FORTIVE CORPORATION 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. We are headquartered inEverett, Washington and employ a team of more than 18,000 research and development, manufacturing, sales, distribution, service, and administrative employees in more than 50 countries around the world. OnOctober 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. OnJanuary 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 byGoldman 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. 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 financial statements included in our 2021 Annual Report on Form 10-K. Our MD&A is divided into five sections:
•Information Relating to Forward-Looking Statements
•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 theSecurities 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 ofthe 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, including the expected impact of trade and tariff policies; 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 of 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 they believe to be appropriate. Forward-looking statements are not guarantees of future performance and actual results may differ materially from 23
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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, among others, the following:
Risk Related to Our Business Operations
•The effect of the COVID-19 pandemic, including the corresponding government-mandated mitigation efforts, on our global operations and the operations of our customers, suppliers, and vendors is continuing to have a material, adverse impact on our business and results of operations.
•If we cannot adjust our manufacturing capacity, supply chain management or the purchases required for our manufacturing activities to reflect changes in market conditions, customer demand and supply chain or transportation disruptions, 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.
•Our financial results are subject to fluctuations in the cost and availability of commodities or components that we use in our operations.
•Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and financial statements.
•Our growth could suffer if the markets into which we sell our products 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 and services.
•Our growth depends in part on the timely development and commercialization and customer acceptance of new and enhanced products and services based on technological innovation.
•If we are unable to recruit and retain key employees, our business may be harmed.
•A significant disruption in, or breach in security of, our information technology systems could adversely affect our business.
•Defects and unanticipated use or inadequate disclosure with respect to our products (including 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 restructuring activities could have long-term adverse effects on our business.
•Work stoppages, 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.
•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 or services.
•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.
Risk Related to our International Operations
•International economic, political, legal, compliance, and business factors including, but not limited to, the impact of the invasion ofUkraine byRussia and the corresponding sanctions and supply chain disruptions, could negatively affect our financial statements. 24
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•Trade relations between
•Foreign currency exchange rates may adversely affect our financial statements.
Risk Related to Our Acquisitions, Investments, and Dispositions
•Any inability to consummate acquisitions at our anticipated rate and at appropriate prices could negatively impact our growth rate and stock price.
•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.
•Potential indemnification liabilities to Vontier pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations, and cash flows.
Risk Related to Regulatory and Compliance Matters
•Changes in industry standards and governmental regulations may reduce demand for our products or services or increase our expenses.
•Our reputation, ability to do business, and financial statements may be impaired by improper conduct by any of our employees, agents, or business partners.
•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 and financial statements.
•Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and reputation.
Risk Related to Our Tax and Accounting Matters
•Changes in our effective 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 could incur significant liability if any of our separation from Danaher, our separation of our Automation and Specialty business or our separation of Vontier (collectively, the "Separation Transactions") is determined to be a taxable transaction.
•Changes in
•We may be required to recognize impairment charges for our goodwill and other intangible assets.
Risk Related to Our Financing Activities
•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.
Risk Related to Shareholder Rights
•Certain provisions in our amended and restated certificate of incorporation and bylaws, and ofDelaware 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 theState of Delaware or, if no state court located within theState of Delaware has jurisdiction, the federal court for the District ofDelaware , 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. 25
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See "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for 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 (or such earlier date as may be specified in such statement). 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 GeneralFortive is a multinational business with global operations with approximately 49% of our sales derived from customers outside ofthe United States in 2021. As a company with global operations, 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 products, software, and services we offer, typically help limit the impact of any one industry or the economy of any single country (except forthe 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 their sales, to the extent possible, 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 includeEastern Europe , theMiddle East ,Africa ,Latin America , andAsia with the exception ofJapan andAustralia . 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, continue to reduce costs and improve operating efficiency and quality, attract relevant talent and retain, grow, and empower our talented workforce, 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.
Provation Acquisition
OnDecember 27, 2021 , we acquiredProvation 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 endedApril 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 Acquisition
OnAugust 24, 2021 , we acquiredServiceChannel 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.
Vontier Separation
OnOctober 9, 2020 , we completed 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 26
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statements reflect the results of separation activities associated with the prior Vontier business as a discontinued operation, which was immaterial for all periods presented.
