating companies from our Automation & Specialty platform into a new company and to merge that new company into a subsidiary of Altra Industrial Motion Corp. in a tax-efficient transaction. The proposed transaction may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits. |
• |
Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our reputation, business and financial statements. |
• |
Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our business, financial statements and reputation. |
• |
International economic, trade, political, legal, compliance and business factors could negatively affect our business and financial statements. |
• |
We may be required to recognize impairment charges for our goodwill and other intangible assets. |
• |
Foreign currency exchange rates may adversely affect our financial statements. |
• |
Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. |
• |
We have incurred a significant amount of debt, and our debt will increase further if we incur additional debt and do not retire existing debt. |
• |
We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our financial statements. |
• |
If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights. |
• |
Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products, software or services. |
• |
Defects and unanticipated use or inadequate disclosure with respect to our products, software or services could adversely affect our business, reputation and financial statements. |
• |
Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements. |
• |
Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations. |
• |
If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies. |
• |
A significant disruption in, or breach in security of, information technology systems we use could adversely affect our business. |
• |
Our restructuring actions could have long-term adverse effects on our business. |
• |
Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations. |
• |
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed. |
• |
Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock. |
• |
Our amended and restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the |
26
sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders which could discourage lawsuits against us and our directors and officers.
• |
As an independent, publicly traded company, we may not enjoy the same benefits that we did as a part of Danaher Corporation (“Danaher” or “Former Parent”). |
• |
Potential indemnification liabilities to Danaher pursuant to our separation agreement with Danaher could materially and adversely affect our businesses, financial condition, results of operations and cash flows. |
• |
In connection with our separation from Danaher, Danaher has indemnified us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Danaher’s ability to satisfy its indemnification obligation will not be impaired in the future. |
• |
There could be significant liability if the separation from Danaher fails to qualify as a tax-free transaction for U.S. federal income tax purposes. |
See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Form 10-Q for the fiscal quarter ended March 30, 2018 and “Part II – Item 1A. Risk Factors” in this Form 10-Q for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
Fortive is a diversified, multinational industrial growth company with global operations and our businesses are affected by worldwide, regional and industry-specific economic and political factors. Our geographic and industry diversity, as well as the range of our products, software and services, typically help limit the impact of any one industry or the economy of any single country (except for the United States) on our operating results. Given the broad range of products manufactured, software and services provided and geographies served, we do not use any indices other than general economic trends to predict the overall outlook for the Company. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.
As a result of our geographic and industry diversity, we face a variety of opportunities and challenges, including technological development in most of the markets we serve, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force and consolidation of our competitors. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America and Asia with the exception of Japan and Australia. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend in particular on our ability to expand our business across geographies and market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products, services and software, expand and improve the effectiveness of our sales force and continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated environment. We are making significant investments, organically and through acquisitions, to address technological change in the markets we serve and to improve our manufacturing, research and development and customer-facing resources in order to be responsive to our customers throughout the world.
In this report, references to sales from existing businesses refers to sales from operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding (1) the impact from acquired businesses and (2) the impact of currency translation. References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations prior to the first anniversary of the divestiture. The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period. Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies.
Management believes that reporting the non-GAAP financial measure of sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating comparisons of our sales
27
performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisitions and divestiture related items because the nature, size and number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation from sales from existing businesses because the impact of currency translation is not under management’s control and is subject to volatility. Management believes the exclusion of the effect of acquisitions and divestitures and currency translation may facilitate the assessment of underlying business trends and may assist in comparisons of long-term performance. References to sales volume refer to the impact of both price and unit sales.
Business Performance and Outlook
While differences exist among our businesses, on an overall basis, demand for our products, software and services increased during the three months ended June 29, 2018 as compared to the comparable period of 2017 resulting in aggregate year-over-year total sales growth of 13.9% and sales growth from existing businesses of 5.3%. Our continued application and deployment of the Fortive Business System including investments in sales growth initiatives and new product introductions, as well as increased demand in both high-growth and developed markets and other business-specific factors discussed below, contributed to overall sales growth from existing businesses across the majority of our businesses in the period.
On a year-over-year basis, sales growth from existing businesses was broad based across our businesses in both our Professional Instrumentation and Industrial Technologies segments. We are beginning to see an improvement in our Transportation Technologies businesses as a result of the approaching deadline of the liability shift related to the enhanced credit card security requirements in the Unites States based on the Europay, Mastercard and Visa (“EMV”) global standards.
