Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

October 27, 2016

Documents

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 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: September 30, 2016
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
 ________________________________________________
Fortive Corporation
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer      ¨
 
Accelerated filer     ¨
 
Non-accelerated filer     x
(Do not check if a
smaller reporting company)
 
Smaller reporting company     ¨
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 21, 2016 was 345,738,553.
 

Table of Contents

FORTIVE CORPORATION
INDEX
FORM 10-Q
 
PART I -
FINANCIAL INFORMATION
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II -
OTHER INFORMATION
 
Item 1A.
Item 6.
 




FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED BALANCE SHEETS
($ in millions, except share and per share amounts)
 
 
As of
 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
724.8

 
$
—

Trade accounts receivable, net
972.0

 
979.3

Inventories:
 
 
 
Finished goods
204.2

 
184.1

Work in process
80.4

 
77.1

Raw materials
273.5

 
261.7

Total inventories
558.1

 
522.9

Prepaid expenses and other current assets
104.3

 
91.9

Total current assets
2,359.2

 
1,594.1

Property, plant and equipment, net of accumulated depreciation of $1,006.3 and $976.8, respectively
538.3

 
514.8

Other assets
412.0

 
393.7

Goodwill
4,048.0

 
3,949.0

Other intangible assets, net
775.8

 
759.0

Total assets
$
8,133.3

 
$
7,210.6

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
619.4

 
$
657.1

Accrued expenses and other current liabilities
749.6

 
666.4

Total current liabilities
1,369.0

 
1,323.5

Other long-term liabilities
695.6

 
704.6

Long-term debt
3,509.1

 
—

Equity:
 
 
 
Preferred stock: $0.01 par value, 15 million and 100 shares authorized, respectively; and no shares issued or outstanding
—

 
—

Common stock: $0.01 par value, 2.0 billion and 100 shares authorized, respectively; and 345.7 million and 100 shares issued and outstanding, respectively
3.5

 
—

Additional paid-in capital
2,375.3

 
—

Retained earnings
202.7

 
—

Former Parent's investment, net
—

 
5,193.9

Accumulated other comprehensive income (loss)
(25.5
)
 
(14.4
)
Total Fortive stockholders' equity
2,556.0

 
5,179.5

Noncontrolling interests
3.6

 
3.0

Total stockholders' equity
2,559.6

 
5,182.5

Total liabilities and equity
$
8,133.3

 
$
7,210.6

See the accompanying Notes to the Consolidated and Combined Condensed Financial Statements.


3
Table of Contents

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Sales
$
1,567.4

 
$
1,524.6

 
$
4,597.2

 
$
4,603.0

Cost of sales
(794.5
)
 
(777.4
)
 
(2,361.0
)
 
(2,360.3
)
Gross profit
772.9

 
747.2

 
2,236.2

 
2,242.7

Operating costs:
 
 
 
 
 
 
 
Selling, general and administrative expenses
(354.5
)
 
(349.7
)
 
(1,042.3
)
 
(1,024.4
)
Research and development expenses
(95.2
)
 
(95.7
)
 
(285.6
)
 
(286.7
)
Operating profit
323.2

 
301.8

 
908.3

 
931.6

Non-operating expense
 
 
 
 
 
 
 
Interest expense
(23.4
)
 
—

 
(26.1
)
 
—

Earnings before income taxes
299.8

 
301.8

 
882.2

 
931.6

Income taxes
(72.9
)
 
(105.2
)
 
(234.4
)
 
(303.9
)
Net earnings
$
226.9

 
$
196.6

 
$
647.8

 
$
627.7

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.57

 
$
1.87

 
$
1.82

Diluted
$
0.65

 
$
0.57

 
$
1.87

 
$
1.82

Average common stock and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
346.0

 
345.2

 
345.5

 
345.2

Diluted
349.2

 
345.2

 
346.6

 
345.2

See the accompanying Notes to the Consolidated and Combined Condensed Financial Statements.


4
Table of Contents

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Net earnings
$
226.9

 
$
196.6

 
$
647.8

 
$
627.7

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(25.7
)
 
(9.9
)
 
(14.2
)
 
(99.8
)
Pension adjustments
1.0

 
(4.3
)
 
3.1

 
7.7

Total other comprehensive income (loss), net of income taxes
(24.7
)
 
(14.2
)
 
(11.1
)
 
(92.1
)
Comprehensive income
$
202.2

 
$
182.4

 
$
636.7

 
$
535.6

See the accompanying Notes to the Consolidated and Combined Condensed Financial Statements.


5
Table of Contents

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED STATEMENT OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Former Parent's
Investment, Net
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Shares
 
Amount
Balance, December 31, 2015
—

 
$
—

 
$
—

 
$
—

 
$
5,193.9

 
$
(14.4
)
 
$
3.0

Net earnings for the period
—

 
—

 
—

 
226.9

 
420.9

 
—

 
—

Recapitalization
345.2

 
3.5

 
—

 
—

 
(3.5
)
 
—

 
—

Cash dividend paid to Former Parent
—

 
—

 
—

 
—

 
(3,000.0
)
 
—

 
—

Dividends to shareholders
—

 
—

 
—

 
(24.2
)
 
—

 
—

 
—

Net transfers to Former Parent
—

 
—

 
—

 
—

 
(301.4
)
 
—

 
—

Noncash adjustment to Net Former Parent's investment
—

 
—

 
2,344.1

 
—

 
(2,332.3
)
 
—

 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
(11.1
)
 
—

Former Parent common stock-based award activity
—

 
—

 
—

 
—

 
22.4

 
—

 
—

Fortive common stock-based award activity
0.5

 
—

 
31.2

 
—

 
—

 
—

 
—

Change in noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
0.6

Balance, September 30, 2016
345.7

 
$
3.5

 
$
2,375.3

 
$
202.7

 
$
—

 
$
(25.5
)
 
$
3.6

See the accompanying Notes to the Consolidated and Combined Condensed Financial Statements.


