10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on April 28, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One) | |||||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: April 1, 2022
Or | |||||
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
________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (425 ) 446-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
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 ☒ No ☐
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 ☒ No ☐
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.
☒ | 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding at April 25, 2022 was 358,447,899 .
FORTIVE CORPORATION
INDEX
FORM 10-Q
PART I - | FINANCIAL INFORMATION | Page | ||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II - | OTHER INFORMATION | |||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 6. | ||||||||
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except per share amounts)
See the accompanying Notes to Consolidated Condensed Financial Statements.
As of | |||||||||||
April 1, 2022 | December 31, 2021 | ||||||||||
(unaudited) | |||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Inventories: | |||||||||||
Finished goods | |||||||||||
Work in process | |||||||||||
Raw materials | |||||||||||
Inventories | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
Property, plant and equipment, net of accumulated depreciation of $ |
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Other assets | |||||||||||
Goodwill | |||||||||||
Other intangible assets, net | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities: | |||||||||||
Current portion of long-term debt | |||||||||||
Trade accounts payable | |||||||||||
Accrued expenses and other current liabilities | |||||||||||
Total current liabilities | |||||||||||
Other long-term liabilities | |||||||||||
Long-term debt | |||||||||||
Commitments and Contingencies | |||||||||||
Equity: | |||||||||||
Preferred stock: $ |
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Common stock: $ |
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Additional paid-in capital | |||||||||||
Treasury shares, at cost: | ( |
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Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( |
( |
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Total Fortive stockholders’ equity | |||||||||||
Noncontrolling interests | |||||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and equity | $ | $ |
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
Three Months Ended | |||||||||||
April 1, 2022 | April 2, 2021 | ||||||||||
Sales of products and software | $ | $ | |||||||||
Sales of services | |||||||||||
Total sales | |||||||||||
Cost of product and software sales | ( |
( |
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Cost of service sales | ( |
( |
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Total cost of sales | ( |
( |
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Gross profit | |||||||||||
Operating costs: | |||||||||||
Selling, general and administrative expenses | ( |
( |
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Research and development expenses | ( |
( |
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Operating profit | |||||||||||
Non-operating income (expense), net: | |||||||||||
Interest expense, net | ( |
( |
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Loss on extinguishment of debt | ( |
||||||||||
Gain on investment in Vontier Corporation | |||||||||||
Other non-operating expense, net | ( |
( |
|||||||||
Earnings from continuing operations before income taxes | |||||||||||
Income taxes | ( |
( |
|||||||||
Net earnings from continuing operations | |||||||||||
Earnings (loss) from discontinued operations, net of income taxes | ( |
||||||||||
Net earnings | |||||||||||
Mandatory convertible preferred dividends | ( |
||||||||||
Net earnings attributable to common stockholders | $ | $ | |||||||||
Net earnings per common share from continuing operations: | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
Net earnings (loss) per share from discontinued operations: | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
Net earnings per share: | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
Average common stock and common equivalent shares outstanding: | |||||||||||
Basic | |||||||||||
Diluted | |||||||||||
The sum of net earnings per share amounts may not add due to rounding. |
5
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
Three Months Ended | |||||||||||
April 1, 2022 | April 2, 2021 | ||||||||||
Net earnings | $ | $ | |||||||||
Other comprehensive income, net of income taxes: | |||||||||||
Foreign currency translation adjustments | ( |
( |
|||||||||
Pension adjustments | |||||||||||
Total other comprehensive income (loss), net of income taxes | ( |
( |
|||||||||
Comprehensive income | $ | $ |
See the accompanying Notes to Consolidated Condensed Financial Statements.
6
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
Common Stock | Preferred Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
|||||||||||||||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||||
— | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2022 | ( |
||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings for the period | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Dividends to common shareholders | — | — | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | — | — | ( |
— | ||||||||||||||||||||||||||||||||||||||||||||
Common stock-based award activity | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchases | ( |
— | — | — | ( |
— | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | ( |
— | — | — | — | ( |
— | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Change in noncontrolling interests | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Balance, April 1, 2022 | $ | $ | $ | ( |
$ | $ | $ | ( |
$ | ||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
|||||||||||||||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||||
Net earnings for the period | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends to common shareholders | — | — | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||||
Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | — | — | ( |
— | ||||||||||||||||||||||||||||||||||||||||||||
Common stock-based award activity | ( |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Shares withheld for tax | ( |
— | — | — | — | ( |
— | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Early extinguishment of |
— | — | — | — | — | ( |
— | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | — | — | — | ( |
||||||||||||||||||||||||||||||||||||||||||||
Balance, April 2, 2021 | $ | $ | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||||
See the accompanying Notes to Consolidated Condensed Financial Statements.