Geographically, sales from existing businesses grew at a mid-single digit rate in both developed and high-growth markets during the three months ended June 29, 2018 as compared to the comparable 2017 period. Year-over-year sales from existing businesses grew at a low double-digit rate in China, at a mid-single digit rate North America and at a low-single digit rate in Western Europe during the three months ended June 29, 2018.
We expect overall sales from existing businesses to continue to grow on a year-over-year basis during the remainder of 2018; however, we continue to monitor developments from macro-economic and geopolitical uncertainties, including global uncertainties related to governmental policies toward international trade, monetary and fiscal policies; including the current uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations, and tariffs. We are also monitoring other factors identified above in “—Information Relating to Forward-Looking Statements.”
Pending Acquisitions
Advanced Sterilization Products
On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. The transaction is expected to close no later than early 2019 and is subject to customary closing conditions, including regulatory approvals.
ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.
Gordian
On July 2, 2018, we entered into a definitive agreement to acquire TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service. The purchase price for the acquisition is $775 million and the transaction is expected to close in the third quarter of 2018. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to be financed with available cash.
Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facilities metrics databases via a subscription-based model.
28
Planned Divestiture of A&S Business
On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp (“Altra”) in a tax-efficient Reverse Morris Trust transaction. In the transaction, we will receive approximately $1.4 billion in cash and debt retirement, and our shareholders will receive in the aggregate 35 million shares of Altra, representing approximately 54% of outstanding shares of Altra common stock immediately following the transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems, and generated approximately $907 million in revenue for the year ended December 31, 2017. The transaction is expected to close by the end of 2018, subject to customary closing conditions, including receipt of certain regulatory approvals, Altra shareholder approval and our receipt of confirmation of the tax treatment of certain matters. Upon closing of the transaction, we will classify the A&S Business as discontinued operations in our financial statements.
RESULTS OF OPERATIONS
Sales Growth
The following tables summarize total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three and six months ended June 29, 2018 as compared to the comparable periods of 2017:
Components of Sales Growth
% Change Three Months Ended June 29, 2018 vs. Comparable 2017 Period |
% Change Six Months Ended June 29, 2018 vs. Comparable 2017 Period |
||||
Total revenue growth (GAAP) |
13.9 |
% |
13.7 |
% |
|
Existing businesses (Non-GAAP) |
5.3 |
% |
4.0 |
% |
|
Acquisitions (Non-GAAP)
|
7.0 |
% |
7.2 |
% |
|
Currency exchange rates (Non-GAAP) |
1.6 |
% |
2.5 |
% |
Operating Profit Margins
Operating profit margin was 20.6% for the three months ended June 29, 2018, a decrease of 80 basis points as compared to 21.4% in the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
• |
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, net of the incremental year-over-year costs associated with various product development and sales and marketing growth investments — 50 basis points
|
Year-over-year operating profit margin comparisons were unfavorably impacted by:
• |
The incremental year-over-year net dilutive effect of acquired businesses — 70 basis points |
• |
The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 60 basis points |
Operating profit margin was 20.0% for the six months ended June 29, 2018, a decrease of 40 basis points as compared to 20.4% in the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
• |
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, net of the incremental year-over-year costs associated with various product development and sales and marketing growth investments — 80 basis points
|
Year-over-year operating profit margin comparisons were unfavorably impacted by:
• |
The incremental year-over-year net dilutive effect of acquired businesses — 80 basis points |
• |
The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 40 basis points |
29
Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions):
Three Months Ended |
Six Months Ended |
||||||||||||||
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
||||||||||||
Professional Instrumentation |
$ |
889.0 |
$ |
759.0 |
$ |
1,760.7 |
$ |
1,475.1 |
|||||||
Industrial Technologies |
967.0 |
869.8 |
1,836.0 |
1,688.9 |
|||||||||||
Total |
$ |
1,856.0 |
$ |
1,628.8 |
$ |
3,596.7 |
$ |
3,164.0 |
PROFESSIONAL INSTRUMENTATION
The Professional Instrumentation segment consists of our Advanced Instrumentation & Solutions and Sensing Technologies businesses. The Advanced Instrumentation & Solutions businesses provide product realization and field solutions services and products. Field solutions include a variety of compact professional test tools, thermal imaging and calibration equipment for electrical, industrial, electronic and calibration applications, online condition-based monitoring equipment; portable gas detection equipment, consumables, and software as a service (SaaS) offerings including safety/user behavior, asset management, and compliance monitoring; subscription-based technical, analytical, and compliance services to determine occupational and environmental radiation exposure; and computerized maintenance management software for critical infrastructure in utility, industrial, energy, construction, public safety, mining, and healthcare applications. Product realization services and products help developers and engineers across the end-to-end product creation cycle from concepts to finished products and also include highly-engineered energetic materials components in specialized vertical applications. Our Sensing Technologies business offers devices that sense, monitor and control operational or manufacturing variables, such as temperature, pressure, level, flow, turbidity and conductivity.
