10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on April 25, 2019
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: March 29, 2019
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 |
|
(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 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.
Large accelerated filer x
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company ¨
|
|||
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 April 18, 2019 was 335,099,399 .
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 2. |
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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 |
|||||||
March 29, 2019 |
December 31, 2018 |
||||||
(unaudited) |
|||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and equivalents |
$ |
$ |
|||||
Accounts receivable, net |
|||||||
Inventories: |
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Finished goods |
|||||||
Work in process |
|||||||
Raw materials |
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Total inventories |
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Prepaid expenses and other current assets |
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Current assets, discontinued operations |
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Total current assets |
|||||||
Property, plant and equipment, net of accumulated depreciation of $797.7 and $889.8 at March 29, 2019 and December 31, 2018, respectively |
|||||||
Operating lease right-of-use assets |
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Other assets |
|||||||
Goodwill |
|||||||
Other intangible assets, net |
|||||||
Total assets |
$ |
$ |
|||||
LIABILITIES AND EQUITY |
|||||||
Current liabilities: |
|||||||
Current portion of long-term debt |
$ |
$ |
|||||
Trade accounts payable |
|||||||
Current operating lease liabilities |
|||||||
Accrued expenses and other current liabilities |
|||||||
Current liabilities, discontinued operations |
|||||||
Total current liabilities |
|||||||
Operating lease liabilities |
|||||||
Other long-term liabilities |
|||||||
Long-term debt |
|||||||
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 March 29, 2019 and December 31, 2018 |
|||||||
Common stock: $0.01 par value, 2.0 billion shares authorized; 335.8 and 335.1 million issued; 335.0 and 334.5 million outstanding at March 29, 2019 and December 31, 2018, respectively |
|||||||
Additional paid-in capital |
|||||||
Retained earnings |
|||||||
Accumulated other comprehensive income (loss) |
( |
) |
( |
) |
|||
Total Fortive stockholders’ equity |
|||||||
Noncontrolling interests |
|||||||
Total stockholders’ equity |
|||||||
Total liabilities and equity |
$ |
$ |
3
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
Three Months Ended |
|||||||
March 29, 2019 |
March 30, 2018 |
||||||
Sales of products |
$ |
$ |
|||||
Sales of services |
|||||||
Total sales |
|||||||
Cost of product sales |
( |
) |
( |
) |
|||
Cost of service sales |
( |
) |
( |
) |
|||
Total cost of sales |
( |
) |
( |
) |
|||
Gross profit |
|||||||
Operating costs: |
|||||||
Selling, general and administrative expenses |
( |
) |
( |
) |
|||
Research and development expenses |
( |
) |
( |
) |
|||
Operating profit |
|||||||
Non-operating expenses, net: |
|||||||
Interest expense, net |
( |
) |
( |
) |
|||
Other non-operating income (expenses), net |
( |
) |
|||||
Earnings from continuing operations before income taxes |
|||||||
Income taxes |
( |
) |
( |
) |
|||
Net earnings from continuing operations |
|||||||
Earnings from discontinued operations, net of income taxes |
|||||||
Net earnings |
|||||||
Mandatory convertible preferred dividends |
( |
) |
|||||
Net earnings attributable to common stockholders |
$ |
$ |
|||||
Net earnings per common share from continuing operations: |
|||||||
Basic |
$ |
$ |
|||||
Diluted |
$ |
$ |
|||||
Net earnings per share from discontinued operations: |
|||||||
Basic |
$ |
$ |
|||||
Diluted |
$ |
$ |
|||||
Net earnings per share: |
|||||||
Basic |
$ |
$ |
|||||
Diluted |
$ |
$ |
|||||
Average common stock and common equivalent shares outstanding: |
|||||||
Basic |
|||||||
Diluted |
|||||||
The sum of net earnings per share may not add due to rounding |
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 |
|||||||
March 29, 2019 |
March 30, 2018 |
||||||
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 STATEMENTS 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, 2018 |
$ |
— |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||||
Net earnings for the period |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||
Dividends to common shareholders |
— |
— |
— |
— |
— |
( |
) |
— |
— |
|||||||||||||||||||
Mandatory convertible preferred stock cumulative dividends |
— |
— |
— |
— |
— |
( |
) |
— |
— |
|||||||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||
Common stock-based award activity |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Issuance of 0.875% senior convertible notes due 2022 |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||
