filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management on Fortive Corporation’s Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework” (2013 framework). Based on this assessment, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting is effective.
The Company completed the acquisitions of the ServiceChannel business on August 24, 2021 and Provation on December 27, 2021, collectively the “Acquired Businesses.” The Company has not yet fully incorporated the internal controls and procedures of the Acquired Businesses into the Company’s internal control over financial reporting, and as such, management excluded the Acquired Businesses from its assessment. The Company has included goodwill and other intangible assets of the Acquired Businesses in this assessment. The assets and revenues of the Acquired Businesses excluded from management’s assessment of internal controls constituted 1% of the Company’s total assets as of December 31, 2021 and 1% of the Company’s total revenues for the year ended December 31, 2021, respectively.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report dated February 28, 2022 appears on page 51 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fortive Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Fortive Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Fortive Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Report of Management on Fortive Corporation’s Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ServiceChannel and Provation, collectively the “Acquired Businesses”, which are included in the 2021 consolidated financial statements of the Company. Collectively, the Acquired Businesses constituted 1% of the Company’s total assets as of December 31, 2021 and 1% of the Company’s total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the Acquired Businesses.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Fortive Corporation and subsidiaries as of December 31, 2021 and 2020, the related consolidated statements of earnings, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Fortive Corporation’s Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Seattle, Washington
February 28, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fortive Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fortive Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of earnings, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Description of the Matter | Valuation of Goodwill The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. To estimate the fair value, management uses a market approach based on multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). In certain circumstances, management computes the estimated fair value through a discounted cash flow analysis to validate the results of the market approach. The goodwill evaluation is performed on an annual basis, or more frequently if a triggering event is identified. As described in Note 7, the Company’s goodwill balance is $9.2 billion as of December 31, 2021. Auditing the Company’s annual goodwill impairment assessment is complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units. In particular, the estimated fair value is sensitive to the significant assumptions related to the selection of market multiples and projected financial information. A high degree of audit judgment and an increased extent of effort including the need to involve our fair value specialists was required. |
| How We Addressed the Matter in Our Audit | We tested controls over management’s goodwill impairment assessment. This included controls related to management’s forecasting and selection of market multiples. To test the annual evaluation of goodwill, among other procedures, we evaluated the reasonableness of management’s forecasts, tested the completeness and accuracy of the underlying data used to develop the forecast and tested the carrying value of the reporting units. Our fair value specialists assisted us with our testing of management’s selected EBITDA multiples for the annual goodwill evaluation. We also evaluated the Company’s disclosures included in Note 7 to the consolidated financial statements in relation to these matters. | ||||
| Description of the Matter | Valuation of acquired intangible assets As described in Note 3 to the consolidated financial statements, the Company completed two acquisitions during 2021 for a total consideration of $2.6 billion. Auditing the accounting for the acquisitions was complex and highly judgmental due to the significant estimation required in determining the fair value of customer relationships, technology, database and trade names acquired (collectively, “intangible assets”), which totaled $792 million in aggregate. In particular, the estimated fair values were sensitive to significant assumptions such as the projected financial information, royalty rates and discount rates used in the valuation models, which are affected by expectations about future market and economic conditions. | ||||
| How We Addressed the Matter in Our Audit | We tested controls over the measurement of the acquired intangible assets, including management’s review of the significant assumptions mentioned above and the completeness and accuracy of the data used in the measurements. To test the estimated fair value of the intangible assets, we read the related purchase agreements, evaluated, among other things, whether (1) the valuation methodologies used were appropriate, (2) the significant assumptions, including discount rates, royalty rates, revenue growth rates, and projected free cash flow, used in valuing these intangibles were reasonable, and (3) the underlying data used by the Company in its analyses was appropriate. Specifically, when evaluating the assumptions related to the projected free cash flow, we compared the assumptions to the past performance of the acquired entities, the Company's history related to similar acquisitions, and the Company’s future plans for the acquired entities. We involved our fair value specialists to assist in our completion of our audit procedures. We also evaluated the Company’s disclosures included in Note 3 to the consolidated financial statements in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015.
Seattle, Washington
February 28, 2022
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ and shares in millions, except per share amounts)
| As of December 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 819.3 | $ | 1,824.8 | |||||||
| Accounts receivable less allowance for doubtful accounts of $39.7 million and $42.5 million, respectively | 930.2 | 810.3 | |||||||||
| Inventories | 512.7 | 455.5 | |||||||||
| Prepaid expenses and other current assets | 252.7 | 206.7 | |||||||||
| Investment in Vontier Corporation | — | 1,119.2 | |||||||||
| Current assets, discontinued operations | — | 30.4 | |||||||||
| Total current assets | 2,514.9 | 4,446.9 | |||||||||
| Property, plant and equipment, net | 395.5 | 422.0 | |||||||||
| Operating lease right-of-use assets | 175.6 | 188.7 | |||||||||
| Other assets | 337.3 | 344.1 | |||||||||
| Goodwill | 9,152.0 | 7,359.2 | |||||||||
| Other intangible assets, net | 3,890.2 | 3,290.6 | |||||||||
| Total assets | $ | 16,465.5 | $ | 16,051.5 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 2,151.7 | $ | 1,399.8 | |||||||
| Trade accounts payable | 557.9 | 480.8 | |||||||||
| Current operating lease liabilities | 44.6 | 47.0 | |||||||||
| Accrued expenses and other current liabilities | 960.7 | 899.9 | |||||||||
| Current liabilities, discontinued operations | — | 33.3 | |||||||||
| Total current liabilities | 3,714.9 | 2,860.8 | |||||||||
| Operating lease liabilities | 139.9 | 154.3 | |||||||||
| Other long-term liabilities | 1,286.4 | 1,233.4 | |||||||||
| Long-term debt | 1,807.3 | 2,830.3 | |||||||||
| Commitments and Contingencies | |||||||||||
| Equity: | |||||||||||
| Preferred stock: $0.01 par value, 15.0 million shares authorized; 5.0% Mandatory convertible preferred stock, series A, zero shares and 1.4 million shares designated, issued and outstanding at December 31, 2021 and December 31, 2020, respectively. | — | — | |||||||||
| Common stock: $0.01 par value, 2.0 billion shares authorized; 360.4 million and 339.0 million issued; 359.1 million and 337.9 million outstanding at December 31, 2021 and December 31, 2020, respectively | 3.6 | 3.4 | |||||||||
| Additional paid-in capital | 3,670.0 | 3,554.5 | |||||||||
| Retained earnings | 6,023.6 | 5,547.4 | |||||||||
| Accumulated other comprehensive loss | (185.0) | (141.1) | |||||||||
| Total Fortive stockholders’ equity | 9,512.2 | 8,964.2 | |||||||||
| Noncontrolling interests | 4.8 | 8.5 | |||||||||
| Total stockholders’ equity | 9,517.0 | 8,972.7 | |||||||||
| Total liabilities and equity | $ | 16,465.5 | $ | 16,051.5 |
See the accompanying Notes to the Consolidated Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
| Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Sales of products | $ | 4,496.1 | $ | 3,956.7 | $ | 3,922.5 | |||||||||||
| Sales of services | 758.6 | 677.7 | 641.4 | ||||||||||||||
| Total sales | 5,254.7 | 4,634.4 | 4,563.9 | ||||||||||||||
| Cost of product sales | (1,833.4) | (1,643.4) | (1,733.3) | ||||||||||||||
| Cost of service sales | (414.2) | (382.5) | (347.4) | ||||||||||||||
| Total cost of sales | (2,247.6) | (2,025.9) | (2,080.7) | ||||||||||||||
| Gross profit | 3,007.1 | 2,608.5 | 2,483.2 | ||||||||||||||
| Operating costs: | |||||||||||||||||
| Selling, general, and administrative expenses | (1,839.5) | (1,748.4) | (1,719.0) | ||||||||||||||
| Research and development expenses | (354.8) | (320.7) | (320.3) | ||||||||||||||
| Operating profit | 812.8 | 539.4 | 443.9 | ||||||||||||||
| Non-operating income (expense), net: | |||||||||||||||||
| Interest expense, net | (103.2) | (148.5) | (142.6) | ||||||||||||||
| Gain from combination of business | — | — | 40.8 | ||||||||||||||
| Loss on extinguishment of debt | (104.9) | — | — | ||||||||||||||
| Gain on litigation resolution | 29.9 | — | — | ||||||||||||||
| Gain on investment in Vontier Corporation | 57.0 | 1,119.2 | — | ||||||||||||||
| Other non-operating expenses, net | (14.1) | (2.4) | (5.4) | ||||||||||||||
| Earnings from continuing operations before income taxes | 677.5 | 1,507.7 | 336.7 | ||||||||||||||
| Income taxes | (63.3) | (55.5) | (68.6) | ||||||||||||||
| Net earnings from continuing operations | 614.2 | 1,452.2 | 268.1 | ||||||||||||||
| Earnings from discontinued operations, net of income taxes | (5.8) | 161.1 | 470.8 | ||||||||||||||
| Net earnings | 608.4 | 1,613.3 | 738.9 | ||||||||||||||
| Mandatory convertible preferred dividends | (34.5) | (69.0) | (69.0) | ||||||||||||||
| Net earnings attributable to common stockholders | $ | 573.9 | $ | 1,544.3 | $ | 669.9 | |||||||||||
| Net earnings per common share from continuing operations: | |||||||||||||||||
| Basic | $ | 1.66 | $ | 4.10 | $ | 0.59 | |||||||||||
| Diluted | $ | 1.65 | $ | 4.05 | $ | 0.59 | |||||||||||
| Net earnings per common share from discontinued operations: | |||||||||||||||||
| Basic | $ | (0.02) | $ | 0.48 | $ | 1.40 | |||||||||||
| Diluted | $ | (0.02) | $ | 0.45 | $ | 1.38 | |||||||||||
| Net earnings per common share: | |||||||||||||||||
| Basic | $ | 1.64 | $ | 4.58 | $ | 1.99 | |||||||||||
| Diluted | $ | 1.63 | $ | 4.49 | $ | 1.97 | |||||||||||
| Average common stock and common equivalent shares outstanding: | |||||||||||||||||
| Basic | 349.0 | 337.4 | 335.8 | ||||||||||||||
| Diluted | 352.3 | 359.0 | 340.0 | ||||||||||||||
| The sum of net earnings per common share amount may not add due to rounding. |
See the accompanying Notes to the Consolidated Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
| Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net earnings | $ | 608.4 | $ | 1,613.3 | $ | 738.9 | |||||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||||||||
| Foreign currency translation adjustments | (68.7) | 63.5 | 50.5 | ||||||||||||||
| Pension adjustments | 24.8 | (12.7) | (20.2) | ||||||||||||||
| Total other comprehensive income (loss), net of income taxes | (43.9) | 50.8 | 30.3 | ||||||||||||||
| Comprehensive income | $ | 564.5 | $ | 1,664.1 | $ | 769.2 |
See the accompanying Notes to the Consolidated Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
($ and shares in millions)
| Common Stock | Preferred Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2019 | 334.5 | $ | 3.4 | 1.4 | $ | — | $ | 3,126.0 | $ | 3,552.7 | $ | (86.6) | $ | 17.4 | |||||||||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 738.9 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (93.8) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred dividends | — | — | — | — | — | (69.0) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 30.3 | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 1.5 | — | — | — | 88.8 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of 0.875% senior convertible notes due 2022 | — | — | — | — | 100.4 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interests | — | — | — | — | — | — | — | (4.2) | |||||||||||||||||||||||||||||||||||||||||||||
| Net transfers to Former Parent | — | — | — | — | (4.1) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 336.0 | 3.4 | 1.4 | — | 3,311.1 | 4,128.8 | (56.3) | 13.2 | |||||||||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standards | (31.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 336.0 | 3.4 | 1.4 | — | 3,311.1 | 4,097.5 | (56.3) | 13.2 | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 1,613.3 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (94.4) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred dividends | — | — | — | — | — | (69.0) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 50.8 | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 3.0 | — | — | — | 112.9 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Vontier Separation and other | — | — | — | 130.5 | — | (135.6) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | (4.7) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 339.0 | 3.4 | 1.4 | — | 3,554.5 | 5,547.4 | (141.1) | 8.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 608.4 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (97.7) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (34.5) | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Mandatory convertible preferred stock to common stock | 19.4 | 0.2 | (1.4) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (43.9) | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.7 | — | — | — | 117.7 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Early extinguishment of 0.875% senior convertible notes due 2022 | — | — | — | — | (11.6) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Vontier Separation and other | — | — | — | — | 8.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | 0.8 | — | — | (3.7) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 359.1 | $ | 3.6 | — | $ | — | $ | 3,670.0 | $ | 6,023.6 | $ | (185.0) | $ | 4.8 |