OnJanuary 19, 2021 , we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Vontier common stock retained by the Company immediately following the Separation (the "Retained Vontier Shares"), for$1.1 billion in aggregate principal amount of indebtedness of the Company held byGoldman 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.
Non-GAAP Measures
In this report, references to sales from existing businesses refer to sales from operations calculated according to generally accepted accounting principles inthe 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 and the effect of purchase accounting adjustments, 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 acquisition 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 business trends and may assist in comparisons of long-term performance.
Business Performance and Outlook
Business Performance For the Period Ended
We experienced robust demand for our products and services during the three month period endedApril 1, 2022 ("the quarter" or the "first quarter"). Despite ongoing COVID-19 and supply chain challenges, year-over-year sales increased 9.3% with contributions from both existing and newly acquired businesses. Sales from existing businesses increased 5.3% during the quarter, as compared to the comparable period in 2021 reflecting broad-based momentum and focused execution across our portfolio, most notably within our short-cycle industrial and SaaS businesses. 27
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Geographically, in the first quarter, year-over-year sales from existing businesses increased in developed markets at a high single-digit rate, driven by high single-digit growth inNorth America and low single-digit growth inEurope . In our high growth markets, year-over-year sales from existing businesses decreased at a low single-digit rate, driven by a low double-digit decline inChina where business activity was constrained by government mandated COVID-19 containment measures, partially offset by high-teens growth inLatin America . Year-over-year price increases contributed 3.2% to sales growth during the quarter, as compared to the comparable period in 2021 and is reflected as a component of the change in sales from existing businesses. In the first quarter, the price increases that we deployed exceeded inflationary increases that we experienced on purchased materials. Widespread supply chain and logistics challenges persisted in the quarter, impacting the availability of key materials, including electronic components, and resulting in higher production and logistics costs. We continue to apply the Fortive Business System ("FBS") to help mitigate the impact of these challenges but demand for our products outpaced our shipments in the quarter and our backlog increased fromDecember 31, 2021 . COVID-19 continues to impact our results, creating operating challenges with logistics, material availability and absenteeism. The government mandated COVID-19 containment measures inChina directly reduced our production levels and shipments in the quarter and creates ongoing risk and uncertainty. We anticipate that the uncertainty and disruption of the pandemic on global commerce will continue into future periods. InFebruary 2022 , Russian forces invadedUkraine ("Russia Ukraine Conflict") resulting in broad economic sanctions being imposed onRussia that has further increased existing global supply chain, logistic, and inflationary challenges. As of the filing date of this report, we have temporarily suspended commercial operations inRussia , other than for sales of ASP's sterilization products, which are exempted from international sanctions and deemed to be humanitarian products. Our business inRussia andUkraine were not material to our results and accounted for less than 1% of total revenue for the fiscal year endedDecember 31, 2021 . As ofApril 1, 2022 , our net assets inRussia totaled approximately$15 million , including those net assets associated with ASP.
Outlook
We anticipate that the strong demand for our offerings experienced in the first quarter will persist throughout 2022 driven by innovation, share gains and robust end markets. Revenue growth is projected to be between 5.0% and 8.0% for the second quarter of 2022, and 9.5% and 12.0% for the full year. We anticipate growth from existing businesses will be between 2.0% and 5.0% for the second quarter of 2022 and 6.0% and 8.5% for the full year. This outlook is subject to various assumptions and risks, including but not limited to, the global supply chain and logistic challenges, magnitude of the impact of the COVID-19 pandemic on macroeconomic conditions, the Russia Ukraine Conflict, continued strength of key end markets, elective surgery rates, the availability of electronic components, our ability to convert backlog and maintain manufacturing capacity. We anticipate that supply chain and inflationary pressures will persist throughout 2022 and that although our backlog may decline compared to 2021, it may remain elevated compared to historical levels. We will continue to deployFBS to actively manage production challenges, collaborate with customers and suppliers to minimize disruptions and utilize price increases and other countermeasures to offset inflationary pressures. We are monitoring the ongoing impact of COVID-19 on the global economy and our business, including government mandated containment measures, such as the lockdown implemented recently inShanghai, China . Continued implementation or expansion of government mandated containment measures, including shutdowns in countries such asChina , could have a material adverse impact on our future results. We are also monitoring developments in international trade, monetary and fiscal policies and relations between theU.S. andChina , as well as evaluating proposed investment and taxation policy initiatives being debated inthe United States and by theOrganization for Economic Co-operation and Development ("OECD"). We continue to monitor the Russia Ukraine Conflict and the impact on our business and operations. As of the filing date of this report, we are unable to quantify the impact of these matters on our financial results. 28