6
Table of Contents

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
 
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
Cash flows from operating activities:
 
 
 
Net earnings
$
647.8

 
$
627.7

Noncash items:
 
 
 
Depreciation
66.7

 
65.7

Amortization
67.2

 
66.5

Stock-based compensation expense
34.4

 
24.3

Impairment charge on intangible assets
3.5

 
12.0

Change in trade accounts receivable, net
9.9

 
(36.2
)
Change in inventories
(34.9
)
 
(52.8
)
Change in trade accounts payable
(37.4
)
 
0.5

Change in prepaid expenses and other assets
(13.3
)
 
(63.1
)
Change in accrued expenses and other liabilities
75.5

 
(23.5
)
Net cash provided by operating activities
819.4

 
621.1

Cash flows from investing activities:
 
 
 
Cash paid for acquisitions
(190.6
)
 
—

Payments for additions to property, plant and equipment
(90.0
)
 
(87.0
)
All other investing activities
4.3

 
3.1

Net cash used in investing activities
(276.3
)
 
(83.9
)
Cash flows from financing activities:
 
 
 
Net proceeds from borrowings (maturities of 90 days or less)
525.6

 
—

Proceeds from borrowings (maturities longer than 90 days)
2,983.0

 
—

Cash dividend paid to Former Parent
(3,000.0
)
 
—

Payment of cash dividend to shareholders
(24.2
)
 
—

Net transfers to Former Parent
(301.4
)
 
(537.2
)
All other financing activities
(2.2
)
 
—

Net cash provided by (used in) financing activities
180.8

 
(537.2
)
Effect of exchange rate changes on cash and equivalents
0.9

 
—

Net change in cash and equivalents
724.8

 
—

Beginning balance of cash and equivalents
—

 
—

Ending balance of cash and equivalents
$
724.8

 
$
—

See the accompanying Notes to the Consolidated and Combined Condensed Financial Statements.


7
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FORTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW AND BASIS OF PRESENTATION
Fortive Corporation is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets. Fortive Corporation’s well-known brands hold leading positions in field instrumentation, transportation, sensing, product realization, automation and specialty, and franchise distribution markets. Fortive Corporation's businesses design, develop, 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.
Fortive Corporation's research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 40 countries.
Fortive Corporation operates in two business segments: Professional Instrumentation and Industrial Technologies. The Professional Instrumentation segment consists of Fortive Corporation's Advanced Instrumentation & Solutions and Sensing Technologies businesses. The Advanced Instrumentation & Solutions business consists of field solutions products and product realization services and products. Field solutions include a variety of compact professional test tools, thermal imaging and calibration equipment for electrical, industrial, electronic and calibration applications, and online condition-based monitoring equipment for critical infrastructure in electrical utility and industrial applications. Product realization services and products help developers and engineers convert concepts into finished products and also include highly-engineered energetic materials components used in specialized vertical applications. The Sensing Technologies business offers devices that sense, monitor and control operational or manufacturing variables, such as temperature, pressure, level, flow, turbidity and conductivity.
The Industrial Technologies segment consists of the Fortive Corporation's Transportation Technologies, Automation & Specialty Components and Franchise Distribution businesses. The Transportation Technologies business is a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management. The Automation & Specialty Components business consists of automation and engine retarder products. The Franchise Distribution business manufactures and distributes professional tools and a full line of wheel service equipment.
Separation from Danaher Corporation—Fortive Corporation completed its separation from Danaher Corporation ("Danaher" or "Former Parent") on July 2, 2016, the first day of its fiscal third quarter (the "Separation"). The Separation was completed in the form of a pro rata distribution to Danaher stockholders of record on June 15, 2016 of 100 percent of the outstanding shares of Fortive Corporation held by Danaher. Each Danaher stockholder of record as of the close of business on June 15, 2016 received one share of Fortive Corporation common stock for every two shares of Danaher common stock held on the record date. Fortive Corporation's common stock began “regular way” trading on the New York Stock Exchange under the ticker symbol “FTV” on July 5, 2016. Fortive Corporation and the Fortive businesses (for the periods prior to the Separation) are collectively referred to as "Fortive" or "the Company" herein.
Prior to the Separation, the Fortive businesses comprised certain operating units that were included in Danaher’s Test & Measurement segment, Industrial Technologies segment (other than its Product Identification platform) and Retail/Commercial Petroleum platform (collectively the “Fortive Businesses”). On July 1, 2016, Danaher contributed the net assets of the Fortive Businesses to Fortive Corporation, formerly a wholly-owned subsidiary of Danaher. In addition, in connection with the Separation, the Company paid a cash dividend to Danaher in the amount of $3.0 billion and the 100 shares of Fortive common stock held by Danaher were recapitalized into 345,237,561 shares of Fortive common stock held by Danaher 100 percent of which were distributed to Danaher stockholders. Following the Separation, Danaher no longer owned any shares of the Company. Per share amounts in the Consolidated and Combined Condensed Statements of Earnings for periods on or prior to July 1, 2016 have been retroactively adjusted to give effect to this recapitalization.
In connection with the Separation, on July 1, 2016, Danaher and Fortive entered into a separation and distribution agreement as well as various other related agreements (collectively the “Agreements”) that govern the Separation and the relationships between the parties going forward, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, and a Danaher Business System ("DBS") license agreement.
Prior to the Separation, the Company was dependent upon Danaher for all of its working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. With the exception of cash, cash equivalents and borrowings clearly associated with Fortive and related to the Separation, including the financial transactions described below, financial transactions relating to the business operations of the Company during the period prior to the Separation were accounted for through the Former Parent's investment, net ("Former Parent's Investment") account of the