See the accompanying Notes to the Consolidated Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
| Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net earnings from continuing operations | $ | 614.2 | $ | 1,452.2 | $ | 268.1 | |||||||||||
| Noncash items: | |||||||||||||||||
| Amortization | 320.8 | 309.9 | 261.0 | ||||||||||||||
| Depreciation | 74.7 | 74.1 | 80.5 | ||||||||||||||
| Stock-based compensation expense | 77.4 | 62.6 | 52.5 | ||||||||||||||
| Loss on extinguishment of debt | 104.2 | — | — | ||||||||||||||
| Unrealized gain on investment in Vontier Corporation | — | (1,119.2) | — | ||||||||||||||
| Gain from combination of business | — | — | (40.8) | ||||||||||||||
| Gain on sale of property | — | (5.3) | — | ||||||||||||||
| Gain on investment in Vontier Corporation | (57.0) | — | — | ||||||||||||||
| Gain on litigation resolution | (29.9) | — | — | ||||||||||||||
| Change in deferred income taxes | (41.0) | (97.6) | (8.5) | ||||||||||||||
| Change in accounts receivable, net | (84.1) | 82.4 | (204.9) | ||||||||||||||
| Change in inventories | (53.6) | (7.3) | 93.5 | ||||||||||||||
| Change in trade accounts payable | 73.4 | 18.1 | 52.4 | ||||||||||||||
| Change in prepaid expenses and other assets | (34.5) | 147.9 | (71.3) | ||||||||||||||
| Change in accrued expenses and other liabilities | 28.3 | 59.9 | 219.5 | ||||||||||||||
| Total operating cash provided by continuing operations | 992.9 | 977.7 | 702.0 | ||||||||||||||
| Total operating cash (used in) provided by discontinued operations | (31.8) | 459.0 | 569.4 | ||||||||||||||
| Net cash provided by operating activities | 961.1 | 1,436.7 | 1,271.4 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Cash paid for acquisitions, net of cash received | (2,570.1) | (40.4) | (3,939.8) | ||||||||||||||
| Payments for additions to property, plant and equipment | (50.0) | (75.7) | (74.5) | ||||||||||||||
| Proceeds from sale of property | 4.5 | 5.3 | — | ||||||||||||||
| Total investing cash used in continuing operations | (2,615.6) | (110.8) | (4,014.3) | ||||||||||||||
| Total investing cash used in discontinued operations | — | (37.6) | (40.3) | ||||||||||||||
| Net cash used in investing activities | (2,615.6) | (148.4) | (4,054.6) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Net proceeds from (repayments of) commercial paper borrowings | 364.9 | (1,141.9) | 494.8 | ||||||||||||||
| Proceeds from borrowings (maturities greater than 90 days), net of $0.3 million and $8 million of issuance costs in 2021 and 2020, respectively | 999.8 | 741.7 | 2,913.2 | ||||||||||||||
| Repayment of borrowings (maturities greater than 90 days) | (611.1) | (1,730.8) | (455.3) | ||||||||||||||
| Payment of common stock cash dividend to shareholders | (97.7) | (94.4) | (93.8) | ||||||||||||||
| Payment of mandatory convertible preferred stock cash dividend to shareholders | (34.5) | (69.0) | (69.0) | ||||||||||||||
| Net cash consideration received from Vontier Separation | — | 1,598.0 | — | ||||||||||||||
| All other financing activities | 30.6 | 20.7 | 23.2 | ||||||||||||||
| Total financing cash (used in) provided by continuing operations | 652.0 | (675.7) | 2,813.1 | ||||||||||||||
| Total financing cash used in discontinued operations | — | (20.4) | (10.2) | ||||||||||||||
| Net cash (used in) provided by financing activities | 652.0 | (696.1) | 2,802.9 | ||||||||||||||
| Effect of exchange rate changes on cash and equivalents | (3.0) | 27.4 | 7.1 | ||||||||||||||
| Net change in cash and equivalents | (1,005.5) | 619.6 | 26.8 | ||||||||||||||
| Beginning balance of cash and equivalents | $ | 1,824.8 | $ | 1,205.2 | $ | 1,178.4 | |||||||||||
| Ending balance of cash and equivalents | $ | 819.3 | $ | 1,824.8 | $ | 1,205.2 | |||||||||||
| Supplemental disclosure: | |||||||||||||||||
| Transfer of noncash net liabilities to Vontier Corporation | $ | — | $ | 147.4 | $ | — |
See the accompanying Notes to the Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW AND BASIS FOR PRESENTATION
Fortive Corporation (“Fortive,” “the Company,” “we,” “our,” “us”) 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 in Everett, 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.
Basis of Presentation
The accompanying consolidated financial statements present our historical financial position, results of operations, changes in equity and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications have been made to prior year financial information to conform to the current period presentation. Unless otherwise indicated, all amounts in the notes to the consolidated financial statements refer to continuing operations.
The financial statements include our accounts and the accounts of our subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. The consolidated financial statements also reflect the impact of noncontrolling interests. Noncontrolling interests do not have a significant impact on our consolidated results of operations; therefore, net earnings and net earnings per share attributable to noncontrolling interests are not presented separately in our Consolidated Statements of Earnings. Net earnings attributable to noncontrolling interests have been reflected in Selling, general, and administrative expenses and were insignificant in all periods presented.
Vontier Separation and Discontinued Operations
On October 9, 2020, we completed the separation of Vontier Corporation (“Vontier”), the entity we created to hold our former Industrial Technologies segment (the “Separation”). The accounting requirements for reporting the Vontier business as a discontinued operation were met when the Separation was completed. Accordingly, the consolidated financial statements reflect the results of the Vontier business as a discontinued operation for all periods presented.
On January 19, 2021, we completed an exchange (the “Debt-for-Equity Exchange”) of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400 million of the term loan outstanding under the 364-Day Term Loan Credit Agreement, dated as of March 23, 2020 (“Term Loan due March 2021”) and (ii) $683.2 million of the $1.0 billion of term loan outstanding under the Term Loan Credit Agreement, dated as of March 1, 2019 (the “Term Loan Due May 2021”).
On October 1, 2018, we completed the split-off of businesses in our automation and specialty platform (the “A&S Business”). Accordingly, the A&S Business has been reported as discontinued operations in our consolidated financial statements for all periods presented.
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. The businesses in our Intelligent Operating Solutions segment 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. Through the Advanced Healthcare Solutions segment, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates on historical experience, the current economic environment, and on various other assumptions that are believed to be reasonable under the circumstances. However, uncertainties associated with these estimates exist and actual results may differ from these estimates.
Cash and Equivalents—We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable and Allowances for Doubtful Accounts— In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amended the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including financing, trade accounts, and unbilled receivables. On January 1, 2020, we adopted ASU 2016-13 and recognized in our Consolidated Balance Sheet as of January 1, 2020 an increase in the allowance for trade accounts, unbilled, and financing receivables of $40.0 million, of which $11.5 million related to our continuing operations and was related primarily to trade accounts and unbilled receivables, with a corresponding net of tax adjustment to beginning retained earnings of $31.3 million.
After the adoption of ASU 2016-13 on January 1, 2020, we measure our allowance to reflect expected credit losses over the remaining contractual life of the asset. We pool assets with similar risk characteristics for this measurement based on attributes that may include asset type, duration, and/or credit risk rating. The future expected losses of each pool are estimated based on numerous quantitative and qualitative factors reflecting management’s estimate of collectability over the remaining contractual life of the pooled assets, including:
-
duration;
-
historical, current, and forecasted future loss experience by asset type;
-
historical, current, and forecasted delinquency and write-off trends;
-
historical, current, and forecasted economic conditions; and
-
historical, current, and forecasted credit risk.
Expected credit losses of the assets originated during the year ended December 31, 2021, as well as changes to expected losses during the same periods, are recognized in earnings for the year ended December 31, 2021.
All trade accounts and unbilled receivables are reported in the Consolidated Balance Sheet adjusted for any write-offs and net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from our unbilled and trade accounts receivable portfolios over the life of the underlying assets. Determination of the allowances requires us to exercise judgment about the severity of credit losses, which includes judgments regarding the risk profile of each underlying receivable and expectations regarding the impact of current and future economic conditions on the creditworthiness of our customers. We regularly perform detailed reviews of our portfolios to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, collateral, debt-servicing ability, payment experience, credit bureau information, and economic conditions. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. 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.
Volatility and uncertainty in overall global economic conditions and worldwide capital markets as a result of the COVID-19 pandemic may negatively impact our customers’ ability to pay and, as a result, may increase the difficulty in collecting trade accounts and unbilled receivables. We did not realize notable increases in loss rates and delinquencies during the year ended December 31, 2021, and given the nature of our portfolio of receivables, our historical experience during times of challenging economic conditions, and our forecasted future impact of COVID-19 on our customer’s ability to pay, we did not record material provisions for credit losses as a result of the COVID-19 pandemic during the year ended December 31, 2021. If the
financial condition of our customers were to deteriorate beyond our current estimates, resulting in an impairment of their ability to make payments, we would be required to write-off additional receivable balances, which would adversely impact our net earnings and financial condition.
The following is a rollforward of the aggregated allowance for credit losses related to our trade accounts receivables as of December 31, 2021 ($ in millions):
| Balance, December 31, 2020 | $ | 42.5 | |||
| Provision | 7.1 | ||||
| Write-offs | (11.2) | ||||
| FX and Other | 1.3 | ||||
| Balance, December 31, 2021 | $ | 39.7 |
The allowance for unbilled receivables was immaterial for all periods.
We do not believe that accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. We recorded $7 million, $7 million and $12 million of expense associated with doubtful accounts for the years ended December 31, 2021, 2020, and 2019, respectively.
Inventory Valuation—Inventories include the costs of material, labor, and overhead. Domestic inventories are stated at the lower of cost or net realizable value primarily using the first-in, first-out (“FIFO”) method with certain businesses applying the last-in, first-out method (“LIFO”) to value inventory. Inventories held outside the United States are stated at the lower of cost or net realizable value primarily using the FIFO method.
Property, Plant, and Equipment—Property, plant, and equipment are carried at cost. The provision for depreciation has been computed principally by the straight-line method based on the estimated useful lives of the depreciable assets as follows:
| Category | Useful Life | |||||||
| Buildings | 30 years | |||||||
| Leased assets and leasehold improvements | Amortized over the lesser of the economic life of the asset or the term of the lease | |||||||
| Machinery and equipment | 3 – 10 years |
Estimated useful lives are periodically reviewed and, when appropriate, changes to estimates are made prospectively. Amortization of finance lease assets is included in depreciation expense as a component of Selling, general, and administrative expenses in the Consolidated Statements of Earnings.
Investments—We account for investments we have significant influence over but do not have a controlling financial interest in under the equity method, which requires us to record investments at cost and subsequently adjust the investment balance each period for our share of the investee’s income or loss and dividends received from the investee. We record our interest in the net earnings of our equity method investees within Other non-operating expenses, net in the Consolidated Statements of Earnings and review our equity method investments for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable.
We account for investments that we have neither significant influence over nor a controlling financial interest in at fair value, and record any changes in fair value of these investments in net earnings.
In certain circumstances, a readily determinable fair value is not available for our investments, and we recognize those investments at cost, less any subsequent impairment, and adjust the investment balance to fair value when observable price changes in identical or similar investments occur.
Other Assets—Other assets principally include noncurrent contract assets, deferred tax assets, and other investments.
Fair Value of Financial Instruments—Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, nonqualified deferred compensation plans, obligations under trade accounts payable, and short and long-term debt. Due to their short-term nature, the carrying values for trade accounts receivable, trade accounts payable, and short-term debt approximate fair value. While outstanding, we remeasured our investment in Vontier common stock at fair value based on Vontier's closing stock price on the measurement date, with unrealized gains recorded in the Consolidated Statement of Earnings. Refer to Note 8 for the fair values of our other obligations.