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Table of Contents RESULTS OF OPERATIONS Sales Growth The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three month periods endedApril 1, 2022 as compared to the comparable periods of 2021: Components of Sales Growth % Change Three Months EndedApril 1, 2022 vs. Comparable 2021 Period Total revenue growth (GAAP) 9.3 % Existing businesses (Non-GAAP) 5.3 % Acquisitions (Non-GAAP) 5.5 % Currency exchange rates (Non-GAAP) (1.5) % Operating Profit Margins Operating profit margin was 15.4% for the first quarter, a decrease of 30 basis points as compared to 15.7% in the comparable period of 2021. Year-over-year operating profit margin comparisons were impacted by:
•Year-over-year price increases and sales volumes from existing businesses, which were partially offset by higher year-over-year freight, logistics and material costs, employee compensation, and investments in R&D, sales and marketing. - favorable 30 basis points
•The year-over-year effect of amortization from existing businesses - favorable 50 basis points
•The year-over-year net effect of acquisition-related transaction costs which were higher during the first quarter than those recognized during the comparable period in 2021 - unfavorable 10 basis points
•The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments - unfavorable 100 basis points
Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions):
Three Months Ended
April 1, 2022 April 2, 2021
Intelligent Operating Solutions $ 587.6 $ 510.9
Precision Technologies 462.4 447.4
Advanced Healthcare Solutions 326.5 300.9
Total $ 1,376.5 $ 1,259.2 INTELLIGENT OPERATING SOLUTIONS
Our Intelligent Operating Solutions segment provides leading 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 a broad and differentiated offering of instrumentation, sensors, software, and services to address these critical workflows for our customers.
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Intelligent Operating Solutions Selected Financial Data
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Sales $ 587.6 $ 510.9
Operating profit 107.0 108.1
Depreciation 9.5 6.6
Amortization 46.2 37.9
Operating profit as a % of sales 18.2 % 21.2 %
Depreciation as a % of sales 1.6 % 1.3 %
Amortization as a % of sales 7.9 % 7.4 %
Components of Sales Growth
% Change Three Months
Ended April 1, 2022 vs.
Comparable 2021 Period
Total revenue growth (GAAP) 15.0 %
Existing businesses (Non-GAAP) 8.7 %
Acquisitions (Non-GAAP) 7.7 %
Currency exchange rates (Non-GAAP) (1.4) %
Year-over-year sales of products and services from existing businesses of
Intelligent Operating Solutions increased 8.7% during the first quarter, as
compared to the comparable period of 2021. The year-over-year results were
driven by higher pricing, continued strong demand for SaaS products and related
services, gas detection instruments, and test & measurement products, as well as
improved factory throughput on gains from supply chain and logistics
countermeasures.
Geographically, during the first quarter, sales from existing businesses in
Intelligent Operating Solutions increased in developed markets by low double
digits on North America and Western Europe . Sales in high growth markets
declined by low single digits on declines in China which were impacted by
government mandated COVID-19 containment measures, partially offset by growth in
Latin America and the Middle East .
Year-over-year price increases in our Intelligent Operating Solutions segment
contributed 3.0% to sales growth during the first quarter, as compared to the
comparable period of 2021, and is reflected as a component of the change in
sales from existing businesses.
Operating profit margin decreased 300 basis points during the first quarter as compared to the comparable period of 2021. Year-over-year operating profit margin comparisons were impacted by:
•The year-over-year effect of amortization from existing businesses - favorable 90 basis points
•The year-over-year net effect of acquisition-related transaction costs, which were higher during first quarter than those recognized during the comparable period in 2021 - unfavorable 110 basis points
•Year-over-year increase in price and volumes from existing businesses were offset by higher year- over-year freight, logistics and material costs and employee compensation costs - flat
•The year-over-year effect of acquired businesses, including amortization - unfavorable 280 basis points
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PRECISION TECHNOLOGIES
Our Precision Technologies segment supplies technologies to a broad set of vertical end markets, enabling our customers to accelerate the development 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.
