10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on October 25, 2023
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: September 29, 2023
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 October 20, 2023 was 351,433,569 .
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 5. | ||||||||
Item 6. | ||||||||
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except share and per share amounts)
As of | |||||||||||
September 29, 2023 | December 31, 2022 | ||||||||||
(unaudited) | |||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and equivalents | $ | $ | |||||||||
Trade accounts receivable less allowance for doubtful accounts of $ |
|||||||||||
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 (Note 9) |
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Equity: | |||||||||||
Common stock: $ |
|||||||||||
Additional paid-in capital | |||||||||||
Treasury shares, at cost | ( |
( |
|||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( |
( |
|||||||||
Total Fortive stockholders’ equity | |||||||||||
Noncontrolling interests | |||||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and equity | $ | $ |
See the accompanying Notes to Consolidated Condensed Financial Statements.
4
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 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
Sales of products and software | $ | $ | $ | $ | |||||||||||||||||||
Sales of services | |||||||||||||||||||||||
Total sales | |||||||||||||||||||||||
Cost of product and software sales | ( |
( |
( |
( |
|||||||||||||||||||
Cost of service sales | ( |
( |
( |
( |
|||||||||||||||||||
Total cost of sales | ( |
( |
( |
( |
|||||||||||||||||||
Gross profit | |||||||||||||||||||||||
Operating costs: | |||||||||||||||||||||||
Selling, general and administrative expenses | ( |
( |
( |
( |
|||||||||||||||||||
Research and development expenses | ( |
( |
( |
( |
|||||||||||||||||||
Russia exit and wind down costs | ( |
( |
|||||||||||||||||||||
Operating profit | |||||||||||||||||||||||
Non-operating income (expense), net: | |||||||||||||||||||||||
Interest expense, net | ( |
( |
( |
( |
|||||||||||||||||||
Other non-operating expense, net | ( |
( |
( |
( |
|||||||||||||||||||
Earnings before income taxes | |||||||||||||||||||||||
Income taxes | ( |
( |
( |
( |
|||||||||||||||||||
Net earnings | $ | $ | $ | $ | |||||||||||||||||||
Net earnings per share: | |||||||||||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||||||||||
Diluted | $ | $ | $ | $ | |||||||||||||||||||
Average common stock and common equivalent shares outstanding: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
See the accompanying Notes to Consolidated Condensed Financial Statements.
5
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in millions)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
Net earnings | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive income (loss), 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 | Additional Paid-In Capital | Treasury Shares | Retained Earnings | Accumulated Other Comprehensive Loss |
Noncontrolling Interests |
||||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2022 | $ | $ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||||||
Net earnings for the period | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Dividends to common shareholders | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Common stock-based award activity | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | ( |
— | ( |
— | — | — | — | ||||||||||||||||||||||||||||||||||
Change in noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||||||
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, June 30, 2023 | $ | $ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||||||
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, September 29, 2023 | $ | $ | $ | ( |
$ | $ | ( |
$ |
7
Common Stock | Additional Paid-In Capital | Treasury Shares | Retained Earnings | Accumulated Other Comprehensive Loss |
Noncontrolling Interests |
||||||||||||||||||||||||||||||||||||
Shares Outstanding | 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 interest | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Balance, April 1, 2022 | $ | $ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||||||
Net earnings for the period | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Dividends to common shareholders | — | — | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | ( |
— | ||||||||||||||||||||||||||||||||||
Common stock-based award activity | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Common stock repurchases | ( |
— | — | ( |
— | — | — | ||||||||||||||||||||||||||||||||||
Shares withheld for taxes | — | — | ( |
— | — | — | — | ||||||||||||||||||||||||||||||||||
Change in noncontrolling interests | — | — | — | — | — | — | ( |
||||||||||||||||||||||||||||||||||
Balance, July 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, September 30, 2022 | $ | $ | $ | ( |
$ | $ | ( |
$ |
See the accompanying Notes to Consolidated Condensed Financial Statements.