Goodwill and Other Intangible Assets—Goodwill and other intangible assets result from our acquisition of existing businesses. In accordance with accounting standards related to business combinations, goodwill and indefinite-lived intangible assets are not amortized; however, certain finite-lived identifiable intangible assets, primarily customer relationships and acquired technology, are amortized over their estimated useful lives. In-process research and development (“IPR&D”) is initially capitalized at fair value and when the IPR&D project is complete, the asset is considered a finite-lived intangible asset and amortized over its estimated useful life. If an IPR&D project is abandoned, an impairment loss equal to the value of the intangible asset is recorded in the period of abandonment. We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. We also test intangible assets with indefinite lives and goodwill at least annually for impairment. Refer to Note 3 and Note 7 for additional information about our goodwill and other intangible assets.
Revenue Recognition—We derive revenue from the sale of products and services. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
Product sales include revenue from the sale of products and equipment, which includes our software and software as a service (“SaaS”) product offerings and equipment rentals.
Service sales include revenues from extended warranties, post-contract customer support, maintenance contracts or services, contract labor to perform ongoing service at a customer location, and services related to previously sold products.
For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customer’s financial condition, collateral, debt-servicing ability, past payment experience, and credit bureau information.
Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract. These allowances and rebates are reflected as a reduction in the contract transaction price. Significant judgment is exercised in determining product returns, customer allowances, and rebates, and are estimated based on historical experience and known trends.
Most of our sales contracts contain standard terms and conditions. We evaluate contracts to identify distinct goods and services promised in the contract (performance obligations). Sometimes this evaluation involves judgment to determine whether the goods or services are highly dependent on or highly interrelated with one another, or whether such goods or services significantly modify or customize one another. Certain customer arrangements include multiple performance obligations, typically hardware, installation, training, consulting, other services, and/or post-contract customer support (“PCS”). Generally, these elements are delivered within the same reporting period, except PCS and other services. We allocate the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation sometimes requires significant judgment.
Revenue from sales of hardware is recognized when control transfers to the customer, which is generally when the product is shipped. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation, other services noted above, or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Further, revenue related to separately priced extended warranty and product maintenance agreements is deferred when appropriate and recognized as revenue over the term of the agreement.
Shipping and Handling—Shipping and handling costs are included as a component of Cost of sales in the Consolidated Statements of Earnings. Revenue derived from shipping and handling costs billed to customers is included in Sales of products in the Consolidated Statements of Earnings.
Advertising—Advertising costs are expensed as incurred.
Research and Development—We conduct research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use, and reliability of our existing products, and expanding the applications for which uses of our products are appropriate. Research and development costs are expensed as incurred.
Restructuring—We periodically initiate restructuring activities to appropriately position our cost base relative to prevailing economic conditions and associated customer demand, as well as in connection with certain acquisitions. Costs associated with restructuring actions can include one-time termination benefits and related charges, in addition to facility closure, contract termination, and other related activities. We record the cost of the restructuring activities when the associated liability is incurred. Refer to Note 15 for additional information.
Foreign Currency Translation and Transactions—Exchange rate adjustments resulting from foreign currency transactions are recognized in Net earnings, whereas effects resulting from the translation of financial statements are reflected as a component of Accumulated other comprehensive loss within Stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates and income statement accounts are translated at weighted average exchange rates. Net foreign currency transaction gains or losses were not material in any of the years presented.
Accounting for Stock-Based Compensation—We account for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), based on the fair value of the award as of the grant date. Equity-based compensation expense is recognized net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award. For awards subject to graded vesting, compensation expense is recognized separately over each vesting tranche of the award, resulting in an accelerated expense recognition pattern. Refer to Note 17 for additional information.
Income Taxes—In accordance with GAAP, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected on our Consolidated Statements of Earnings. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Consolidated Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we establish a valuation allowance.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in evaluating tax positions and determining income tax provisions. We reevaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense. Refer to Note 14 for additional information.
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. While outstanding, we designated our Euro-denominated commercial paper and ¥13.8 billion senior unsecured term facility loan as net investment hedges of our investment in certain foreign operations. Accordingly, foreign currency transaction gains or losses on the debt were 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. We exited our Euro-denominated commercial paper positions during the second quarter of 2020 and repaid our ¥13.8 billion senior unsecured term facility loan during the fourth
quarter of 2020.We did not designate any net investment hedges during the year ended December 31, 2021. In 2020 and 2019 we recognized gains of $1.9 million and $5.7 million, respectively, in Other comprehensive income (loss) related to the net investment hedges. We recorded no ineffectiveness from our net investment hedges during the years ended December 31, 2020 and 2019. Any amounts deferred in AOCI will remain until the hedged investment is sold or substantially liquidated. As of December 31, 2021, we had no designated net investment hedges.
The changes in AOCI by component are summarized below ($ in millions):
| Foreign currency translation adjustments | Pension & post- retirement plan benefit adjustments (b) | Total | |||||||||||||||
| Balance, January 1, 2019 | $ | (29.3) | $ | (57.3) | $ | (86.6) | |||||||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||
| Increase (decrease) | 50.5 | (29.8) | 20.7 | ||||||||||||||
| Income tax impact | 7.3 | 7.3 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | 50.5 | (22.5) | 28.0 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase | 3.1 | (a) | 3.1 | ||||||||||||||
| Income tax impact | (0.8) | (0.8) | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes: | — | 2.3 | 2.3 | ||||||||||||||
| Net current period other comprehensive income (loss): | 50.5 | (20.2) | 30.3 | ||||||||||||||
| Balance, December 31, 2019 | $ | 21.2 | $ | (77.5) | $ | (56.3) | |||||||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||
| Increase (decrease) | 63.5 | (20.7) | 42.8 | ||||||||||||||
| Income tax impact | — | 4.3 | 4.3 | ||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | 63.5 | (16.4) | 47.1 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase | — | 4.7 | (a) | 4.7 | |||||||||||||
| Income tax impact | — | (1.0) | (1.0) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 3.7 | 3.7 | ||||||||||||||
| Net current period other comprehensive income (loss) | 63.5 | (12.7) | 50.8 | ||||||||||||||
| Vontier Separation | (138.7) | 3.1 | (135.6) | ||||||||||||||
| Balance, December 31, 2020 | $ | (54.0) | $ | (87.1) | $ | (141.1) | |||||||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||
| Increase (decrease) | (68.7) | 27.7 | (41.0) | ||||||||||||||
| Income tax impact | — | (6.2) | (6.2) | ||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | (68.7) | 21.5 | (47.2) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase | — | 4.3 | (a) | 4.3 | |||||||||||||
| Income tax impact | — | (1.0) | (1.0) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 3.3 | 3.3 | ||||||||||||||
| Net current period other comprehensive income (loss) | (68.7) | 24.8 | (43.9) | ||||||||||||||
| Balance, December 31, 2021 | $ | (122.7) | $ | (62.3) | $ | (185.0) | |||||||||||
| (a) This component of AOCI is included in the computation of net periodic pension cost (refer to Note 12) and also includes activity related to the Vontier business prior to the cumulative Vontier Separation adjustment shown above. | |||||||||||||||||
| (b) Includes balances relating to defined benefit plans, supplemental executive retirement plans, and other postretirement employee benefit plans. |
Pension—We measure our pension assets and obligations to determine the funded status as of December 31st each year, and recognize an asset for an overfunded status or a liability for an underfunded status in our Consolidated Balance Sheets. Changes in the funded status of the pension plans are recognized in the year in which the changes occur and are reported in Other comprehensive income (loss). Refer to Note 12 for additional information on our pension plans including a discussion of
actuarial assumptions, our policy for recognizing associated gains and losses, and the method used to estimate service and interest cost components.
We report all components of net periodic pension costs, with the exception of service costs, in other non-operating expenses as a component of non-operating income in the accompanying Consolidated Statements of Earnings. Service costs are reported in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Earnings according to the classification of the participant’s compensation.
New Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which amends the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. This standard was effective for us beginning January 1, 2022 and impacts the accounting treatment of our Convertible Notes. Upon adoption of the standard using a modified retrospective approach, we expect to record an adjustment to reclassify the remaining value of the conversion feature that was originally recognized as equity to debt, and adjust beginning retained earnings for the amount previously recognized as noncash interest expense. We do not expect this standard to have material impacts on our consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, rather than at fair value as previously required under Topic 805. Fortive elected to early adopt ASU No. 2021-08 in the fourth quarter of 2021 and the amendments have been applied to all business combinations that occurred on or after January 1, 2021. Accordingly, during the fourth quarter of 2021, we adjusted the deferred revenue balance recognized in the opening balance sheet for ServiceChannel in accordance with the amendments, resulting in a $1.5 million increase in revenue recognized during the year ended December 31, 2021. Further, we have applied these amendments to our initial recognition of the contract assets and contract liabilities assumed in the Provation acquisition, discussed in Note 3.
NOTE 3. ACQUISITIONS
We continually evaluate potential mergers, acquisitions, and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive areas. We have completed a number of acquisitions that have been accounted for as purchases of businesses and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors including the complimentary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complimentary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings, or cash flows), and the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses.
We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact of certain acquisitions. The determination of the fair value of the acquired intangible assets involves judgment and is sensitive to significant assumptions, including projected financial information, royalty rates and discount rates used in the valuation models, and are affected by uncertainties about future market and economic conditions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
The following describes our acquisition activity for the years ended December 31, 2021, 2020, and 2019.
Provation
On December 27, 2021, we acquired Provation Software, Inc. (“Provation”), a leading provider of clinical workflow software solutions used in hospitals and ambulatory surgery centers. The acquisition of Provation extends our digital offering and software capabilities in the healthcare space. The total consideration paid was approximately $1.4 billion, net of acquired cash and was primarily financed with proceeds from our financing activities and available cash. We preliminarily recorded $970 million of goodwill related to the acquisition, which is not tax deductible. Provation had revenue in 2020 of approximately $90 million and is an operating company within our Advanced Healthcare Solutions segment.
ServiceChannel
On August 24, 2021, we acquired ServiceChannel Holdings, Inc. (“ServiceChannel”), a privately held, global provider of 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 includes 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 ServiceChannel acquisition, which is not tax deductible. ServiceChannel had revenue in 2020 of approximately $70 million and is an operating company within our Intelligent Operating Solutions segment.
Revenue and operating loss attributable to these acquisitions were $46.4 million and $60.9 million for the year ended December 31, 2021, respectively. The operating loss includes $12.0 million of intangible asset amortization and $47.9 million of transaction and integration costs, primary comprised of compensation cost for employee retention and amounts paid to third party advisors, which are recorded in Selling, general and administration expenses.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed from acquisitions discussed above as of December 31, 2021 ($ in millions):
| Provation | ServiceChannel | Total | |||||||||||||||||||||
| Accounts receivable | $ | 39.6 | $ | 10.0 | $ | 49.6 | |||||||||||||||||
| Goodwill | 969.6 | 873.4 | 1,843.0 | ||||||||||||||||||||
| Other intangible assets, primarily customer relationships, technology, database, and trade names | 586.5 | 342.9 | 929.4 | ||||||||||||||||||||
| Deferred revenue, current | (50.2) | (1.7) | (51.9) | ||||||||||||||||||||
| Deferred tax liabilities | (119.4) | (50.8) | (170.2) | ||||||||||||||||||||
| Other assets and liabilities, net | (20.5) | (7.1) | (27.6) | ||||||||||||||||||||
| Net cash consideration | $ | 1,405.6 | $ | 1,166.7 | $ | 2,572.3 |
Advanced Sterilization Products
On April 1, 2019 (the “Principal Closing Date”), we acquired the advanced sterilization products business (“ASP”) of Johnson & Johnson, a New Jersey corporation (“Johnson & Johnson”) for an aggregate purchase price of $2.7 billion (the “Transaction”), subject to certain post-closing adjustments set forth in a Stock and Asset Purchase Agreement, dated effective as of June 6, 2018 (the “Purchase Agreement”), between the Company and Ethicon, Inc., a New Jersey corporation (“Ethicon”) and a wholly owned subsidiary of Johnson & Johnson. ASP engages in the research, development, manufacture, marketing, distribution, and sale of low-temperature terminal sterilization and high-level disinfection products. ASP generated annual revenues of approximately $800 million in 2018.