Precision Technologies Selected Financial Data
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Sales $ 462.4 $ 447.4
Operating profit 101.4 95.9
Depreciation 6.0 6.3
Amortization 3.6 4.3
Operating profit as a % of sales 21.9 % 21.4 %
Depreciation as a % of sales 1.3 % 1.4 %
Amortization as a % of sales 0.8 % 1.0 %
Components of Sales Growth
% Change Three Months
Ended April 1, 2022 vs.
Comparable 2021 Period
Total revenue growth (GAAP) 3.4 %
Existing businesses (Non-GAAP) 4.6 %
Acquisitions (Non-GAAP) - %
Currency exchange rates (Non-GAAP) (1.2) %
Year-over-year sales of products and services from existing businesses in
Precision Technologies increased 4.6% during the first quarter as compared to
the comparable period of 2021. The year-over-year results were driven by price
increases, market growth and share gains in key verticals and increased
shipments of energetic materials, all partially offset by reductions in sales in
China as a result of the government mandated COVID-19 containment measures.
Geographically, sales from existing businesses in our Precision Technologies
segment increased during the first quarter in developed markets, driven by
growth in North America and Europe , and slightly declined in high growth markets
where, despite growth in Latin America , the Middle East and Africa , we
experienced a large decrease in China , which was a result of government mandated
COVID-10 containment measures.
Year-over-year price increases in our Precision Technologies segment contributed
4.6% to sales growth for the first quarter, as compared to the comparable period
of 2021, and is reflected as a component of the change in sales from existing
businesses.
Operating profit margin increased 50 basis points for the first quarter as compared to the comparable period of 2021. Year-over-year operating profit margin comparisons were impacted by:
•Higher year-over-year price increases which were partially offset by higher material, freight and employee compensation costs - favorable 30 basis points
•The year-over-year effect of amortization from existing businesses - favorable 20 basis points
ADVANCED HEALTHCARE SOLUTIONS
Our Advanced Healthcare Solutions segment serves healthcare customers with
enabling products and services for critical activities that help ensure safe,
efficient, and timely healthcare. We provide broad hardware and software
portfolio offerings optimized around our end-users' most critical workflows,
including instrument and device reprocessing, instrument tracking, cell therapy
equipment design and manufacturing, biomedical test tools, radiation safety
monitoring, and asset management.
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Advanced Healthcare Solutions Financial Data
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Sales $ 326.5 $ 300.9
Operating profit 28.0 18.9
Depreciation 4.7 5.5
Amortization 46.5 35.3
Operating profit as a % of sales 8.6 % 6.3 %
Depreciation as a % of sales 1.4 % 1.8 %
Amortization as a % of sales 14.2 % 11.7 %
Components of Sales Growth
% Change Three Months Ended
April 1, 2022 vs. Comparable 2021 Period
Total revenue growth (GAAP) 8.5 %
Existing businesses (Non-GAAP) 0.6 %
Acquisitions (Non-GAAP) 10.0 %
Currency exchange rates (Non-GAAP) (2.1) %
Year-over-year sales of products and services from existing businesses of
Advanced Healthcare Solutions increased 0.6% during the first quarter, as
compared to the comparable period of 2021. The year-over-year results were
driven by higher pricing and increased demand for radiation management and
surgical instrument tracking offerings partially offset by reductions in cell
therapy equipment design and sterilization products, primarily in
Sales from existing businesses in our Advanced Healthcare Solutions segment increased low single digits during the first quarter in developed markets, driven by a mid single digit increase inNorth America , which was partially offset by a low single digit decrease inEurope . High growth markets declined by low single digits on government mandated COVID-19 containment measures inChina and declines in theMiddle East andAfrica .
Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 1.3% to sales growth during the first quarter, as compared to the comparable period of 2021, and is reflected as a component of the change in sales from existing businesses.
