Fortive Corporation FTV reported first-quarter 2018 earnings of 78 cents per share, which surpassed the Zacks Consensus Estimate by four cents. The figure increased 30% from the year-ago quarter but declined 4.9% on a sequential basis. The figure also came ahead of management’s guidance of 72-76 cents.

Revenues declined 3.9% sequentially but surged 13.7% year over year to $1.74 billion. The figure came slightly better than the Zacks Consensus Estimate of $1.71 billion.

This year-over-year growth was driven by strong product portfolio, improved performance in end markets and strengthening Fortive Business System. Further, the recent acquisitions also drove the top line in this quarter. While acquisitions contributed 7.3%, favorable foreign exchange added 3.5%. Moreover, core revenue contributed 2.6%.

We note that shares of Fortive have returned 11.4% over a year, underperforming the industry’s rally of 17.1%.

 

Top Line in Detail

Fortive operates in two operational segments: Professional Instrumentation and Industrial Technologies.

Professional Instrumentation: The segment generated $871.7 million revenues (50.1% of total revenues), which increased 21.6% on a year-over-year basis but dipped 0.6% sequentially. Core revenues and acquisitions contributed 5.5% and 12.2%, respectively to the year-over-year growth. Sensing technologies platform witnessed high single digit growth, which was driven by its strong performance at Gem Sensors. Additionally, Fortive’s Field solutions performed well in the United States and China and exhibited high single digit growth.

Industrial Technologies: This segment generated $869 million revenues (49.9% of revenues), which improved 6.1% from the prior-year quarter but declined 6.5% on a sequential basis. Acquisitions contributed 300 basis points (bps) to the year-over-year growth in this segment. This was driven by robust performance of Fluke and Tektronix. Fluid also witnessed high single digit growth. eMaint and Landauer performance were strong as well. Although, transportation technologies platform declined by high single digit but the company exhibited high single digit growth in Industrial Scientific which was further driven by strong iNet.

Geographically, Fortive witnessed strong growth in its end markets like — Asia, Latin America and Western Europe. Additionally, Gilbarco Veeder-Root, Fluke and Sensing Technologies performed well in China.

Further, robust Fluke, Tektronix, Qualitrol and Jacobs Vehicle Systems benefited the company in the North American market.

Although, core sales in Qualitrol decreased due to its weak performance in Europe and the Middle East but Tektronix recorded mid single digit growth which can be attributed to growing penetration of the Tektronix 5 Series, MSO and Wideband Solutions.
Additionally, Fortive witnessed a low double-digit growth in Teletrac Navman, which was attributed to strong sales in Australia, New Zealand and Mexico.

The company’s revenues from Automation and Specialty division exhibited low double digit growth, primarily attributed to improved automation growth in Europe. Further, Jacobs Vehicle Systems performed well in North America.

Kollmorgen revenues reflected double digit growth from the prior-year quarter. This was driven by rising demand for the company’s industrial automation products. Thomson also witnessed year-over-year core growth.

Operating Details

In the first quarter, gross margin came in 50%, which expanded 150 bps year over year, while contracting 40 bps on a sequential basis.

Total operating expenses were $532.6 million, reflecting an increase of 18.8% year over year and a decrease of 3.8% sequentially. As a percentage of revenues, selling, general & administrative (SG&A) expenses increased by 24.3% year over year, while research & development expenses remained flat at 6.2% in comparison to the prior-year quarter.

Operating margin was 19.2%, which expanded 20 bps year over year, while contracting 30 bps sequentially. Segment wise, operating margin for Professional Instrumentation came in 23.7%, expanded 160 bps year over year and 220 bps sequentially.

Industrial Technologies operating margins came in 18.2%, which contracted 50 bps from the year-ago quarter and 210 bps sequentially.

Fortive Corporation Price, Consensus and EPS Surprise

Fortive Corporation Price, Consensus and EPS Surprise | Fortive Corporation Quote

Cash Flow

Fortive generated $140 million of free cash flow in the first quarter, which reflects an increase of 15%.

Guidance

For second-quarter 2018, management expects adjusted net earnings in the range of 86-90 cents per share. The Zacks consensus estimate for the upcoming quarter is pegged at 87 cents per share.

For 2018, Fortive revised its guidance of adjusted net earnings from $3.35-$3.45 to $3.40-$3.50 per share. The Zacks consensus estimate for 2018 is pegged at $3.43 per share.

Zacks Rank & Stocks to Consider

Fortive carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader technology sector are Paycom Software PAYC, Micron Technology MU and Agilent Technologies A. While Paycom Software and Micron Technology sport a Zacks Rank #1 (Strong Buy), Agilent Technologies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Paycom Software, Micron Technology and Agilent Technologies is pegged at 24.75%, 10% and 10.75%, respectively.

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