On the Principal Closing Date, we paid $2.7 billion in cash and obtained the transferred assets and assumed liabilities in 20 countries (“Principal Countries”), general patent and trademark assignments, and all transferred equity interests in ASP. ASP has operations in an additional 39 countries (“Non-Principal Countries”). The transferred assets and liabilities associated with these operations closed when requirements of country-specific agreements or regulatory approvals were satisfied.
The $2.7 billion purchase price was paid in exchange for ASP’s businesses in both Principal and Non-Principal Countries. As of December 31, 2021 we have closed all Principal Countries and Non-Principal Countries. All of the provisional goodwill associated with the Transaction is included in goodwill in our Advanced Healthcare Solutions segment at December 31, 2021, and the majority of the provisional goodwill is tax deductible.
In addition, the Company entered into a transition services agreement with Johnson & Johnson for certain administrative and operational services (“TSA”) with Principal Countries and distribution agreements in the Non-Principal Countries. Under the distribution agreements, ASP sells finished goods to Ethicon at prices agreed by the parties. ASP recognizes these sales as revenue when the conditions for revenue recognition are met. Following the sale of finished goods by ASP, Ethicon obtains title of the finished goods, has full authority to sell and market the finished goods to end customers as it sees fit, and retains any revenue and profit from sale. As of December 31, 2021, ASP had exited the TSAs and substantially all of the distribution agreements.
Prior to our acquisition of ASP, Johnson & Johnson received a Civil Investigative Demand from the United States Department of Justice (“DOJ”) regarding a False Claims Act investigation arising from a whistleblower lawsuit pertaining to the pricing, quality, marketing, and promotion of certain of ASP’s products. Based on the totality of available information at the Principal Closing Date and throughout the applicable measurement period, management allocated $26 million of the $2.7 billion purchase price to a potential liability related to the aforementioned litigation. Following the Principal Closing Date, management continually evaluated the likelihood and magnitude of the asserted claims based on any new information that became available. In the second quarter of 2021, following the unsealing of the whistleblower lawsuit and DOJ’s declination to intervene in the litigation, the plaintiff dismissed the whistleblower lawsuit. Based on these developments, management derecognized the litigation liability from our Consolidated Balance Sheet and recorded a Gain on litigation resolution of $26 million within Non-operating income (expense), net in our Consolidated Statements of Earnings during the year ended December 31, 2021.
Operating loss includes amortization of intangible assets, acquisition-related fair value adjustments, and post-close transaction and integration costs associated with the Transaction of $230 million during the year ended December 31, 2019. We incurred approximately $11 million, $70 million, and $86 million of pretax transaction and integration costs related to the ASP Transaction for the years ended December 31, 2021, 2020, and 2019, respectively. These costs are recorded in Selling, general, and administrative expenses and were primarily for banking fees, legal fees, and amounts paid to other third party advisors.
The following table summarizes the combined final fair values and provisional fair value estimates of the assets acquired and liabilities assumed of Principal and Non-Principal Countries that have been transferred to ASP as of December 31, 2021; we did not acquire accounts receivable or accounts payable from Johnson & Johnson ($ in millions):
| Advanced Sterilization Products | |||||
| Inventories | $ | 211.1 | |||
| Property, plant and equipment | 51.7 | ||||
| Goodwill | 1,450.2 | ||||
| Other intangible assets, primarily customer relationships, trade names and technology | 1,123.5 | ||||
| Other assets and liabilities, net | (94.5) | ||||
| Net cash consideration | $ | 2,742.0 |
Completed Acquisitions in 2019
In addition to the acquisition of ASP, during 2019, we acquired Intelex Technologies and Pruftechnik, both of which complement existing businesses in our Intelligent Operation Solutions segment, and Censis Technologies (“Censis”) within our Advanced Healthcare Solutions segment, for total consideration of $1.2 billion in cash, net of cash acquired. We recorded an aggregate of $781 million of goodwill related to these acquisitions. Approximately $21 million of goodwill associated with these acquisitions is tax deductible.
At the closing date of the purchase of Censis Technologies, a contractual liability existed which management allocated to the purchase price and was recorded in our Consolidated Balance Sheet. During the fourth quarter of 2021, that liability was discharged for an amount less than the amount allocated, and the excess was recorded as a Gain on litigation resolution of $3.9 million within Non-operating income (expense), net in our Consolidated Statements of Earnings during the year ended December 31, 2021.
The aggregate annual sales of these businesses in 2018 were approximately $191 million. We incurred approximately $17 million of pretax transaction-related costs recorded in Selling, general, and administrative expenses for the year ended December 31, 2019, which were primarily for banking fees, legal fees, and amounts paid to other third-party advisers. The revenue and operating loss from these acquisitions included in our results were approximately $76 million and $53 million, respectively, during the year ended December 31, 2019.
Acquisitions Summary
The following summarizes the estimated fair values of the assets acquired and liabilities assumed for all acquisitions consummated during the years ended December 31. Balances presented for 2020 and 2019 reflect final measurement period adjustments ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Accounts receivable | $ | 49.8 | $ | 0.1 | $ | 44.1 | |||||||||||
| Inventories | $ | 11.5 | 26.9 | 186.9 | |||||||||||||
| Property, plant and equipment | $ | 5.2 | 5.0 | 54.3 | |||||||||||||
| Goodwill | $ | 1,840.8 | 30.9 | 2,220.3 | |||||||||||||
| Other intangible assets, primarily customer relationships, trade names and technology | $ | 929.4 | 9.5 | 1,659.5 | |||||||||||||
| Prepaid acquisition asset related to ASP Non-Principal Countries | $ | — | — | 34.7 | |||||||||||||
| Trade accounts payable | $ | (10.4) | (1.1) | (7.5) | |||||||||||||
| Other assets and liabilities, net | $ | (256.2) | (41.8) | (287.3) | |||||||||||||
| Net cash consideration | $ | 2,570.1 | $ | 29.5 | $ | 3,905.0 |
NOTE 4. DISCONTINUED OPERATIONS AND DISPOSITIONS
Vontier Separation
On October 9, 2020, we completed the Vontier Separation, by distributing 80.1% of the outstanding shares of Vontier to Fortive stockholders on a pro rata basis. To effect the Separation, we distributed to our stockholders two shares of Vontier common stock for every five shares of our common stock outstanding held on September 25, 2020, the record date for the distribution. We retained 19.9% of the shares of Vontier common stock immediately following the Separation (the “Retained Vontier Shares”).
On September 29, 2020, Vontier entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks, consisting of a three-year, $800 million senior unsecured delayed draw term loan facility (the “Three-Year Term Loans”), a two-year, $1 billion senior unsecured delayed draw term loan facility (the “Two-Year Term Loans” and together with the Three-Year Term Loans, the “Term Loans”) and a three-year, $750 million senior unsecured multi-currency revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loans, the “Credit Facilities”). On the Distribution Date, Vontier drew down the full $1.8 billion available under the Term Loans. Vontier used the proceeds from the Term Loans to make payments to the Company, with $1.6 billion used as part of the consideration for the contribution of certain assets and liabilities to Vontier by the Company in connection with the Separation and $202 million used as an adjustment for excess cash balances remaining with Vontier (collectively, the “Cash Consideration”). We applied the Cash Consideration to repay certain outstanding indebtedness, interest on certain debt instruments, and to pay certain of the Company’s regular, quarterly cash dividends. Refer to Note 11 for the description of the debt repayments made subsequent to the Distribution Date. Interest expense and extinguishment costs related to the debt retired during the fourth quarter of 2020 using the Cash Consideration was allocated to discontinued operations for all periods presented.
The accounting requirements for reporting the Vontier business as a discontinued operation were met when the Vontier Separation was completed. Accordingly, the consolidated financial statements reflect the results of the Vontier business as a discontinued operation for all periods presented.
On January 19, 2021, we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400.0 million of the Term Loan due March 2021 and (ii) $683.2 million of the Term Loan due May 2021. We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the year ended December 31, 2021.
In preparation for and executing the Separation, the Company incurred $84 million and $35 million in Vontier stand-up and separation-related transaction costs during the years ended December 31, 2020 and 2019, respectively, which were recorded in the Selling, general, and administrative expenses component of Earnings from discontinued operations, net of income taxes in the Consolidated Statements of Earnings. These stand-up and separation-related costs primarily relate to professional fees associated with preparation of regulatory filings and transaction execution and separation activities within finance, tax, legal, and information system functions.
Vontier Impairment Charge
As a result of the 2020 interim impairment testing performed, we concluded that the estimated fair value of the Telematics reporting unit was less than its carrying value as of March 27, 2020, and recorded a noncash goodwill impairment charge of $85.3 million during the three month period ended March 27, 2020. The Telematics reporting unit was included in our former Industrial Technologies segment and part of the Vontier Separation. Accordingly, the impairment charge is recorded in Earnings from discontinued operations, net of income taxes in the Consolidated Statement of Earnings.
Divestiture of A&S Business
On October 1, 2018, we completed the separation of our A&S Business. The accounting requirements for reporting the disposition of the A&S Business as a discontinued operation were met when the separation and merger were completed. Accordingly, the consolidated financial statements for all periods presented reflect this business as discontinued operations.
The key components of income from discontinued operations for the years ended December 31 were as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Sales | $ | — | $ | 1,963.4 | $ | 2,778.2 | |||||||||||
| Cost of sales | — | (1,107.3) | (1,587.5) | ||||||||||||||
| Selling, general, and administrative expenses | (4.5) | (455.3) | (494.4) | ||||||||||||||
| Research and development expenses | — | (98.6) | (136.4) | ||||||||||||||
| Goodwill impairment | — | (85.3) | — | ||||||||||||||
| Gain (loss) on disposition of discontinued operations before income taxes | — | — | (2.1) | ||||||||||||||
| Interest expense and other | 0.1 | (31.0) | (22.2) | ||||||||||||||
| Earnings (loss) before income taxes | (4.4) | 185.9 | 535.6 | ||||||||||||||
| Income taxes | (1.4) | (24.8) | (64.8) | ||||||||||||||
| Earnings from discontinued operations, net of income taxes | $ | (5.8) | $ | 161.1 | $ | 470.8 |
The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company’s Consolidated Balance Sheets as of December 31 ($ in millions):
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Accounts receivable, net | $ | — | $ | — | |||||||
| Inventories | — | — | |||||||||
| Other current assets | — | 30.4 | |||||||||
| Total current assets, discontinued operations | — | 30.4 | |||||||||
| Property, plant and equipment, net | — | — | |||||||||
| Goodwill | — | — | |||||||||
| Other intangible assets, net | — | — | |||||||||
| Other non-current assets | — | — | |||||||||
| Total other assets, discontinued operations | — | — | |||||||||
| Total assets, discontinued operations | $ | — | $ | 30.4 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | — | $ | — | |||||||
| Accrued expenses and other current liabilities | — | (33.3) | |||||||||
| Total current liabilities, discontinued operations | — | (33.3) | |||||||||
| Other long-term liabilities | — | — | |||||||||
| Total liabilities, discontinued operations | $ | — | $ | (33.3) |
Combination of the Tektronix Video Business with Telestream
On July 20, 2019, we completed the combination of the Tektronix Video test and monitoring equipment business (“Tektronix Video Business”) with Telestream, LLC (the “Combined Business”), a portfolio company of Genstar Capital LLC. We recognized a pretax gain of $41 million upon the combination, and hold a 33% equity stake in the Combined Business. This transaction did not meet the criteria for discontinued operations reporting, and therefore the operating results of the Tektronix Video Business prior to the combination with Telestream are included in continuing operations for all periods presented. At December 31, 2021 and December 31, 2020, the carrying amount of the investment in the Combined Business included in other assets in the Consolidated Balance Sheets was $66 million and $77 million, respectively. For the years ended December 31, 2021 and December 31, 2020, the loss from our equity investment in the Combined Business recorded in Other non-operating expenses, net in the Consolidated Statements of Earnings was $11 million and $4 million, respectively.