Operating profit margin increased 230 basis points during the three month period endedApril 1, 2022 as compared to the comparable period of 2021. Year-over-year operating profit margin comparisons were impacted by: •The year-over-year net effect of acquisition-related transaction costs which were less in the first quarter than those recognized in the comparable period in 2021 - favorable 150 basis points
•The year-over-year effect of amortization from existing businesses - favorable 90 basis points
•The year-over-year effect of acquired businesses, including amortization, and
acquisition-related fair value adjustments to inventory - favorable 30 basis
points
•Lower year-over-year sales volumes from existing businesses and higher employee
compensation costs, which were partially offset by higher year-over-year price
increases - unfavorable 40 basis points
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COST OF SALES AND GROSS PROFIT
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Sales $ 1,376.5 $ 1,259.2
Cost of sales (584.5) (547.3)
Gross profit $ 792.0 $ 711.9
Gross profit margin 57.5 % 56.5 %
The year-over-year increase in cost of sales during the first quarter, as
compared to the comparable period in 2021, is due primarily to year-over-year
increases in sales volumes from existing and newly acquired businesses, and
higher material, freight and employee compensation costs. Year-over-year changes
in currency exchange rates decreased cost of sales during the first quarter.
The year-over-year increase in gross profit and gross profit margin for the
first quarter, as compared to the comparable period in 2021, is due primarily to
higher year-over-year sales volumes and price increases, which were partially
offset by higher material, freight and employee compensation costs.
OPERATING EXPENSES
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Sales $ 1,376.5 $ 1,259.2
Selling, general and administrative ("SG&A") expenses 480.6 428.1
Research and development ("R&D") expenses 99.1 86.2
SG&A as a % of sales 34.9 % 34.0 %
R&D as a % of sales 7.2 % 6.8 %
SG&A expenses increased during the first quarter as compared to the comparable
period of 2021 due to higher intangible amortization and incremental expenses
from our recent acquisitions, increased employee compensation expenses and
customer acquisition and marketing costs.
On a year-over-year basis, SG&A expenses as a percentage of sales increased 90
basis points in the first quarter as a result of higher amortization expenses
from our recent acquisitions, partially offset by leverage on SG&A costs, which
grew at a slower rate than our sales growth.
R&D expenses (consisting principally of internal and contract engineering
personnel costs) increased during the first quarter as compared to the
comparable period of 2021 due to incremental costs from our recent acquisitions,
investments in innovation and key initiatives and higher employee compensation
costs. On a year-over-year basis, R&D expenses increased as a percentage of
sales by 40 basis points in the first quarter mainly driven by our recent
acquisitions, where R&D spending is higher as a percentage of sales than in
existing businesses.
INTEREST COSTS
For a discussion of our outstanding indebtedness, refer to Note 5 to the consolidated condensed financial statements.
Net interest expense for the three month period endedApril 1, 2022 was$19 million compared to$28 million for the three month period endedApril 2, 2021 . The year-over-year decrease in interest expense was due to lower year-over-year effective interest rates on debt instruments.
INCOME TAXES
Our effective tax rate for the quarter was 13.5% as compared to 5.9% in the comparable period in 2021 and the year-over year increase was primarily due to a non-recurring permanent difference on the Q1 2021 gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange and increases in certain federal tax benefits during the first quarter. Our effective tax rate for the first quarter and the comparable period in 2021, differ from theU.S. federal statutory rate of 21% due primarily to the positive and negative effects of the Tax Cuts and Jobs Act,U.S. federal permanent differences, the impact of credits and deductions provided by law, and a reduction in our uncertain tax positions. Specific to the three month period 33
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endedApril 1, 2021 , our effective tax rate also differs from theU.S. federal statutory rate of 21% due to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange.
COMPREHENSIVE INCOME
Comprehensive income increased by$50 million during the first quarter as compared to the comparable period in 2021 due primarily to net earnings that were higher by$55 million , partially offset by unfavorable changes in foreign currency translation adjustments of$4 million .
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 believe that our operating cash flow and other sources of liquidity, which consist of access to bank loans, commercial paper, capital markets, and our revolving credit facility will be sufficient to allow us to continue funding and investing in our existing businesses, consummate strategic acquisitions, make interest and principal payments on our outstanding indebtedness, fulfill our contractual obligations, and manage our capital structure on a short and long-term basis.
