October 25, 2018 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________

FORM 10-Q

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(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 28, 2018



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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x				Accelerated filer ¨

Non-accelerated filer ¨				Smaller reporting company ¨

				Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares of common stock outstanding at October 18, 2018 was 333,962,913.

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FORTIVE CORPORATION

INDEX

FORM 10-Q



PART I -	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Earnings	4
	Consolidated Condensed Statements of Comprehensive Income	5
	Consolidated Condensed Statement of Changes in Equity	6
	Consolidated Condensed Statements of Cash Flows	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
PART II -	OTHER INFORMATION
Item 1A.	Risk Factors	40
Item 6.	Exhibits	40
	Signatures	42

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORTIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

($ in millions, except per share amounts)



	As of
	September 28, 2018			December 31, 2017
	(unaudited)
ASSETS
Current assets:
Cash and equivalents	$	1,145.1		$	962.1
Accounts receivable, net	1,295.6			1,143.6
Inventories:
Finished goods	222.7			217.2
Work in process	109.8			78.9
Raw materials	316.7			284.5
Total inventories	649.2			580.6
Prepaid expenses and other current assets	324.4			250.5
Total current assets	3,414.3			2,936.8
Property, plant and equipment, net of accumulated depreciation of $1,135.4 and $1,086.8 at September 28, 2018 and December 31, 2017, respectively	682.3			712.5
Other assets	523.0			476.8
Goodwill	6,743.3			5,098.5
Other intangible assets, net	2,499.9			1,276.0
Total assets	$	13,862.8		$	10,500.6
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	1,824.5		$	—
Trade accounts payable	758.7			727.5
Accrued expenses and other current liabilities	896.3			874.8
Total current liabilities	3,479.5			1,602.3
Other long-term liabilities	1,356.2			1,033.9
Long-term debt	3,178.0			4,056.2
Equity:
5.0% Mandatory convertible preferred stock, series A: $0.01 par value, 15.0 million shares authorized; 1.4 million shares issued and outstanding at September 28, 2018; no shares issued or outstanding at December 31, 2017	—			—
Common stock: $0.01 par value, 2.0 billion shares authorized; 350.3 and 348.2 million issued; 349.8 and 347.8 million outstanding at September 28, 2018 and December 31, 2017, respectively	3.5			3.5
Additional paid-in capital	3,862.5			2,444.1
Retained earnings	2,057.1			1,350.3
Accumulated other comprehensive income (loss)	(92.8		)	(7.6		)
Total Fortive stockholders’ equity	5,830.3			3,790.3
Noncontrolling interests	18.8			17.9
Total stockholders’ equity	5,849.1			3,808.2
Total liabilities and equity	$	13,862.8		$	10,500.6

See the accompanying Notes to the Consolidated Condensed Financial Statements.

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FORTIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

($ and shares in millions, except per share amounts)

(unaudited)



	Three Months Ended						Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales	$	1,840.1		$	1,685.3		$	5,436.8		$	4,849.3
Cost of sales	(915.8		)	(845.9		)	(2,702.8		)	(2,460.8		)
Gross profit	924.3			839.4			2,734.0			2,388.5
Operating costs:
Selling, general and administrative expenses	(490.4		)	(380.7		)	(1,359.5		)	(1,089.8		)
Research and development expenses	(112.5		)	(102.0		)	(332.4		)	(297.3		)
Operating profit	321.4			356.7			1,042.1			1,001.4
Non-operating expenses:
Gain from acquisition	—			15.3			—			15.3
Interest expense, net	(24.4		)	(22.9		)	(74.3		)	(68.2		)
Other non-operating expenses	(0.8		)	(0.8		)	(2.6		)	(2.3		)
Earnings before income taxes	296.2			348.3			965.2			946.2
Income taxes	(50.9		)	(80.5		)	(163.7		)	(238.6		)
Net earnings	245.3			267.8			801.5			707.6
Mandatory convertible preferred stock cumulative dividends	(17.4		)	—			(17.6		)	—
Net earnings attributable to common stockholders	$	227.9		$	267.8		$	783.9		$	707.6
Net earnings per common share:
Basic	$	0.65		$	0.77		$	2.24		$	2.04
Diluted	$	0.64		$	0.76		$	2.21		$	2.01
Average common stock and common equivalent shares outstanding:
Basic	349.9			347.7			349.2			347.3
Diluted	355.3			352.9			354.8			352.2

See the accompanying Notes to the Consolidated Condensed Financial Statements.

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FORTIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

($ in millions)

(unaudited)



	Three Months Ended					Nine Months Ended
	September 28, 2018			September 29, 2017		September 28, 2018			September 29, 2017
Net earnings	$	245.3		$	267.8	$	801.5		$	707.6
Other comprehensive income, net of income taxes:
Foreign currency translation adjustments	(23.9		)	38.1		(87.3		)	126.9
Pension adjustments	0.7			0.9		2.1			2.6
Total other comprehensive income, net of income taxes	(23.2		)	39.0		(85.2		)	129.5
Comprehensive income	$	222.1		$	306.8	$	716.3		$	837.1

See the accompanying Notes to the Consolidated Condensed Financial Statements.

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FORTIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY

($ and shares in millions)

(unaudited)



	Common Stock			Preferred Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests
	Shares	Amount		Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests
Balance, December 31, 2017	347.8	$	3.5	—	$	—	$	2,444.1	$	1,350.3		$	(7.6	)	$	17.9
Adoption of accounting standards	—	—		—	—		—		(3.9		)	—			—
Balance, January 1, 2018	347.8	3.5		—	—		2,444.1		1,346.4			(7.6		)	17.9
Net earnings for the period	—	—		—	—		—		801.5			—			—
Dividends to shareholders	—	—		—	—		—		(73.2		)	—			—
Mandatory convertible preferred stock cumulative dividends	—	—		—	—		—		(17.6		)	—			—
Separation related adjustments	—	—		—	—		9.1		—			—			—
Other comprehensive income	—	—		—	—		—		—			(85.2		)	—
Common stock-based award activity	2.0	—		—	—		72.3		—			—			—
Issuance of mandatory convertible preferred stock	—	—		1.4	—		1,337.0		—			—			—
Change in noncontrolling interests	—	—		—	—		—		—			—			0.9
Balance, September 28, 2018	349.8	$	3.5	1.4	$	—	$	3,862.5	$	2,057.1		$	(92.8	)	$	18.8

See the accompanying Notes to the Consolidated Condensed Financial Statements.

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FORTIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

($ in millions)

(unaudited)



	Nine Months Ended
	September 28, 2018			September 29, 2017
Cash flows from operating activities:
Net earnings	$	801.5		$	707.6
Noncash items:
Depreciation	103.3			72.4
Amortization	81.5			41.3
Stock-based compensation expense	40.5			37.2
Gain from acquisition	—			(15.3		)
Change in accounts receivable, net	(85.1		)	(30.8		)
Change in inventories	(78.9		)	8.2
Change in trade accounts payable	30.2			(51.2		)
Change in prepaid expenses and other assets	(28.8		)	(17.9		)
Change in accrued expenses and other liabilities	35.4			(38.5		)
Net cash provided by operating activities	899.6			713.0
Cash flows from investing activities:
Cash paid for acquisitions	(2,825.2		)	(802.1		)
Payments for additions to property, plant and equipment	(93.7		)	(87.7		)
All other investing activities	4.1			1.5
Net cash used in investing activities	(2,914.8		)	(888.3		)
Cash flows from financing activities:
Net (repayments of) proceeds from borrowings (maturities of 90 days or less)	(64.3		)	176.8
Proceeds from borrowings (maturities longer than 90 days)	1,750.0			125.9
Repayment of borrowings (greater than 90 days)	(725.0		)	—
Proceeds from issuance of mandatory convertible preferred stock net of $43 million of issuance costs	1,337.4			—
Payment of common stock cash dividend to shareholders	(73.2		)	(72.8		)
Payment of mandatory convertible preferred stock cash dividend to shareholders	(17.6		)	—
All other financing activities	27.2			10.9
Net cash provided by financing activities	2,234.5			240.8
Effect of exchange rate changes on cash and equivalents	(36.3		)	42.2
Net change in cash and equivalents	183.0			107.7
Beginning balance of cash and equivalents	962.1			803.2
Ending balance of cash and equivalents	$	1,145.1		$	910.9

See the accompanying Notes to the Consolidated Condensed Financial Statements.

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FORTIVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1. BUSINESS OVERVIEW

Fortive Corporation (“Fortive”, the “Company,” “we,” “us,” or “our”) is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.

We prepared the unaudited consolidated condensed financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe the disclosures are adequate to make the information presented not misleading. The consolidated condensed financial statements included herein should be read in conjunction with the audited annual consolidated financial statements as of and for the year ended December 31, 2017 and the footnotes (“Notes”) thereto included within our 2017 Annual Report on Form 10-K.

In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present our financial position as of September 28, 2018 and December 31, 2017, and our results of operations and cash flows for the three and nine months ended September 28, 2018 and September 29, 2017. Reclassification of certain prior year amounts have been made to conform to current year presentation.

Accumulated Other Comprehensive Income (Loss)—Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions):



	Foreign currency translation adjustments			Pension adjustments				Total
For the Three Months Ended September 28, 2018:
Balance, June 29, 2018	$	0.6		$	(70.2	)		$	(69.6	)
Other comprehensive income (loss) before reclassifications, net of income taxes	(23.9		)	—				(23.9		)
Amounts reclassified from accumulated other comprehensive income (loss):
Increase (decrease)	—			0.9			^(a)	0.9
Income tax impact	—			(0.2		)		(0.2		)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes	—			0.7				0.7
Net current period other comprehensive income (loss), net of income taxes	(23.9		)	0.7				(23.2		)
Balance, September 28, 2018	$	(23.3	)	$	(69.5	)		$	(92.8	)
^(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).