NOTE 5. INVENTORIES
The classes of inventory as of December 31 are summarized as follows ($ in millions):
| 2021 | 2020 | ||||||||||
| Finished goods | $ | 215.4 | $ | 227.9 | |||||||
| Work in process | 94.0 | 75.2 | |||||||||
| Raw materials | 203.3 | 152.4 | |||||||||
| Total | $ | 512.7 | $ | 455.5 |
As of December 31, 2021 and 2020, the difference between inventories valued at LIFO and the value of that same inventory if the FIFO method had been used was not significant. The liquidation of LIFO inventory did not have a significant impact on our results of operations in any period presented.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The classes of property, plant and equipment as of December 31 are summarized as follows ($ in millions):
| 2021 | 2020 | ||||||||||
| Land and improvements | $ | 54.9 | $ | 57.1 | |||||||
| Buildings and leasehold improvements | 312.9 | 321.6 | |||||||||
| Machinery and equipment | 706.7 | 717.8 | |||||||||
| Gross property, plant and equipment | 1,074.5 | 1,096.5 | |||||||||
| Less: accumulated depreciation | (679.0) | (674.5) | |||||||||
| Property, plant and equipment, net | $ | 395.5 | $ | 422.0 |
No interest was capitalized related to capitalized expenditures in any period.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 3, goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired, less assumed liabilities. We assess the goodwill of each of our reporting units for impairment at least annually as of the first day of the fourth quarter and as “triggering” events occur that indicate that it is more likely than not that an impairment exists. We elected to bypass the optional qualitative goodwill assessment allowed by applicable accounting standards and performed a quantitative impairment test for all reporting units as this was determined to be the most effective method to assess impairment across a large spectrum of reporting units.
We estimate the fair value of our reporting units primarily using a market approach, based on multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) determined by current trading market multiples of earnings for companies operating in businesses similar to each of our reporting units, in addition to recent market available sale transactions of comparable businesses. In certain circumstances we also evaluate other factors including results of the estimated fair value utilizing a discounted cash flow analysis (i.e., an income approach), market positions of the businesses, comparability of market sales transactions, and financial and operating performance in order to validate the results of the market approach. If the estimated fair value of the reporting unit is less than its carrying value, we will impair the goodwill for the amount of the carrying value in excess of the fair value.
In 2021, we had five continuing operations reporting units for goodwill impairment testing. As of the date of the 2021 annual impairment test, the carrying value of goodwill in each reporting unit ranged from $171.3 million to approximately $3.3 billion. No goodwill impairment charges were recorded for continuing operations for the years ended December 31, 2021, 2020, and 2019, and no “triggering” events have occurred subsequent to the performance of the 2021 annual impairment test. The factors used by management in its impairment analysis are inherently subject to uncertainty. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings. Refer to Note 4 for information on goodwill impairment charges for discontinued operations.
The following is a rollforward of our goodwill by segment ($ in millions):
| Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | Total | |||||||||||||||||||||||
| Balance, January 1, 2020 | $ | 3,208.9 | $ | 1,842.9 | $ | 2,189.7 | $ | 7,241.5 | ||||||||||||||||||
| Measurement period adjustments for 2019 acquisitions | 14.8 | — | 20.1 | 34.9 | ||||||||||||||||||||||
| Attributable to 2020 acquisitions | 21.0 | — | 9.9 | 30.9 | ||||||||||||||||||||||
| Foreign currency translation and other | 24.1 | 25.0 | 2.8 | 51.9 | ||||||||||||||||||||||
| Balance, December 31, 2020 | 3,268.8 | 1,867.9 | 2,222.5 | 7,359.2 | ||||||||||||||||||||||
| Measurement period adjustments for 2020 acquisitions | 0.4 | — | (2.7) | (2.3) | ||||||||||||||||||||||
| Attributable to 2021 acquisitions | 873.4 | — | 969.6 | 1,843.0 | ||||||||||||||||||||||
| Foreign currency translation and other | (16.6) | (27.9) | (3.4) | (47.9) | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 4,126.0 | $ | 1,840.0 | $ | 3,186.0 | $ | 9,152.0 |
Finite-lived intangible assets are amortized over the shorter of their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible asset as of December 31 ($ in millions):
| 2021 | 2020 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Finite-lived intangibles: | |||||||||||||||||||||||
| Patents and technology | $ | 1,130.0 | $ | (475.8) | $ | 983.3 | $ | (401.1) | |||||||||||||||
| Customer relationships and other intangibles | 3,571.9 | (1,064.4) | 2,958.3 | (896.8) | |||||||||||||||||||
| Trademarks and trade names | 110.5 | (4.2) | 18.0 | (1.4) | |||||||||||||||||||
| Total finite-lived intangibles | 4,812.4 | (1,544.4) | 3,959.6 | (1,299.3) | |||||||||||||||||||
| Indefinite-lived intangibles: | |||||||||||||||||||||||
| Trademarks and trade names | 622.2 | — | 630.3 | — | |||||||||||||||||||
| Total intangibles | $ | 5,434.6 | $ | (1,544.4) | $ | 4,589.9 | $ | (1,299.3) |
During 2021 we acquired finite-lived intangible assets, consisting primarily of customer relationships, trade names and technology, with a weighted average life of 16 years. During 2020, we acquired finite-lived intangible assets, consisting primarily of customer relationships and developed technology, with a weighted average life of 11 years. Refer to Note 3 for additional information on the intangible assets acquired.
Total intangible amortization expense in 2021, 2020, and 2019 was $321 million, $310 million and $261 million, respectively. Based on the intangible assets recorded as of December 31, 2021, amortization expense is estimated to be $381 million during 2022, $369 million during 2023, $367 million during 2024, $364 million during 2025, and $362 million during 2026.
NOTE 8. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value for assets and liabilities required to be carried at fair value, and provide for certain disclosures related to the valuation methods used within the valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
-
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
-
Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
-
Level 3 inputs are unobservable inputs based on our assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial assets and liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
| Quoted Prices in Active Market (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Deferred compensation liabilities | — | 36.0 | — | 36.0 | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Investment in Vontier | $ | 1,119.2 | $ | — | $ | — | $ | 1,119.2 | |||||||||||||||
| Deferred compensation liabilities | $ | — | $ | 34.8 | $ | — | $ | 34.8 |
On October 9, 2020, we completed the Vontier separation and retained 19.9% of the shares of Vontier common stock immediately following the Separation. We did not retain a controlling interest in Vontier and therefore the fair value of our retained shares and subsequent fair value changes are included in our assets of and results from continuing operations, respectively. At December 31, 2020, our investment in Vontier common stock was remeasured at fair value based on Vontier’s closing stock price, with unrealized gains of $1.1 billion recorded in the Consolidated Statement of Earnings.
On January 19, 2021, we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400 million of the 2021 Term Loan and (ii) $683.2 million of the 2020 Delayed-Draw Term Loan. During the first quarter of 2021 we recognized a gain of $57.0 million related to the subsequent change in the fair value of the Retained Vontier Shares.
Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and other post-retirement benefits accruals included in Other long-term liabilities in the accompanying Consolidated Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (“401(k) Programs”) (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
Fair Value of Other Financial Instruments
The carrying amounts and fair values of financial instruments as of December 31 were as follows ($ in millions):
| 2021 | 2020 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Current portion of long-term debt | $ | 2,151.7 | $ | 2,158.3 | $ | 1,399.8 | $ | 1,400.0 | |||||||||||||||
| Long-term debt, net of current maturities | 1,807.3 | 1,978.9 | 2,830.3 | 3,155.5 |
As of December 31, 2021 and December 31, 2020, long-term borrowings were categorized as Level 1.
The fair value of the current portion of long-term debt and long-term debt were based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing. The fair value of cash and equivalents, accounts receivable, net, and trade accounts payable approximates their carrying amount due to the short-term maturities of these instruments.
Refer to Note 12 for information related to the fair value of the Company-sponsored defined benefit pension plan assets.
NOTE 9. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of December 31 were as follows ($ in millions):
| 2021 | 2020 | ||||||||||||||||||||||
| Current | Long-term | Current | Long-term | ||||||||||||||||||||
| Compensation and other post-retirement benefits | $ | 253.2 | $ | 58.2 | $ | 262.1 | $ | 66.6 | |||||||||||||||
| Claims, including self-insurance and litigation | 5.6 | 13.9 | 13.8 | 14.3 | |||||||||||||||||||
| Pension obligations | 4.5 | 133.9 | 4.5 | 167.1 | |||||||||||||||||||
| Taxes, income and other | 53.0 | 1,011.2 | 65.5 | 887.0 | |||||||||||||||||||
| Deferred revenue | 457.6 | 33.8 | 376.4 | 34.2 | |||||||||||||||||||
| Sales and product allowances | 21.6 | — | 20.2 | — | |||||||||||||||||||
| Warranty | 23.0 | 2.2 | 22.9 | 2.0 | |||||||||||||||||||
| Other | 142.2 | 33.2 | 134.5 | 62.2 | |||||||||||||||||||
| Total | $ | 960.7 | $ | 1,286.4 | $ | 899.9 | $ | 1,233.4 |
Warranty
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and, in certain instances, estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of our accrued warranty liability ($ in millions):
| Balance, January 1, 2020 | $ | 21.6 | |||
| Accruals for warranties issued during the year | 13.9 | ||||
| Settlements made | (11.5) | ||||
| Additions due to acquisitions | 1.2 | ||||
| Effect of foreign currency translation | (0.3) | ||||
| Balance, December 31, 2020 | $ | 24.9 | |||
| Accruals for warranties issued during the year | 17.5 | ||||
| Settlements made | (17.6) | ||||
| Additions due to acquisitions | — | ||||
| Effect of foreign currency translation | 0.4 | ||||
| Balance, December 31, 2021 | $ | 25.2 |
NOTE 10. LEASES
We determine if an arrangement is or contains a lease at inception and recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months. We have operating leases for office space, warehouses, distribution centers, research and development facilities, manufacturing locations, and certain equipment, primarily automobiles. Many leases include optional terms, ranging from options to terminate the lease in less than one year to options to extend the lease for up to 23 years. We include optional periods as part of the lease term when we determine that we are reasonably certain to exercise the renewal option or we will not early terminate the lease. Reasonably certain is based on economic incentives and represents a high threshold. We have lease agreements with lease and non-lease components, and we have elected the practical expedient for all underlying asset classes to account for the lease and related non-lease component(s) as a single lease component. Our finance lease and lessor arrangements are immaterial.
Lease-related balances are presented in the following three line items on the Consolidated Balance Sheet: (i) operating lease right-of-use assets; (ii) current operating lease liabilities; and (iii) operating lease liabilities.
Operating lease cost was $60 million, $60 million, and $58 million for the years ended December 31, 2021, 2020, and 2019, respectively. Short-term and variable lease cost was immaterial for the years ended December 31, 2021, 2020, and 2019.
During the years ended December 31, 2021 and 2020, cash paid for operating leases included in operating cash flows was $53 million and $52 million, respectively. ROU assets obtained in exchange for operating lease liabilities were $34 million and $55 million for the years ended December 31, 2021 and 2020, respectively.
The following table presents the maturities of our operating lease liabilities as of December 31, 2021 ($ in millions):
| 2022 | $ | 45.6 | |||
| 2023 | 36.7 | ||||
| 2024 | 27.6 | ||||
| 2025 | 19.5 | ||||
| 2026 | 15.6 | ||||
| Thereafter | 58.3 | ||||
| Total lease payments | 203.3 | ||||
| Less: imputed interest | (18.8) | ||||
| Total lease liabilities | $ | 184.5 |
As of December 31, 2021 and 2020, the weighted average lease term of our operating leases was 7.85 years and 7.5 years, respectively, and the weighted average discount rate of our operating leases was 2.6% and 2.8%, respectively. We primarily use our incremental borrowing rate as the discount rate for our operating leases, as we are generally unable to determine the interest rate implicit in the lease.
As of December 31, 2021, we did not enter into any operating leases for which the lease term had not yet commenced.
