Fortive To Separate Into Two Public Companies

Deal Overview

On September 04, 2024, Fortive Corporation (NYSE: FTV, $75.71; Market Cap: $26.52 billion) announced its plans to spin-off its Precision Technologies segment ("NewCo"). The spin-off will result in the formation of two separate publicly traded companies, each with distinct business models and customized investment and capital allocation strategies.

Post separation, Fortive (stub) will include the portfolio brands currently operating under its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) segments, such as Accruent, Fluke, Gordian, Censis, Provation, and Evotech. Meanwhile, Precision Technologies (NewCo) will focus on key growth areas such as test and measurement, specialty sensors, and aerospace & defence sub-systems and encompass brands like Anderson-Negele, Gems Setra, Hengstler Dynapar, Qualitrol, and Tektronix.

The spin-off is anticipated to be effective through a pro-rata distribution of the common stock of the newly-formed entity to Fortive shareholders and is intended to qualify as a tax-free spin-off for US federal income tax purposes. Fortive is currently targeting the completion of the spin-off by 4Q25, contingent upon several conditions. These include obtaining final approval from Fortive's Board of Directors, completing necessary financing, receiving a favourable opinion from legal counsel, securing a private letter ruling from the US Internal Revenue Service on the tax treatment, the effectiveness of a Form 10 registration statement filed with the US SEC, and acquiring other regulatory approvals.

From the announcement date of separation until the completion of the spinoff transaction, Fortive plans to use about 75.0% of its available free cash flow for incremental share repurchases. The remaining free cash flow will be allocated to quarterly dividend payments and debt reduction, ensuring that both resulting companies maintain strong, investment-grade balance sheets after the separation.

Upon the completion of the spin-off, James A. Lico will retire from his roles as President, CEO, and director. Following his retirement, Olumide Soroye, currently the President and CEO of Fortive's Intelligent Operation Solutions segment, will be appointed as the new President, CEO, and director of Fortive. Tami Newcombe, the President and CEO of Fortive's Precision Technologies and Advanced Healthcare Solutions segments, will become the President and CEO of NewCo. Evercore and Morgan Stanley & Co. LLC are serving as financial advisors, and Wachtell, Lipton, Rosen & Katz are serving as legal counsel to Fortive.

Deal Rationale

Fortive is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets through its three core segments - Intelligent Operating Solutions (43.3% of FY23 revenues), Precision Technologies or PT (35.0%), and Advanced Healthcare Solutions (21.7%). The company has a track record of delivering consistent growth (FY20-23 revenue CAGR of 9.3%), driven by a high-quality growth portfolio and rigorous application of a differentiated business system. Specifically, the PT division has delivered a robust CAGR of 8.9%, benefiting from trends in electrification and connectivity. However, for FY23, core revenue growth at the company level was flat, with favourable pricing and volume gains in IOS, and AHS segments getting offset by a volume decline in PT. The segment in recent times has been impacted by normalization of demand in certain brands such as Tektronix and Sensing after its high growth phase, forex headwinds and delays in the assignment of military and government R&D projects.

As per management, the rationale for a spin-off of the PT segment into a separate publicly traded company stems from several strategic considerations. The move would result in the creation of two independent companies, each with a focused business model. Fortive intends to concentrate on its IOS and AHS segments, emphasizing on a recurring revenue model and software businesses. Whereas, the NewCo intends to focus on capitalizing on secular growth trends in areas like test & measurement, specialty sensors and aerospace & defence subsystems.