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	Foreign currency translation adjustments			Pension adjustments				Total
For the Three Months Ended September 29, 2017:
Balance, June 30, 2017	$	16.2		$	(71.5	)		$	(55.3	)
Other comprehensive income (loss) before reclassifications, net of income taxes	38.1			—				38.1
Amounts reclassified from accumulated other comprehensive income (loss):
Increase (decrease)	—			1.2			^(a)	1.2
Income tax impact	—			(0.3		)		(0.3		)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes	—			0.9				0.9
Net current period other comprehensive income (loss), net of income taxes	38.1			0.9				39.0
Balance, September 29, 2017	$	54.3		$	(70.6	)		$	(16.3	)

For the Nine Months Ended September 28, 2018:
Balance, December 31, 2017	$	64.0		$	(71.6	)		$	(7.6	)
Other comprehensive income (loss) before reclassifications, net of income taxes	(87.3		)	—				(87.3		)
Amounts reclassified from accumulated other comprehensive income (loss):
Increase (decrease)	—			2.7			^(a)	2.7
Income tax impact	—			(0.6		)		(0.6		)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes	—			2.1				2.1
Net current period other comprehensive income (loss)	(87.3		)	2.1				(85.2		)
Balance, September 28, 2018	$	(23.3	)	$	(69.5	)		$	(92.8	)

For the Nine Months Ended September 29, 2017:
Balance, December 31, 2016	$	(72.6	)	$	(73.2	)		$	(145.8	)
Other comprehensive income (loss) before reclassifications, net of income taxes	126.9			—				126.9
Amounts reclassified from accumulated other comprehensive income (loss):
Increase (decrease)	—			3.4			^(a)	3.4
Income tax impact	—			(0.8		)		(0.8		)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes	—			2.6				2.6
Net current period other comprehensive income (loss)	126.9			2.6				129.5
Balance, September 29, 2017	$	54.3		$	(70.6	)		$	(16.3	)

^(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).

Recently Issued Accounting Standards—In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. This standard is effective for us beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on our financial statements.

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. The standard also requires lessees and lessors to disclose the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from the current standard. In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provided additional

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implementation guidance on the previously issued ASU. This standard is effective for us beginning January 1, 2019 (with early adoption permitted), and it also provides for certain practical expedients that we plan to elect. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional transition method that allows the initial application of the lease standard at the adoption date using a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to adopt this standard on January 1, 2019 utilizing the new transition method. We are in the process of assessing the impact of the standard and designing related internal control procedures. Based on our efforts to date, we expect the recognition of the right-of-use asset and lease liability for our real estate and equipment leases will have a material impact on the Consolidated Balance Sheets. We do not expect this standard to have a material impact on our future Consolidated Statements of Earnings.

NOTE 2. ACQUISITIONS AND DIVESTITURES

For a description of our material acquisition activity in 2017 and during the nine months ended September 28, 2018, refer to Note 3 of our 2017 Annual Report on Form 10-K and the discussion below.

We continually evaluate potential mergers, acquisitions and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive areas. We have completed a number of acquisitions that have been accounted for as purchases and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors including the complimentary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complimentary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings or cash flows) and the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses.

We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact of certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.

Completed Acquisitions in 2018

Accruent

On September 6, 2018, we acquired Accruent, LLC (“Accruent”), a privately-held, leading provider of facilities asset management software, for a total purchase price of approximately $2.0 billion net of acquired cash (the “Accruent Acquisition”). Accruent is a recognized leader in the facilities asset management industry, combining deep domain and industry capabilities with an integrated, cloud-based framework that provides insights spanning the full lifecycle of real estate, facilities and asset management. Accruent serves over 10,000 global customers, and helps assure clients fulfill the mission of their organization by extending the lifecycle of assets, monitoring full compliance and reducing safety risks. Accruent is headquartered in Austin, Texas, and is included in our the Professional Instrumentation Segment. Accruent generated annual revenues of approximately $200 million in 2017. We financed the Accruent Acquisition with available cash and proceeds from our financing activities. We preliminarily recorded approximately $1.2 billion of goodwill related to the Accruent Acquisition.

Gordian

On July 27, 2018, we acquired TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service, for a total purchase price of $778 million net of cash acquired (the “Gordian Acquisition”). Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions designed to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facility metrics databases via a subscription-based model. Gordian is headquartered in Greenville, South Carolina, and is included in our Professional Instrumentation segment. Gordian generated annual revenues of approximately $110 million in 2017. We financed the Gordian Acquisition with available cash. We preliminarily recorded approximately $443 million of goodwill related to the Gordian Acquisition.

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In addition to the acquisitions of Accruent and Gordian, during the nine months ended September 28, 2018, we acquired one business for total consideration of $7.7 million in cash, net of cash acquired. The business acquired complements existing units of our Professional Instrumentation segment. We preliminarily recorded an aggregate of $1.8 million of goodwill related to this acquisition.

The following summarizes the provisional fair value estimates of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions closed during the nine months ended September 28, 2018 ($ in millions):



	Accruent			Gordian			Other			Total
Accounts receivable	$	52.8		$	30.0		$	—		$	82.8
Property, plant and equipment	4.1			3.0			—			7.1
Goodwill	1,217.5			442.5			1.8			1,661.8
Other intangible assets, primarily customer relationships, trade names and technology	926.5			376.5			6.8			1,309.8
Trade accounts payable	(8.7		)	(1.0		)	—			(9.7		)
Other assets and liabilities, net	(199.3		)	(72.8		)	(0.9		)	(273.0		)
Net cash consideration	$	1,992.9		$	778.2		$	7.7		$	2,778.8

Pro Forma Financial Information (Unaudited)

The unaudited pro forma information for the periods set forth below gives effect to the 2018 and 2017 acquisitions as if they had occurred as of January 1, 2017. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time ($ in millions except per share amounts):



	Three Months Ended				Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
Sales	$	1,895.5	$	1,854.0	$	5,691.4	$	5,396.4
Net earnings	$	228.0	$	211.9	$	730.0	$	584.1
Diluted net earnings per share	$	0.64	$	0.60	$	2.07	$	1.66

Revenue and operating losses attributable to the acquisitions included in our results for the three and nine months ended September 28, 2018 were $35.7 million and $19.1 million, respectively.

Tritium

On September 11, 2018, we acquired a minority interest in Tritium Holdings Pty, Ltd for less than $50.0 million. Tritium specializes in the design and manufacture of DC fast charging solutions for electric vehicles. Established in 2001, it launched its first DC fast charger in 2014, and has since become a leading global supplier, with installations in 26 countries. Tritium offers a range of hardware, software and services developed and designed to support the global transition to e-mobility. Our investment in Tritium is recorded in Other assets on the Consolidated Condensed Balance Sheet at cost. We have elected to use the measurement alternative for equity investments without readily determinable fair values and evaluate this investment for indicators of impairment quarterly.

Pending Acquisitions

Advanced Sterilization Products

On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. On September 20, 2018, Ethicon, Inc. accepted our offer and countersigned the purchase agreement. The transaction is expected to close in the first quarter of 2019 and is subject to customary closing conditions.

ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.

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Divestiture of A&S Business

On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp (“Altra”) in a tax-efficient Reverse Morris Trust transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems, and generated approximately $907 million in revenue for the year ended December 31, 2017. On October 1, 2018, we completed the split-off of the A&S Business. The total consideration received was $2.7 billion and consisted of (i) $1.3 billion through a fully-subscribed exchange offer, in which we accepted and subsequently retired 15,824,931 shares of our own common stock from our stockholders in exchange for the 35,000,000 of common stock of Stevens Holding Company, Inc.; (ii) $1.0 billion in cash paid to us for the direct sales of certain assets and liabilities of the A&S Business; (iii) $248.5 million as part of a debt-for-debt exchange that reduced outstanding indebtedness of Fortive; and (iv) $150 million in cash paid to us by Steven’s Holding Company, Inc. as a dividend.

As this transaction occurred during the fourth quarter of 2018, we will retrospectively classify the A&S Business as discontinued operations in our financial statements beginning in the fourth quarter of 2018 in accordance with the authoritative accounting guidance.

Transaction Costs

We incurred approximately $56.0 million and $70.8 million of pretax transaction-related costs associated with the divestiture and these acquisitions during during the three and nine months ended September 28, 2018, respectively, which are primarily for professional fees. These amounts are recorded in selling, general and administrative expenses.

NOTE 3. GOODWILL

The following is a rollforward of our goodwill ($ in millions):



Balance, December 31, 2017	$	5,098.5
Attributable to 2018 acquisitions	1,661.8
Foreign currency translation & other	(17.0		)
Balance, September 28, 2018	$	6,743.3

The carrying value of goodwill by segment is summarized as follows ($ in millions):



	September 28, 2018		December 31, 2017
Professional Instrumentation	$	4,992.3	$	3,331.0
Industrial Technologies	1,751.0		1,767.5
Total goodwill	$	6,743.3	$	5,098.5

We have not identified any triggering events which would have indicated a potential impairment of goodwill in the nine months ended September 28, 2018.

NOTE 4. FAIR VALUE MEASUREMENTS

Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:


•	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.


•	Level 3 inputs are unobservable inputs based on our assumptions. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

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Below is a summary of financial liabilities that are measured at fair value on a recurring basis ($ in millions):



	Quoted Prices in Active Market (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 28, 2018
Deferred compensation liabilities	$	—	$	24.2	$	—	$	24.2
December 31, 2017
Deferred compensation liabilities	$	—	$	20.9	$	—	$	20.9

Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.

Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments are as follows ($ in millions):



	September 28, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Current portion of long-term debt	$	1,824.5	$	1,822.4	$	—	$	—
Long-term debt, net of current maturities	$	3,178.0	$	3,075.1	$	4,056.2	$	4,051.8

As of September 28, 2018 and December 31, 2017, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.

The fair values of the current portion of long-term debt and long-term debt were 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 our credit ratings subsequent to the incurrence of the borrowing. The fair value of cash and cash equivalents, accounts receivable, net and trade accounts payable approximates their carrying amount due to the short-term maturities of these instruments.