8
Table of Contents

Company. Accordingly, none of the Former Parent's cash, cash equivalents or debt at the corporate level was assigned to the Company in the financial statements for the periods prior to the Separation.
In June 2016, the Company completed the following financing transactions:
•
Entered into a credit agreement with a syndicate of banks providing for a three-year $500 million senior term facility (the “Term Facility”) and a five-year $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (the “Revolving Credit Facility,” and together with the Term Facility, the “Credit Agreement”). The Company borrowed the entire $500 million of loans under the Term Facility;
•
Completed the private placement of $2.5 billion of senior unsecured notes in multiple series (collectively, the “Notes”); and
•
Established a commercial paper program supported by the Revolving Credit Facility.
These financing activities yielded net proceeds of approximately $3.5 billion (including aggregate commercial paper outstanding as of September 30, 2016 of $527 million), of which $3.0 billion was paid to Danaher in June 2016 as a cash dividend in connection with the Separation. Refer to Note 5 to the Consolidated and Combined Condensed Financial Statements for additional information related to the Company’s financing activities.
Basis of Presentation—The accompanying Consolidated and Combined Condensed Financial Statements present the historical financial position, results of operations, changes in equity and cash flows of Fortive in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The combined financial statements for periods prior to the Separation were derived from Danaher's condensed consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with Fortive have been included in the combined financial statements. Prior to the Separation, the combined financial statements also included allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to the Company and allocations of related assets, liabilities, and the Former Parent’s investment, as applicable. The allocations were determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company been an entity that operated independently of Danaher during the applicable periods. Related party allocations prior to the Separation, including the method for such allocation, are discussed further in Note 12.
Following the Separation, the consolidated financial statements include the accounts of Fortive and its wholly-owned subsidiaries and no longer include any allocations of expenses from Danaher to the Company. Accordingly:
•
The Consolidated and Combined Condensed Balance Sheet at September 30, 2016, consists of the consolidated balances of Fortive, while at December 31, 2015, it consists of the combined balances of Fortive and the Fortive Businesses.
•
The Consolidated and Combined Condensed Statement of Earnings and Statement of Comprehensive Income for the three months ended September 30, 2016 consists of the consolidated results of Fortive. The Consolidated and Combined Condensed Statement of Earnings and Statement of Comprehensive Income for the nine months ended September 30, 2016 consists of the consolidated results of Fortive for the three months ended September 30, 2016 and the combined results of Fortive and the Fortive Businesses for the six months ended July 1, 2016. The Consolidated and Combined Condensed Statements of Earnings and Statements of Comprehensive Income for the three and nine months ended October 2, 2015 consist of the combined results of the Fortive Businesses.
•
The Consolidated and Combined Condensed Statement of Changes in Equity for the nine months ended September 30, 2016 consists of the consolidated activity for Fortive for the three months ended September 30, 2016 and the combined activity for Fortive and the Fortive Businesses for the six months ended July 1, 2016.
•
The Consolidated and Combined Condensed Statement of Cash Flows for the nine months ended September 30, 2016 consists of the consolidated results of Fortive for the three months ended September 30, 2016 and the combined results of Fortive and the Fortive Businesses for the six months ended July 1, 2016. The Consolidated and Combined Condensed Statement of Cash Flows for the nine months ended October 2, 2015 consist of the combined results of the Fortive Businesses.


9
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The Consolidated and Combined Condensed Financial Statements of Fortive may not be indicative of the Company's results had it been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what the Company's financial position, results of operations and cash flows may be in the future.
All significant transactions between the Company and Danaher have been included in the accompanying Consolidated and Combined Condensed Financial Statements for all periods presented. Cash transactions with Danaher prior to the Separation are reflected in the accompanying Consolidated and Combined Condensed Statements of Changes in Equity as "Net transfers to Former Parent" and "Cash dividend paid to Former Parent" and in the accompanying Consolidated and Combined Condensed Balance Sheets within "Former Parent's investment, net." Former Parent's Investment, which included retained earnings prior to the Separation, represents Danaher's interest in the recorded net assets of the Company prior to the Separation. In addition, the accumulated net effect of intercompany transactions between the Company and Former Parent or Former Parent affiliates for periods prior to the Separation are included in Former Parent’s Investment.
On July 2, 2016, in connection with the Separation, Former Parent's Investment was redesignated within stockholders' equity and allocated between common stock and additional paid-in capital based on the number of shares of the Company's common stock outstanding at the distribution date. The Agreements include a "Wrong-Pockets Provision" that ensures the Separation-related transactions were executed in accordance with the Agreements. In periods subsequent to the Separation the Company and Danaher may make adjustments to balances transferred at the Separation date in accordance with the Wrong-Pockets Provision. Any such adjustments are recorded through the Former Parent’s Investment account. During the three months ended September 30, 2016, the Company recorded net Wrong-Pockets Provision adjustments of approximately $30 million.
The financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. The Consolidated and Combined Condensed Financial Statements also reflect the impact of non-controlling interests. Non-controlling interests do not have a significant impact on the Company’s consolidated results of operations, therefore net earnings and net earnings per share attributable to non-controlling interests are not presented separately in the Company’s Consolidated and Combined Condensed Statements of Earnings. Net earnings attributable to non-controlling interests have been reflected in selling, general and administrative expenses ("SG&A") and were insignificant in all periods presented.
The Consolidated and Combined Condensed Financial Statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). 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, the Company believes that the disclosures are adequate to make the information presented not misleading. The Consolidated and Combined Condensed Financial Statements included herein should be read in conjunction with the audited annual combined financial statements as of and for the year ended December 31, 2015 and the Notes thereto included within the Company’s Information Statement furnished as Exhibit 99.1 to the Company’s Form 8-K filed with the SEC on June 15, 2016 (the “Information Statement”).
In the opinion of the Company, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 2016 and December 31, 2015, and its results of operations for the three and nine months ended September 30, 2016 and October 2, 2015 and its cash flows for each of the nine months then ended.
Revision of Prior Periods—In order to correct immaterial errors in the prior periods presented and thereby facilitate period-to-period comparison, the management of the Company has revised the Combined Condensed Statements of Earnings (the “Carved-Out Earnings Statements”) for the three and nine months ended October 2, 2015 (the “October Periods”) and for the three months and year ended December 31, 2015 (the “December Periods”) of the Fortive Businesses that had been prepared prior to the Separation on a carved-out basis in accordance with GAAP. In preparing the Carved-Out Earnings Statements for the October Periods prior to the Separation, both sales and SG&A included over-allocations from Danaher, in each case, by $14.4 million, which error was corrected prior to the Separation in the Carved-Out Earnings Statements for the December Periods. In effectuating such correction during the December Periods, cost of sales included over-allocations from Danaher and SG&A included under-allocations from Danaher by, in each case, $4.7 million. Both Danaher, prior to the Separation, and the management of the Company, after the Separation, have analyzed the errors both quantitatively and qualitatively, and concluded that they were not material to the periods affected.

10
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The effect of the foregoing on specific items of the Carved-Out Earnings Statements for the October Periods and the December Periods is set forth in the table below:
 
Three Months Ended October 2, 2015
 
Nine Months Ended October 2, 2015
 
Previously Reported (a)
 
Corrections
 
As Revised
 
Previously Reported
 
Corrections
 
As Revised
Sales
$
1,539.0

 
$
(14.4
)
 
$
1,524.6

 
$
4,617.4

 
$
(14.4
)
 
$
4,603.0

Cost of sales
(777.4
)
 
—

 
(777.4
)
 
(2,360.3
)
 
—

 
(2,360.3
)
Gross profit
761.6

 
(14.4
)
 
747.2

 
2,257.1

 
(14.4
)
 
2,242.7

Operating costs:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(364.1
)
 
14.4

 
(349.7
)
 
(1,038.8
)
 
14.4

 
(1,024.4
)
Research and development expenses
(95.7
)
 
—

 
(95.7
)
 
(286.7
)
 
—

 
(286.7
)
Operating profit
$
301.8

 
$
—

 
$
301.8

 
$
931.6

 
$
—

 
$
931.6

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
196.6

 
$
—

 
$
196.6

 
$
627.7

 
$
—

 
$
627.7

 
Three Months Ended December 31, 2015
 
Year Ended December 31, 2015
 
Previously Reported (a)
 