7
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
Three Months Ended | |||||||||||
April 1, 2022 | April 2, 2021 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net earnings from continuing operations | $ | $ | |||||||||
Noncash items: | |||||||||||
Amortization | |||||||||||
Depreciation | |||||||||||
Stock-based compensation expense | |||||||||||
Loss on extinguishment of debt | |||||||||||
Gain on investment in Vontier Corporation | ( |
||||||||||
Change in trade accounts receivable, net | ( |
( |
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Change in inventories | ( |
( |
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Change in trade accounts payable | ( |
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Change in prepaid expenses and other assets | ( |
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Change in accrued expenses and other liabilities | ( |
( |
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Total operating cash provided by continuing operations | |||||||||||
Total operating cash used in discontinued operations | ( |
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Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Cash paid for acquisitions, net of cash received | ( |
||||||||||
Payments for additions to property, plant and equipment | ( |
( |
|||||||||
Net cash used in investing activities | ( |
( |
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Cash flows from financing activities: | |||||||||||
Payment of |
( |
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Net proceeds from commercial paper borrowings | |||||||||||
Repayment of borrowings (maturities greater than 90 days) | ( |
||||||||||
Payment of common stock cash dividend to shareholders | ( |
( |
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Payment of mandatory convertible preferred stock cash dividend to shareholders | ( |
||||||||||
Repurchase of common shares | ( |
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All other financing activities | ( |
( |
|||||||||
Net cash used in financing activities | ( |
( |
|||||||||
Effect of exchange rate changes on cash and equivalents | ( |
||||||||||
Net change in cash and equivalents | ( |
( |
|||||||||
Beginning balance of cash and equivalents | |||||||||||
Ending balance of cash and equivalents | $ | $ |
See the accompanying Notes to Consolidated Condensed Financial Statements.
8
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 provider of essential technologies for connected workflow solutions across a range of attractive end-markets. Our strategic segments - Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions - include well-known brands with leading positions in their markets. Our businesses design, develop, manufacture, and service professional and engineered products, software, and services, building upon leading brand names, innovative technologies, and significant market positions. Our research and development, manufacturing, sales, distribution, service, and administrative facilities are located in more than 50 countries around the world.
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 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, 2021 and the footnotes (“Notes”) thereto included within our 2021 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 April 1, 2022 and December 31, 2021, our results of operations and cash flows for the three month periods ended April 1, 2022 and April 2, 2021. Reclassification of certain prior year amounts have been made to conform to current year presentation.
Vontier Separation and Discontinued Operations
On October 9, 2020, we completed the separation of Vontier Corporation (“Vontier”), the entity we created to hold our former Industrial Technologies segment (the “Separation”). The accounting requirements for reporting the Vontier business as a discontinued operation were met when the Separation was completed. Accordingly, the consolidated condensed financial statements reflect the results of separation activities associated with the prior Vontier business as a discontinued operation, which was immaterial for all periods presented.
On January 19, 2021, we completed an exchange (the “Debt-for-Equity Exchange”) of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co. Interest expense and extinguishment costs related to the Debt-for-Equity Exchange during the first quarter of 2021 are included in continuing operations.
Segment Presentation
We operate and report our results in three segments, Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions, each of which is further described below.
Our Intelligent Operating Solutions segment provides leading workflow solutions to accelerate industrial and facility reliability and performance, as well as compliance and safety across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others. We provide differentiated instrumentation and sensors, software and services to address our customers’ toughest workflow challenges.
Our Precision Technologies segment supplies instrumentation and sensing technologies to a broad set of vertical end markets, enabling our customers to accelerate the development, manufacture and launch of innovative products and solutions. We provide our customers with electrical test and measurement instruments and services, energetic material devices, and a broad portfolio of sensor and control system solutions.
Our Advanced Healthcare Solutions segment supplies critical workflow solutions to hospitals and other healthcare customers, enabling safer, more efficient, and higher quality healthcare. We provide hardware, consumables, software and services that optimize our customers’ most critical workflows, including instrument sterilization and device reprocessing, instrument tracking, cell therapy equipment design and manufacturing, biomedical test tools, radiation safety monitoring, end-to-end clinical productivity solutions and asset management.