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NOTE 5. FINANCING AND CAPITAL

Financing

The carrying value of the components of our long-term debt were as follows ($ in millions):



	September 28, 2018		December 31, 2017
U.S. dollar-denominated commercial paper	$	594.6	$	665.1
Euro-denominated commercial paper	273.3		282.7
U.S. dollar variable interest rate term loan due 2019	175.0		500.0
Delayed-draw term loan due 2019	1,350.0		—
Yen variable interest rate term loan due 2022	121.3		122.4
1.80% senior unsecured notes due 2019	299.5		298.9
2.35% senior unsecured notes due 2021	746.7		745.9
3.15% senior unsecured notes due 2026	891.8		891.0
4.30% senior unsecured notes due 2046	546.9		546.8
Other	3.4		3.4
Long-term debt	5,002.5		4,056.2
Less: current portion of long-term debt	1,824.5		—
Long-term debt, net of current maturities	$	3,178.0	$	4,056.2

Unamortized debt discounts, premiums and issuance costs of $15.5 million and $18.2 million as of September 28, 2018 and December 31, 2017, respectively, are netted against the aggregate principal amounts of the components of debt table above. Refer to Note 9 of our 2017 Annual Report on Form 10-K for further details of our debt financing.

We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Credit support for the Commercial Paper Programs is provided by a five-year $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (the “Revolving Credit Facility”) which can also be used for working capital and other general corporate purposes. As of September 28, 2018, no borrowings were outstanding under the Revolving Credit Facility.

On July 20, 2018, we prepaid $325 million of our outstanding U.S dollar variable interest rate term loan due in 2019, and on October 5, 2018, we prepaid the remaining $175 million of the outstanding balance. The prepayment penalties associated with these payments were immaterial.

On August 22, 2018, we entered into a credit facility agreement that provides for a 364-day delayed-draw term loan facility (“Delayed-Draw Term Loan”) in an aggregate principal amount of $1.75 billion. On September 5, 2018, we drew down the full $1.75 billion available under the Delayed-Draw Term Loan in order to fund, in part, the Accruent Acquisition. The Delayed-Draw Term Loan bears interest at a variable rate equal to the London inter-bank offered rate plus a ratings based margin currently at 75 basis points. As of September 28, 2018, borrowings under this facility bore an interest rate of 2.69% per annum. The Delayed-Draw Term Loan is prepayable at our option, and we are not permitted to re-borrow once the term loan is repaid. The terms and conditions, including covenants, applicable to the Delayed-Draw Term Loan are substantially similar to those applicable to the Revolving Credit Facility. On September 26, 2018, we repaid $400 million of this loan.

In connection with the debt exchange in the split-off of the A&S Business, on October 1, 2018, we retired $244.7 million of our 1.80% senior unsecured notes due in 2019.

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The details of our Commercial Paper Programs as of September 28, 2018 are as follows ($ in millions):



	Carrying value		Annual effective rate		Weighted average remaining maturity (in days)
U.S. dollar-denominated commercial paper	$	594.6	2.38	%	11
Euro-denominated commercial paper	$	273.3	(0.10	)%	87

We classified our borrowings outstanding under the Commercial Paper Programs as long-term debt in the accompanying Consolidated Condensed Balance Sheets as we had the intent and ability, as supported by availability under the Revolving Credit Facility referenced above, to refinance these borrowings for at least one year from the balance sheet date.

As of September 28, 2018, we were in compliance with all of our covenants.

Capital

On June 29, 2018, we issued 1,380,000 shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received net $1.34 billion in proceeds from the issuance of the MCPS, excluding $43 million of issuance costs. We used the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures.

In connection with the split-off of the A&S Business, on September 26, 2018, we triggered an anti-dilution adjustment pursuant to the terms of the MCPS and after giving affect to this adjustment, each then outstanding share of MCPS will convert automatically on July 1, 2021 (“Mandatory Conversion Date”) into between 10.9041 and 13.3575 common shares, subject to further anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the average volume weighted average price per share of our common stock over the 20 consecutive trading day period beginning on the 22nd scheduled trading day preceding the Mandatory Conversion Date. At any time prior to July 1, 2021, holders may elect to convert each share of the MCPS into shares of common stock at the rate of 10.9041, subject to further anti-dilution adjustments. In the event of a fundamental change, the MCPS will convert at the fundamental change rates specified in the certificate of designations, as adjusted, and the holders of MCPS would be entitled to a fundamental change make-whole dividend.

We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock in January, April, July and October of each year, commencing on October 1, 2018 and ending on July 1, 2021. Dividends that are declared will be payable on the dividend payment dates to holders of record on the immediately preceding March 15, June 15, September 15 and December 15 (each a “record date”), whether or not such holders convert their shares, or such shares are automatically converted, after the corresponding record date.

NOTE 6. SALES

On January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policy under ASC Topic 605 Revenue Recognition. We recorded an immaterial transition adjustment to opening retained earnings as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact to sales as a result of applying Topic 606 was immaterial for the three and nine months ended September 28, 2018.

Our significant accounting policies are detailed in Note 2 of our 2017 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below and have been applied prospectively from the adoption date of January 1, 2018:

Revenue Recognition—We derive revenues primarily from the sale of Professional Instrumentation and Industrial Technologies products and services. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.

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For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.

Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract; these allowances and rebates are reflected as a reduction in the contract transaction price. Significant judgment is exercised in determining product returns, customer allowances and rebates, and are estimated based on historical experience and known trends.

Most of our sales contracts contain standard terms and conditions. We evaluate contracts to identify distinct goods and services promised in the contract (performance obligations). Sometimes this evaluation involves judgment to determine whether the goods or services are highly dependent on or highly interrelated with one another, or whether such goods or services significantly modify or customize one another. Certain customer arrangements include multiple performance obligations, typically hardware, installation, training, consulting, services and/or post contract support (“PCS”). Generally, these elements are delivered within the same reporting period, except PCS or other services. We allocate the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation sometimes requires significant judgment.

Our principal terms of sale are FOB Shipping Point, or equivalent, and, as such, we primarily record revenue upon shipment as we have transferred control to the customer at that point and our performance obligations are satisfied. We evaluate contracts with delivery terms other than FOB Shipping Point and recognize revenue when we have transfered control and satisfied our performance obligations. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation, other services noted above or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Further, revenue related to separately priced extended warranty and product maintenance agreements is deferred when appropriate and recognized as revenue over the term of the agreement.

Contract Assets — In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. Contract assets were immaterial as of September 28, 2018.

Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions. Deferred sales-related commissions are generally not capitalized as the amortization period is one year or less, and we elected to use the practical expedient to expense these sales commissions as incurred.

Impairment losses recognized on our contract-related assets were immaterial in the three and nine months ended September 28, 2018.

Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to PCS and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets.

Our contract liabilities consisted of the following ($ in millions):



	September 28, 2018		December 31, 2017
Deferred revenue - current	$	241.6	$	213.4
Deferred revenue - noncurrent	91.7		86.9
Total contract liabilities	$	333.3	$	300.3

In the three and nine months ended September 28, 2018, we recognized $20 million and $84 million of revenue related to our contract liabilities at January 1, 2018, respectively. The change in our contract liabilities from December 31, 2017 to September 28, 2018 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.

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Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from September 28, 2018, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.

The aggregate performance obligations attributable to each of our segments is as follows ($ in millions):



	September 28, 2018
Professional Instrumentation	$	123.6
Industrial Technologies	440.6
Total remaining performance obligations	$	564.2

The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 40 percent within the next two years, approximately 75 percent within the next three years and substantially all within four years.

Disaggregation of Revenue

We disaggregate revenue from contracts with customers by geographic location, major product group and end market for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three months ended September 28, 2018 is presented as follows ($ in millions):



	Total		Professional Instrumentation		Industrial Technologies
Geographic:
United States	$	1,044.5	$	479.8	$	564.7
China	142.1		90.1		52.0
Germany	85.0		34.5		50.5
All other (each country individually less than 5% of total sales)	568.5		289.7		278.8
Total	$	1,840.1	$	894.1	$	946.0

Major Products Group:
Professional tools and equipment	$	1,243.0	$	729.3	$	513.7
Industrial automation, controls and sensors	318.1		99.7		218.4
Franchise distribution	160.9		—		160.9
All other	118.1		65.1		53.0
Total	$	1,840.1	$	894.1	$	946.0

End markets:
Direct sales:
Retail fueling^(a)	$	446.9	$	—	$	446.9
Industrial & Manufacturing	171.7		91.6		80.1
Vehicle repair^(a)	146.4		—		146.4
Utilities & Power	32.0		31.2		0.8
Other	553.8		356.4		197.4
Total direct sales	1,350.8		479.2		871.6
Distributors^(a)	489.3		414.9		74.4
Total	$	1,840.1	$	894.1	$	946.0

(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended September 28, 2018 was $837 million.

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Disaggregation of revenue for the three months ended September 29, 2017 is presented as follows ($ in millions):



	Total		Professional Instrumentation		Industrial Technologies
Geographic:
United States	$	935.0	$	384.8	$	550.2
China	130.9		84.7		46.2
Germany	80.5		34.0		46.5
All other (each country individually less than 5% of total sales)	538.9		283.3		255.6
Total	$	1,685.3	$	786.8	$	898.5

Major Products Group:
Professional tools and equipment	$	1,105.4	$	617.3	$	488.1
Industrial automation, controls and sensors	303.5		99.6		203.9
Franchise distribution	155.3		—		155.3
All other	121.1		69.9		51.2
Total	$	1,685.3	$	786.8	$	898.5

End markets:
Direct sales:
Retail fueling^(a)	$	431.9	$	—	$	431.9
Industrial & Manufacturing	144.1		68.0		76.1
Vehicle repair^(a)	140.3		—		140.3
Utilities & Power	55.1		54.4		0.7
Other	488.2		304.8		183.4
Total direct sales	1,259.6		427.2		832.4
Distributors^(a)	425.7		359.6		66.1
Total	$	1,685.3	$	786.8	$	898.5

(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended September 29, 2017 was $783.4 million.

