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16 May 2016
New York, May 16, 2016 -- Moody's Investors Service (Moody's) assigned an issuer rating of
Baa1 to Fortive Corporation (Fortive), the diversified industrial-focused
company being spun-off from Danaher, Inc. (Danaher).
At the same time, Moody's assigned a P-2 Commercial
Paper rating. The rating outlook is stable.
Fortive consists largely of the Professional Instrumentation and Industrial
Technologies segments of the current Danaher Corporation (Danaher;
A2 Negative). Concurrent with Danaher's agreement to acquire
Pall Corporation in May 2015, Danaher announced that it would split
into a science and technology company and an industrial-growth
company through a tax-free separation to existing shareholders.
The spin-off, which entails a $3 billion distribution
to Danaher in exchange for the assets received via the separation,
is targeted to close in early July 2016.
Fortive's Baa1 rating reflects the company's highly diversified
product portfolio highlighted by market leading positions in various industrial
end markets (gas stations/convenience stores, automotive,
military/defense, energy, packaging, medical/pharmaceutical
and food and beverage). Fortive has strong margins and return measures,
both of which compare favorably to other industrial peers at similar rating
levels. Moody's expects Fortive to preserve its low-20%
operating margin with the continuation of significant research and development
expenditures (over 6% as a percentage of revenues) and the proven,
highly-effective continuous improvement program known as the Danaher
Business System (to be the Fortive Business System (FBS) within Fortive).
The operating margin and scale, in conjunction with Fortive's
modestly capital intensive operating model and working capital control,
translates into Moody's expectation for robust free cash flow of
at least $900 million in 2016. Moody's also expects
that free cash flow, along with any incremental debt, will
be utilized for acquisitions.
Fortive's group of businesses have demonstrated a track record for
steady top-line performance, similar to GDP-level
growth rates, despite what has been and continues to be a challenging
macroeconomic environment. In addition, many of the company's
end markets are demonstrating generally favorable trends with several
presenting above-average growth trajectories (point-of-sale
system upgrades, increased industrial automation, changing
environmental regulations) over the near-to-intermediate
Moody's expects that acquisitions will be instrumental in the company's
growth strategy, particularly if global economic conditions remain
soft. Post-spin leverage (debt-to-EBITDA)
is in the 2.5x range (assuming initial financing results in $3.25
billion in debt) and expected to remain in that range. However,
leverage could rise temporarily with acquisition activity that exceeds
Fortive's annual free cash flow levels. Moody's acknowledges
that Fortive may periodically flex-up for larger acquisitions that
require some debt-financing but expects the strong cash flow profile
to bring metrics back in-line relatively quickly. In addition
to the potential for elevated debt levels, Moody's believes
it will be challenging for the company to target acquisitions that generate,
or can potentially generate, operating margins at or above Fortive's
level, creating the possibility of margin dilution.
Fortive's lack of a track record as a standalone entity as well as the
loss of significant scale, scope and diversification benefits that
it enjoyed with the Danaher affiliation are also offsets to the rating.
The rating outlook is stable, reflecting Moody's expectations for
steady but relatively modest organic revenue growth (1-2%
annually) supplemented by acquisition-related growth (5-7%
annually), the maintenance of strong margins (> 20%) and
annual free cash flow generation (> $900 million) in addition
to an improving liquidity profile even with an active acquisition strategy.
More specifically, the stable outlook encompasses the expectation
for Fortive to balance its acquisition appetite with credit metrics that
remain supportive of its current rating level given Fortive's business
risks, which would include debt-to-EBITDA in the 2x
- 2.75x range and retained cash flow-to-debt
of at least 20%.
There currently is no upward rating pressure but Moody's could upgrade
the rating if Fortive utilizes a prudent growth/acquisition strategy to
expand its scale and scope to have a revenue base consistent with other
companies at the higher rating level and materially enhance its recurring
revenue stream - currently in the 20% range - to
help mitigate vulnerability to economic cycles. Strong return measures
and evidence of the ability to sustain market leadership in industries
which have favorable growth characteristics would also be important considerations.
In addition, a stronger liquidity profile bolstered by the establishment
of a meaningful cash position and increasing free cash flow generation
could also result in upward rating momentum.
Conversely, the rating could be downgraded if Fortive undertakes
larger-scale acquisitions that require significant debt-financing
above and beyond annual free cash flow generation. More specifically,
debt-to-EBITDA expected to be sustained in the upper 2x
range could result in a downgrade Additionally, sustained negative
organic revenue growth, an operating margin trending towards the
upper teens or free cash flow-to-debt falling to the mid-teens
could create downward rating pressure. Sizeable acquisitions that
could be challenging to integrate or are in industries outside of Fortive's
core/adjacent markets could also pressure the rating.
Moody's took the following rating actions on Fortive Corporation:
- Issuer rating assigned at Baa1
- Commercial Paper rating assigned at P-2
- Rating outlook is stable
Issuer Ratings are opinions of the ability of entities to honor senior
unsecured debt and debt like obligations, and incorporate any external
support that is expected to apply to all current and future issuance of
senior unsecured financial obligations and contracts, such as explicit
support stemming from a guarantee of all senior unsecured financial obligations
and contracts. Issuer Ratings do not incorporate support arrangements,
such as guarantees, that apply only to specific (but not to all)
senior unsecured financial obligations and contracts. Moody's
expects to withdraw the Issuer Rating when Fortive issues long term debt.
The principal methodology used in these ratings was Global Manufacturing
Companies published in July 2014. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
Headquartered in Everett, Washington, Fortive Corporation
is a diversified industrial-focused company that provides testing
devices and sensors to measure and monitor a wide-range of industrial
applications, fuel dispensing, point-of-sale
and payment systems, vehicle fleet tracking and management solutions,
electronic motion control products, braking systems for commercial
trucks and franchised professional tools and wheel-service equipment
distributors. Revenues for the fiscal year ended December 31,
2015 were approximately $6.2 billion.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Corporate Finance
Corporate Finance Group
Moody's assigns Baa1 Issuer Rating at Fortive; stable outlook
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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