9
Foreign currency translation adjustments |
Pension
adjustments (a)
|
Total | |||||||||||||||
For the Three Months Ended April 1, 2022: | |||||||||||||||||
Balance, December 31, 2021 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | ( |
( |
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | |||||||||||||||||
Net current period other comprehensive income (loss), net of income taxes | ( |
( |
|||||||||||||||
Balance, April 1, 2022 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
For the Three Months Ended April 2, 2021: | |||||||||||||||||
Balance, December 31, 2020 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | ( |
( |
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | |||||||||||||||||
Net current period other comprehensive income (loss), net of income taxes | ( |
( |
|||||||||||||||
Balance, April 2, 2021 | $ | ( |
$ | ( |
$ | ( |
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(a) Includes balances relating to defined benefit plans, supplemental executive retirement plans, and other postretirement employee benefit plans.
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(b) This component of AOCI is included in the computation of net periodic pension cost (refer to Note 12 in our most recently filed Form 10-K for additional details).
|
Allowances for Doubtful Accounts
All trade accounts and unbilled receivables are reported in the Consolidated Condensed Balance Sheet adjusted for any write-offs and net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from our unbilled and trade accounts receivable portfolios over the life of the underlying assets. Additions to the allowances are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances.
10
The following is a rollforward of the aggregated allowance for credit losses related to our trade accounts receivables as of April 1, 2022 ($ in millions):
Balance, December 31, 2021 | $ | ||||
Provision | |||||
Write-offs | ( |
||||
Foreign currency exchange and other | ( |
||||
Balance, April 1, 2022 | $ |
The allowance for unbilled receivables was immaterial for all periods presented.
Recently Issued Accounting Standard
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which amends the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. On January 1, 2022, we adopted ASU 2020-06 using a modified retrospective approach and recognized in our balance sheet, as of January 1, 2022, a net of tax adjustment to reduce Additional Paid-in Capital by $65.7 million and increase debt by $3.7 million, with a corresponding net of tax adjustment to beginning retained earnings of $62.8 million. These adjustments are related to our 0.875 % Convertible Senior Notes (the “Convertible Notes”), which were the only outstanding instruments impacted by the new standard at the time of adoption.
Results for reporting periods beginning January 1, 2022 reflect the adoption of ASU 2020-06, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting practices.
Prior to our adoption of ASU 2020-06 on January 1, 2022, we recognized the fair value of the nonconvertible debt component of our Convertible Notes subject to the cash conversion guidance as debt and attributed the residual value to the conversion feature which was recognized in APIC. Subsequent to the issuance of our Convertible Notes in February 2019, we accreted the debt discount as non-cash interest expense in our Statements of Earnings. Further, we applied the treasury stock method to our Convertible Notes when calculating earnings per share (“EPS”) in all periods prior to our adoption of ASU 2020-06. After our adoption of ASU 2020-06, we account for convertible debt instruments wholly as debt, unless a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or a convertible debt instrument is issued at a substantial premium.
On January 1, 2022, we reclassified the unamortized cost basis of our outstanding Convertible Notes wholly as debt, which subsequently matured and was settled on February 15, 2022. We applied the if-converted method to all convertible instruments when calculating EPS for the three months ended April 1, 2022. As of April 1, 2022, we had no convertible instruments outstanding subject to the guidance in ASU 2020-06.
NOTE 2. ACQUISITIONS
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 of businesses 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 complementary 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 complementary 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.
During the three month period ended April 1, 2022, adjustments were made to the preliminary purchase price allocation of prior year acquisitions as described below.
11
Provation
On December 27, 2021, we acquired Provation Software, Inc. (“Provation”), a leading provider of clinical workflow software solutions used in hospitals and ambulatory surgery centers. The acquisition of Provation extends our digital offering and software capabilities in the healthcare space. The total consideration paid was approximately $1.4 billion, net of acquired cash and was primarily financed with proceeds from our financing activities and available cash. We preliminarily recorded $978 million of goodwill related to the acquisition, which is not tax deductible. During the three month period ended April 1, 2022, provisional goodwill increased by $8.1 million for measurement period adjustments. Provation had revenue in 2020 of approximately $90 million and is an operating company within our Advanced Healthcare Solutions segment.
ServiceChannel
On August 24, 2021, we acquired ServiceChannel Holdings, Inc. (“ServiceChannel”), a privately held, global provider of Software as a Service (“SaaS”) based multi-site facilities maintenance service solutions with an integrated service-provider network. The acquisition of ServiceChannel broadens our offering of software-enabled solutions for the facility and asset lifecycle workflow. The total consideration paid was approximately $1.2 billion, net of acquired cash, and included approximately $28 million of deferred compensation consideration that is being recognized ratably over a twelve month service period. The ServiceChannel acquisition was primarily financed with available cash and proceeds from our financing activities. We preliminarily recorded approximately $873 million of goodwill related to the acquisition, which is not tax deductible. ServiceChannel had revenue in 2020 of approximately $70 million and is an operating company within our Intelligent Operating Solutions segment.