8
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
Nine Months Ended | |||||||||||
September 29, 2023 | September 30, 2022 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net earnings | $ | $ | |||||||||
Noncash items: | |||||||||||
Amortization | |||||||||||
Depreciation | |||||||||||
Stock-based compensation expense | |||||||||||
Russia exit and wind down costs | |||||||||||
Change in trade accounts receivable, net | ( |
||||||||||
Change in inventories | ( |
( |
|||||||||
Change in trade accounts payable | ( |
||||||||||
Change in prepaid expenses and other assets | ( |
( |
|||||||||
Change in accrued expenses and other liabilities | ( |
( |
|||||||||
Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Payments for additions to property, plant and equipment | ( |
( |
|||||||||
Cash paid for acquisitions, net of cash received | ( |
( |
|||||||||
Proceeds from sale of property | |||||||||||
Proceeds from sale of business | |||||||||||
Net cash used in investing activities | ( |
( |
|||||||||
Cash flows from financing activities: | |||||||||||
Net proceeds from (repayments of) commercial paper borrowings | ( |
||||||||||
Proceeds from borrowings (maturities greater than 90 days), net of issuance costs | |||||||||||
Repayment of borrowings (maturities greater than 90 days) | ( |
||||||||||
Payment of |
( |
||||||||||
Repurchase of common shares | ( |
( |
|||||||||
Payment of dividends | ( |
( |
|||||||||
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.
9
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 unaudited 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, 2022 and the footnotes (“Notes”) thereto included within our 2022 Annual Report on Form 10-K.
In our opinion, the accompanying financial statements contain all adjustments, which consist of only normal, recurring accruals necessary to fairly present our financial position, results of operations, comprehensive income, stockholders’ equity, and cash flows for the periods presented. The results of operations for the three and nine months ended September 29, 2023, are not necessarily indicative of the results for the full year.
Russia Ukraine Conflict
In February 2022, Russian forces invaded Ukraine (“Russia Ukraine Conflict”) resulting in broad economic sanctions being imposed on Russia. In the second quarter of 2022, the Company exited business operations in Russia, other than for ASP’s sterilization products, which are exempt from international sanctions as humanitarian products.
In the three and nine-month periods ended September 30, 2022, the Company recorded pre-tax charges of $1.1 million and $17.3 million, respectively, primarily relating to the write-off of net assets, the cumulative translation adjustment in earnings for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies. These costs are identified as the “Russia exit and wind down costs” in the Condensed Consolidated Statements of Earnings. The exit activities were completed in 2022.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. We have designated our outstanding ¥14.4 billion Yen-denominated term loan and our €275 million Euro-denominated term loan as net investment hedges of our investment in applicable foreign operations.
We recognized after-tax foreign currency transaction gains of $9.6 million and $14.6 million during the three-month periods ended September 29, 2023 and September 30, 2022, respectively, and gains of $13.0 million and $18.3 million during the nine-month periods ended September 29, 2023 and September 30, 2022, respectively, on the debt that was deferred in the foreign currency translation component of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as an offset to the foreign currency translation adjustments on our investments in foreign subsidiaries. Any amounts deferred in AOCI will remain until the hedged investment is sold or substantially liquidated. We recorded no ineffectiveness from our net investment hedges during the three and nine-month periods ended September 29, 2023 and September 30, 2022.