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Disaggregation of revenue for the nine months ended September 28, 2018 is presented as follows ($ in millions):



	Total		Professional Instrumentation		Industrial Technologies
Geographic:
United States	$	2,954.9	$	1,324.1	$	1,630.8
China	460.2		299.4		160.8
Germany	255.8		102.4		153.4
All other (each country individually less than 5% of total sales)	1,765.9		928.9		837.0
Total	$	5,436.8	$	2,654.8	$	2,782.0

Major Products Group:
Professional tools and equipment	$	3,609.0	$	2,155.6	$	1,453.4
Industrial automation, controls and sensors	979.4		309.1		670.3
Franchise distribution	486.0		—		486.0
All other	362.4		190.1		172.3
Total	$	5,436.8	$	2,654.8	$	2,782.0

End markets:
Direct sales:
Retail fueling^(a)	$	1,256.1	$	—	$	1,256.1
Industrial & Manufacturing	503.2		279.2		224.0
Vehicle repair^(a)	442.9		—		442.9
Utilities & Power	134.6		132.6		2.0
Other	1,613.7		989.4		624.3
Total direct sales	3,950.5		1,401.2		2,549.3
Distributors^(a)	1,486.3		1,253.6		232.7
Total	$	5,436.8	$	2,654.8	$	2,782.0

(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the nine months ended September 28, 2018 was $2,484.2 million.

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Disaggregation of revenue for the nine months ended September 29, 2017 is presented as follows ($ in millions):



	Total		Professional Instrumentation		Industrial Technologies
Geographic:
United States	$	2,670.7	$	1,068.9	$	1,601.8
China	395.0		267.1		127.9
Germany	221.8		90.2		131.6
All other (each country individually less than 5% of total sales)	1,561.8		835.7		726.1
Total	$	4,849.3	$	2,261.9	$	2,587.4

Major Products Group:
Professional tools and equipment	$	3,122.0	$	1,769.2	$	1,352.8
Industrial automation, controls and sensors	899.8		294.2		605.6
Franchise distribution	476.5		—		476.5
All other	351.0		198.5		152.5
Total	$	4,849.3	$	2,261.9	$	2,587.4

End markets:
Direct sales:
Retail fueling^(a)	$	1,179.9	$	—	$	1,179.9
Industrial & Manufacturing	357.6		190.6		167.0
Vehicle repair^(a)	433.8		—		433.8
Utilities & Power	152.3		149.3		3.0
Other	1,447.4		854.7		592.7
Total direct sales	3,571.0		1,194.6		2,376.4
Distributors^(a)	1,278.3		1,067.3		211.0
Total	$	4,849.3	$	2,261.9	$	2,587.4

(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the nine months ended September 29, 2017 was $2,319.2 million.

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NOTE 7. PENSION PLANS

For a full description of our noncontributory defined benefit pension plans, including the U.S. plan acquired in 2017, refer to Note 10 of our 2017 Annual Report on Form 10-K.

The following sets forth the components of our net periodic pension costs associated with our noncontributory defined benefit pension plans ($ in millions):



	Three Months Ended						Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
U.S. Pension Benefits:
Interest cost	$	0.3		$	—		$	0.9		$	—
Expected return on plan assets	(0.4		)	—			(1.1		)	—
Net periodic pension cost	$	(0.1	)	$	—		$	(0.2	)	$	—

Non-U.S. Pension Benefits:
Service cost	$	0.5		$	1.1		$	1.4		$	3.1
Interest cost	1.4			1.5			4.4			4.4
Expected return on plan assets	(1.8		)	(1.9		)	(5.5		)	(5.5		)
Amortization of net loss	0.9			1.2			2.7			3.4
Net curtailment and settlement loss recognized	0.3			—			0.9			—
Net periodic pension cost	$	1.3		$	1.9		$	3.9		$	5.4

On January 1, 2018, we retrospectively adopted ASU No. 2017-07, Compensation–Retirement Benefits (Topic 715). Accordingly, we have included all components of net periodic pension costs, with the exception of service costs, in other non-operating expenses as a component of non-operating income in the accompanying Consolidated Condensed Statements of Earnings. Service costs continue to be included in cost of sales and selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings according to the classification of the participant’s compensation. This reclassification of prior year pension cost increased operating income by $0.8 million and $2.3 million for the three and nine months ended September 29, 2017, respectively.

Employer Contributions

During 2018, our cash contribution requirements for our non-U.S. defined benefit pension plans are expected to be approximately $10 million. We do not expect to make contributions to the U.S. plan during 2018. The actual 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 8. INCOME TAXES

Our effective tax rates for the three and nine months ended September 28, 2018 were 17.2% and 17.0%, respectively, as compared to 23.1% and 25.2% for the three and nine months ended September 29, 2017, respectively. The decrease for both the three and nine month periods is due primarily to favorable impacts in 2018 resulting from a lower statutory tax rate in the United States and foreign-derived intangible income tax benefits, partially offset by the loss of the United States domestic production activities deduction, all of which are a result of the Tax Cuts and Jobs Act (“TCJA”), and other federal and international tax benefits.

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to transition taxes, specifically from a decrease in foreign remittance taxes. We recorded a net adjustment of $4.9 million to our provisional estimates during the nine months ended September 28, 2018, which decreased tax expense and decreased our effective tax rate by 50 basis points, and was related to a $11.9 million decrease in tax expense related to the revaluation of certain deferred tax assets and liabilities, a $3.9 million decrease in tax expense related to transition taxes, specifically from decrease in foreign remittance taxes and an offsetting $10.9 million increase in tax expense from a reduction of foreign tax credits. We will continue to evaluate the effects of the TCJA on the 2017 provisional estimates through the end of the SAB 118 allowable measurement period. Refer to Note 11 of our 2017 Annual Report on Form 10-K for further details including disclosures pursuant to SAB 118 interpretive guidance, and provisional estimates for all TCJA effects.

On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 715): Intra-entity Transfers of Assets Other Than Inventory using the modified retrospective method, and recorded an immaterial adjustment to opening retained earnings as of January 1, 2018.

NOTE 9. STOCK-BASED COMPENSATION

Our stock-based compensation program (the “Stock Plan”) provides for the grant of stock appreciation rights, performance stock units, restricted stock units, restricted stock awards and performance stock awards (collectively, “Stock Awards”), stock options or any other stock-based award. As of September 28, 2018, approximately 22 million shares of our common stock were available for subsequent issuance under the Stock Plan. For a full description of our stock-based compensation program refer to Note 15 of our 2017 Annual Report on Form 10-K.

Stock-based Compensation Expense

Stock-based compensation has been recognized as a component of selling, general & administrative expenses in the accompanying Consolidated Condensed Statements of Earnings based on the portion of the awards that are ultimately expected to vest.

The following summarizes the components of our stock-based compensation expense under the Stock Plan ($ in millions):



	Three Months Ended						Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Stock Awards:
Pretax compensation expense	$	8.5		$	7.2		$	24.1		$	22.6
Income tax benefit	(1.8		)	(2.4		)	(5.1		)	(8.0		)
Stock Award expense, net of income taxes	6.7			4.8			19.0			14.6
Stock options:
Pretax compensation expense	5.5			4.7			16.4			14.6
Income tax benefit	(1.2		)	(1.6		)	(3.5		)	(5.0		)
Stock option expense, net of income taxes	4.3			3.1			12.9			9.6
Total stock-based compensation:
Pretax compensation expense	14.0			11.9			40.5			37.2
Income tax benefit	(3.0		)	(4.0		)	(8.6		)	(13.0		)
Total stock-based compensation expense, net of income taxes	$	11.0		$	7.9		$	31.9		$	24.2

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The following summarizes the unrecognized compensation cost for the Stock Plan awards as of September 28, 2018. This compensation cost is expected to be recognized over a weighted average period of approximately two years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):



Stock Awards	$	52.8
Stock options	51.7
Total unrecognized compensation cost	$	104.5

NOTE 10. COMMITMENTS AND CONTINGENCIES

For a description of our litigation and contingencies, refer to Notes 13 and 14 of our 2017 Annual Report on Form 10-K.

Our operating leases extend for varying periods of time up to twenty years and, in some cases, contain renewal options that would extend existing terms beyond twenty years. Minimum rental payments for all operating leases having initial or remaining noncancelable lease terms in excess of one year for 2018 through 2022 and thereafter are: $48 million in 2018, $42 million in 2019, $31 million in 2020, $20 million in 2021, $16 million in 2022 and $20 million thereafter.

We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.

The following is a rollforward of our accrued warranty liability ($ in millions):



Balance, December 31, 2017	$	69.4
Accruals for warranties issued during the period	56.8
Settlements made	(58.7		)
Additions due to acquisitions	0.2
Effect of foreign currency translation	(0.3		)
Balance, September 28, 2018	$	67.4

NOTE 11. NET EARNINGS PER SHARE

Basic net earnings per share (“EPS”) is calculated by dividing net earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans under the treasury stock method, except where the inclusion of such shares would have an anti-dilutive impact. There were no anti-dilutive options to purchase shares excluded from the diluted EPS calculation for the three months ended September 28, 2018 and there were 0.1 million anti-dilutive options excluded from the diluted EPS calculation for the nine months ended September 28, 2018. The anti-dilutive options to purchase shares excluded from the diluted EPS calculation were immaterial for the three and nine months ended September 29, 2017.

The impact of our MCPS calculated under the if-converted method were anti-dilutive, and as such 16.1 million and 5.4 million shares were excluded from the dilutive EPS calculation for the three and nine months ended September 28, 2018.