Revenue and operating loss attributable to the Provation and ServiceChannel acquisitions were $67.3 million and $23.4 million for the three months ended April 1, 2022. The operating loss includes $19.5 million of intangible asset amortization and $20.4 million of transaction and integration costs, primary comprised of compensation cost for employee retention and amounts paid to third party advisors, which are recorded in Selling, general and administration expenses.
Provation | ServiceChannel | Total | |||||||||
Accounts receivable | $ | $ | $ | ||||||||
Goodwill | |||||||||||
Other intangible assets, primarily customer relationships, technology, database, and trade names | |||||||||||
Deferred revenue, current | ( |
( |
( |
||||||||
Deferred tax liabilities | ( |
( |
( |
||||||||
Other assets and liabilities, net | ( |
( |
( |
||||||||
Net cash consideration | $ | $ | $ |
NOTE 3. GOODWILL
The following is a rollforward of our carrying value of goodwill by segment ($ in millions):
Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | Total Goodwill | ||||||||||||||||||||
Balance, December 31, 2021 | $ |
|
$ |
|
$ |
|
$ |
|
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Measurement period adjustments for 2021 acquisitions | ( |
||||||||||||||||||||||
Foreign currency translation and other | ( |
( |
( |
( |
|||||||||||||||||||
Balance, April 1, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
During the three month period ended April 1, 2022, we identified no triggering events indicating a potential impairment of goodwill.
12
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) for identical assets or liabilities in active markets.
•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.
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 | ||||||||||||||||||||
April 1, 2022 | |||||||||||||||||||||||
Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||||
Deferred compensation liabilities |
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 Consolidated Condensed Balance Sheets. Participants may choose among alternative earnings 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.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant, and equipment, goodwill, and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at their carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets.
We evaluated events or circumstances that may indicate the carrying value of our non-financial assets may not be fully recoverable during the three month period ended April 1, 2022, and recorded no impairments.
Fair Value of Financial Instruments
April 1, 2022 | December 31, 2021 | ||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
Current portion of long-term debt | $ | $ | $ | $ | |||||||||||||||||||
Long-term debt, net of current maturities | $ | $ | $ | $ |
As of April 1, 2022 and December 31, 2021, 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
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NOTE 5. FINANCING AND CAPITAL
April 1, 2022 | December 31, 2021 | ||||||||||
U.S. dollar-denominated commercial paper | $ | $ | |||||||||
Delayed-Draw Term Loan due 2022 | |||||||||||
Long-term debt | |||||||||||
Less: current portion of long-term debt | |||||||||||
Long-term debt, net of current maturities | $ | $ | |||||||||
Aggregate unamortized debt discounts, premiums, and issuance costs of $8 million and $13 million as of April 1, 2022 and December 31, 2021, respectively, are netted against the principal amounts of the components of debt in the table above. Refer to Note 11 of our 2021 Annual Report on Form 10-K for further details of our debt financing.
Convertible Senior Notes
On February 22, 2019, we issued $1.4 billion in aggregate principal amount of our 0.875 % Convertible Senior Notes due 2022, including $187.5 million in aggregate principal amount resulting from an exercise in full of an over-allotment option. The Convertible Notes were issued in a private placement to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
Of the $1.4 billion in principal amount from the issuance of the Convertible Notes, $1.3 billion was classified as debt and $102.2 million was classified as equity, using an assumed effective interest rate of 3.38 %. Debt issuance costs of $24.3 million were proportionately allocated to debt and equity.
On February 9, 2021, we repurchased $281 million of the Convertible Notes at fair value using the remaining cash proceeds received from Vontier in the Vontier Separation and other cash on hand. In connection with the repurchase, we recorded a loss on debt extinguishment during the three month period ended April 2, 2021 of $10.5 million. In addition, upon repurchase we recorded $11.6 million as a reduction to additional paid-in capital related to the equity component of the repurchased Convertible Notes.
On January 1, 2022, we adopted ASU 2020-06, as further detailed in Note 1. We reclassified the carrying value of the instrument wholly to debt, eliminating the value formerly attributable to the conversion feature and the associated debt issuance costs that were previously classified as equity.
On February 15, 2022, the maturity date of the Convertible Notes, Fortive repaid, in cash, $1.2 billion in outstanding principal and accrued interest thereon.