Corrections
 
As Revised
 
Previously Reported
 
Corrections
 
As Revised
Sales
$
1,561.4

 
$
14.4

 
$
1,575.8

 
$
6,178.8

 
$
—

 
$
6,178.8

Cost of sales
(823.2
)
 
4.7

 
(818.5
)
 
(3,183.5
)
 
4.7

 
(3,178.8
)
Gross profit
738.2

 
19.1

 
757.3

 
2,995.3

 
4.7

 
3,000.0

Operating costs:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(309.1
)
 
(19.1
)
 
(328.2
)
 
(1,347.9
)
 
(4.7
)
 
(1,352.6
)
Research and development expenses
(91.0
)
 
—

 
(91.0
)
 
(377.7
)
 
—

 
(377.7
)
Operating profit
$
338.1

 
$
—

 
$
338.1

 
$
1,269.7

 
$
—

 
$
1,269.7

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
236.1

 
$
—

 
$
236.1

 
$
863.8

 
$
—

 
$
863.8

 
 
 
 
 
 
 
 
 
 
 
 
(a) The Carved-out Earnings Statement for the three months ended October 2, 2015 and December 31, 2015 were previously reported in filings with the SEC only to the extent incorporated into the Carved-out Earnings Statements for the nine months ended October 2, 2015 and the year ended December 31, 2015, respectively.

The errors noted above, as well as the associated corrections impacted only the results of the Industrial Technologies segment and did not have any impact on the Professional Instrumentation segment.
Cash and Equivalents—The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.


11
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Accumulated Other Comprehensive Income (Loss)—The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions). Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
 
Foreign
currency
translation
adjustments
 
Pension &
post-
retirement
plan benefit
adjustments
 
Total
For the Three Months Ended September 30, 2016:
 
 
 
 
 
Balance, July 1, 2016
$
62.7

 
$
(63.5
)
 
$
(0.8
)
Other comprehensive income (loss) before reclassifications, net of income taxes
(25.7
)
 
—

 
(25.7
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
1.3

 
1.3

Income tax impact
—

 
(0.3
)
 
(0.3
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
1.0

 
1.0

Net current period other comprehensive income (loss)
(25.7
)
 
1.0

 
(24.7
)
Balance, September 30, 2016
$
37.0

 
$
(62.5
)
 
$
(25.5
)
 
 
 
 
 
 
For the Three Months Ended October 2, 2015:
 
 
 
 
 
Balance, July 3, 2015
$
93.0

 
$
(71.4
)
 
$
21.6

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
Increase (decrease)
(9.9
)
 
(8.9
)
 
(18.8
)
Income tax impact
—

 
3.4

 
3.4

Other comprehensive income (loss) before reclassifications, net of income taxes
(9.9
)
 
(5.5
)
 
(15.4
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
1.6

 
1.6

Income tax impact
—

 
(0.4
)
 
(0.4
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
1.2

 
1.2

Net current period other comprehensive income (loss)
(9.9
)
 
(4.3
)
 
(14.2
)
Balance, October 2, 2015
$
83.1

 
$
(75.7
)
 
$
7.4


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Foreign
currency
translation
adjustments
 
Pension &
post-
retirement
plan benefit
adjustments
 
Total
For the Nine Months Ended September 30, 2016:
 
 
 
 
 
Balance, December 31, 2015
$
51.2

 
$
(65.6
)
 
$
(14.4
)
Other comprehensive income (loss) before reclassifications, net of income taxes
(14.2
)
 
—

 
(14.2
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
4.1

 
4.1

Income tax impact
—

 
(1.0
)
 
(1.0
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
3.1

 
3.1

Net current period other comprehensive income (loss)
(14.2
)
 
3.1

 
(11.1
)
Balance, September 30, 2016
$
37.0

 
$
(62.5
)
 
$
(25.5
)
 
 
 
 
 
 
For the Nine Months Ended October 2, 2015:
 
 
 
 
 
Balance, December 31, 2014
$
182.9

 
$
(83.4
)
 
$
99.5

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
Increase (decrease)
(99.8
)
 
5.2

 
(94.6
)
Income tax impact
—

 
(1.3
)
 
(1.3
)
Other comprehensive income (loss) before reclassifications, net of income taxes
(99.8
)
 
3.9

 
(95.9
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase
—

 
5.0

 
5.0

Income tax impact
—

 
(1.2
)
 
(1.2
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
3.8

 
3.8

Net current period other comprehensive income (loss)
(99.8
)
 
7.7

 
(92.1
)
Balance, October 2, 2015
$
83.1

 
$
(75.7
)
 
$
7.4


New Accounting Standards - In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. For the Company, this standard is effective beginning January 1, 2018, with early adoption permitted. The standard should be adopted using a retrospective transition approach, unless impracticable. Management has not yet completed its assessment of the impact of the new standard on the Company’s financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), which aims to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification of certain items on the statement of cash flows and accounting for forfeitures. The Company intends to adopt this standard beginning January 1, 2017 on a prospective basis. Management believes the impact of this standard on the Company's future financial statements is inherently uncertain and dependent primarily on the timing and relative value realized for future share-based transactions, and this may cause volatility in earnings after the adoption date.
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.  Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts.  The accounting applied by a lessor is largely unchanged from that applied under the current standard.  The standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients.  For the Company, this standard is effective beginning January 1, 2019, with early

13
Table of Contents

adoption permitted.  Management has not yet completed its assessment of the impact of the new standard on the Company’s financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity’s revenue recognition.  The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In July 2015, the FASB deferred the effective date of the standard by one year which results in the new standard being effective for the Company beginning January 1, 2018.  In addition, during March, April and May 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, respectively, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability and presentation of sales taxes.  The Company is currently assessing the impact that the adoption of the new standard will have on its consolidated financial statements and related disclosures, including possible transition alternatives, and expects to adopt this standard in 2018.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for annual and interim periods beginning after December 15, 2015. The Company has adopted the standard and has applied the guidance to all 2016 debt issuances.
NOTE 2. ACQUISITIONS
For a full description of the Company’s acquisition activity, reference is made to Note 3 of the Company’s audited annual combined financial statements as of and for the year ended December 31, 2015 included within the Company’s Information Statement.
The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into a new and attractive business area. The Company has completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses, the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance the Company’s existing offerings to key target markets and develop new and profitable businesses, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. In the months after closing, as the Company obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learns more about the newly acquired business, it is 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. The Company is in the process of obtaining valuations of certain acquired intangible assets in connection with these acquisitions. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
During the first nine months of 2016, the Company acquired three businesses for total consideration of $191 million in cash, net of cash acquired. The businesses acquired complement existing units of the Industrial Technology and Professional Instrumentation segments. The aggregate annual sales of these businesses at the time of their respective acquisitions, in each case based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $47 million. The Company preliminarily recorded an aggregate of $114 million of goodwill related to these acquisitions.