NOTE 11. FINANCING
The carrying value of the components of our long-term debt as of December 31 were as follows ($ in millions):
| 2021 | 2020 | ||||||||||
| U.S. dollar-denominated commercial paper | $ | 364.9 | $ | — | |||||||
| 3.15% senior unsecured notes due 2026 | 895.1 | 894.1 | |||||||||
| 4.30% senior unsecured notes due 2046 | 547.3 | 547.2 | |||||||||
| 0.875% senior convertible notes due 2022 | 1,152.0 | 1,389.0 | |||||||||
| Delayed-Draw Term Loan | 999.7 | — | |||||||||
| Term Loan due May 2021 | — | 1,000.0 | |||||||||
| Term Loan due March 2021 | — | 399.8 | |||||||||
| Long-term debt | 3,959.0 | 4,230.1 | |||||||||
| Less: current portion of long-term debt | 2,151.7 | 1,399.8 | |||||||||
| Long-term debt, net of current maturities | $ | 1,807.3 | $ | 2,830.3 |
Aggregate unamortized debt discounts, premiums, and issuance costs of $13 million and $57 million as of December 31, 2021 and December 31, 2020, respectively, are netted against the principal amounts of the components of debt in the table above.
Credit Facilities
Delayed-Draw Term Loan
On December 16, 2021, we entered into a term loan credit agreement, which provides for a 364-day delayed-draw term loan facility up to an aggregate principal amount of $1.0 billion. Borrowings under the Delayed-Draw Term Loan facility may be Base Rate Loans, Daily Floating London Interbank Offered Rate (“LIBOR”) Loans or Eurodollar Rate Loans and bear interest as follows: (1) Eurodollar Rate Loans bear interest at a variable rate equal to the London inter-bank offered rate plus a margin of between 60.0 and 80.0 basis points, depending on the Company’s long-term debt credit rating; (2) Daily Floating LIBOR Rate Loans, like Eurodollar Rate Loans, bear interest at a variable rate equal to the London inter-bank offered rate plus a margin of between 60.0 and 80.0 basis points, depending on the Company’s long-term debt credit rating; and (3) Base Rate Loans bear interest at a variable rate equal to the highest of (a) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 1/2 of 1%, (b) Bank of America’s prime rate as publicly announced from time to time and (c) the Eurodollar Rate (as defined in the Credit Agreement) plus 1%; provided that in no event will the Eurodollar Rate be less than 0.0%.
We immediately drew down the full $1.0 billion available under the facility as a daily floating LIBOR rate loan (“Delayed-Draw Term Loan”) with repayment of the principal due December 15, 2022. The Delayed-Draw Term Loan bears interest at a variable rate equal to the daily LIBOR rate plus a spread of 60 basis points, based on Fortive’s current credit rating. Borrowings under the Delayed-Draw Term Loan facility are prepayable at the Company’s option in whole or in part without premium or penalty and amounts borrowed may not be reborrowed once repaid.
Debt-for-Equity Exchange
On January 19, 2021, we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400.0 million of the Term Loan due March 2021 and (ii) $683.2 million of the Term Loan due May 2021. We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the year ended December 31, 2021.
Term Loan due May 2021
On January 21, 2021, we repaid the remaining $316.8 million outstanding of the Term Loan due May 2021 from the cash proceeds received from Vontier in the Vontier Separation. The fees associated with the prepayment were immaterial.
Our credit facility agreements require, among others, that we maintain certain financial covenants and we were in compliance with all of our financial covenants on December 31, 2021.
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 (the “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.
The Convertible Notes bear interest at a rate of 0.875% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2019. Of the $1.4 billion in principal amount from the issuance of the Convertible Notes, $1.3 billion was classified as debt and $102.2 million was classified as equity, using an assumed effective interest rate of 3.38%. Debt issuance costs of $24.3 million were proportionately allocated to debt and equity.
On February 9, 2021, we repurchased $281 million of the Convertible Notes using the remaining cash proceeds received from Vontier in the Separation and other cash on hand. In connection with the repurchase, we recorded a loss on debt extinguishment during 2021 of $10.5 million. In addition, upon repurchase we recorded $11.6 million as a reduction to additional paid-in capital related to the equity component of the repurchased Convertible Notes.
We recognized $45 million in interest expense during the year ended December 31, 2021, of which $10 million related to the contractual coupon rate of 0.875%, $6 million was attributable to the amortization of debt issuance costs, and $29 million was attributable to the amortization of the discount. Additionally, we recognized $0.3 million interest expense related to the Delayed- Draw Term Loan. We recognized $54 million in interest expense during the year ended December 31, 2020, of which $13 million related to the contractual coupon rate of 0.875%, $8 million was attributable to the amortization of debt issuance costs, and $34 million was attributable to the amortization of the discount. The discount at issuance was $102 million and is being amortized over a three-year period. The unamortized discount at December 31, 2021 was $4 million.
The Convertible Notes matured on February 15, 2022, as described in the Subsequent Event section below.
Revolving Credit Facility
On June 16, 2016, we entered into a five-year $1.5 billion Revolving Credit Facility that expired on June 16, 2021. On November 30, 2018, we entered into an amended and restated agreement (the “Credit Agreement”) extending the availability period of the Revolving Credit Facility to November 30, 2023 and increased the facility to $2.0 billion. The Revolving Credit Facility is subject to a one year extension option at our request and with the consent of the lenders. The Credit Agreement also contains an option permitting us to request an increase in the amounts available under the Credit Agreement of up to an aggregate additional $1.0 billion. On April 24, 2020, we amended the $2.0 billion Revolving Credit Facility as described above.
The Credit Agreement contains customary representations, warranties, conditions precedent, events of default, indemnities, and affirmative and negative covenants. As of December 31, 2021 and December 31, 2020, we were in compliance with all covenants under the Credit Agreement and had no borrowings outstanding under the Revolving Credit Facility.
Commercial Paper Programs
We periodically issue 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.
During 2020 we paid down and refinanced our outstanding commercial paper with the Term Loan that was initially due March 2021 and was retired in the Debt-for-Equity Exchange. In August 2021, we resumed borrowing under our Commercial Paper Program. Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”). As of December 31, 2021, no borrowings were outstanding under the Revolving Credit Facility.
The details of our Commercial Paper Programs as of December 31, 2021 were as follows ($ in millions):
| Carrying value | Annual effective rate | Weighted average remaining maturity (in days) | |||||||||||||||
| U.S. dollar-denominated commercial paper | $ | 364.9 | 0.32 | % | 30.3 |
The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the Commercial Paper Programs’ credit ratings. 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, to repay any outstanding commercial paper as it matures.
Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit rating and market conditions. Any downgrade in our credit rating would increase the cost of borrowing under our commercial paper programs and the Credit Agreement, and could limit or preclude our ability to issue commercial paper. If our access to the commercial paper market is adversely affected due to a downgrade, change in market conditions, or otherwise, we would expect to rely on a combination of available cash, operating cash flow, and the Revolving Credit Facility to provide short-term funding. In such event, the cost of borrowings under the Revolving Credit Facility could be higher than the historic cost of commercial paper borrowings.
We classified our borrowings outstanding under the Commercial Paper Programs as of December 31, 2021 as long-term debt in the accompanying Consolidated Balance Sheets as we have the intent and ability, as supported by availability under the Revolving Credit Facility referenced above, to refinance these borrowings for at least one year from the balance sheet date.
Proceeds from borrowings under the commercial paper programs are typically available for general corporate purposes, including acquisitions.
Registered Notes
As of December 31, 2021, we had outstanding the following senior notes, collectively the “Registered Notes”:
-
$900 million aggregate principal amount of senior notes due June 15, 2026 issued at 99.644% of their principal amount and bearing interest at the rate of 3.15% per year.
-
$350 million and $200 million aggregate principal amounts of senior notes due June 15, 2046 issued at 99.783% and 101.564%, respectively, of their principal amounts and bearing interest at the rate of 4.30% per year.
Interest on the Registered Notes is payable semi-annually in arrears on June 15 and December 15 of each year.
Covenants and Redemption Provisions Applicable to Registered Notes
We may redeem the Registered Notes of the applicable series, in whole or in part, at any time prior to the dates specified in the Registered Notes indenture (the “Call Dates”) by paying the principal amount and the “make-whole” premium specified in the Registered Notes indenture, plus accrued and unpaid interest. Additionally, we may redeem all or any part of the Registered Notes of the applicable series on or after the Call Dates without paying the “make-whole” premium specified in the Registered Notes indenture.
| Registered Notes Series | Call Dates | ||||
| 3.15% senior unsecured notes due 2026 | March 15, 2026 | ||||
| 4.30% senior unsecured notes due 2046 | December 15, 2045 |
If a change of control triggering event occurs, we will, in certain circumstances, be required to make an offer to repurchase the Registered Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. A change of control triggering event is defined as the occurrence of both a change of control and a rating event, each as defined in the Registered Notes indenture. Except in connection with a change of control triggering event, the Registered Notes do not have any credit rating downgrade triggers that would accelerate the maturity of the Registered Notes.
The Registered Notes contain customary covenants, including limits on the incurrence of certain secured debt and sale/leaseback transactions. None of these covenants are considered restrictive to our operations and as of December 31, 2021, we were in compliance with all of our covenants.
Other
We made interest payments, including amounts allocated to interest expense from discontinued operations during 2020 and 2019 of $123 million and $127 million, respectively. We had no interest payments from discontinued operations during 2021.
There are $2.2 billion of minimum principal payments due under our total long-term debt during 2022. The future minimum principal payments due are presented in the following table:
| Term Loans | Convertible and Registered Notes | Total | |||||||||||||||
| 2022 | $ | 1,000.0 | $ | 1,156.5 | $ | 2,156.5 | |||||||||||
| 2023 | — | — | — | ||||||||||||||
| 2024 | — | — | — | ||||||||||||||
| 2025 | — | — | — | ||||||||||||||
| 2026 | — | 900.0 | 900.0 | ||||||||||||||
| Thereafter | — | 550.0 | 550.0 | ||||||||||||||
| Total principal payments (a) | $ | 1,000.0 | $ | 2,606.5 | $ | 3,606.5 | |||||||||||
| (a) Not included in the table above are discounts, net of premiums and issuance costs associated with the Convertible and Registered Notes and Commercial Paper, which totaled $13 million as of December 31, 2021, and have been recorded as an offset to the carrying amount of the related debt in the accompanying Consolidated Balance Sheet as of December 31, 2021. In addition, the table above does not include principal balance of $365 million under the Commercial Paper Programs. |
Subsequent Event
On February 15, 2022, the maturity date of the Convertible Notes, Fortive repaid, in cash, $1.2 billion in outstanding principal and accrued interest thereon.
NOTE 12. PENSION PLANS
Certain employees participate in noncontributory defined benefit pension plans. In general, our policy is to fund these plans based on considerations relating to legal requirements, underlying asset returns, the plan’s funded status, the anticipated deductibility of the contribution, local practices, market conditions, interest rates, and other factors. Our U.S. pension plans are frozen, and as such, there are no ongoing benefit accruals associated with the U.S. pension plans.