10
The changes in AOCI by component are summarized below ($ in millions):
Foreign currency translation adjustments |
Pension & post-retirement plan benefit adjustments (a)
|
Total | |||||||||||||||
For the Three Months Ended September 29, 2023: | |||||||||||||||||
Balance, June 30, 2023 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
( |
||||||||||||||
Amounts reclassified from AOCI into income: |
|||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | ( |
( |
|||||||||||||||
Amounts reclassified from AOCI into income, net of income taxes |
|||||||||||||||||
Net current period other comprehensive income (loss), net of income taxes | ( |
( |
|||||||||||||||
Balance, September 29, 2023 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
For the Three Months Ended September 30, 2022: | |||||||||||||||||
Balance, July 1, 2022 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
|||||||||||||||
Amounts reclassified from AOCI into income: |
|||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | ( |
( |
|||||||||||||||
Amounts reclassified from AOCI into income, net of income taxes |
|||||||||||||||||
Net current period other comprehensive income (loss), net of income taxes | ( |
( |
|||||||||||||||
Balance, September 30, 2022 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
11
Foreign currency translation adjustments |
Pension & post-retirement plan benefit adjustments (a)
|
Total | |||||||||||||||
For the Nine Months Ended September 29, 2023: | |||||||||||||||||
Balance, December 31, 2022 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
( |
||||||||||||||
Amounts reclassified from AOCI into income: |
|||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | |||||||||||||||||
Amounts reclassified from AOCI into income, net of income taxes |
|||||||||||||||||
Net current period other comprehensive income (loss) | ( |
( |
( |
||||||||||||||
Balance, September 29, 2023 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
For the Nine Months Ended September 30, 2022: | |||||||||||||||||
Balance, December 31, 2021 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
Other comprehensive income (loss) before reclassifications, net of income taxes | ( |
( |
|||||||||||||||
Amounts reclassified from AOCI into income: |
|||||||||||||||||
Increase (decrease) | (b) |
||||||||||||||||
Income tax impact | ( |
( |
|||||||||||||||
Amounts reclassified from AOCI into income, net of income taxes |
|||||||||||||||||
Net current period other comprehensive income (loss) | ( |
( |
|||||||||||||||
Balance, September 30, 2022 | $ | ( |
$ | ( |
$ | ( |
|||||||||||
(a) Includes balances relating to defined benefit plans, supplemental executive retirement plans, and other postretirement employee benefit plans.
| |||||||||||||||||
(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 recorded in the Consolidated Condensed Balance Sheets 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. During the three and nine-month periods ending September 29, 2023 and September 30, 2022, the activity was immaterial.
Restructuring
We initiated a discrete plan in the first quarter of 2023 that is expected to be completed by December 31, 2023. The nature of these activities were broadly consistent throughout our segments and consist primarily of targeted workforce reductions in response to overall macroeconomic and other external conditions. We incurred these costs to position ourselves to provide superior products and services to customers in a cost-efficient manner, while taking into consideration the impact of broad economic uncertainties. During the three and nine-month periods ended September 29, 2023, we incurred charges of $0.9 million and $29.2 million, respectively. These charges are recorded within Cost of sales and Selling, general, and administrative expenses in the Consolidated Condensed Statements of Earnings. Accrued restructuring costs were $10 million as of September 29, 2023 and are recorded within Accrued expenses and other current liabilities in the Consolidated Condensed Balance Sheets. During the third quarter, the plan was amended due to on-going macroeconomic and external conditions. As a result, we now expect to recognize approximately $60 to $65 million under this discrete plan during the year ending December 31, 2023.
12
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 (“Convertible Notes”), 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. Upon conversion of the Convertible Notes, holders were entitled to receive cash, shares of our common stock, or a combination thereof, at our election. Upon adopting 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 (“ASU 2020-06”), on January 1, 2022, we accounted for the Convertible Notes under the if-converted method in our calculation of diluted EPS, as required under the new guidance.
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.
Recently Issued Accounting Standard
The Financial Accounting Standards Board (“FASB”) establishes changes to accounting principles under GAAP in the form of accounting standards updates (“ASUs”) to the Accounting Standards Codification (“ASC”). We consider the applicability and impact of all ASUs. Any recently issued ASUs were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s result of operations, financial position or cash flows.
NOTE 2. ACQUISITIONS AND DIVESTITURES
Acquisitions
We continually evaluate potential mergers and acquisitions that align with our business portfolio strategy. 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 when the purchase price for an acquired business exceeds its identifiable assets, net of liabilities. The purchase price for acquired businesses reflect a number of factors, including the future earnings and cash flow potential of the business, the strategic fit and resulting synergies from the complementary portfolio of the acquired business to our existing operations, industry expertise, and market access.