14
Table of Contents

The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during the nine months ended September 30, 2016 ($ in millions):
Trade accounts receivable
$
5.2

Inventories
2.2

Property, plant and equipment
0.6

Goodwill
113.9

Other intangible assets, primarily customer relationships, trade names and technology
82.7

Trade accounts payable
(1.5
)
Other assets and liabilities, net
(12.5
)
Net cash consideration
$
190.6


Pro forma financial information for these acquisitions has not been presented because the impact is not material.
NOTE 3. GOODWILL
The following is a rollforward of the Company’s goodwill ($ in millions):
Balance, December 31, 2015
$
3,949.0

Attributable to 2016 acquisitions
113.9

Foreign currency translation & other
(14.9
)
Balance, September 30, 2016
$
4,048.0

The carrying value of goodwill by segment is summarized as follows ($ in millions):
 
September 30, 2016
 
December 31, 2015
Professional Instrumentation
$
2,466.4

 
$
2,400.6

Industrial Technologies
1,581.6

 
1,548.4

Total goodwill
$
4,048.0

 
$
3,949.0


The Company has not identified any “triggering” events which indicate a potential impairment of goodwill in 2016.
NOTE 4. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where the Company’s 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 the Company’s assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

15
Table of Contents

A summary of financial liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
 
Quoted Prices
in Active
Market
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
September 30, 2016
 
 
 
Deferred compensation liabilities
$
—

 
$
14.1

 
$
—

 
$
14.1

December 31, 2015
 
 
 
Deferred compensation liabilities
$
—

 
$
53.7

 
$
—

 
$
53.7


Certain management employees of the Company participate in the Company’s nonqualified deferred compensation program, which permits such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plan are unfunded, unsecured obligations of the Company and are presented as a component of the Company’s compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated and Combined Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within the Company’s 401(k) program (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of the Company’s 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. Prior to the Separation, certain management employees of the Company participated in Danaher's nonqualified deferred compensation programs with similar terms except that earnings rates for amounts contributed unilaterally by Former Parent were entirely based on changes in the value of Danaher's common stock.
In connection with the Separation, Fortive established a deferred compensation program which was designed to replicate Danaher’s. Accounts in Danaher’s deferred compensation programs held by Fortive employees at the time of the Separation were converted into accounts in the Fortive deferred compensation program based on the “concentration method” designed to maintain the economic value before and after the Separation date using the relative fair market value of the Danaher and Fortive common stock as of the date of the Separation.  Prior to the Separation, the entire value of the Fortive employees’ deferred compensation program accounts in Danaher’s deferred compensation programs was recorded in other long-term liabilities. Upon conversion of these accounts to the Fortive deferred compensation program, $19.2 million of deferred compensation liabilities were reclassified from other long-term liabilities to additional paid-in capital, representing the value of the deferred compensation that will ultimately be settled in Fortive common stock.
In addition, Danaher retained a liability of approximately $21.7 million of deferred compensation liabilities related to former employees of Fortive Businesses whose employment terminated prior to the Separation. As a result, the deferred compensation liabilities balance recorded at September 30, 2016 does not include amounts related to such terminated employees. Because this amount had been included in the Company's Combined Condensed Balance Sheet prior to the Separation, Danaher's retention of the liability has been reflected as an adjustment to Former Parent's Investment. This amount is considered a non-cash financing activity for purposes of the Consolidated and Combined Condensed Statements of Cash Flows.
Fair Value of Financial Instruments
The carrying amounts and fair values of financial instruments were as follows ($ in millions):
 
September 30, 2016
 
Carrying Amount
 
Fair
Value
Long-term borrowings
$
3,509.1

 
$
3,615.7


As of September 30, 2016, the long-term borrowings were categorized as Level 1. Long-term borrowings were incurred in June 2016 and as of December 31, 2015, the Company did not have any long-term borrowings.
The fair value of long-term borrowings was based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or the Company’s credit profile subsequent to the incurrence of the borrowing. The fair values of cash and cash equivalents, trade accounts receivable, net and trade accounts payable approximate their carrying amounts due to the short-term maturities of these instruments.

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NOTE 5. FINANCING
The carrying value of the components of the Company’s debt as of September 30, 2016 were as follows ($ in millions):
 
 
September 30, 2016
Commercial paper
 
$
526.6

Variable interest rate Term Facility
 
500.0

1.80% senior unsecured notes due 2019
 
298.1

2.35% senior unsecured notes due 2021
 
744.5

3.15% senior unsecured notes due 2026
 
889.9

4.30% senior unsecured notes due 2046
 
546.8

Other financing
 
3.2

Long-term debt
 
$
3,509.1


Credit Facilities
As described above in Note 1, on June 16, 2016, the Company entered into the Credit Agreement with a syndicate of banks that provides for:
•
a $500 million Term Facility that matures on June 16, 2019. The Company borrowed the entire $500 million available under this facility, and
•
a $1.5 billion Revolving Credit Facility that expires on June 16, 2021.
The Company borrowed the entire variable rate loan of $500 million available under the Term Facility. As of September 30, 2016 the borrowing under the Term Facility bore an interest rate of 1.7% per annum. The term loan is pre-payable at the option of the Company. Re-borrowing is not permitted once the term loan is repaid.
The Revolving Credit Facility is subject to a one-year extension option at the request of the Company and with the consent of the lenders. The Credit Agreement also contains an option permitting the Company to request an increase in the amounts available under the Credit Agreement of up to an aggregate additional $500 million. The obligations under the Credit Agreement were initially guaranteed on an unsecured, unsubordinated basis by Danaher, which guarantee terminated upon the completion of the Separation on July 2, 2016.
Borrowings under the Credit Agreement (other than bid loans under the Revolving Credit Facility) bear interest at a rate equal (at the Company’s option) to either (1) a LIBOR-based rate (the “LIBOR-Based Rate”), or (2) the highest of (a) the Federal funds rate plus 1/2 of 1%, (b) the prime rate and (c) the LIBOR-Based Rate plus 1%, plus in each case a margin that varies according to the Company’s long-term debt credit rating. The Company is obligated to pay an annual facility fee for the Revolving Credit Facility of between 9.0 and 25.0 basis points varying according to the Company's long-term debt credit rating.
The Credit Agreement requires the Company to maintain a consolidated net leverage ratio of debt to Consolidated EBITDA (as defined in the Credit Agreement) of less than 3.5 to 1.0 and a consolidated interest coverage ratio of Consolidated EBITDA to interest expense of greater than 3.5 to 1.0 as of the end of any fiscal quarter, beginning with the fiscal quarter ending September 30, 2016. The Credit Agreement also contains customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants. As of September 30, 2016, the Company was in compliance with all covenants under the Credit Agreement that were in effect and the Company had no borrowings outstanding under the Revolving Credit Facility.
Commercial Paper Program
The Company generally satisfies any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under its commercial paper program. Under this program, the Company may issue and sell unsecured, short-term promissory notes with maturities not exceeding 397 days. Interest expense on the notes is paid at maturity and is generally based on the short-term ratings assigned to the Company by credit rating agencies at the time of issuance and prevailing market rates measured by reference to LIBOR.
As of September 30, 2016, $527 million of commercial paper was outstanding under this program with a weighted average annual interest rate of 0.9% and a weighted average remaining maturity of approximately 20 days.