The following sets forth the funded status of our plans and amounts recorded in Accumulated other comprehensive income (loss) as of the most recent actuarial valuations using measurement dates of December 31 ($ in millions):
| U.S. Pension Benefits | Non-U.S. Pension Benefits | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Change in pension benefit obligation: | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 47.2 | $ | 35.2 | $ | 371.8 | $ | 328.0 | |||||||||||||||
| Service cost | — | — | 4.1 | 4.4 | |||||||||||||||||||
| Interest cost | 1.0 | 1.2 | 2.8 | 4.0 | |||||||||||||||||||
| Employee contributions | — | — | 1.3 | 1.2 | |||||||||||||||||||
| Benefits paid and other plan costs | (2.1) | (1.9) | (9.8) | (6.1) | |||||||||||||||||||
| Actuarial loss (gain) | (1.4) | 7.0 | (11.7) | 17.9 | |||||||||||||||||||
| Amendments, settlements and curtailments | — | — | (1.5) | (2.3) | |||||||||||||||||||
| Plan acquisitions and other | 1.7 | 5.7 | 1.0 | — | |||||||||||||||||||
| Foreign exchange rate impact | — | — | (17.2) | 24.7 | |||||||||||||||||||
| Benefit obligation at end of year | 46.4 | 47.2 | 340.8 | 371.8 | |||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | 29.3 | 26.5 | 224.4 | 189.9 | |||||||||||||||||||
| Actual return on plan assets | 3.4 | 3.5 | 6.7 | 17.3 | |||||||||||||||||||
| Employer contributions | 1.3 | 1.2 | 10.2 | 10.6 | |||||||||||||||||||
| Employee contributions | — | — | 1.4 | 1.2 | |||||||||||||||||||
| Amendments and settlements | — | — | (1.2) | (1.8) | |||||||||||||||||||
| Benefits paid and other plan costs | (2.1) | (1.9) | (9.7) | (6.1) | |||||||||||||||||||
| Plan acquisitions and other | — | — | — | — | |||||||||||||||||||
| Foreign exchange rate impact | — | — | (8.7) | 13.3 | |||||||||||||||||||
| Fair value of plan assets at end of year | 31.9 | 29.3 | 223.1 | 224.4 | |||||||||||||||||||
| Funded status | $ | (14.5) | $ | (17.9) | $ | (117.7) | $ | (147.4) | |||||||||||||||
The difference between the accumulated benefit obligation and the projected benefit obligation as of December 31, 2021 and 2020 is immaterial.
| U.S. Pension Benefits | Non-U.S. Pension Benefits | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Amounts recorded in the Consolidated Balance Sheets as of December 31 | |||||||||||||||||||||||
| Other assets | $ | — | $ | — | $ | 6.2 | $ | 6.3 | |||||||||||||||
| Accrued expenses and other current liabilities | (0.6) | (0.5) | (3.9) | (4.0) | |||||||||||||||||||
| Other long-term liabilities | (13.9) | (17.4) | (120.0) | (149.7) | |||||||||||||||||||
| Net amount recorded | $ | (14.5) | $ | (17.9) | $ | (117.7) | $ | (147.4) |
| U.S. Pension Benefits | Non-U.S. Pension Benefits | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Amounts recorded in AOCI as of December 31 | |||||||||||||||||||||||
| Prior service cost | $ | — | $ | — | $ | 2.4 | $ | 2.9 | |||||||||||||||
| Actuarial loss | (3.5) | 6.8 | 77.1 | 99.6 | |||||||||||||||||||
| Total recorded in AOCI, before tax | $ | (3.5) | $ | 6.8 | $ | 79.5 | $ | 102.5 |
Weighted average assumptions used to determine benefit obligations at date of measurement
| U.S. Pension Plans | Non-U.S. Pension Plans | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Discount rate | 2.82 | % | 2.40 | % | 1.31 | % | 0.99 | % | |||||||||||||||
| Rate of compensation increase | N/A | N/A | 2.43 | % | 2.36 | % |
Components of net periodic pension cost
The following sets forth the components of net periodic pension cost for our plans for the years ended December 31 ($ in millions):
| U.S. Pension Benefits | Non-U.S. Pension Benefits | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | — | $ | 4.1 | $ | 4.4 | $ | 2.2 | |||||||||||||||||||||||
| Interest cost | 1.0 | 1.2 | 1.3 | 2.8 | 4.0 | 5.3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (1.0) | (1.3) | (1.3) | (5.0) | (5.4) | (5.5) | |||||||||||||||||||||||||||||
| Amortization of net loss | 0.1 | — | — | 3.9 | 4.1 | 2.5 | |||||||||||||||||||||||||||||
| Amortization of prior service cost | — | — | — | 0.3 | 0.3 | 0.2 | |||||||||||||||||||||||||||||
| Net curtailment and settlement loss recognized | (0.1) | — | — | 0.2 | (0.5) | 0.2 | |||||||||||||||||||||||||||||
| Net periodic pension cost | $ | — | $ | (0.1) | $ | — | $ | 6.3 | $ | 6.9 | $ | 4.9 |
Weighted average assumptions used to determine net periodic pension cost at date of measurement
| U.S. Pension Plans | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Discount rate | 2.65 | % | 3.26 | % | 4.40 | % | 0.99 | % | 1.38 | % | 2.28 | % | |||||||||||||||||||||||
| Expected return on plan assets | 4.32 | % | 4.86 | % | 5.75 | % | 2.34 | % | 2.82 | % | 3.41 | % | |||||||||||||||||||||||
| Rate of compensation increase | N/A | N/A | N/A | 2.36 | % | 2.44 | % | 2.61 | % |
The discount rates reflect the market rate on December 31 for high-quality fixed-income investments with maturities corresponding to our benefit obligations and are subject to change each year. For non-U.S. plans, rates appropriate for each plan are determined based on investment grade instruments with maturities approximately equal to the average expected benefit payout under the plan.
The expected rates of return reflect the asset allocation of the plans and ranged from 1.25% to 4.32% in 2021, 1.25% to 4.86% in 2020, and 1.50% to 5.75% in 2019. The domestic plan rate is based primarily on broad publicly-traded-equity and fixed-income indices and forward-looking estimates of active portfolio and investment management. The expected rates of return on asset assumptions for the non-U.S. plans were determined on a plan-by-plan basis based on the composition of assets.
We report all components of net periodic pension costs, with the exception of service costs, in Other non-operating expenses, net in the Consolidated Statements of Earnings for all periods presented. Service costs are reported in Cost of sales and Selling, general, and administrative expenses in the Consolidated Statements of Earnings according to the classification of the participant’s compensation.
Plan Assets
Plan assets are invested in various insurance contracts and equity and debt securities as determined by the administrator of each plan. Some of these investments, consisting of mutual funds and other private investments, are valued using the net asset value (“NAV”) method as a practical expedient. The investments valued using the NAV method are allocated across a broad array of funds and diversify the portfolio. The value of the plan assets directly affects the funded status of our pension plans recorded in the financial statements.
The fair values of our pension plan assets as of December 31, 2021, by asset category were as follows ($ in millions):
| Quoted Prices in Active Market (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| Cash and equivalents | $ | 3.7 | $ | — | $ | — | $ | 3.7 | |||||||||||||||
| Mutual funds | — | 32.6 | — | 32.6 | |||||||||||||||||||
| Insurance contracts | — | 31.7 | — | 31.7 | |||||||||||||||||||
| Total | $ | 3.7 | $ | 64.3 | $ | — | $ | 68.0 | |||||||||||||||
| Investments measured at NAV(a): | |||||||||||||||||||||||
| Mutual funds | 125.6 | ||||||||||||||||||||||
| Real estate funds | 18.7 | ||||||||||||||||||||||
| Other private investments | 42.7 | ||||||||||||||||||||||
| Total assets at fair value | $ | 255.0 | |||||||||||||||||||||
| (a) The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets. |
The fair values of our pension plan assets as of December 31, 2020, by asset category were as follows ($ in millions):
| Quoted Prices in Active Market (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| Cash and equivalents | $ | 5.4 | $ | — | $ | — | $ | 5.4 | |||||||||||||||
| Mutual funds | — | 30.8 | — | 30.8 | |||||||||||||||||||
| Insurance contracts | — | 27.8 | — | 27.8 | |||||||||||||||||||
| Total | $ | 5.4 | $ | 58.6 | $ | — | $ | 64.0 | |||||||||||||||
| Investments measured at NAV(a): | |||||||||||||||||||||||
| Mutual funds | 155.1 | ||||||||||||||||||||||
| Real estate funds | 15.2 | ||||||||||||||||||||||
| Other private investments | 19.4 | ||||||||||||||||||||||
| Total assets at fair value | $ | 253.7 | |||||||||||||||||||||
| (a) The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets. |
Certain mutual funds are valued at the quoted closing price reported on the active market on which the individual securities are traded. Common stock, corporate bonds, and mutual funds that are not traded on an active market are valued at quoted prices reported by investment brokers and dealers based on the underlying terms of the security and comparison to similar securities traded on an active market.
Certain mutual funds and other private investments are valued using NAV based on the information provided by the asset fund managers, which reflects the plan’s share of the fair value of the net assets of the investment. Depending on the nature of the assets, the underlying investments are valued using a combination of either discounted cash flows, earnings and market multiples, third party appraisals, or through reference to the quoted market prices of the underlying investments held by the venture, partnership, or private entity where available. In addition, some of these investments have limits on their redemption to monthly, quarterly, semiannually, or annually and may require up to 90 days prior written notice. Valuation adjustments reflect changes in operating results, financial condition, or prospects of the applicable portfolio company.
The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are appropriate and consistent with the methods used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Expected Contributions
During 2021, we contributed $1 million and $10 million to our U.S. and non-U.S. defined benefit pension plans, respectively. During 2022, our cash contribution requirements for our U.S. and non-U.S. defined benefit pension plans are expected to be approximately $2 million and $12 million, respectively.
The following sets forth benefit payments to participants, which reflect expected future service, as appropriate, expected to be paid by the plans in the periods indicated ($ in millions):
| U.S. Pension Plans | Non-U.S. Pension Plans | All Pension Plans | |||||||||||||||
| 2022 | $ | 2.4 | $ | 10.2 | $ | 12.6 | |||||||||||
| 2023 | 2.5 | 9.9 | 12.4 | ||||||||||||||
| 2024 | 2.6 | 10.1 | 12.7 | ||||||||||||||
| 2025 | 2.7 | 10.1 | 12.8 | ||||||||||||||
| 2026 | 2.8 | 10.0 | 12.8 | ||||||||||||||
| 2027-2031 | 14.7 | 51.0 | 65.7 |
Defined Contribution Plans
We administer and maintain 401(k) programs and contributions to the 401(k) programs are determined based on a percentage of compensation. We recognized compensation expense for our participating U.S. employees in the 401(k) programs totaling $57 million in 2021, $51 million in 2020, and $48 million in 2019.
NOTE 13. SALES
We derive revenue primarily from the sales of products and software, and services. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or 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 $71 million as of December 31, 2021 and $56 million as of December 31, 2020.
Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions and costs associated with assets used by our customers in certain service arrangements. Deferred sales-related commissions are generally not capitalized as the amortization period is one year or less, and we elected to use the practical expedient to expense these sales commissions as incurred. As of December 31, 2021, we had $27 million in net revenue-related contract assets primarily related to certain software contracts recorded in Prepaid expenses and other current assets and Other assets in our Consolidated Balance Sheet. Our revenue-related contract assets at December 31, 2020 were $31 million. These assets have estimated useful lives between 3 and 8 years.
Impairment losses recognized on our contract-related assets were immaterial during both the years ended December 31, 2021 and December 31, 2020.
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to PCS and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in Other long-term liabilities in the Consolidated Balance Sheets.
Our contract liabilities as of December 31 consisted of the following ($ in millions):
| 2021 | 2020 | ||||||||||
| Deferred revenue - current | $ | 457.6 | $ | 376.4 | |||||||
| Deferred revenue - noncurrent | 33.8 | 34.2 | |||||||||
| Total contract liabilities | $ | 491.4 | $ | 410.6 |
In the year ended December 31, 2021, we recognized $307 million of revenue-related to our contract liabilities at January 1, 2021. The change in our contract liabilities from December 31, 2020 to December 31, 2021 was primarily due to an increase of $52.4 million from acquisitions and the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders and the average contract value for software contracts, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.
The aggregate performance obligations attributable to each of our segments as of December 31, 2021 is as follows ($ in millions):
| 2021 | |||||||||||
| Intelligent Operating Solutions | $ | 638.7 | |||||||||
| Precision Technologies | 52.9 | ||||||||||
| Advanced Healthcare Solutions | 48.5 | ||||||||||
| Total remaining performance obligations | $ | 740.1 |
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.
