10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on October 25, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One) |
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ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 28, 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 |
________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________
Delaware |
47-5654583 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification number)
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6920 Seaway Blvd
Everett, WA
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98203 |
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(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 every Interactive Data File required to be submitted 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 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
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company ¨
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Emerging growth company ¨
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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 October 18, 2018 was 333,962,913 .
FORTIVE CORPORATION
INDEX
FORM 10-Q
PART I - |
FINANCIAL INFORMATION |
Page |
Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II - |
OTHER INFORMATION |
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Item 1A. |
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Item 6. |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except per share amounts)
As of |
|||||||
September 28, 2018 |
December 31, 2017 |
||||||
(unaudited) |
|||||||
ASSETS |
|||||||
Current assets: |
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Cash and equivalents |
$ |
$ |
|||||
Accounts receivable, net |
|||||||
Inventories: |
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Finished goods |
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Work in process |
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Raw materials |
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Total inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net of accumulated depreciation of $1,135.4 and $1,086.8 at September 28, 2018 and December 31, 2017, respectively |
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Other assets |
|||||||
Goodwill |
|||||||
Other intangible assets, net |
|||||||
Total assets |
$ |
$ |
|||||
LIABILITIES AND EQUITY |
|||||||
Current liabilities: |
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Current portion of long-term debt |
$ |
$ |
|||||
Trade accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Other long-term liabilities |
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Long-term debt |
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Equity: |
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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 September 28, 2018; no shares issued or outstanding at December 31, 2017 |
|||||||
Common stock: $0.01 par value, 2.0 billion shares authorized; 350.3 and 348.2 million issued; 349.8 and 347.8 million outstanding at September 28, 2018 and December 31, 2017, respectively |
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Additional paid-in capital |
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Retained earnings |
|||||||
Accumulated other comprehensive income (loss) |
( |
) |
( |
) |
|||
Total Fortive stockholders’ equity |
|||||||
Noncontrolling interests |
|||||||
Total stockholders’ equity |
|||||||
Total liabilities and equity |
$ |
$ |
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 |
Nine Months Ended |
||||||||||||||
September 28, 2018 |
September 29, 2017 |
September 28, 2018 |
September 29, 2017 |
||||||||||||
Sales |
$ |
$ |
$ |
$ |
|||||||||||
Cost of sales |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Gross profit |
|||||||||||||||
Operating costs: |
|||||||||||||||
Selling, general and administrative expenses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Research and development expenses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Operating profit |
|||||||||||||||
Non-operating expenses: |
|||||||||||||||
Gain from acquisition |
|||||||||||||||
Interest expense, net |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Other non-operating expenses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Earnings before income taxes |
|||||||||||||||
Income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Net earnings |
|||||||||||||||
Mandatory convertible preferred stock cumulative dividends |
( |
) |
( |
) |
|||||||||||
Net earnings attributable to common stockholders |
$ |
$ |
$ |
$ |
|||||||||||
Net earnings per common share: |
|||||||||||||||
Basic |
$ |
$ |
$ |
$ |
|||||||||||
Diluted |
$ |
$ |
$ |
$ |
|||||||||||
Average common stock and common equivalent shares outstanding: |
|||||||||||||||
Basic |
|||||||||||||||
Diluted |
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 |
Nine Months Ended |
||||||||||||||
September 28, 2018 |
September 29, 2017 |
September 28, 2018 |
September 29, 2017 |
||||||||||||
Net earnings |
$ |
$ |
$ |
$ |
|||||||||||
Other comprehensive income, net of income taxes: |
|||||||||||||||
Foreign currency translation adjustments |
( |
) |
( |
) |
|||||||||||
Pension adjustments |
|||||||||||||||
Total other comprehensive income, net of income taxes |
( |
) |
( |
) |
|||||||||||
Comprehensive income |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||
Adoption of accounting standards |
— |
— |
— |
— |
— |
( |
) |
— |
— |
||||||||||||||||||||
Balance, January 1, 2018 |
( |
) |
|||||||||||||||||||||||||||
Net earnings for the period |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Dividends to shareholders |
— |
— |
— |
— |
— |
( |
) |
— |
— |
||||||||||||||||||||
Mandatory convertible preferred stock cumulative dividends |
— |
— |
— |
— |
— |
( |
) |
— |
— |
||||||||||||||||||||
Separation related adjustments |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
— |
— |
( |
) |
— |
||||||||||||||||||||
Common stock-based award activity |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Issuance of mandatory convertible preferred stock |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Change in noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Balance, September 28, 2018 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
6