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Credit support for the commercial paper program is provided by the Revolving Credit Facility. The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the existing credit ratings of the Company’s commercial paper program. The Company expects to limit any borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow the Company to borrow, if needed, to repay all of the outstanding commercial paper as it matures.
The Company’s ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of the Company's credit rating and market conditions. Any downgrade in the Company’s credit rating would increase the cost of borrowing under the Company’s commercial paper program and the Credit Agreement, and could limit or preclude the Company's ability to issue commercial paper. If the Company’s access to the commercial paper market is adversely affected due to a downgrade, change in market conditions or otherwise, the Company expects it would rely on a combination of available cash, operating cash flow and the Revolving Credit Facility to provide short-term funding. In such event, the cost of borrowings under the Credit Agreement could be higher than the historic cost of commercial paper borrowings.
The Company classified its borrowings outstanding under the commercial paper program as of September 30, 2016 as long-term debt in the accompanying Consolidated and Combined Condensed Balance Sheet as the Company has 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.
Proceeds from borrowings under the commercial paper program are typically available for general corporate purposes, including acquisitions.
Long-Term Indebtedness
On June 20, 2016, the Company completed the private placement of each of the following series of the Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act") and outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act:
•
$300 million aggregate principal amount of senior notes due June 15, 2019 (the “2019 Notes”). The 2019 Notes were issued at 99.893% of their principal amount and bear interest at the rate of 1.80% per year.
•
$750 million aggregate principal amount of senior notes due June 15, 2021 (the “2021 Notes”). The 2021 Notes were issued at 99.977% of their principal amount and bear interest at the rate of 2.35% per year.
•
$900 million aggregate principal amount of senior notes due June 15, 2026 (the “2026 Notes”). The 2026 Notes were issued at 99.644% of their principal amount and bear interest at the rate of 3.15% per year.
•
$350 million aggregate principal amount of senior notes due June 15, 2046 (the “Initial 2046 Notes”). The Initial 2046 Notes were issued at 99.783% of their principal amount and bear interest at the rate of 4.30% per year.
•
$200 million aggregate principal amount of senior notes due June 15, 2046 (the “Additional 2046 Notes” and, together with the Initial 2046 Notes, the “2046 Notes”). The Additional 2046 Notes were issued at 101.564% of their principal amount and bear interest at the rate of 4.30% per year.
Interest on the Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2016.
In connection with the issuance of the Notes, the Company entered into a registration rights agreement, pursuant to which the Company is obligated to use commercially reasonable efforts to file with the SEC, and cause to be declared effective, a registration statement with respect to an offer to exchange each series of Notes for registered notes with terms that are substantially identical to the Notes of such series. Alternatively, if the exchange offers are not available or cannot be completed, the Company would be required to use commercially reasonable efforts to file, and cause to be declared effective, a shelf registration statement to cover resales of the Notes under the Securities Act. If the Company does not comply with these obligations, it will be required to pay additional interest on the Notes.
The Company used the net proceeds from the issuance of the Notes and Term Facility to fund a $3.0 billion cash dividend payment to Danaher in connection with the Separation.
Net discounts, premiums and issuance costs associated with long-term indebtedness totaled $20.8 million as of September 30, 2016 and has been recorded as an offset to the carrying amount of the related debt in the accompanying Consolidated and Combined Condensed Balance Sheet as of September 30, 2016.

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Covenants and Redemption Provisions Applicable to Notes
The Company may redeem the Notes of the applicable series, in whole or in part, at any time prior to the dates specified in the applicable indentures (the “Call Dates”) by paying the principal amount and the “make-whole” premium specified in the applicable indenture, plus accrued and unpaid interest. Additionally, with the exception of the 2019 Notes, the Company may redeem all or any part of the Notes of the applicable series on or after the Call Dates without paying the “make-whole” premium specified in the applicable indenture.
Note Series
Call Dates
2019 Notes
June 15, 2019
2021 Notes
May 15, 2021
2026 Notes
March 15, 2026
2046 Notes
December 15, 2045

If a change of control triggering event occurs, the Company will, in certain circumstances, be required to make an offer to repurchase the Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. A change of control triggering event is defined as the occurrence of both a change of control and a rating event, each as defined in the applicable indenture. Except in connection with a change of control triggering event, the Notes do not have any credit rating downgrade triggers that would accelerate the maturity of the Notes.
The Notes contain customary covenants, including limits on the incurrence of certain secured debt and sale/leaseback transactions. None of these covenants are considered restrictive to the Company’s operations and as of September 30, 2016, the Company was in compliance with all the covenants under the Notes.
Minimum Principal Payments
There are no minimum principal payments due under the Company's total outstanding debt during the next two years. The principal payments due are presented in the following table:
 
Commercial
Paper
 
Term
Loan
 
Notes
 
Total
2019
$
—

 
$
500.0

 
$
300.0

 
$
800.0

2020
—

 
—

 
—

 
—

2021
—

 
—

 
750.0

 
750.0

Thereafter
526.9

 
—

 
1,450.0

 
1,976.9

Total principal payments (a)
$
526.9

 
$
500.0

 
$
2,500.0

 
$
3,526.9

 
 
 
 
 
 
 
 
(a) Amount is higher than the carrying value of debt as net discounts, premiums and issuance costs of $21.0 million as of September 30, 2016 are included in the carrying amount of the related debt in the accompanying Consolidated and Combined Condensed Balance Sheet as of September 30, 2016 but excluded from the principal payments disclosed herein. In addition, these amounts exclude other financing balances of $3.2 million.
 