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Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts):



	Three Months Ended					Nine Months Ended
	September 28, 2018			September 29, 2017		September 28, 2018			September 29, 2017
Numerator
Net earnings	$	245.3		$	267.8	$	801.5		$	707.6
Mandatory convertible preferred stock cumulative dividends	(17.4		)	—		(17.6		)	—
Net earnings attributable to common stockholders	$	227.9		$	267.8	$	783.9		$	707.6

Denominator
Weighted average common shares outstanding used in basic earnings per share	349.9			347.7		349.2			347.3
Incremental common shares from:
Assumed exercise of dilutive options and vesting of dilutive Stock Awards	5.4			5.2		5.6			4.9
Weighted average common shares outstanding used in diluted earnings per share	355.3			352.9		354.8			352.2

Net earnings per common share - Basic	$	0.65		$	0.77	$	2.24		$	2.04
Net earnings per share - Diluted	$	0.64		$	0.76	$	2.21		$	2.01

We declared and paid cash dividends per common share during the periods presented as follows:



	Dividend Per Common Share		Amount ($ in millions)
2018:
First quarter	$	0.07	$	24.3
Second quarter	0.07		24.4
Third quarter	0.07		24.5
Total	$	0.21	$	73.2

2017:
First quarter	$	0.07	$	24.3
Second quarter	0.07		24.3
Third quarter	0.07		24.3
Total	$	0.21	$	72.8

* The sum of the components of total dividends paid may not equal the total amount due to rounding.

On August 2, 2018, we declared an initial quarterly cash dividend of $12.78 per share on our MCPS which was paid on September 28, 2018, to stockholders of record on September 15, 2018. The aggregate amount of such cash dividend was $17.6 million.

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NOTE 12. SEGMENT INFORMATION

We report our results in two separate business segments consisting of Professional Instrumentation and Industrial Technologies. When determining the reportable segments, we aggregated operating segments based on their similar economic and operating characteristics. Operating profit amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance. Our segment results are as follows ($ in millions):



	Three Months Ended						Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales:
Professional Instrumentation	$	894.1		$	786.8		$	2,654.8		$	2,261.9
Industrial Technologies	946.0			898.5			2,782.0			2,587.4
Total	$	1,840.1		$	1,685.3		$	5,436.8		$	4,849.3
Operating Profit:
Professional Instrumentation	$	180.0		$	179.2		$	605.8		$	523.2
Industrial Technologies	199.7			196.4			558.9			530.9
Other	(58.3		)	(18.9		)	(122.6		)	(52.7		)
Total Operating Profit	321.4			356.7			1,042.1			1,001.4
Gain from acquisition	—			15.3			—			15.3
Interest expense	(24.4		)	(22.9		)	(74.3		)	(68.2		)
Other non-operating expenses	(0.8		)	(0.8		)	(2.6		)	(2.3		)
Earnings before income taxes	$	296.2		$	348.3		$	965.2		$	946.2

As of September 28, 2018, the material changes in total assets by segment since December 31, 2017 were due primarily to the acquisitions discussed in Note 2 and the capital issuance discussed in Note 5. Our segment identifiable assets are as follows ($ in millions):



	September 28, 2018		December 31, 2017
Professional Instrumentation	$	8,634.0	$	5,588.1
Industrial Technologies	3,876.3		3,773.7
Other	1,352.5		1,138.8
Total	$	13,862.8	$	10,500.6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fortive Corporation (“Fortive”, the “Company,” “we,” “us,” or “our”) is a diversified industrial growth company comprised of Professional Instrumentation and Industrial Technologies segments and encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management. The following discussion should be read in conjunction with the MD&A and consolidated and combined financial statements included in our 2017 Annual Report on Form 10-K. Our MD&A is divided into five sections:


•	Information Relating to Forward-Looking Statements

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•	Overview


•	Results of Operations


•	Liquidity and Capital Resources


•	Critical Accounting Estimates

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; impact on changes to tax laws; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.

Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:


•	Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and financial statements. Furthermore, significant uncertainties related to changes in governmental policies toward international trade currently exist, and depending on how such uncertainties are resolved, could have a material adverse effect on our financial results.


•	Potential changes in international trade relations between China and the United States could have a material adverse effect on our business and financial statements.


•	Our growth could suffer if the markets into which we sell our products, software and services decline, do not grow as anticipated or experience cyclicality.


•	We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products, software and services.


•	Changes in industry standards, governmental regulations and applicable laws may reduce demand for our products, software or services or increase our expenses.


•	Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.


•	Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products, software and services based on technological innovation.


•	Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners.

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•	Our acquisition of businesses, joint ventures and strategic relationships could negatively impact our financial statements.


•	The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.


•	Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we have sold could adversely affect our financial statements.


•	Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our reputation, business and financial statements.


•	Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our business, financial statements and reputation.


•	International economic, trade, political, legal, compliance and business factors could negatively affect our business and financial statements.


•	We may be required to recognize impairment charges for our goodwill and other intangible assets.


•	Foreign currency exchange rates may adversely affect our financial statements.


•	Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.


•	We have incurred a significant amount of debt, and our debt will increase further if we incur additional debt and do not retire existing debt.


•	We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our financial statements.


•	If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.


•	Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products, software or services.


•	Defects and unanticipated use or inadequate disclosure with respect to our products, software or services could adversely affect our business, reputation and financial statements.


•	Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.


•	Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.


•	If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.


•	A significant disruption in, or breach in security of, information technology systems we use could adversely affect our business.


•	Our restructuring actions could have long-term adverse effects on our business.


•	Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations.


•	If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.

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•	Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

•

Our amended and restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders which could discourage lawsuits against us and our directors and officers.

See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Forms 10-Q for the fiscal quarters ended March 31, 2018 and June 29, 2018 and “Part II – Item 1A. Risk Factors” in this Form 10-Q for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.

OVERVIEW

General

Fortive is a diversified, multinational industrial growth company with global operations and our businesses are affected by worldwide, regional and industry-specific economic and political factors. Our geographic and industry diversity, as well as the range of our products, software and services, typically help limit the impact of any one industry or the economy of any single country (except for the United States) on our operating results. Given the broad range of products manufactured, software and services provided and geographies served, we do not use any indices other than general economic trends to predict the overall outlook for the Company. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.

As a result of our geographic and industry diversity, we face a variety of opportunities and challenges, including technological development in most of the markets we serve, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force and consolidation of our competitors. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America and Asia with the exception of Japan and Australia. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend in particular on our ability to expand our business across geographies and market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products, services and software, expand and improve the effectiveness of our sales force and continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated environment. We are making significant investments, organically and through acquisitions, to address technological change in the markets we serve and to improve our manufacturing, research and development and customer-facing resources in order to be responsive to our customers throughout the world.

In this report, references to sales from existing businesses refers to sales from operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding (1) the impact from acquired businesses and (2) the impact of currency translation. References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations prior to the first anniversary of the divestiture. The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period. Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies.

Management believes that reporting the non-GAAP financial measure of sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisitions and divestiture related items because the nature, size and number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation from sales from existing businesses because the impact of currency translation is not under management’s control and is subject to volatility. Management believes the exclusion of the effect of acquisitions and divestitures and currency translation may facilitate the assessment of underlying

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business trends and may assist in comparisons of long-term performance. References to sales volume refer to the impact of both price and unit sales.

Business Performance and Outlook

While differences exist among our businesses, on an overall basis, demand for our products, software and services increased during the three months ended September 28, 2018 as compared to the comparable period of 2017 resulting in aggregate year-over-year total sales growth of 9.2% and sales growth from existing businesses of 3.2%. Our continued application and deployment of the Fortive Business System including investments in sales growth initiatives and new product introductions, as well as increased demand in both high-growth and developed markets and other business-specific factors discussed below, contributed to overall sales growth from existing businesses across the majority of our businesses in the period.

On a year-over-year basis, both segments experienced sales growth from existing businesses with Professional Instrumentation growing 1.4% and Industrial Technologies growing 4.8%. In our Industrial Technologies segment, the liability shift related to enhanced credit card security requirements in the Unites States based on the Europay, Mastercard and Visa (“EMV”) global standards is continuing to drive demand within our transportation technologies platform, particularly with our customers who manage a smaller number of retail fueling sites.

Geographically, sales from existing businesses grew at a mid-single digit rate in high-growth markets and at a low-single digit rate in developed markets during the three months ended September 28, 2018 as compared to the comparable 2017 period. Year-over-year sales from existing businesses grew at a low double-digit rate in Asia, at a mid-single digit rate North America, and a high-single digit rate in Latin America, while sales in Europe declined at a low single-digit rate during the three months ended September 28, 2018.

We expect overall sales from existing businesses to continue to grow on a year-over-year basis during the remainder of 2018; however, we continue to monitor developments from macro-economic and geopolitical uncertainties, including global uncertainties related to governmental policies toward international trade, monetary and fiscal policies; including the current uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations, and tariffs. We are also monitoring other factors identified above in “—Information Relating to Forward-Looking Statements.”

Completed Acquisitions

Pending Acquisitions

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Divestiture of A&S Business

As this transaction occurred during the fourth quarter of 2018, we will retrospectively classify the A&S Business as discontinued operations, in our financial statements beginning in the fourth quarter of 2018 in accordance with the authoritative accounting guidance.