The spin-off aims to reduce complexity within Fortive's portfolio, allowing each company to focus on its core strengths and strategic priorities. This simplification is expected to unlock long-term value for stakeholders by providing strategic clarity and enabling tailored capital allocation strategies. Both companies are expected to offer distinct investment profiles. While Fortive aims for a balanced capital allocation strategy, prioritizing mergers and acquisitions that enhance recurring revenue and free cash flow, the NewCo is expected to leverage its industry-leading margins and cash flow to pursue organic growth and selective M&A opportunities. The recurring revenue focus of Fortive could appeal to investors seeking stability and predictable cash flows, while NewCo's exposure to highgrowth tech sectors may attract those looking for higher growth potential. Management believes this is the right portfolio evolution for Fortive, as the spin-off aligns with Fortive's long-term succession planning, with Olumide Soroye becoming President and CEO of Fortive and Tami Newcombe leading the NewCo. This leadership transition is expected to drive focused execution and strategic clarity for both entities..

Fortive provides essential technologies for connected workflow solutions across various attractive end-markets. Its strategic segments—Intelligent Operating Solutions (IOS), Precision Technologies (PT), and Advanced Healthcare Solutions (AHS)—comprise well-known brands that hold leading positions in their respective markets. These segments are involved in designing, developing, servicing, manufacturing, and marketing professional and engineered products, software, and services, leveraging renowned brand names, innovative technologies, and strong market positions.

Intelligent Operating Solutions

The IOS segment focuses on delivering advanced instrumentation and software solutions designed to optimize performance, ensure safety and compliance, and improve energy efficiency across various industries. This segment includes products such as Fluke, Industrial Scientific, Accruent, Gordian, and TeamSense. These products provide a range of services, including smart building solutions, asset management software, and environmental monitoring systems. The applications of IOS products are diverse, spanning smart office buildings, universities, high-tech construction sites, and warehouses. For example, Fluke's tools are widely used for electrical testing and measurement, while Accruent's software helps manage physical resources and facilities. Industrial Scientific focuses on gas detection and safety solutions, crucial for maintaining safe working environments in industrial settings. IOS caters to various industries such as construction, education, healthcare, manufacturing, and logistics. These industries rely on IOS solutions to enhance operational efficiency, reduce downtime, and ensure regulatory compliance. The segment has a strong presence in North America, Europe, and Asia.

Advanced Healthcare Solutions

The AHS segment provides essential workflow solutions that enable healthcare providers to deliver exceptional patient care more efficiently. The offerings include instrument sterilization solutions, instrument tracking, cell therapy equipment design and manufacturing, biomedical test tools, radiation detection & safety monitoring, and comprehensive clinical productivity software & solutions. The products and services in the segment are marketed under various brands, including Advanced Sterilization Products (ASP), Censis, Censitrac, Evotech, Fluke Health Solutions, Invetech, Landauer, Provation, Raysafe, and Sterrad. The applications of these products are diverse, spanning hospitals, healthcare facilities, and laboratories. For instance, ASP offers state-of-the-art infection prevention technologies crucial for maintaining sterile environments in medical settings. Fluke Health Solutions provides advanced tools for testing and measuring healthcare equipment, ensuring they operate at peak performance. Provation offers clinical productivity solutions that streamline workflows and improve care coordination, while Censis specializes in surgical asset management, helping healthcare providers track and manage surgical instruments efficiently. Industries that benefit from Fortive's Advanced Healthcare Solutions include hospitals, ambulatory surgical centres, laboratories, and other healthcare facilities. The segment has a strong presence in North America, Europe, and Asia.

Precision Technologies

PT segment is a leader in providing advanced technological solutions across several high-growth markets. This segment specializes in test and measurement, specialty sensors, and aerospace and defence subsystems. These technologies are vital for applications in manufacturing, food and beverage production, electric vehicles, clean energy, and broadcast communications. They address complex technical challenges, driving advancements in digital and electric technologies. The products and services in the segment are marketed under various brands, including Anderson-Negele, Gems, Setra, Hengstler-Dynapar, Qualitrol, Pacific Scientific, Keithley, and Tektronix. Key industries relying on these technologies include automotive, aerospace, defense, electronics, and industrial manufacturing. Their test and measurement tools ensure product quality and reliability, while specialty sensors are crucial for environmental monitoring and industrial automation. With a strong global presence in North America, Europe, and Asia, the segment serves a diverse customer base and leverages regional growth opportunities. This global reach enables effective customer service and drives innovation and growth through local expertise and resources.