We recognized $2.1 million in interest expense during the three month period ended April 1, 2022, of which $1.3 million was related to the contractual coupon rate of 0.875 % and $0.8 million was attributable to the amortization of debt issuance costs. We recognized $12.2 million in interest expense during the three month period ended April 2, 2021, of which $2.8 million related to the contractual coupon rate of 0.875 %, $1.7 million was attributable to the amortization of debt issuance costs, and $7.7 million was attributable to the amortization of the discount.
Other Liquidity Sources
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial
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Paper Programs”). Under these programs, we may issue unsecured promissory notes with maturities not exceeding 397 and 183 days, respectively.
Interest expense on commercial paper is paid at maturity and is generally based on our credit ratings at the time of issuance and prevailing short-term interest rates.
The details of our outstanding Commercial Paper Programs as of April 1, 2022 were as follows ($ in millions):
Carrying value | Annual effective rate | Weighted average remaining maturity (in days) | |||||||||||||||
U.S. dollar-denominated commercial paper | $ | % |
Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for our commercial paper programs, can also be used for working capital and other general corporate purposes. As of April 1, 2022, no borrowings were outstanding under the Revolving Credit Facility.
Debt-for-Equity Exchange
On January 19, 2021, we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company. During the first quarter of 2021 we recognized a gain of $57.0 million related to the subsequent change in the fair value of the Retained Vontier Shares. We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the three month period ended April 2, 2021.
NOTE 6. SALES
We derive revenue primarily from the sale of products and software, 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, software, or services.
Product sales include revenue from the sale of products and equipment, which includes our software and SaaS product offerings and equipment rentals.
Service sales include revenues from extended warranties, post-contract customer support (“PCS”), maintenance contracts or services, contract labor to perform ongoing service at a customer location, and services related to previously sold products.
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 $72 million as of April 1, 2022 and $71 million as of December 31, 2021.
Contract Costs — We incur and capitalize direct incremental costs to obtain certain contracts, typically sales-related commissions and costs associated with assets used by our customers in certain software arrangements. Deferred sales-related commissions are not capitalized when the amortization period is one year or less, as we elected to use the practical expedient to expense these sales commissions as incurred. As of April 1, 2022 and December 31, 2021, we had $30 million and $27 million, respectively, in net revenue-related contract assets primarily related to certain software contracts. Revenue-related contract assets are recorded in the Prepaid expenses and other current assets and Other assets line items in our Consolidated Condensed Balance Sheets. These assets have estimated useful lives between 3 and 8 years.
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. The noncurrent portion of deferred revenue is included in Other long-term liabilities in the Consolidated Condensed Balance Sheets.
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April 1, 2022 | December 31, 2021 | ||||||||||
Deferred revenue - current | $ | $ | |||||||||
Deferred revenue - noncurrent | |||||||||||
Total contract liabilities | $ | $ |
During the three month period ended April 1, 2022, we recognized revenue related to our contract liabilities at December 31, 2021 of $154 million. The change in our contract liabilities from December 31, 2021 to April 1, 2022 was primarily due to the timing of billings and recognition as revenue of PCS and extended warranty services.
April 1, 2022 | |||||
Intelligent Operating Solutions | $ | ||||
Precision Technologies | |||||
Advanced Healthcare Solutions | |||||
Total remaining performance obligations | $ |
The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 80 percent within the next two years , approximately 90 percent within the next three years , and substantially all within four years .
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Disaggregation of Revenue
We disaggregate revenue from contracts with customers by sales of products and software and services, geographic location, 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 month period ended April 1, 2022 is presented as follows ($ in millions):
Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
Sales: | |||||||||||||||||||||||
Sales of products and software | $ | $ | $ | $ | |||||||||||||||||||
Sales of services | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
Geographic: | |||||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
China | |||||||||||||||||||||||
All other (each country individually less than 5% of total sales) | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
End markets:(a)
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Direct sales: | |||||||||||||||||||||||
Medical | $ | $ | $ | $ | |||||||||||||||||||
Industrial & Manufacturing | |||||||||||||||||||||||
Utilities & Power | |||||||||||||||||||||||
Government | |||||||||||||||||||||||
Communication, Electronics & Semiconductor | |||||||||||||||||||||||
Aerospace & Defense | |||||||||||||||||||||||
Oil & Gas | |||||||||||||||||||||||
Retail & Consumer | |||||||||||||||||||||||
Other | |||||||||||||||||||||||
Total direct sales | |||||||||||||||||||||||
Distributors | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
(a) Direct sales by end market include sales made through third-party distributors where we have visibility into the end customer.
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Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
Sales: | |||||||||||||||||||||||
Sales of products and software | $ | $ | $ | $ | |||||||||||||||||||
Sales of services | |||||||||||||||||||||||
Total | $ | $ | $ |