NOTE 6. PENSION PLANS
The Company has noncontributory defined benefit pension plans outside of the United States. The following sets forth the components of the Company’s net periodic pension costs associated with these plans ($ in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Service cost
$
0.9

 
$
1.3

 
$
2.6

 
$
3.7

Interest cost
1.8

 
2.2

 
5.6

 
6.4

Expected return on plan assets
(2.0
)
 
(2.4
)
 
(6.1
)
 
(6.7
)
Amortization of net loss
1.3

 
1.8

 
4.1

 
5.2

Net periodic pension cost
$
2.0

 
$
2.9

 
$
6.2

 
$
8.6



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Net periodic pension costs are included in cost of sales and SG&A in the accompanying Consolidated and Combined Condensed Statements of Earnings.
Effective December 31, 2015, the Company changed its estimate of the service and interest cost components of net periodic benefit cost for its pension plans. Previously, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provides a more precise measurement of service and interest costs recognized by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change is accounted for as a change in accounting estimate that is inseparable from a change in accounting principle, which is applied prospectively. For 2016, the change in estimate is expected to reduce net periodic pension cost by approximately $1 million when compared to the prior methodology.
Employer Contributions
During 2016, the Company’s cash contribution requirements for its defined benefit pension plans are expected to be approximately $11 million. The ultimate amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors.
NOTE 7. INCOME TAXES
The Company’s effective tax rates for the three and nine months ended September 30, 2016, were 24.3% and 26.6% respectively, as compared to 34.9% and 32.6% for the three and nine months ended October 2, 2015. The difference in effective tax rates between the periods primarily involved a higher mix of income in jurisdictions with lower tax rates and higher federal tax benefits. The Company’s effective tax rates for 2016 and 2015 differ from the U.S. federal statutory rate of 35% due principally to the Company’s earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate and the impact of credits and deductions provided by law.
In connection with the Separation, Danaher and the Company entered into the Agreements, including a tax matters agreement. The tax matters agreement distinguishes between the treatment of tax matters for pre-Separation “Joint” filings compared to pre-Separation “Separate” filings. Joint filings involve legal entities, such as those in the United States, that include operations from both Danaher and the Company. By contrast, Separate filings involve certain entities (primarily outside of the United States), that exclusively include either Danaher’s or the Company’s operations, respectively.
Under the tax matters agreement, for pre-Separation Joint filings, Danaher remains liable for and has contractually assumed all income tax liabilities including applicable interest and penalties. Danaher has also indemnified the Company for all tax liabilities for Joint returns related to pre-Separation periods. For the U.S. federal portion of Joint tax liabilities, U.S. Treasury Regulations make each member of prior period U.S. consolidated tax filings severally liable to the U.S. government for any U.S. federal income tax liability incurred by the U.S. consolidated group. As of the Separation date, the amount of uncertain tax positions associated with Fortive Businesses that Danaher has recorded and contractually assumed related to pre-Separation periods is approximately $135 million. Danaher is the primary obligor for such pre-Separation liabilities. The Company believes it is remote that it will have any liability for pre-Separation income tax Joint filings, principally in view of Danaher’s strong financial position. Therefore, the Company has removed the liability from its balance sheet as of the Separation date by adjusting Former Parent’s Investment.  This is a non-cash financing activity for purposes of the Consolidated and Combined Condensed Statements of Cash Flows and was offset by other changes in tax attributes associated with the Separation.
For the Company’s pre-Separation Separate filings, the Company is fully liable for all income tax liabilities including interest and penalties. As of the Separation date, the Company had approximately $33 million of uncertain tax positions reflected in other long-term liabilities.
Following the Separation, the Company will file tax returns on its own behalf. The Company’s income tax expense and deferred income tax balances have been recorded in accordance with the Company’s stand-alone income tax positions. The Company may periodically be audited by the tax authorities. Resolution of such audits or expiration of the statute of limitations may impact the Company’s unrecognized tax benefits in future periods.

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Table of Contents

NOTE 8. STOCK-BASED COMPENSATION
The Company had no stock-based compensation plans prior to the Separation; however certain Fortive employees participated in Danaher’s stock-based compensation plans ("Danaher Plans"), which provided for the grants of stock options, performance stock units (“PSUs”), and restricted stock units (“RSUs”) among other types of awards. The expense associated with Fortive employees who participated in the Danaher Plans was allocated to the Company in the accompanying Combined Condensed Statements of Earnings for the associated periods prior to the Separation.
In connection with the Separation and the employee matters agreement, the Company adopted the 2016 Stock Incentive Plan (the “Stock Plan”) and outstanding equity awards of Danaher held by Fortive employees (the "Converted Awards") were converted into or replaced with equity awards of Fortive (the "Conversion Awards") under the Stock Plan based on the “concentration method,” and as adjusted to maintain the economic value before and after the distribution date using the relative fair market value of the Danaher and Fortive common stock based on the closing prices as of July 1, 2016. There was no significant incremental stock-based compensation expense recorded as a result of the equity award conversion. 
Outstanding performance-based RSU and PSU of Danaher held by Fortive employees with pending performance goals of Danaher at the Separation date were cancelled and replaced in connection with the Separation with performance-based restricted stock awards ("RSAs") and performance stock awards ("PSAs") of Fortive with comparable value, performance goals and vesting requirements. All other terms of the equity awards continued unchanged following the conversion or replacement.
The Stock Plan provides for the grant of stock options, stock appreciation rights, RSUs, PSUs, RSAs and PSAs (collectively, "Stock Awards") or any other stock-based award. A total of 23.0 million shares of Fortive common stock have been authorized for issuance under the Stock Plan. As of September 30, 2016, approximately 22.4 million shares of the Company's common stock remain available for issuance under the Stock Plan. Stock options under the Stock Plan generally vest pro rata over a five year period and terminate 10 years from the grant date, though the specific terms of each grant are determined by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"). The Company’s executive officers and certain other employees may be awarded options with different vesting criteria, and options granted to non-employee directors are fully vested as of the grant date. Option exercise prices for new options granted by the Company under this plan equal the closing price of the Company’s common stock on the NYSE on the date of grant, while options issued as Conversion Awards were priced to maintain the economic value before and after the Separation.