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
Nine Months Ended |
|||||||
September 28, 2018 |
September 29, 2017 |
||||||
Cash flows from operating activities: |
|||||||
Net earnings |
$ |
$ |
|||||
Noncash items: |
|||||||
Depreciation |
|||||||
Amortization |
|||||||
Stock-based compensation expense |
|||||||
Gain from acquisition |
( |
) |
|||||
Change in accounts receivable, net |
( |
) |
( |
) |
|||
Change in inventories |
( |
) |
|||||
Change in trade accounts payable |
( |
) |
|||||
Change in prepaid expenses and other assets |
( |
) |
( |
) |
|||
Change in accrued expenses and other liabilities |
( |
) |
|||||
Net cash provided by operating activities |
|||||||
Cash flows from investing activities: |
|||||||
Cash paid for acquisitions |
( |
) |
( |
) |
|||
Payments for additions to property, plant and equipment |
( |
) |
( |
) |
|||
All other investing activities |
|||||||
Net cash used in investing activities |
( |
) |
( |
) |
|||
Cash flows from financing activities: |
|||||||
Net (repayments of) proceeds from borrowings (maturities of 90 days or less) |
( |
) |
|||||
Proceeds from borrowings (maturities longer than 90 days) |
|||||||
Repayment of borrowings (greater than 90 days) |
( |
) |
|||||
Proceeds from issuance of mandatory convertible preferred stock net of $43 million of issuance costs |
|||||||
Payment of common stock cash dividend to shareholders |
( |
) |
( |
) |
|||
Payment of mandatory convertible preferred stock cash dividend to shareholders |
( |
) |
|||||
All other financing activities |
|||||||
Net cash provided by financing activities |
|||||||
Effect of exchange rate changes on cash and equivalents |
( |
) |
|||||
Net change in cash and equivalents |
|||||||
Beginning balance of cash and equivalents |
|||||||
Ending balance of cash and equivalents |
$ |
$ |
See the accompanying Notes to the Consolidated Condensed Financial Statements.
7
FORTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 September 28, 2018 and December 31, 2017, and our results of operations and cash flows for the three and nine months ended September 28, 2018 and September 29, 2017. Reclassification of certain prior year amounts have been made to conform to current year presentation.
Foreign
currency
translation
adjustments
|
Pension
adjustments
|
Total |
|||||||||
For the Three Months Ended September 28, 2018: |
|||||||||||
Balance, June 29, 2018 |
$ |
$ |
( |
) |
$ |
( |
) |
||||
Other comprehensive income (loss) before reclassifications, net of income taxes |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
(a) |
||||||||||
Income tax impact |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss), net of income taxes |
( |
) |
( |
) |
|||||||
Balance, September 28, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||
(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 September 29, 2017: |
|||||||||||
Balance, June 30, 2017 |
$ |
$ |
( |
) |
$ |
( |
) |
||||
Other comprehensive income (loss) before reclassifications, net of income taxes |
|||||||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
(a) |
||||||||||
Income tax impact |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss), net of income taxes |
|||||||||||
Balance, September 29, 2017 |
$ |
$ |
( |
) |
$ |
( |
) |
||||
For the Nine Months Ended September 28, 2018: |
|||||||||||
Balance, December 31, 2017 |
$ |
$ |
( |
) |
$ |
( |
) |
||||
Other comprehensive income (loss) before reclassifications, net of income taxes |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
(a) |
||||||||||
Income tax impact |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss) |
( |
) |
( |
) |
|||||||
Balance, September 28, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||
For the Nine Months Ended September 29, 2017: |
|||||||||||
Balance, December 31, 2016 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||
Other comprehensive income (loss) before reclassifications, net of income taxes |
|||||||||||
Amounts reclassified from accumulated other comprehensive income (loss): |
|||||||||||
Increase (decrease) |
(a) |
||||||||||
Income tax impact |
( |
) |
( |
) |
|||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss) |
|||||||||||
Balance, September 29, 2017 |
$ |
$ |
( |
) |
$ |
( |
) |
||||
(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).
|
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. In September 2017, the FASB issued 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
9
For a description of our material acquisition activity in 2017 and during the nine months ended September 28, 2018, refer to Note 3 of our 2017 Annual Report on Form 10-K and the discussion below.
We continually evaluate potential mergers, acquisitions and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive areas. We have completed a number of acquisitions that have been accounted for as purchases and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors including the complimentary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complimentary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings or cash flows) and 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.
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 of certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
Completed Acquisitions in 2018
Accruent
On September 6, 2018, we acquired Accruent, LLC (“Accruent”), a privately-held, leading provider of facilities asset management software, for a total purchase price of approximately $2.0 billion net of acquired cash (the “Accruent Acquisition”). Accruent is a recognized leader in the facilities asset management industry, combining deep domain and industry capabilities with an integrated, cloud-based framework that provides insights spanning the full lifecycle of real estate, facilities and asset management. Accruent serves over 10,000 global customers, and helps assure clients fulfill the mission of their organization by extending the lifecycle of assets, monitoring full compliance and reducing safety risks. Accruent is headquartered in Austin, Texas, and is included in our the Professional Instrumentation Segment. Accruent generated annual revenues of approximately $200 million in 2017. We financed the Accruent Acquisition with available cash and proceeds from our financing activities. We preliminarily recorded approximately $1.2 billion of goodwill related to the Accruent Acquisition.