We have generally satisfied any short-term liquidity needs that are not met
through operating cash flows and available cash through issuances of commercial
paper under our
Credit support for the Commercial Paper Programs is provided by a five-year$2.0 billion senior unsecured revolving credit facility that expires onNovember 30, 2023 (the "Revolving Credit Facility") which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes. As ofApril 1, 2022 , no borrowings were outstanding under the Revolving Credit Facility. The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the existing credit ratings of the Commercial Paper Programs when we have outstanding borrowings. We expect to limit any future borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, and repay any outstanding commercial paper as it matures. We continue to monitor the financial markets and general global economic conditions. If changes in financial markets or other areas of the economy adversely affect our access to the capital markets, we would expect to rely on a combination of available cash and existing available capacity under our credit facilities to provide short-term funding. 34
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Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity for the three month
period ended
Three Months Ended
($ in millions) April 1, 2022 April 2, 2021
Total operating cash provided by continuing operations $
214.8
Cash paid for acquisitions, net of cash received $ 0.9 $ (0.2) Payments for additions to property, plant and equipment (18.8) (8.4) All other investing activities - - Total investing cash used in continuing operations $
(17.9) $ (8.6)
Payment of 0.875% convertible senior notes due 2022$ (1,156.5) $ - Net proceeds from commercial paper borrowings 930.7 - Repayment of borrowings (maturities greater than 90 days) - (611.1) Payment of common stock cash dividend to shareholders (25.1) -
Payment of mandatory convertible preferred stock cash dividend to
- (23.7)
shareholders
Repurchase of common shares (63.8) (17.3) All other financing activities (17.9) (2.8) Total financing cash used in continuing operations$ (332.6) $ (654.9) Operating Activities Operating cash flows from continuing operations can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, pension funding, and other items impact reported cash flows. Operating cash flows from continuing operations were$215 million during the first quarter, an increase of$63 million , or 41%, as compared to the comparable period of 2021. The year-over-year change in operating cash flows from continuing operations was primarily attributable to the following factors: •Year-over-year increases of$31.9 million in Operating cash flows from net earnings from continuing operations, net of non-cash expenses (Depreciation, Amortization, Stock-based compensation, Loss on extinguishment of debt and Gain on investment in Vontier Corporation) •The aggregate of accounts receivable, inventories, and trade accounts payable used$25 million of cash during the first quarter of 2022 as compared to using$44 million in the comparable period of 2021. 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 generally 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 used$63 million of cash during the first quarter of 2022 as compared to using$77 million of cash in the comparable period of 2021. The year-over-year changes were driven by reduced tax cash payments, timing on deferred revenue, partially offset by higher payments for employee compensation and benefits. Investing Activities Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures, and increased$9.3 million during the first quarter as compared to the comparable period of 2021. The increase in investing cash flows was primarily due to a year-over-year increase in capital expenditures of approximately$10 million . 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 revenue arrangements with customers. For the year endingDecember 31, 2022 , we expect capital spending to be approximately$80-100 million , although actual expenditures will ultimately depend on business conditions. 35
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Financing Activities and Indebtedness
Financing cash flows from continuing operations consist primarily of cash flows associated with the issuance of equity, the issuance and repayments of debt and commercial paper, and payments of quarterly cash dividends to shareholders.
Financing activities from continuing operations used cash of
•On
•During the first quarter, we incurred$931 million in net commercial paper borrowings under theU.S. dollar-denominated commercial paper program, which had a weighted annual effective rate of 0.91% and a weighted average remaining maturity of approximately 39 days.
•During the first quarter we repurchased 1,000,000 shares for approximately
In the comparable 2021 period, financing activities from continuing operations
used
OnJanuary 19, 2021 , we completed the non-cash 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 byGoldman Sachs & Co. 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 endedApril 1, 2021 .
Refer to Note 5 to the consolidated condensed financial statements for information regarding our financing activities and indebtedness.
Aggregate cash payments for common stock dividends paid to shareholders during the first quarter were$25 million and are recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity and the Consolidated Condensed Statement of Cash Flows.
On
Cash and Cash Requirements
As ofApril 1, 2022 , we held approximately$684 million of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less that yielded insignificant interest income during the three period endedApril 1, 2022 . Approximately 90% of the$684 million of cash and equivalents we held as ofApril 1, 2022 was held outside ofthe 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 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 and repayment of maturing debt, we may also borrow under our commercial paper programs or credit facilities or 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. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions. Foreign cumulative earnings remain subject to foreign remittance taxes. 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. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.
As of
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CRITICAL ACCOUNTING ESTIMATES
There were no material changes during the three month period ended
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