RSUs and RSAs issued under the Stock Plan provide for the issuance of a share of the Company’s common stock at no cost to the holder. RSUs granted to employees under the Stock Plan generally provide for time-based vesting over a five year period, although certain employees may be awarded RSUs with different time-based vesting criteria, and RSAs granted to members of the Company’s senior management are also subject to performance-based vesting criteria. RSUs granted to non-employee directors under the Stock Plan vest on the earlier of the first anniversary of the grant date or the date of, and immediately prior to, the next annual meeting of the Company’s shareholders following the grant date. However, the underlying shares are not issued until the earlier of the director’s death or the first day of the seventh month following the director’s retirement from the Board of Directors (the "Board"). Prior to vesting, RSUs granted under the Stock Plan do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued or outstanding. RSAs granted under the Stock Plan have all of the same dividend, voting and other rights corresponding to all other common stock, provided, however, that the dividends payable on the RSAs will accrue and be delivered at the time of delivery of the shares upon vesting of the RSA .

As part of the Company's executive equity compensation program, PSUs may be granted under the Stock Plan that vest based on the Company’s total shareholder return ranking relative to the S&P 500 Index over a three year performance period. No PSUs have been issued under the Stock Plan. During the third quarter of 2016, PSAs were granted under the Stock Plan as Conversion Awards that vest based on the Company’s total shareholder return ranking relative to the S&P 500 Index over the performance period remaining on the corresponding Converted Awards.

The equity compensation awards granted by the Company generally vest only if the employee is employed by the Company (or
in the case of directors, the director continues to serve on the Board) on the vesting date or in other limited circumstances. To cover the exercise of options, vesting of RSUs and PSUs and issuances of RSAs and PSAs, the Company generally issues new shares from its authorized but unissued share pool, although it may instead issue treasury shares in certain circumstances.

The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date. The Company recognizes the compensation expense over the requisite service period (which is generally the vesting period but may be shorter than the vesting period if the employee becomes retirement eligible before the end of the vesting period). The fair value for RSUs was calculated using the closing price of the Company’s common stock on the date of grant, adjusted for the fact that RSUs do not accrue dividends.

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Table of Contents

The fair value for RSAs was calculated using the closing price of the Company’s common stock on the date of grant. The fair value of the PSUs and PSAs was calculated using a Monte Carlo pricing model. The fair value of the options granted was calculated using a Black-Scholes Merton (“Black-Scholes”) option pricing model.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of SG&A in the accompanying Consolidated and Combined Condensed Statements of Earnings. Prior to the Separation, the Company was allocated stock-based compensation expense by Danaher. Following the Separation, stock-based compensation is recorded based on the provisions of the Stock Plan. Accordingly, the amounts presented for the nine months ended September 30, 2016 and the three and nine months ended October 2, 2015 may not be indicative of the Company's results had it been a separate stand-alone entity throughout the periods presented.
The following summarizes the components of the Company’s stock-based compensation expense under the Stock Plan and the Danaher Plans ($ in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
RSUs/PSUs:
 
 
 
 
 
 
 
Pretax compensation expense
$
7.3

 
$
5.1

 
$
21.5

 
$
15.3

Income tax benefit
(2.3
)
 
(1.8
)
 
(7.1
)
 
(5.2
)
RSU/PSU expense, net of income taxes
5.0

 
3.3

 
14.4

 
10.1

Stock options:
 
 
 
 
 
 
 
Pretax compensation expense
4.7

 
3.4

 
12.9

 
9.0

Income tax benefit
(1.6
)
 
(1.1
)
 
(4.4
)
 
(3.1
)
Stock option expense, net of income taxes
3.1

 
2.3

 
8.5

 
5.9

Total stock-based compensation:
 
 
 
 
 
 
 
Pretax compensation expense
12.0

 
8.5

 
34.4

 
24.3

Income tax benefit
(3.9
)
 
(2.9
)
 
(11.5
)
 
(8.3
)
Total stock-based compensation expense, net of income taxes
$
8.1

 
$
5.6

 
$
22.9

 
$
16.0


The following summarizes the unrecognized compensation cost for the Stock Plan awards as of September 30, 2016 which are expected to recognized over a weighted average period of approximately three years. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
Stock Awards
$
50.5

Stock options
46.0

Total unrecognized compensation cost
$
96.5


Stock Options
The following summarizes the assumptions used in the Black-Scholes model to value options granted during the three months ended September 30, 2016:
Risk-free interest rate
1.21% - 1.25%

Weighted average volatility (a)
25.0
%
Dividend yield (b)
0.6
%
Expected years until exercise
5.5 - 8.0

 
 
(a) Weighted average volatility was estimated based on an average historical stock price volatility of a group of peer companies, given the Company's limited trading history.
(b) The dividend yield is calculated by dividing Fortive's annual dividend, based on the most recent quarterly dividend rate, by the closing Fortive stock price on the grant date.


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Table of Contents

The following summarizes option activity under the Stock Plan and the Danaher Plans for the nine months ended September 30, 2016 (in millions, except price per share and numbers of years):
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2015
5.8

 


 
 
 
 
Granted
1.6

 
 
 
 
 
 
Exercised
(1.4
)
 
 
 
 
 
 
Canceled/forfeited
(0.7
)
 
 
 
 
 
 
Aggregate impact of conversion related to the Separation (a)
5.5

 


 
 
 
 
Outstanding as of September 30, 2016
10.8

 
$
32.96

 
7
 
$
194.1

Vested and expected to vest as of September 30, 2016 (b)
10.4

 
$
32.12

 
7
 
$
190.3

Vested as of September 30, 2016
4.9

 
$
24.64

 
5
 
$
127.8

 
 
 
 
 
 
 
 
(a) The “Aggregate impact of conversion related to the Separation” represents the number of options issued as a result of the Separation by applying the “concentration method” to convert employee options based on the ratio of the fair value of Danaher and Fortive common stock as of the date of the Separation.
(b) The “expected to vest” options are the net unvested options that remain after applying the forfeiture rate assumption to total unvested options.


The weighted average exercise price of stock options outstanding at December 31, 2015, and for stock options granted, exercised, canceled/forfeited is not included in the table above as the nine months ended September 30, 2016 include the conversion of stock option awards under Danaher's Plans into awards under the Stock Plan. The weighted average exercise price of Fortive stock options granted, exercised and canceled/forfeited during the three months ended September 30, 2016 was $50.60, $27.67, and $40.27, respectively.
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing stock price of Fortive's common stock on the last trading day of the third quarter of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2016. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock.
The following summarizes aggregate intrinsic value, cash receipts and tax benefits realized related to option exercise activity under the Stock Plan and the Danaher Plans for the three and nine months ended September 30, 2016 and October 2, 2015 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Aggregate intrinsic value of options exercised
$
2.8

 
$
18.0

 
$
73.7

 
$
50.4

Cash receipts from exercise of options
$
3.3

 
$
12.7

 
$
56.7

 
$
35.4