Total revenue grew 1.7% YoY to $1,552 million (-0.9% vs. consensus) due to incremental revenue from acquisitions, partially offset by negative currency impact. Core Core revenue growth was flat as increased prices and volume growth in IOS, and AHS were offset by a volume decline in PT. IOS revenue grew 3.7% YoY to $677 million as addition to incremental revenues from acquisitions, the existing business benefitted from higher prices and volume. This was partially offset by negative currency impact. PT revenue declined 1.5% YoY to $552 million, due to a decline in existing business on lower net volumes, and negative currency impact, offset by incremental revenue contribution from acquisitions. AHS revenue grew 3.4% YoY to $324 million, driven by growth in existing businesses due to price hikes across the segment and increased volumes in sterilization products, offset by negative currency impact. Adjusted operating income grew 5.2% YoY to $417 million, and the corresponding margin improved ~90bps to 26.9%, driven by price and volume increases in existing businesses and productivity gains, partially offset by higher costs and negative currency impact. Adjusted net income grew 8.6% YoY to $329 million (1.1% vs. consensus), and the corresponding margin grew ~134bps to 21.2%. Adjusted diluted earnings per share came in at $0.93 (2Q23: $0.85), beating the consensus estimates by 1.2%.

FY23

Total revenue grew 4.1% YoY to $6.1 billion (0.3% vs. consensus). The growth was due to increased revenue from IOS and PT segment, partially offset by negative currency impact. IOS revenue grew 5.9% YoY to $2,612 million due to price increases across the offerings and higher demand for software and services offerings, partially offset by reduced volumes in certain test, and measurement instrumentation products. PT revenue grew 4.6% YoY to $2,133 million, due to price increases and higher volumes in test and measurement products, power and energy equipment, and energetic materials, partially offset by lower volumes in sensing technologies, and negative currency impact. AHS revenue declined marginally by 0.1% YoY to $1,320 million, due to a decline in volume for system design services, decreased revenue from divestiture, and negative currency impact, offset by price increase, and higher demand for software and related services.

Adjusted operating income grew 11.1% YoY to $1,572 million, and the corresponding margin improved ~164bps to 25.9%, driven by price and volume increases, and productivity gains, partially offset by higher employee compensation and unfavorable product mix. Adjusted net income grew 8.6% YoY to $1,220 million (1.2% vs. consensus), and the corresponding margin grew ~67bps to 20.1%. Adjusted diluted earnings per share came in at $3.43 (FY22: $3.15), beating the consensus estimates by 1.2%.

Company Description

Fortive Corporation (Parent)

Fortive Corporation was incorporated in 2016, and headquartered in Everett, Washington. Fortive is a provider of essential technologies for connected workflow solutions across a range of end markets. Fortive's segments include IOS, PT, and AHS. The IOS segment provides advanced instrumentation, software, and services to over 10,000 customers in 150 countries. AHS segment provides essential workflow solutions that help healthcare providers to deliver patient care more efficiently. As of June 30, 2024, Fortive has 18,000 employees in over 50 countries. In 2023, the US accounted for 54.2% of revenue, China 11.5%, and all other countries 34.3%.

Precision Technologies Business (Spin-Off)

Precision Technologies business unit focuses on providing advanced solutions to address complex technical challenges across various industries. PT provides a range of solutions, including electrical tests and measurement, sensing, and material technologies. PT encompasses renowned brands like Qualitrol, Gems, Pacific Scientific, Tektronix, Hengstler-Dynapar, Keithley, Anderson-Negele and Setra. PT business unit accounted for 35.0% of Fortive's revenue in 2023. In 2023, North America accounted for 54% of revenue, China 17%, Western Europe 13%, and the rest of the world 16%.