During the three and nine month periods ended September 29, 2023, we made three acquisitions (“the Q3 2023 acquisitions”) in our Intelligent Operating Solutions segment for an aggregate cash consideration of $59.0 million, which includes an immaterial deferred payment, net of acquired cash. The Q3 2023 acquisitions accelerate our strategy and strengthen our product portfolio, providing world-class solutions to our customers. We recorded approximately $36.2 million of goodwill related to the acquisitions, which is not tax deductible, as well as $19.9 million of intangible assets, primarily consisting of customer relationships, technology, and trade names. All other acquired assets and assumed liabilities are immaterial.
The purchase price allocation is provisional and is subject to further adjustments as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required and as soon as practicable.
Divestitures
On September 30, 2022, we completed the sale of our Therapy Physics product line, which was reported in our Advanced Healthcare Solutions segment, to an unrelated third party for total consideration of $9.6 million. As a result of the sale, in the three and nine month periods ended September 30, 2022, we recorded a net realized pre-tax gain totaling $2.3 million, net of transaction costs, which is recorded within Other non-operating expense, net in the Consolidated Condensed Statements of Earnings. The divestiture of this product line did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore the divested product line is not reported as a discontinued operation.
Subsequent Event
On October 22, 2023, we entered into a definitive agreement to acquire EA Elektro-Automatik Holding GmbH, a leading supplier of high-power electronic test solutions for energy storage, mobility, hydrogen, and renewable energy applications, for a total purchase price of approximately $1.665 billion in cash. The acquisition is subject to customary closing conditions and regulatory approvals and is expected to close early in the first quarter of 2024.
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NOTE 3. GOODWILL
The following is a roll forward of our carrying value of goodwill by segment ($ in millions):
Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | Total Goodwill | ||||||||||||||||||||
Balance, December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
Attributable to acquisitions |
|||||||||||||||||||||||
Foreign currency translation and other | ( |
( |
( |
||||||||||||||||||||
Balance, September 29, 2023 | $ | $ | $ | $ |
NOTE 4. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where certain 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 | ||||||||||||||||||||
September 29, 2023 | |||||||||||||||||||||||
Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
December 31, 2022 | |||||||||||||||||||||||
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 recorded within Other long-term liabilities in the accompanying 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 and are recorded within Selling, general and administrative in the Consolidated Condensed Statements of Earnings.
Non-recurring 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 and nine-month periods ended September 29, 2023, and recorded no material impairments.
We evaluated events and circumstances that, during the three and nine month periods ended September 30, 2022, indicated the carrying value of the equity investment in a third-party entity held by our Intelligent Operating Solutions segment was no
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longer recoverable. As a result, in the three and nine month periods ended September 30, 2022, we recorded a pre-tax impairment loss of $8.1 million to write down an investment to fair value. The loss was recorded within Other non-operating expense, net in our Consolidated Condensed Statement of Earnings.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are as follows ($ in millions):
September 29, 2023 | December 31, 2022 | ||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
Current portion of long-term debt | $ | $ | $ | $ | |||||||||||||||||||
Long-term debt, net of current maturities |
As of September 29, 2023 and December 31, 2022, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.
The fair values of long-term borrowings 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 borrowing. The fair value of cash and cash equivalents, trade accounts receivable, net, trade accounts payable, and commercial paper approximates their carrying value due to the short-term maturities of these instruments.
NOTE 5. FINANCING
September 29, 2023 | December 31, 2022 | ||||||||||
U.S. dollar-denominated commercial paper | $ | $ | |||||||||
Delayed-Draw Term Loan due 2023 | |||||||||||
Euro Term Loan due 2025 | |||||||||||
Yen Term Loan due 2025 | |||||||||||
Long-term debt, principal amounts | |||||||||||
Less: aggregate unamortized debt discounts, premiums, and issuance costs | |||||||||||
Long-term debt, carrying value | |||||||||||
Less: current portion of long-term debt, carrying value |
|||||||||||
Long-term debt, net of current maturities | $ | $ |
Refer to Note 11 of our 2022 Annual Report on Form 10-K for further details of our debt financing.