Change in noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
( |
) |
|||||||||||||||||||
Balance, March 29, 2019 |
$ |
— |
$ |
$ |
$ |
( |
) |
$ |
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 common shareholders |
— |
— |
— |
— |
— |
( |
) |
— |
— |
||||||||||||||||||||
Separation related adjustments |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Common stock-based award activity |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Change in noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
( |
) |
||||||||||||||||||||
Balance, March 30, 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)
Three Months Ended |
|||||||
March 29, 2019 |
March 30, 2018 |
||||||
Cash flows from operating activities: |
|||||||
Net earnings from continuing operations |
$ |
$ |
|||||
Noncash items: |
|||||||
Depreciation |
|||||||
Amortization |
|||||||
Stock-based compensation expense |
|||||||
Change in trade 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 |
( |
) |
( |
) |
|||
Total operating cash provided by continuing operations |
|||||||
Total operating cash provided by (used in) discontinued operations |
( |
) |
|||||
Net cash provided by operating activities |
|||||||
Cash flows from investing activities: |
|||||||
Cash paid for acquisitions, net of cash received |
( |
) |
|||||
Payments for additions to property, plant and equipment |
( |
) |
( |
) |
|||
All other investing activities |
|||||||
Total investing cash used in continuing operations |
( |
) |
( |
) |
|||
Total investing cash used in discontinued operations |
( |
) |
|||||
Net cash used in investing activities |
( |
) |
( |
) |
|||
Cash flows from financing activities: |
|||||||
Net proceeds from (repayments of) commercial paper borrowings |
( |
) |
|||||
Proceeds from borrowings (maturities greater than 90 days), net of $24.3 million of issuance costs |
|||||||
Repayment of borrowings (maturities greater than 90 days) |
( |
) |
|||||
Payment of common stock cash dividend to shareholders |
( |
) |
( |
) |
|||
Payment of mandatory convertible preferred stock cash dividend to shareholders |
( |
) |
|||||
All other financing activities |
( |
) |
|||||
Total financing cash provided by (used in) continuing operations |
( |
) |
|||||
Total financing cash provided by (used in) discontinued operations |
( |
) |
|||||
Net cash provided by (used in) 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 technology growth company encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, sensing, transportation technology, 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, 2018 and the footnotes (“Notes”) thereto included within our 2018 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 March 29, 2019 and December 31, 2018, and our results of operations and cash flows for the three months ended March 29, 2019 and March 30, 2018. Reclassification of certain prior year amounts have been made to conform to current year presentation.
On October 1, 2018, we completed the split-off of businesses in our automation and specialty platform (excluding our Hengstler and Dynapar businesses) (the “A&S Business”) and have reported the A&S Business as discontinued operations in our Consolidated Condensed Statements of Income, Consolidated Condensed Balance Sheets, and Consolidated Condensed Statements of Cash Flows for all periods presented. Unless otherwise noted discussion within these notes to the consolidated condensed financial statements relates to continuing operations. Refer to Note 3 for additional information on discontinued operations.
8
Foreign
currency
translation
adjustments
|
Pension
adjustments (b)
|
Total |
|||||||||
For the Three Months Ended March 29, 2019: |
|||||||||||
Balance, December 31, 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 |
( |
) |
(c) |
( |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss), net of income taxes |
|||||||||||
Balance, March 29, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||
For the Three Months Ended March 30, 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 |
( |
) |
(c) |
( |
) |
||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes |
|||||||||||
Net current period other comprehensive income (loss), net of income taxes |
|||||||||||
Balance, March 30, 2018 |
$ |
$ |
( |
) |
$ |
||||||
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 9 for additional details).
| |||||||||||
(b) Includes balances relating to defined benefit plans, supplemental executive retirement plans and other postretirement employee benefit plans.
| |||||||||||
(c) We did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
|
For a description of our material acquisition activity refer to Note 3 of our 2018 Annual Report on Form 10-K.
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
9
(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.
During the three months ended March 29, 2019, we recorded certain adjustments to the preliminary purchase price allocation of acquisitions that closed during 2018 which resulted in a net increase of $31.8 million to goodwill.