Gordian
On July 27, 2018, we acquired 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, for a total purchase price of $778 million net of cash acquired (the “Gordian Acquisition”). Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions designed 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 facility metrics databases via a subscription-based model. Gordian is headquartered in Greenville, South Carolina, and is included in our Professional Instrumentation segment. Gordian generated annual revenues of approximately $110 million in 2017. We financed the Gordian Acquisition with available cash. We preliminarily recorded approximately $443 million of goodwill related to the Gordian Acquisition.
10
In addition to the acquisitions of Accruent and Gordian, during the nine months ended September 28, 2018, we acquired one business for total consideration of $7.7 million in cash, net of cash acquired. The business acquired complements existing units of our Professional Instrumentation segment. We preliminarily recorded an aggregate of $1.8 million of goodwill related to this acquisition.
Accruent |
Gordian |
Other |
Total |
||||||||||||
Accounts receivable |
$ |
$ |
$ |
$ |
|||||||||||
Property, plant and equipment |
|||||||||||||||
Goodwill |
|||||||||||||||
Other intangible assets, primarily customer relationships, trade names and technology |
|||||||||||||||
Trade accounts payable |
( |
) |
( |
) |
( |
) |
|||||||||
Other assets and liabilities, net |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Net cash consideration |
$ |
$ |
$ |
$ |
Pro Forma Financial Information (Unaudited)
Three Months Ended |
Nine Months Ended |
||||||||||||||
September 28, 2018 |
September 29, 2017 |
September 28, 2018 |
September 29, 2017 |
||||||||||||
Sales |
$ |
$ |
$ |
$ |
|||||||||||
Net earnings |
$ |
$ |
$ |
$ |
|||||||||||
Diluted net earnings per share |
$ |
$ |
$ |
$ |
Revenue and operating losses attributable to the acquisitions included in our results for the three and nine months ended September 28, 2018 were $35.7 million and $19.1 million, respectively.
Tritium
On September 11, 2018, we acquired a minority interest in Tritium Holdings Pty, Ltd for less than $50.0 million. Tritium specializes in the design and manufacture of DC fast charging solutions for electric vehicles. Established in 2001, it launched its first DC fast charger in 2014, and has since become a leading global supplier, with installations in 26 countries. Tritium offers a range of hardware, software and services developed and designed to support the global transition to e-mobility. Our investment in Tritium is recorded in Other assets on the Consolidated Condensed Balance Sheet at cost. We have elected to use the measurement alternative for equity investments without readily determinable fair values and evaluate this investment for indicators of impairment quarterly.
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. On September 20, 2018, Ethicon, Inc. accepted our offer and countersigned the purchase agreement. The transaction is expected to close in the first quarter of 2019 and is subject to customary closing conditions.
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.
11
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. 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. On October 1, 2018, we completed the split-off of the A&S Business. The total consideration received was $2.7 billion and consisted of (i) $1.3 billion through a fully-subscribed exchange offer, in which we accepted and subsequently retired 15,824,931 shares of our own common stock from our stockholders in exchange for the 35,000,000 of common stock of Stevens Holding Company, Inc.; (ii) $1.0 billion in cash paid to us for the direct sales of certain assets and liabilities of the A&S Business; (iii) $248.5 million as part of a debt-for-debt exchange that reduced outstanding indebtedness of Fortive; and (iv) $150 million in cash paid to us by Steven’s Holding Company, Inc. as a dividend.
As this transaction occurred during the fourth quarter of 2018, we will retrospectively classify the A&S Business as discontinued operations in our financial statements beginning in the fourth quarter of 2018 in accordance with the authoritative accounting guidance.
Transaction Costs
Balance, December 31, 2017 |
$ |
||
Attributable to 2018 acquisitions |
|||
Foreign currency translation & other |
( |
) |
|
Balance, September 28, 2018 |
$ |
The carrying value of goodwill by segment is summarized as follows ($ in millions):
September 28, 2018 |
December 31, 2017 |
||||||
Professional Instrumentation |
$ |
$ |
|||||
Industrial Technologies |
|||||||
Total goodwill |
$ |
$ |
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. |
12
Quoted Prices
in Active
Market
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total |
||||||||||||
September 28, 2018 |
|||||||||||||||
Deferred compensation liabilities |
$ |
$ |
$ |
$ |
|||||||||||
December 31, 2017 |
|||||||||||||||
Deferred compensation liabilities |
$ |
$ |
$ |
$ |
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
September 28, 2018 |
December 31, 2017 |
||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Current portion of long-term debt |
$ |
$ |
$ |
$ |
|||||||||||
Long-term debt, net of current maturities |
$ |
$ |
$ |
$ |
As of September 28, 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.