Delayed-Draw Term Loan due 2023
On August 24, 2023, we repaid $250 million of the Delayed-Draw Term Loan Due 2023, which is prepayable at our option without premium or penalty. The amount repaid may not be reborrowed. The remaining principal is due on December 14, 2023.
Other Liquidity Sources
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Under these programs, we may issue unsecured promissory notes with maturities not exceeding 397 and 183 days, respectively.
Interest expense on commercial paper is paid at maturity and is generally based on our credit ratings at the time of issuance and prevailing short-term interest rates.
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The details of our outstanding Commercial Paper Programs as of September 29, 2023 were as follows ($ in millions):
Carrying value (a)
|
Annual effective rate | Weighted average maturity (in days) | |||||||||||||||
U.S. dollar-denominated commercial paper | $ | % | |||||||||||||||
(a) Net of unamortized debt discount. |
Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on October 18, 2027 (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 September 29, 2023, no borrowings were outstanding under the Revolving Credit Facility.
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, to refinance these borrowings for at least one year from the balance sheet date.
NOTE 6. SALES
We derive revenue primarily from the sale of products, including 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, services related to previously sold products, and software implementation services.
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 $108 million as of September 29, 2023 and $82 million as of December 31, 2022. Contract assets are recorded within Prepaid expenses and other current assets in our Consolidated Condensed Balance Sheets.
Contract Costs — We incur and capitalize incremental costs to obtain certain contracts, typically sales-related commissions where the amortization period is greater than one year and costs associated with assets used by our customers in certain service arrangements. As of September 29, 2023 and December 31, 2022, we had $48 million and $42 million, respectively, in net revenue-related contract costs primarily related to certain software contracts. Revenue-related contract costs are recorded within Prepaid expenses and other current assets and Other assets in our Consolidated Condensed Balance Sheets. These assets have estimated useful lives between and five years .
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to subscription-based software contracts, PCS and extended warranty sales, where we generally receive up-front payment and recognize revenue over the service or support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The current portion of deferred revenue is recorded within Accrued expenses and other current liabilities and the noncurrent portion of deferred revenue is recorded within Other long-term liabilities in our Consolidated Condensed Balance Sheets.
Our contract liabilities consisted of the following ($ in millions):
September 29, 2023 | December 31, 2022 | ||||||||||
Deferred revenue - current | $ | $ | |||||||||
Deferred revenue - noncurrent | |||||||||||
Total contract liabilities | $ | $ |
During the three and nine-month periods ended September 29, 2023, we recognized revenue related to our contract liabilities at December 31, 2022 of $80 million and $368 million, respectively. The change in our contract liabilities from December 31, 2022 to September 29, 2023 was primarily due to the timing of billings and revenue recognized for subscription-based software contracts, PCS and extended warranty services.
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The aggregate remaining performance obligations attributable to each of our segments is as follows ($ in millions):
September 29, 2023 | |||||
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 September 29, 2023 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 |
|||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
End markets:(a)
|
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Direct sales: | |||||||||||||||||||||||
Healthcare | $ | $ | $ | $ | |||||||||||||||||||
Industrial & Manufacturing | |||||||||||||||||||||||
Utilities & Power | |||||||||||||||||||||||
Government | |||||||||||||||||||||||
Communications, 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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Disaggregation of revenue for the three-month period ended September 30, 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 |
|||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
End markets:(a)
|
|||||||||||||||||||||||
Direct sales: | |||||||||||||||||||||||
Healthcare | $ | $ | $ | $ | |||||||||||||||||||
Industrial & Manufacturing | |||||||||||||||||||||||
Utilities & Power | |||||||||||||||||||||||
Government | |||||||||||||||||||||||
Communications, 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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Disaggregation of revenue for the nine-month period ended September 29, 2023 is presented as follows ($ in millions):
Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
Sales: | |||||||||||||||||||||||
Sales of products and software | $ | $ |