Advanced Sterilization Products
We entered into a purchase agreement, effective June 6, 2018, with Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. The transaction was completed in accordance with the terms of the purchase agreement, and on April 1, 2019, we paid $2.7 billion in cash to acquire the ASP business. 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.
Divestiture of A&S Business
On October 1, 2018, we completed the split-off of four of our operating companies from the Automation & Specialty platform (the “A&S Business”) in a tax efficient Reverse Morris Trust transaction with Altra Industrial Motion Corp. (“Altra”). 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 shares of common stock of Stevens Holding Company, Inc., an entity created to hold the A&S Business; (ii) $1.0 billion in cash paid to us for the direct sales of certain assets and liabilities of the A&S Business; (iii) $250 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. We recognized an after-tax gain on the transaction of $1.9 billion.
The accounting requirements for reporting the disposition of the A&S Business as a discontinued operation were met when the separation and merger were completed in the fourth quarter of 2018. Accordingly, the accompanying consolidated financial statements reflect this business as discontinued operations for all periods presented.
We are providing certain support services to Altra under transition services agreements. The impact of these services on our consolidated condensed financial statements was immaterial.
10
March 29, 2019 |
March 30, 2018 |
||||||
Sales |
$ |
$ |
|||||
Cost of sales |
( |
) |
( |
) |
|||
Selling, general and administrative expenses |
( |
) |
|||||
Research and development expenses |
( |
) |
|||||
Gain on disposition of discontinued operations before income taxes |
|||||||
Interest expense and other |
( |
) |
|||||
Earnings before income taxes |
|||||||
Income taxes |
( |
) |
|||||
Net earnings |
$ |
$ |
Interest expense related to the debt retired as part of the debt-for-debt exchange was allocated to discontinued operations for all periods prior to the disposition.
March 29, 2019 |
December 31, 2018 |
||||||
ASSETS |
|||||||
Trade accounts receivable, net |
$ |
$ |
|||||
Inventories |
|||||||
Other current assets |
|||||||
Total current assets, discontinued operations |
$ |
$ |
|||||
LIABILITIES |
|||||||
Current liabilities: |
|||||||
Trade accounts payable |
$ |
$ |
|||||
Accrued expenses and other current liabilities |
|||||||
Total current liabilities, discontinued operations |
$ |
$ |
Balance, December 31, 2018 |
$ |
||
Foreign currency translation & other |
|||
Balance, March 29, 2019 |
$ |
The carrying value of goodwill by segment is summarized as follows ($ in millions):
March 29, 2019 |
December 31, 2018 |
||||||
Professional Instrumentation |
$ |
$ |
|||||
Industrial Technologies |
|||||||
Total goodwill |
$ |
$ |
11
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. |
Quoted Prices
in Active
Market
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total |
||||||||||||
March 29, 2019 |
|||||||||||||||
Deferred compensation liabilities |
$ |
$ |
$ |
$ |
|||||||||||
December 31, 2018 |
|||||||||||||||
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
March 29, 2019 |
December 31, 2018 |
||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Current portion of long-term debt |
$ |
$ |
$ |
$ |
|||||||||||
Long-term debt, net of current maturities |
$ |
$ |
$ |
$ |
As of March 29, 2019 and December 31, 2018, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.
12
March 29, 2019 |
December 31, 2018 |
||||||
U.S. dollar-denominated commercial paper |
$ |
$ |
|||||
Euro-denominated commercial paper |
|||||||
Delayed-draw term loan due 2019 |
|||||||
Delayed-draw term loan due 2020 |
|||||||
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 |
|||||||
0.875% senior convertible notes due 2022 |
|||||||
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 $137.7 million and $17.0 million as of March 29, 2019 and December 31, 2018, respectively, are netted against the aggregate principal amounts of the components of debt in the table above. Refer to Note 10 of our 2018 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 $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”) which can also be used for working capital and other general corporate purposes. As of March 29, 2019, no borrowings were outstanding under the Revolving Credit Facility.