RESULTS OF OPERATIONS

Sales Growth

The following tables summarize total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three and nine months ended September 28, 2018 as compared to the comparable periods of 2017:

Components of Sales Growth



	% Change Three Months Ended September 28, 2018 vs. Comparable 2017 Period		% Change Nine Months Ended September 28, 2018 vs. Comparable 2017 Period
Total revenue growth (GAAP)	9.2	%	12.1	%
Existing businesses (Non-GAAP)	3.2	%	3.7	%
Acquisitions(Non-GAAP)	7.2	%	7.2	%
Currency exchange rates (Non-GAAP)	(1.2	)%	1.2	%

Operating Profit Margins

Operating profit margin was 17.5% for the three months ended September 28, 2018, a decrease of 370 basis points as compared to 21.2% in the comparable period of 2017. Year-over-year operating profit margin comparisons were negatively impacted by:

•

Higher 2018 sales volumes from existing businesses, price increases and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were more than offset by unfavorable sales mix, continued investments in our sales and marketing growth initiatives, increased material costs associated primarily with inflationary pressures and recently enacted tariffs and changes in foreign currency exchange rates — 25 basis points


•	The incremental year-over-year net dilutive effect of acquired businesses — 85 basis points


•	The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 260 basis points

Operating profit margin was 19.2% for the nine months ended September 28, 2018, a decrease of 150 basis points as compared to 20.7% in the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:

•

Higher 2018 sales volumes from existing businesses, price increases, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, which were partially offset by incremental year-over-year costs associated with various product development and sales and marketing growth investments, unfavorable sales mix and increased material costs associated primarily with inflationary pressures and recently enacted tariffs — 50 basis points

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Year-over-year operating profit margin comparisons for the nine months ended September 28, 2018 were unfavorably impacted by:


•	The incremental year-over-year net dilutive effect of acquired businesses — 80 basis points


•	The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 120 basis points

Business Segments

Sales by business segment for each of the periods indicated were as follows ($ in millions):



	Three Months Ended				Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
Professional Instrumentation	$	894.1	$	786.8	$	2,654.8	$	2,261.9
Industrial Technologies	946.0		898.5		2,782.0		2,587.4
Total	$	1,840.1	$	1,685.3	$	5,436.8	$	4,849.3

PROFESSIONAL INSTRUMENTATION

The Professional Instrumentation segment consists of our Advanced Instrumentation & Solutions and Sensing Technologies businesses. The Advanced Instrumentation & Solutions businesses provide product realization and field solutions 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, online condition-based monitoring equipment; portable gas detection equipment, consumables, and software as a service (SaaS) offerings including safety/user behavior, asset management, and compliance monitoring; subscription-based technical, analytical, and compliance services to determine occupational and environmental radiation exposure; and computerized maintenance management software for critical infrastructure in utility, industrial, energy, construction, public safety, mining, and healthcare applications. Product realization services and products help developers and engineers across the end-to-end product creation cycle from concepts to finished products and also include highly-engineered energetic materials components in specialized vertical applications. Our Sensing Technologies business offers devices that sense, monitor and control operational or manufacturing variables, such as temperature, pressure, level, flow, turbidity and conductivity.

Professional Instrumentation Selected Financial Data



	Three Months Ended						Nine Months Ended
($ in millions)	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales	$	894.1		$	786.8		$	2,654.8		$	2,261.9
Operating profit	180.0			179.2			605.8			523.2
Depreciation	16.0			10.0			48.5			27.5
Amortization	24.8			8.4			58.3			23.9
Operating profit as a % of sales	20.1		%	22.8		%	22.8		%	23.1		%
Depreciation as a % of sales	1.8		%	1.3		%	1.8		%	1.2		%
Amortization as a % of sales	2.8		%	1.1		%	2.2		%	1.1		%

Components of Sales Growth



	% Change Three Months Ended September 28, 2018 vs. Comparable 2017 Period		% Change Nine Months Ended September 28, 2018 vs. Comparable 2017 Period
Total revenue growth (GAAP)	13.6	%	17.4	%
Existing businesses (Non-GAAP)	1.4	%	3.4	%
Acquisitions (Non-GAAP)	13.2	%	12.5	%
Currency exchange rates (Non-GAAP)	(1.0	)%	1.5	%

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Sales from existing businesses in the segment’s Advanced Instrumentation & Solutions businesses grew at a low-single digit rate during both the three and nine months ended September 28, 2018, as compared to the comparable periods of 2017. Year-over-year sales from existing businesses of field solutions products and services grew at a low-single and mid-single digit rate during the three and nine months ended September 28, 2018, respectively due to continued strong demand for industrial test equipment, network tools and SaaS offerings, offset somewhat by declines in demand for electrical grid condition-based monitoring equipment.

Year-over-year sales from existing businesses of product realization solutions decreased slightly and increased at a low-single digit rate during the three and nine months ended September 28, 2018, respectively, as compared to the comparable periods of 2017. Both periods realized continued growth in the industrial and manufacturing end market and increased demand for oscilloscopes and new product introductions, which were more than offset by sales declines for our services and products in the 3D sensing market. On a year-over-year basis, our our energetic materials business grew in the three months ended September 28, 2018 and declined slightly in the nine months ended September 28, 2018.

Geographically, demand from existing businesses increased on a year-over-year basis during the three and nine months ended September 28, 2018 in North America and China, and in Western Europe during the nine months ended September 28, 2018. Demand from existing businesses in Western Europe and the Middle East decreased on a year-over-year basis during the three months ended September 28, 2018.

Sales from existing businesses in the segment’s Sensing Technologies businesses grew slightly and at a mid-single digit rate during the three and nine months ended September 28, 2018, respectively, as compared to the comparable periods of 2017 largely due to increased year-over-year demand in the industrial end market, offset by one-time impacts of Hurricane Florence that occurred in September. Geographically, increases in sales from existing businesses on a year-over-year basis during the three and nine months ended September 28, 2018 were driven by growth in Asia.

Year-over-year price increases in the Professional Instrumentation segment contributed 0.7% during both the three and nine months ended September 28, 2018, as compared to the comparable periods of 2017 and are reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 270 basis points during the three months ended September 28, 2018 as compared to the comparable period of 2017. Higher 2018 sales volumes from existing businesses, price increases and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, were fully offset by unfavorable sales mix, continued investments in our sales and marketing growth initiatives, increased material costs associated primarily with inflationary pressures and recently enacted tariffs and changes in foreign currency exchange rates. Year-over-year operating profit margin comparisons were negatively impacted by:


•	The incremental year-over-year net dilutive effect of acquired businesses — 180 basis points


•	The incremental year-over-year net dilutive effect of acquisition-related transaction costs — 90 basis points

Operating profit margin decreased 30 basis points during the nine months ended September 28, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:

•

Higher 2018 sales volumes from existing businesses, price increases, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates net of the incremental year-over-year costs associated with various product development and sales and marketing growth investments unfavorable sales mix and increased material costs associated primarily with inflationary pressures and recently enacted tariffs — 160 basis points

Year-over-year operating profit margin comparisons for the nine months ended September 28, 2018 were unfavorably impacted by:


•	The incremental year-over-year net dilutive effect of acquired businesses — 165 basis points


•	The incremental year-over-year net dilutive effect of acquisition-related transaction costs — 25 basis points

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INDUSTRIAL TECHNOLOGIES

The Industrial Technologies segment consists of our Transportation Technologies, Automation & Specialty Components and Franchise Distribution businesses. Our 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, and traffic management. The Automation & Specialty Components business provides a wide range of electromechanical and electronic motion control products and mechanical components, as well as supplemental braking systems for commercial vehicles. Our Franchise Distribution business manufactures and distributes professional tools and a full-line of wheel service equipment.

Industrial Technologies Selected Financial Data



	Three Months Ended						Nine Months Ended
($ in millions)	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales	$	946.0		$	898.5		$	2,782.0		$	2,587.4
Operating profit	199.7			196.4			558.9			530.9
Depreciation	17.8			14.5			52.6			43.0
Amortization	7.6			6.3			23.2			17.4
Operating profit as a % of sales	21.1		%	21.9		%	20.1		%	20.5		%
Depreciation as a % of sales	1.9		%	1.6		%	1.9		%	1.7		%
Amortization as a % of sales	0.8		%	0.7		%	0.8		%	0.7		%

Components of Sales Growth



	% Change Three Months Ended September 28, 2018 vs. Comparable 2017 Period		% Change Nine Months Ended September 28, 2018 vs. Comparable 2017 Period
Total revenue growth (GAAP)	5.3	%	7.5	%
Existing businesses (Non-GAAP)	4.8	%	4.0	%
Acquisitions(Non-GAAP)	2.0	%	2.5	%
Currency exchange rates (Non-GAAP)	(1.5	)%	1.0	%

Sales from existing businesses in the segment’s Transportation Technologies businesses grew at a mid-single digit and low-single digit rate during the three and nine months ended September 28, 2018, respectively, as compared to the comparable periods of 2017. The results were largely attributable to strong demand in fuel management systems primarily in China and North America as well as demand for payment solutions, offset somewhat by one-time impacts of Hurricane Florence that occurred in September. Results in North America were favorably impacted by the approaching deadline of the liability shift related to EMV global standards. Geographically, sales from existing businesses increased on a year-over-year basis during the three months ended September 28, 2018 in Asia, Latin America and North America, which were partially offset by declines in Western Europe. Geographic sales growth from existing businesses during the nine months ended September 28, 2018 was driven by China and North America, partially offset by declines in Western Europe.

Sales from existing businesses in the segment’s Automation & Specialty Components businesses grew at a high single-digit rate during the three and nine months ended September 28, 2018, respectively, compared to the comparable periods of 2017. The results were largely attributable to increased year-over-year demand in industrial and robotics end-markets in Western Europe, North America and China, and strong demand for engine retarder products in the United States, which benefited from improved heavy-duty truck production.

Sales from existing businesses in the segment’s Franchise Distribution businesses grew at a mid-single and low-single digit rate during the three and nine months ended September 28, 2018, respectively, compared to the comparable periods of 2017. We recognized growth in tool storage and hardline tools during the three months ended September 28, 2018, and increased demand for hardline and specialty tools and tool storage contributed to the year-over-year growth during the nine months ended September 28, 2018.

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Year-over-year price increases in the Industrial Technologies segment contributed 0.6% and 0.5% during the three and nine months ended September 28, 2018, respectively, as compared to the comparable period of 2017, and are reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 80 basis points during the three months ended September 28, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were unfavorably impacted by:

•

Higher 2018 sales volumes from existing businesses, price increases and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were more than off set by unfavorable sales mix, continued investments in our sales and marketing growth initiatives, increased material costs associated primarily with inflationary pressures and recently enacted tariffs and changes in foreign currency exchange rates — 40 basis points


•	The incremental year-over-year net dilutive effect of acquired businesses — 40 basis points

Operating profit margin decreased 40 basis points during the nine months ended September 28, 2018 as compared to the comparable period of 2017 due to the incremental year-over-year net dilutive effect of acquired businesses. Higher 2018 sales volumes from existing businesses, price increases, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, were fully offset by incremental year-over-year costs associated with various product development and sales and marketing growth investments, unfavorable sales mix and increased material costs associated primarily with inflationary pressures and recently enacted tariffs.