13
Financing
September 28, 2018 |
December 31, 2017 |
||||||
U.S. dollar-denominated commercial paper |
$ |
$ |
|||||
Euro-denominated commercial paper |
|||||||
U.S. dollar variable interest rate term loan due 2019 |
|||||||
Delayed-draw term loan due 2019 |
|||||||
Yen variable interest rate term loan due 2022 |
|||||||
1.80% senior unsecured notes due 2019 |
|||||||
2.35% senior unsecured notes due 2021 |
|||||||
3.15% senior unsecured notes due 2026 |
|||||||
4.30% senior unsecured notes due 2046 |
|||||||
Other |
|||||||
Long-term debt |
|||||||
Less: current portion of long-term debt |
|||||||
Long-term debt, net of current maturities |
$ |
$ |
Unamortized debt discounts, premiums and issuance costs of $15.5 million and $18.2 million as of September 28, 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 September 28, 2018, no borrowings were outstanding under the Revolving Credit Facility.
On July 20, 2018, we prepaid $325 million of our outstanding U.S dollar variable interest rate term loan due in 2019, and on October 5, 2018, we prepaid the remaining $175 million of the outstanding balance. The prepayment penalties associated with these payments were immaterial.
On August 22, 2018, we entered into a credit facility agreement that provides for a 364 -day delayed-draw term loan facility (“Delayed-Draw Term Loan”) in an aggregate principal amount of $1.75 billion. On September 5, 2018, we drew down the full $1.75 billion available under the Delayed-Draw Term Loan in order to fund, in part, the Accruent Acquisition. The Delayed-Draw Term Loan bears interest at a variable rate equal to the London inter-bank offered rate plus a ratings based margin currently at 75 basis points. As of September 28, 2018, borrowings under this facility bore an interest rate of 2.69 % per annum. The Delayed-Draw Term Loan is prepayable at our option, and we are not permitted to re-borrow once the term loan is repaid. The terms and conditions, including covenants, applicable to the Delayed-Draw Term Loan are substantially similar to those applicable to the Revolving Credit Facility. On September 26, 2018, we repaid $400 million of this loan.
In connection with the debt exchange in the split-off of the A&S Business, on October 1, 2018, we retired $244.7 million of our 1.80 % senior unsecured notes due in 2019.
14
Carrying value |
Annual effective rate |
Weighted average remaining maturity (in days) |
||||||
U.S. dollar-denominated commercial paper |
$ |
% |
||||||
Euro-denominated commercial paper |
$ |
( |
)% |
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 September 28, 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 net $1.34 billion in proceeds from the issuance of the MCPS, excluding $43 million of issuance costs. We used 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.
In connection with the split-off of the A&S Business, on September 26, 2018, we triggered an anti-dilution adjustment pursuant to the terms of the MCPS and after giving affect to this adjustment, each then outstanding share of MCPS will convert automatically on July 1, 2021 (“Mandatory Conversion Date”) into between 10.9041 and 13.3575 common shares, subject to further 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 beginning on the 22nd scheduled trading day 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 10.9041 , subject to further 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, as adjusted, 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.
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 nine months ended September 28, 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:
15
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 September 28, 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 nine months ended September 28, 2018.
September 28, 2018 |
December 31, 2017 |
||||||
Deferred revenue - current |
$ |
$ |
|||||
Deferred revenue - noncurrent |
|||||||
Total contract liabilities |
$ |
$ |
In the three and nine months ended September 28, 2018, we recognized $20 million and $84 million of revenue related to our contract liabilities at January 1, 2018, respectively. The change in our contract liabilities from December 31, 2017 to September 28, 2018 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.
16
September 28, 2018 |
|||
Professional Instrumentation |
$ |
||
Industrial Technologies |
|||
Total remaining performance obligations |
$ |
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 75 percent within the next three years and substantially all within four years .
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 September 28, 2018 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Geographic: |
|||||||||||
United States |
$ |
$ |
$ |
||||||||
China |
|||||||||||
Germany |
|||||||||||
All other (each country individually less than 5% of total sales) |
|||||||||||
Total |
$ |
$ |
$ |
||||||||
Major Products Group: |
|||||||||||
Professional tools and equipment |
$ |
$ |
$ |
||||||||
Industrial automation, controls and sensors |
|||||||||||
Franchise distribution |
|||||||||||
All other |
|||||||||||
Total |
$ |
$ |
$ |
||||||||
End markets: |
|||||||||||
Direct sales: |
|||||||||||
Retail fueling (a)
|
$ |
$ |