Convertible Senior Notes
On February 22, 2019, we issued $1.4 billion in aggregate principal amount of our 0.875 % Convertible Senior Notes due 2022 (the “Convertible Notes”), including $187.5 million in aggregate principal amount resulting from an exercise in full of an over-allotment option. The Convertible Notes were sold in a private placement to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
The Convertible Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by four of our wholly-owned domestic subsidiaries (the “Guarantees”). Under the Indenture, the Convertible Notes are our senior unsecured obligations, and the Convertible Notes and the Guarantees rank equally in right of payment with all of our and the guarantors’ existing and future liabilities that are not subordinated, but effectively rank junior to any of our and the guarantors secured indebtedness to the extent of the value of the assets securing such indebtedness. In addition, the Convertible Notes are structurally subordinated to all of the existing and future obligations, including trade payables, of our subsidiaries that do not guarantee the Convertible Notes.
The Convertible Notes bear interest at a rate of 0.875 % per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2019. The Convertible Notes mature on February 15, 2022, unless earlier repurchased or converted in accordance with their terms prior to such date.
The Convertible Notes are convertible into shares of our common stock at an initial conversion rate of 9.3777 shares per $1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of $106.64 per share), subject to adjustment upon the occurrence of certain events. The initial conversion price represents a premium of approximately 32.5 % to the $80.48 per share closing price of our common stock on February 19, 2019. Upon conversion of the Convertible Notes, holders will receive cash, shares of our common stock, or a combination thereof, at Fortive’s election. Our current intention is to settle such conversions through cash up to the principal amount of the converted Convertible Notes and, if applicable,
13
through shares of our common stock for conversion value, if any, in excess of the principal amount of the converted Convertible Notes.
Of the $1.4 billion in proceeds received from the issuance of the Convertible Notes, $1.3 billion was classified as debt and $102.2 million was classified as equity, using an assumed effective interest rate of 3.38 %. Debt issuance costs of $24.3 million were proportionately allocated to debt and equity. We recognized $5.5 million in interest expense during the three months ended March 29, 2019, of which $1.3 million related to the contractual coupon rate of 0.875 % and $0.9 million was attributable to the amortization of debt issuance costs. The discount at issuance was $102.2 million and is being amortized over a three-year period. The unamortized discount at March 29, 2019 was $99.0 million.
Prior to November 15, 2021, the Convertible Notes will be convertible only upon the occurrence of certain events and will be convertible thereafter at any time until the close of business on the business day immediately preceding the maturity date of the Convertible Notes.
The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events described in the Indenture occur prior to the maturity date, the conversion rate will be increased for a holder that elects to convert its Convertible Notes in connection with such corporate event in certain circumstances.
The Convertible Notes are not redeemable prior to maturity, and no sinking fund is provided for the Convertible Notes. If we undergo a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Notes. The fundamental change purchase price will be 100 % of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid additional interest up to but excluding the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25 % in aggregate principal amount of the outstanding Convertible Notes may declare 100 % of the principal of, and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable.
We used the net proceeds from the offering to fund a portion of the cash consideration payable for, and certain costs associated with, our acquisition of ASP.
In connection with this offering of the Convertible Notes, on February 21, 2019, we entered into amendments to the credit facility agreement associated with our delayed-draw term loan due 2019 dated as of August 22, 2018, and our Credit Agreement, dated as of November 30, 2018, to exclude the Guarantees from the limitations on subsidiary indebtedness under the Agreements.
Delayed-Draw Term Loan Due 2020
On March 1, 2019, we entered into a credit facility agreement that provides for a 364-day delayed-draw term loan facility (“2020 Delayed-Draw Term Loan”) in an aggregate principal amount of $1.0 billion. On March 20, 2019, we drew down the full $1.0 billion available under the 2020 Delayed-Draw Term Loan in order to fund, in part, the ASP Acquisition. The 2020 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 March 29, 2019, borrowings under this facility bore an interest rate of 3.24 % per annum. The 2020 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 2020 Delayed-Draw Term Loan are substantially similar to those applicable to the Revolving Credit Facility.
Commercial Paper
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.
14
As of March 29, 2019, we were in compliance with all of our covenants.
Repayments
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as “ASC 842”.
On January 1, 2019, we adopted ASC 842 using the modified retrospective transition method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 840, Leases. The standard had a material impact on our Consolidated Condensed Balance Sheet but had no impact on our consolidated net earnings and cash flows. The most significant impact of adopting ASC 842 was the recognition of the ROU asset and lease liabilities for operating leases, which are presented in the following three line items on the Consolidated Condensed Balance Sheet: (i) operating lease right-of-use asset; (ii) current operating lease liabilities; and (iii) operating lease liabilities.