COST OF SALES AND GROSS PROFIT



	Three Months Ended						Nine Months Ended
($ in millions)	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales	$	1,840.1		$	1,685.3		$	5,436.8		$	4,849.3
Cost of sales	(915.8		)	(845.9		)	(2,702.8		)	(2,460.8		)
Gross profit	$	924.3		$	839.4		$	2,734.0		$	2,388.5
Gross profit margin	50.2		%	49.8		%	50.3		%	49.3		%

The year-over-year increase in cost of sales during the three and nine months ended September 28, 2018 as compared to the comparable periods in 2017 is due primarily to the impact of higher year-over-year sales volumes from existing businesses, incremental cost of sales from our recently acquired businesses, increased material costs associated primarily with inflationary pressures and recently enacted tariffs, partly offset by incremental cost savings associated with restructuring and productivity improvement initiatives and material cost and supply chain improvement actions. Changes in currency exchange rates decreased cost of sales in the three months ended September 28, 2018 and increased cost of sales during the nine months ended September 28, 2018.

The year-over-year increase in gross profit for the three months ended September 28, 2018, is due primarily to the favorable impact of pricing improvements and higher year-over-year sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and material cost and supply chain improvement actions and the impact of recently acquired businesses, offset partially by increased material costs associated primarily with inflationary pressures and recently enacted tariffs and changes in foreign currency exchange rates. The 40 basis point increase in gross profit margin for the three months ended September 28, 2018 as compared to the comparable periods in 2017 is due primarily to the accretive impact of our recently acquired companies.

The year-over-year increase in gross profit, and the related 100 basis point increase in gross profit margin for the nine months ended September 28, 2018 as compared to the comparable period in 2017 is due primarily to the favorable impact of pricing improvements and higher year-over-year sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, material cost and supply chain improvement actions, changes in foreign currency exchange rates and the accretive impact of our recently acquired companies.

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OPERATING EXPENSES



	Three Months Ended						Nine Months Ended
($ in millions)	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Sales	$	1,840.1		$	1,685.3		$	5,436.8		$	4,849.3
Selling, general and administrative (“SG&A”) expenses	490.4			380.7			1,359.5			1,089.8
Research and development (“R&D”) expenses	112.5			102.0			332.4			297.3
SG&A as a % of sales	26.7		%	22.6		%	25.0		%	22.5		%
R&D as a % of sales	6.1		%	6.1		%	6.1		%	6.1		%

SG&A expenses increased during the three and nine months ended September 28, 2018 as compared to the comparable periods of 2017 due primarily to costs associated with the divestiture of the A&S businesses and announced acquisitions, continued investments in our sales and marketing growth initiatives, incremental year-over-year general and administrative expenses, incremental expenses from recently acquired businesses and increased depreciation and amortization expense due primarily to our recently acquired businesses. These increases were partly offset by incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives. Changes in currency exchange rates decreased operating expenses in the three months ended September 28, 2018 and increased operating expenses during the nine months ended September 28, 2018. On a year-over-year basis, SG&A expenses as a percentage of sales increased 410 and 250 basis points in the three and nine months ended September 28, 2018, respectively, due primarily to acquisition and divestiture-related transaction costs and higher relative spending levels at our recently acquired businesses.

We expect we will continue to incur significant transaction-related costs in the fourth quarter of 2018.

R&D expenses (consisting principally of internal and contract engineering personnel costs) increased during the three and nine months ended September 28, 2018 as compared to the comparable periods of 2017 due to incremental year-over-year investments in our product development initiatives. On a year-over-year basis, R&D expenses as a percentage of sales were relatively flat during both the three and nine months ended September 28, 2018.

INTEREST COSTS

For a discussion of our outstanding indebtedness, refer to Note 5 to the accompanying Consolidated Condensed Financial Statements.

Net interest expense of $24 million and $74 million was recorded for the three and nine months ended September 28, 2018, respectively, compared to $23 million and $68 million for the three and nine months ended September 29, 2017, respectively. The increase in interest expense was attributable to an increase in the average debt balance as compared to the comparable periods of 2017.

INCOME TAXES

Our effective tax rates for the three and nine months ended September 28, 2018 were 17.2% and 17.0%, respectively, as compared to 23.1% and 25.2% for the three and nine months ended September 29, 2017, respectively. The year-over-year decrease was due primarily to favorable impacts in 2018 resulting from a lower statutory tax rate in the United States as a result of the Tax Cuts and Jobs Act (“TCJA”) as well as other federal and international tax benefits.

Our effective tax rates for 2018 and 2017 differ from the U.S. federal statutory rate of 21% and 35%, respectively, due primarily to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law and the effect of adjustments to the provisional estimates recorded in 2017 related to the TCJA as permitted under SEC Staff Accounting Bulletin No. 118 (“SAB 118”). We recorded a net adjustment of $1.2 million to our provisional estimates during the three months ended September 28, 2018, which increased tax expense and increased our effective tax rate by 40 basis points, and was attributable to a $3.2 million increase in tax expense related to the revaluation of certain deferred tax assets and liabilities and a $2.0 million decrease in tax expense related to transition taxes, specifically from a decrease in foreign remittance taxes. We recorded a net adjustment of $4.9 million to our provisional estimates during the nine months ended September 28, 2018, which decreased tax expense and decreased our effective tax rate by 50 basis points, and was related to a $11.9 million decrease in tax expense related to the revaluation of certain deferred tax assets and liabilities, a $3.9 million decrease in tax expense related to transition taxes, specifically from decrease in foreign remittance taxes and an offsetting $10.9 million increase in tax expense from a reduction of foreign tax credits. We will continue to evaluate the effects of the TCJA on the 2017 provisional estimates through the end of the SAB 118

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allowable measurement period. Refer to Note 11 of our 2017 Annual Report on Form 10-K for further details including disclosures pursuant to SAB 118 interpretive guidance, and provisional estimates for all TCJA effects.

COMPREHENSIVE INCOME

Comprehensive income decreased by $85 million during the three months ended September 28, 2018 as compared to the comparable period in 2017 due primarily to unfavorable changes in foreign currency translation adjustments of $62 million and net earnings that were lower by $23 million.

Comprehensive income decreased by $121 million during the nine months ended September 28, 2018 as compared to the comparable period in 2017 due primarily to unfavorable changes in foreign currency translation adjustments of $214 million partially offset by net earnings that were higher by $94 million.

INFLATION

The effect of inflation on our sales and net earnings was not significant in the three and nine month periods ended September 28, 2018.

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and expect that our operating cash flow and other sources of liquidity will be sufficient to allow us to continue to invest in existing businesses, consummate strategic acquisitions, make interest payments on our outstanding indebtedness, and manage our capital structure on a short and long-term basis.

Overview of Cash Flows and Liquidity

Following is an overview of our cash flows and liquidity for the nine months ended September 28, 2018:



	Nine Months Ended
($ in millions)	September 28, 2018			September 29, 2017
Net cash provided by operating activities	$	899.6		$	713.0

Cash paid for acquisitions	$	(2,825.2	)	$	(802.1	)
Payments for additions to property, plant and equipment	(93.7		)	(87.7		)
All other investing activities	4.1			1.5
Net cash used in investing activities	$	(2,914.8	)	$	(888.3	)

Net (repayments of) proceeds from borrowings (maturities of 90 days or less)	$	(64.3	)	$	176.8
Proceeds from borrowings (maturities longer than 90 days)	1,750.0			125.9
Repayment of borrowings (greater than 90 days)	(725.0		)	—
Proceeds from issuance of mandatory convertible preferred stock net of $43 million of issuance costs	1,337.4			—
Payment of common stock cash dividend to shareholders	(73.2		)	(72.8		)
Payment of mandatory convertible preferred stock cash dividend to shareholders	(17.6		)	—
All other financing activities	27.2			10.9
Net cash provided by financing activities	$	2,234.5		$	240.8

Operating Activities

Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, various employee liabilities, restructuring activities and other items impact reported cash flows.

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Operating cash flows were approximately $900 million for the first nine months of 2018, an increase of $187 million, or approximately 26%, as compared to the comparable period of 2017. The year-over-year change in operating cash flows was primarily attributable to the following factors:

•

2018 operating cash flows benefited from higher net earnings for the first nine months of 2018 as compared to the comparable period in 2017. Net earnings for the nine months ended September 28, 2018 benefited from a year-over-year increase in operating profits of $41 million, partially offset by a year-over-year increase in net interest expense of $6 million associated with our financing activities. The year-over-year increase in operating profit also includes a year-over-year increase in depreciation and amortization expense of $71 million largely attributable to recently acquired businesses. Depreciation and amortization are noncash expenses that decrease earnings without a corresponding impact to operating cash flows.

•

The aggregate of accounts receivable, inventories and trade accounts payable used $134 million of cash during the first nine months of 2018 compared to using $74 million of cash in the comparable period of 2017. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventories and trade accounts payable depends upon how effectively we manage the cash conversion cycle, which effectively represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period.


•	The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities provided $7 million of cash during the first nine months of 2018 as compared to using $56 million of cash in the comparable period of 2017. The timing of net tax payments and various employee benefit accruals drove the majority of this change.

Investing Activities

Cash flows relating to investing activities consist primarily of cash used for acquisitions and capital expenditures. Net cash used in investing activities increased $2,027 million during the nine months ended September 28, 2018 as compared to the comparable period of 2017, due primarily to business acquisitions completed during the nine months ended September 28, 2018.

Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting product development initiatives, improving information technology systems and purchasing equipment that is used in operating-type lease arrangements with customers. For the full year 2018, we expect capital spending to be between approximately $115 million and $125 million, excluding capital expenditures related to the A&S Business, though actual expenditures will ultimately depend on business conditions.