Professional Instrumentation Selected Financial Data
Three Months Ended |
Six Months Ended |
||||||||||||||
($ in millions) |
June 29, 2018 |
June 30, 2017 |
June 29, 2018 |
June 30, 2017 |
|||||||||||
Sales |
$ |
889.0 |
$ |
759.0 |
$ |
1,760.7 |
$ |
1,475.1 |
|||||||
Operating profit |
219.4 |
185.5 |
425.8 |
344.0 |
|||||||||||
Depreciation |
15.5 |
8.7 |
32.5 |
17.5 |
|||||||||||
Amortization |
16.3 |
7.7 |
33.5 |
15.5 |
|||||||||||
Operating profit as a % of sales |
24.7 |
% |
24.4 |
% |
24.2 |
% |
23.3 |
% |
|||||||
Depreciation as a % of sales |
1.7 |
% |
1.1 |
% |
1.8 |
% |
1.2 |
% |
|||||||
Amortization as a % of sales |
1.8 |
% |
1.0 |
% |
1.9 |
% |
1.1 |
% |
Components of Sales Growth
% Change Three Months Ended June 29, 2018 vs. Comparable 2017 Period |
% Change Six Months Ended June 29, 2018 vs. Comparable 2017 Period |
||||
Total revenue growth (GAAP) |
17.1 |
% |
19.4 |
% |
|
Existing businesses (Non-GAAP) |
3.4 |
% |
4.4 |
% |
|
Acquisitions (Non-GAAP) |
11.9 |
% |
12.1 |
% |
|
Currency exchange rates (Non-GAAP) |
1.8 |
% |
2.9 |
% |
Sales from existing businesses in the segment’s Advanced Instrumentation & Solutions businesses grew at a low-single digit and mid-single digit rate during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017. Year-over-year sales from existing businesses of field solutions products and services grew at a mid-single digit rate during the three and six months ended June 29, 2018, due to continued strong demand for industrial test and thermography equipment, network tools and SaaS offerings, offset somewhat by declines in demand for electrical grid condition-based monitoring equipment. Year-over-year sales from existing businesses of product realization solutions increased slightly during the three months ended June 29, 2018 and grew at a low-single digit rate during the six months ended June 29, 2018, as compared to the comparable periods of 2017, driven primarily by continued growth in the industrial and
30
manufacturing end market as well as increased demand for oscilloscopes and new product introductions. These increases were partly offset by declines in the consumer electronics end-market, lower demand for design, engineering and manufacturing services as well as in the segment’s energetic materials business during the three and six months ended June 29, 2018. Geographically, demand from existing businesses increased on a year-over-year basis in North America, Western Europe and Japan during the three and six months ended June 29, 2018, which was partially offset by declines in Korea. In addition, demand from existing businesses increased in China during the six months ended June 29, 2018.
Sales from existing businesses in the segment’s Sensing Technologies businesses grew at a mid-single digit rate during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017 largely due to increased year-over-year demand in the industrial end market. Geographically, increases in sales from existing businesses on a year-over-year basis during the three and six months ended June 29, 2018 were driven by growth in Asia and Western Europe.
Year-over-year price increases in the Professional Instrumentation segment contributed 0.6% and 0.7% during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017 and are reflected as a component of the change in sales from existing businesses.
Operating profit margin increased 30 basis points during the three months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
• |
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates net of incremental year-over-year costs associated with various product development and sales and marketing growth investments — 180 basis points
|
Year-over-year operating profit margin comparisons were unfavorably impacted by:
• |
The incremental year-over-year net dilutive effect of acquired businesses — 150 basis points |
Operating profit margin increased 90 basis points during the six months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
• |
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates net of incremental year-over-year costs associated with various product development and sales and marketing growth investments — 240 basis points
|
Year-over-year operating profit margin comparisons were unfavorably impacted by:
• |
The incremental year-over-year net dilutive effect of acquired businesses — 150 basis points |
31
INDUSTRIAL TECHNOLOGIES
The Industrial Technologies segment consists of our Transportation Technologies, Automation & Specialty Components and Franchise Distribution businesses. Our Transportation Technologies business is a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management, and traffic management. The Automation & Specialty Components business provides a wide range of electromechanical and electronic motion control products and mechanical components, as well as supplemental braking systems for commercial vehicles. Our Franchise Distribution business manufactures and distributes professional tools and a full-line of wheel service equipment.
Industrial Technologies Selected Financial Data