We elected the package of practical expedients for leases that commenced before the effective date of ASC 842 whereby we elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. In addition, we have lease agreements with lease and non-lease components and we have elected the practical expedient for all underlying asset classes and account for them as a single lease component. Our finance lease and lessor arrangements are immaterial.
We determine if an arrangement is a lease at inception. We have operating leases for office space, warehouses, distribution centers, research and development facilities, manufacturing locations, and certain equipment, primarily automobiles. Many leases include one or more options to renew, some of which include options to extend the leases for up to 15 years, and some of which include options to terminate the leases in less than one year. We considered options to renew in our lease terms and measurement of right-of-use assets and lease liabilities if we determined they were reasonably certain to be exercised.
For the three months ended March 29, 2019, operating lease cost was $17.8 million. Short-term and variable lease cost, and cost for finance leases were immaterial for the three months ended March 29, 2019. During the three-month period ended March 29, 2019, cash paid for operating leases included in operating cash flows was $15.8 million. ROU assets obtained in exchange for operating lease obligations were immaterial for the three months ended March 29, 2019.
Remainder of 2019 |
$ |
|||
2020 |
||||
2021 |
||||
2022 |
||||
2023 |
||||
Thereafter |
||||
Total lease payments |
||||
Less: imputed interest |
( |
) |
||
Total lease liabilities |
$ |
15
2019 |
$ |
|||
2020 |
||||
2021 |
||||
2022 |
||||
2023 |
||||
Thereafter |
||||
Total lease payments |
$ |
As of March 29, 2019, the weighted average lease term of our operating leases was 6.3 years and the weighted average discount rate of our operating leases was 3.4 %. We primarily use our incremental borrowing rate as the discount rate for our operating leases, as we are generally unable to determine the interest rate implicit in the lease.
Product Sales include revenues from the sale of products and equipment, which includes our software as a service product offerings and equipment rentals.
Service Sales includes revenues from extended warranties, post-contract customer support (“PCS”), maintenance contracts or services, contract labor to perform ongoing service at a customer location, and services related to previously sold products.
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 March 29, 2019 and December 31, 2018.
Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions and costs associated with assets used by our customers in certain service arrangements. Deferred sales-related commissions are generally not capitalized as the amortization period is 1 year or less, and we elected to use the practical expedient to expense these sales commissions as incurred. As of March 29, 2019, we had $139.2 million in net revenue-related contract assets related to certain service arrangements. Our revenue-related contract assets at December 31, 2018 were $144.4 million, the majority of which were recorded in property, plant and equipment on the Consolidated Condensed Balance Sheet. These assets have estimated useful lives between 3 and 5 years.
Impairment losses recognized on our revenue-related contract assets were immaterial in the three months ended March 29, 2019.
March 29, 2019 |
December 31, 2018 |
||||||
Deferred revenue - current |
$ |
$ |
|||||
Deferred revenue - noncurrent |
|||||||
Total contract liabilities |
$ |
$ |
16
In the three months ended March 29, 2019, we recognized $114.3 million of revenue related to our contract liabilities at December 31, 2018. The change in our contract liabilities from December 31, 2018 to March 29, 2019 was primarily due to the timing of cash receipts and sales of post-contract support and extended warranty services.
March 29, 2019 |
|||
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 .
17
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by sales of products and services, 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 March 29, 2019 is presented as follows ($ in millions):
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Sales: |
|||||||||||
Sales of products |
$ |
$ |
$ |
||||||||
Sales of services |
|||||||||||
Total |
$ |
$ |
$ |
||||||||
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)
|
$ |
$ |
$ |
||||||||
Industrial & Manufacturing |
|||||||||||
Vehicle repair (a)
|
|||||||||||
Utilities & Power |
|||||||||||
Other |
|||||||||||
Total direct sales |
|||||||||||
Distributors(a)
|
|||||||||||
Total |
$ |
$ |
$ |
||||||||
(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 March 29, 2019 was $745.2 million. |
18
Total |
Professional Instrumentation |
Industrial Technologies |
|||||||||
Sales: |
|||||||||||
Sales of products |
$ |
$ |
$ |
||||||||
Sales of services |
|||||||||||
Total |
$ |
$ |
$ |
||||||||
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 |