Financing Activities and Indebtedness

Cash flows from financing activities consist primarily of cash flows associated with the issuance and repayments of debt and commercial paper, the issuance of shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) and payments of quarterly cash dividends to shareholders. Financing activities generated cash of $2,235 million during the nine months ended September 28, 2018, of which $1.34 billion was due to the issuance of our MCPS and net $1.35 billion was related to the issuance of our 364-day delayed-draw term loan facility (“Delayed-Draw Term Loan”), as compared to generating approximately $241 million of cash in the comparable period in 2017. In the nine months ended September 28, 2018, we made net repayments of commercial paper under the U.S. and Euro commercial paper programs (“Commercial Paper Programs”) of $64 million and paid $91 million of cash dividends to shareholders of our common stock and MCPS.

On June 29, 2018, we issued 1,380,000 shares of MCPS with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received $1.34 billion in proceeds from the issuance of the MCPS, excluding $43 million of issuance costs. We will use the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures.

On July 20, 2018, we prepaid $325 million of our outstanding U.S variable interest rate term loan due in 2019, and on October 5, 2018, we prepaid the remaining $175 million outstanding. The prepayment penalties associated with these payments were immaterial.

On August 22, 2018, we entered into a Delayed Draw Term Loan in an aggregate principal amount of $1.75 billion. On September 5, 2018, we drew down the full $1.75 billion available under the Delayed-Draw Term Loan in order to fund the acquisition of Accruent, LLC. The Delayed-Draw Term Loan bears interest at a variable rate equal to the London inter-bank offered rate plus a ratings based margin currently at 75 basis points. As of September 28, 2018, borrowings under this facility

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bore an interest rate of 2.69% per annum. The Delayed-Draw Term Loan is prepayable at our option, and we are not permitted to re-borrow once the term loan is repaid. The terms and conditions, including covenants, applicable to the Delayed-Draw Term Loan are substantially similar to those applicable to the Revolving Credit Facility. On September 26, 2018, we repaid $400 million of this loan.

We generally expect to satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under the Commercial Paper Programs. Credit support for the Commercial Paper Programs is provided by our five-year, $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (“Revolving Credit Facility”). We classified our borrowings outstanding under the Commercial Paper Programs as long-term debt in the accompanying Consolidated Condensed Balance Sheet as of September 28, 2018, as we have the intent and ability, as supported by availability under the Revolving Credit Facility, to refinance these borrowings for at least one year from the balance sheet date. As commercial paper obligations mature, we may issue additional short-term commercial paper obligations to refinance all or part of these borrowings.

We had $1.5 billion available under the Revolving Credit Facility as of September 28, 2018. Of this amount, approximately $868 million was being used to backstop outstanding U.S. and Euro commercial paper balances. Accordingly, we had the ability to incur an additional $632 million of indebtedness under the Revolving Credit Facility as of September 28, 2018. Refer to Note 5 of the Consolidated Condensed Financial Statements for information regarding our financing activities and indebtedness.

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 Commercial Paper Programs. We expect to limit any borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, to repay all of the outstanding commercial paper as it matures.

As of September 28, 2018, commercial paper outstanding under the U.S. dollar-denominated commercial paper program had an annual effective rate of 2.38% and a weighted average remaining maturity of approximately 11 days. As of September 28, 2018, commercial paper outstanding under the Euro-denominated commercial paper program had an annual effective rate of (0.10)% and a weighted average remaining maturity of approximately 87 days.

Pursuant to our senior note and term loan agreements, $1,825 million of our long-term debt is scheduled for maturity and repayment within 12 months. Accordingly, we have classified these as short-term debt on the accompanying Consolidated Condensed Balance Sheet.

In connection with the debt exchange in the split-off of the A&S Business, on October 1, 2018, we retired $244.7 million of our 1.80% senior unsecured notes due in 2019. Additionally, on October 5, 2018, we prepaid the remaining $175 million outstanding on our U.S variable interest rate term loan due in 2019. The prepayment penalties associated with these payments were immaterial.

Dividends

On August 2, 2018, we declared a regular quarterly dividend of $0.07 per share of common stock paid on September 28, 2018, to holders of record on August 31, 2018. For the nine months ended September 28, 2018, cash dividend payments of $73.2 million were recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity.

Dividends on our MCPS are payable on a cumulative basis when, as and if declared by our Board, at an annual rate of 5.0% of the liquidation preference of $1,000 per share (equivalent to $50.00 annually per share). On August 2, 2018, we declared an initial quarterly cash dividend of $12.78 per share on our MCPS and paid on September 28, 2018, to stockholders of record on September 15, 2018, cash dividends of $17.6 million. These payments were recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity

Cash and Cash Requirements

As of September 28, 2018, we held approximately $1,145.1 million of cash and cash equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less with an annual effective interest rate that approximated 1.25% during the three months ended September 28, 2018. Substantially all of the cash was held outside of the United States.

We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our restructuring activities and pension plans as required, pay dividends to shareholders and support other business needs or objectives. With respect to our cash requirements, we generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may also borrow under our commercial paper programs or

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credit facilities, enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under our commercial paper programs and/or access the capital markets. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions.

The TCJA that was enacted in December 2017 is materially improving our U.S. liquidity through lower corporate tax rates and enhanced cash repatriation. During the first nine months of 2018, we repatriated $187.4 million in connection with the TCJA and these repatriations did not result in any foreign remittance taxes.

Conversely, we have made an election regarding the amount of earnings that we do not intend to repatriate due to local working capital needs, local law restrictions, high foreign remittance costs, previous investments in physical assets and acquisitions, or future growth needs. Such earnings are intended for indefinite foreign reinvestment and no provision for non-U.S. income taxes has been made. The amount of income taxes that may be applicable to such earnings is not readily determinable given the unknown duration of local law restrictions as applicable to such earnings, unknown changes in foreign tax law that may occur during the restriction periods, and the various alternatives we could employ if we repatriated these earnings. The cash that our foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. We expect the TCJA to have a favorable impact in our future ability to engage in acquisition activities.

In connection with the direct sale of certain assets and liabilities of the A&S business to Altra on October 1, 2018, we received $1.0 billion in cash proceeds. In addition, as part of the split-off of the A&S Business, we received a $150 million cash dividend.

As of September 28, 2018, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future, including our cash needs in the United States.

CRITICAL ACCOUNTING ESTIMATES

There were no material changes during the three and nine months ended September 28, 2018 to the items we disclosed as our critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Annual Report on Form 10-K. Changes to our accounting policy for revenue recognition as a result of adopting ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) are discussed in Note 6 to the consolidated condensed financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Instruments and Risk Management,” in our 2017 Annual Report on Form 10-K. There were no material changes during the three months ended September 28, 2018 to the information reported in our 2017 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of the President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer, have concluded that, as of the end of such period, these disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Information Related to Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q, in the “Risk Factors” section of our 2017 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 30, 2018 and June 29, 2018. There were no material changes during the quarter ended September 28, 2018 to the risk factors reported in the “Risk Factors” section of our 2017 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the fiscal quarters ended March 30, 2018 and June 29, 2018.

ITEM 6. EXHIBITS




Exhibit Number		Description
2.1		Transaction Agreement, dated as of July 30, 2018, by and among Athena SuperHoldCo, Inc., TLFN Holding II Company, Gilbarco Catlow LLC, Gryphon Merger Sub Inc., Genstar Capital VII, L.P., solely in its capacity as the Seller Representative, and Fortive Corporation, solely in its capacity as the Parent Guarantor (incorporated by reference to Exhibit 2.1 to Fortive Corporation’s Current Report on Form 8-K filed on July 31, 2018, File No. 1-37654).

2.2		Stock and Asset Purchase Agreement, dated as of June 6, 2018 and executed on September 20, 2018, between Ethicon and the Company (incorporated by reference to Exhibit 2.1 to Fortive Corporation’s Current Report on Form 8-K filed on September 21, 2018, File No. 1-37654)

3.1		Amended and Restated Certificate of Incorporation of Fortive Corporation (incorporated by reference to Exhibit 3.1 to Fortive Corporation’s Current Report on Form 8-K filed on June 9, 2017, File No. 1-37654).

3.2		Amended and Restated Bylaws of Fortive Corporation (incorporated by reference to Exhibit 3.2 to Fortive Corporation’s Current Report on Form 8-K filed on June 9, 2017, File No 1-37654).

3.3		Certificate of Designations of the 5.00% Mandatory Convertible Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to Fortive Corporation’s Current Report on Form 8-K filed on June 29, 2018, File No 1-37654).

4.1		Specimen Certificate of the 5.00% Mandatory Convertible Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to Fortive Corporation’s Current Report on Form 8-K filed on June 29, 2018, File No. 1-37654).

10.1		Credit Agreement, dated as of August 22, 2018, among Fortive Corporation, Bank of America, N.A., as Administrative Agent, and the lenders referred to therein. (incorporated by reference to Exhibit 10.1 to Fortive Corporation’s Current Report on Form 8-K filed on August 22, 2018, File No. 1-37654).

12.1		Computation of earnings to fixed charges.

31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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101.INS		XBRL Instance Document* - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets as of September 28, 2018 and December 31, 2017, (ii) Consolidated Condensed Statements of Earnings for the three and nine months ended September 28, 2018 and September 29, 2017, (iii) Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 28, 2018 and September 29, 2017, (iv) Consolidated Condensed Statement of Changes in Equity for the nine months ended September 28, 2018, (v) Consolidated Condensed Statements of Cash Flows for the nine months ended September 28, 2018 and September 29, 2017, and (vi) Notes to Consolidated Condensed Financial Statements.

The registrant agrees to furnish to the Commission supplementally upon request a copy of schedules or exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K of any material plan or acquisition, disposition or reorganization set forth above.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	FORTIVE CORPORATION:

Date: October 25, 2018	By:	/s/ Charles E. McLaughlin
		Charles E. McLaughlin
		Senior Vice President and Chief Financial Officer

Date: October 25, 2018	By:	/s/ Emily A. Weaver
		Emily A. Weaver
		Chief Accounting Officer

Form: 10-Q

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