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by sales of product 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 year ended December 31, 2021 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products | $ | 4,496.1 | $ | 1,899.8 | $ | 1,630.6 | $ | 965.7 | |||||||||||||||
| Sales of services | 758.6 | 269.6 | 218.3 | 270.7 | |||||||||||||||||||
| Total | $ | 5,254.7 | $ | 2,169.4 | $ | 1,848.9 | $ | 1,236.4 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 2,683.0 | $ | 1,118.1 | $ | 921.2 | $ | 643.7 | |||||||||||||||
| China | 650.7 | 212.3 | 321.1 | 117.3 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,921.0 | 839.0 | 606.6 | 475.4 | |||||||||||||||||||
| Total | $ | 5,254.7 | $ | 2,169.4 | $ | 1,848.9 | $ | 1,236.4 | |||||||||||||||
| End markets: | |||||||||||||||||||||||
| Direct sales:(a) | |||||||||||||||||||||||
| Medical | $ | 1,332.7 | $ | 37.7 | $ | 138.4 | $ | 1,156.6 | |||||||||||||||
| Industrial & Manufacturing | 1,256.9 | 816.0 | 416.3 | 24.6 | |||||||||||||||||||
| Utilities & Power | 390.2 | 223.4 | 166.8 | — | |||||||||||||||||||
| Government | 389.2 | 203.8 | 145.8 | 39.6 | |||||||||||||||||||
| Communication, Electronics & Semiconductor | 381.4 | 118.0 | 261.5 | 1.9 | |||||||||||||||||||
| Aerospace & Defense | 239.0 | — | 239.0 | — | |||||||||||||||||||
| Oil & Gas | 262.2 | 252.1 | 10.1 | — | |||||||||||||||||||
| Retail & Consumer | 217.2 | 129.0 | 88.2 | — | |||||||||||||||||||
| Other | 506.3 | 252.3 | 253.9 | 0.1 | |||||||||||||||||||
| Total direct sales | 4,975.1 | 2,032.3 | 1,720.0 | 1,222.8 | |||||||||||||||||||
| Distributors | 279.6 | 137.1 | 128.9 | 13.6 | |||||||||||||||||||
| Total | $ | 5,254.7 | $ | 2,169.4 | $ | 1,848.9 | $ | 1,236.4 | |||||||||||||||
| (a) Direct Sales also include sales made through third-party distributors to these end markets. |
Disaggregation of revenue for the year ended December 31, 2020 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products | $ | 3,956.7 | $ | 1,677.2 | $ | 1,445.7 | $ | 833.8 | |||||||||||||||
| Sales of services | 677.7 | 206.5 | 205.6 | 265.6 | |||||||||||||||||||
| Total | $ | 4,634.4 | $ | 1,883.7 | $ | 1,651.3 | $ | 1,099.4 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 2,436.6 | $ | 970.3 | $ | 856.0 | $ | 610.3 | |||||||||||||||
| China | 534.1 | 172.0 | 265.8 | 96.3 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,663.7 | 741.4 | 529.5 | 392.8 | |||||||||||||||||||
| Total | $ | 4,634.4 | $ | 1,883.7 | $ | 1,651.3 | $ | 1,099.4 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 1,185.2 | $ | 39.1 | $ | 114.0 | $ | 1,032.1 | |||||||||||||||
| Industrial & Manufacturing | 1,057.0 | 700.2 | 335.3 | 21.5 | |||||||||||||||||||
| Utilities & Power | 357.8 | 208.3 | 149.5 | — | |||||||||||||||||||
| Government | 348.0 | 170.5 | 146.3 | 31.2 | |||||||||||||||||||
| Communication, Electronics & Semiconductor | 290.9 | 116.3 | 172.5 | 2.1 | |||||||||||||||||||
| Aerospace & Defense | 250.3 | 20.4 | 229.9 | — | |||||||||||||||||||
| Oil & Gas | 228.6 | 217.7 | 10.9 | — | |||||||||||||||||||
| Retail & Consumer | 171.3 | 90.4 | 80.9 | — | |||||||||||||||||||
| Other | 480.4 | 225.3 | 255.1 | — | |||||||||||||||||||
| Total direct sales | 4,369.5 | 1,788.2 | 1,494.4 | 1,086.9 | |||||||||||||||||||
| Distributors | 264.9 | 95.5 | 156.9 | 12.5 | |||||||||||||||||||
| Total | $ | 4,634.4 | $ | 1,883.7 | $ | 1,651.3 | $ | 1,099.4 | |||||||||||||||
| (a) Direct Sales also include sales made through third-party distributors to these end markets. | |||||||||||||||||||||||
Disaggregation of revenue for the year ended December 31, 2019 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products | $ | 3,922.5 | $ | 1,677.6 | $ | 1,587.0 | $ | 657.9 | |||||||||||||||
| Sales of services | 641.4 | 221.3 | 221.4 | 198.7 | |||||||||||||||||||
| Total | $ | 4,563.9 | $ | 1,898.9 | $ | 1,808.4 | $ | 856.6 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 2,394.2 | $ | 1,135.7 | $ | 917.4 | $ | 341.1 | |||||||||||||||
| China | 501.2 | 181.6 | 279.5 | 40.1 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,668.5 | 581.6 | 611.5 | 475.4 | |||||||||||||||||||
| Total | $ | 4,563.9 | $ | 1,898.9 | $ | 1,808.4 | $ | 856.6 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 925.3 | $ | 16.2 | $ | 104.0 | $ | 805.1 | |||||||||||||||
| Industrial & Manufacturing | 1,050.4 | 680.2 | 349.8 | 20.4 | |||||||||||||||||||
| Utilities & Power | 396.1 | 217.2 | 178.9 | — | |||||||||||||||||||
| Government | 284.3 | 117.2 | 148.9 | 18.2 | |||||||||||||||||||
| Communication, Electronics & Semiconductor | 363.1 | 131.4 | 231.7 | — | |||||||||||||||||||
| Aerospace & Defense | 276.8 | 22.3 | 254.5 | — | |||||||||||||||||||
| Oil & Gas | 222.9 | 207.6 | 15.3 | — | |||||||||||||||||||
| Retail & Consumer | 219.9 | 116.0 | 103.4 | 0.5 | |||||||||||||||||||
| Other | 528.4 | 252.2 | 275.9 | 0.3 | |||||||||||||||||||
| Total direct sales | 4,267.2 | 1,760.3 | 1,662.4 | 844.5 | |||||||||||||||||||
| Distributors | 296.7 | 138.6 | 146.0 | 12.1 | |||||||||||||||||||
| Total | $ | 4,563.9 | $ | 1,898.9 | $ | 1,808.4 | $ | 856.6 | |||||||||||||||
| (a) Direct Sales also include sales made through third-party distributors to these end markets. | |||||||||||||||||||||||
NOTE 14. INCOME TAXES
Earnings and Income Taxes
Earnings from continuing operations before income taxes for the years ended December 31 were as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 367.4 | $ | 1,213.3 | $ | 91.3 | |||||||||||
| International | 310.1 | 294.4 | 245.4 | ||||||||||||||
| Total | $ | 677.5 | $ | 1,507.7 | $ | 336.7 |
The continuing operations provision for income taxes for the years ended December 31 were as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal U.S. | $ | 21.5 | $ | 59.4 | $ | 23.4 | |||||||||||
| Non-U.S. | 75.0 | 74.3 | 48.7 | ||||||||||||||
| State and local | 7.8 | 19.4 | 5.0 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal U.S. | (21.9) | (44.1) | 16.9 | ||||||||||||||
| Non-U.S. | (16.9) | (33.0) | (17.4) | ||||||||||||||
| State and local | (2.2) | (20.5) | (8.0) | ||||||||||||||
| Income tax provision | $ | 63.3 | $ | 55.5 | $ | 68.6 |
Effective Income Tax Rate
The continuing operations effective income tax rate for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:
| Percentage of Pretax Earnings | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Increase (decrease) in tax rate resulting from: | |||||||||||||||||
| State income taxes (net of federal income tax benefit) | 0.9 | % | 0.4 | % | (3.3) | % | |||||||||||
| Foreign income taxed at different rates than U.S. statutory rate | (4.4) | % | (0.5) | % | (1.7) | % | |||||||||||
| U.S. federal permanent differences related to the TCJA | (5.6) | % | (0.9) | % | 1.2 | % | |||||||||||
| Compensation related | (0.3) | % | (0.5) | % | (1.7) | % | |||||||||||
| Other | (0.3) | % | (0.2) | % | 4.9 | % | |||||||||||
| Effective income tax rate before adjustments related to the unrealized gain on the Retained Vontier Shares | 11.3 | % | 19.3 | % | 20.4 | % | |||||||||||
| Adjustment for the unrealized gain on the Retained Vontier Shares | (2.0) | % | (15.6) | % | — | % | |||||||||||
| Effective income tax rate after adjustments related to the unrealized gain on the Retained Vontier Shares | 9.3 | % | 3.7 | % | 20.4 | % |
Our effective tax rate for 2021 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, and a permanent difference on the realized gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange that was completed on January 19, 2021. The Debt-for-Equity Exchange included an exchange of all of our Vontier common stock owned as of December 31, 2020.
Our effective tax rate for 2020 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, offset by tax costs associated with
repatriating a portion of our previously reinvested earnings outside of the United States, and a permanent difference on the unrealized gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange that was completed on January 19, 2021. The Debt-for-Equity Exchange included an exchange of all of our Vontier common stock owned as of December 31, 2020.
Our effective tax rate for 2019 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, and earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate.
We conduct business globally, and, as part of our global business, we file numerous income tax returns in the U.S. federal, state and foreign jurisdictions. After the TCJA, our ability to obtain a tax benefit in certain countries that continue to have lower statutory tax rates than the United States is dependent on our levels of taxable income in such foreign countries. We believe that a change in the statutory tax rate of any individual foreign country would not typically have a material effect on our financial statements given the geographic dispersion of our taxable income.
We are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state, and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states, and foreign jurisdictions for the tax years 2010 to 2021. These examinations include filings of tax returns prior to our separation from Danaher, tax returns of enterprises no longer in our portfolio, and tax returns for pre-acquisition periods of enterprises added to our portfolio. Significant obligations are detailed in the tax matters agreements in connection with the separation of Fortive from Danaher on July 1, 2016, the split-off of the A&S business on October 1, 2018, and the Vontier separation on October 9, 2020. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions, and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.
We made income tax payments related to continuing operations of $103 million, $95 million, and $79 million during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
Deferred Tax Assets and Liabilities
All deferred tax assets and liabilities have been classified as noncurrent and are included in Other assets and Other long-term liabilities in the Consolidated Balance Sheets. Deferred income tax assets and liabilities from continuing operations as of December 31 were as follows ($ in millions):
| 2021 | 2020 | ||||||||||
| Deferred Tax Assets: | |||||||||||
| Allowance for doubtful accounts | $ | 7.5 | $ | 8.4 | |||||||
| Operating lease liabilities | 45.6 | 47.9 | |||||||||
| Inventories | 11.4 | 12.5 | |||||||||
| Pension benefits | 36.9 | 32.1 | |||||||||
| Environmental and regulatory compliance | 2.2 | 4.1 | |||||||||
| Other accruals and prepayments | 30.6 | 16.5 | |||||||||
| Deferred service income | 5.2 | 4.6 | |||||||||
| Warranty services | 5.4 | 3.9 | |||||||||
| Stock-based compensation expense | 29.0 | 27.9 | |||||||||
| Tax credit and loss carryforwards | 214.8 | 155.1 | |||||||||
| Valuation allowances | (73.7) | (47.1) | |||||||||
| Total deferred tax assets | $ | 314.9 | $ | 265.9 | |||||||
| Deferred Tax Liabilities: | |||||||||||
| Property, plant and equipment | $ | (43.8) | $ | (46.0) | |||||||
| Operating lease right-of-use assets | (42.6) | (44.3) | |||||||||
| Insurance, including self-insurance | (157.3) | (166.8) | |||||||||
| Goodwill and other intangibles | (765.1) | (554.4) | |||||||||
| Other | (4.0) | (27.6) | |||||||||
| Total deferred tax liabilities | (1,012.8) | (839.1) | |||||||||
| Net deferred tax liability | $ | (697.9) | $ | (573.2) |
In accordance with GAAP, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected in our Consolidated Statements of Earnings. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Consolidated Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we establish a valuation allowance.
Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.
Deferred taxes associated with U.S. entities from continuing operations consist of net deferred tax liabilities of approximately $698 million and $550 million inclusive of valuation allowances of $52 million and $25 million as of December 31, 2021 and December 31, 2020, respectively. Deferred taxes associated with non-U.S. entities from continuing operations consist of net deferred tax liabilities of $0.1 million and $23 million, inclusive of valuation allowances of $21 million and $22 million, as of December 31, 2021 and December 31, 2020, respectively. Our valuation allowance increased by $27 million and by $3 million during the years ended December 31, 2021 and December 31, 2020, respectively, due primarily to foreign net operating losses in both years and acquired domestic tax attributes in 2021.
As of December 31, 2021, our U.S. and non-U.S. net operating loss carryforwards totaled $1.8 billion, of which $285 million is related to federal net operating loss carryforwards, $1.0 billion is related to state net operating loss carryforwards, and $483 million is related to non-U.S. net operating loss carryforwards. Included in deferred tax assets as of December 31, 2021 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $182 million, before applicable valuation allowances of $53 million. Certain of these losses can be carried forward indefinitely and others can be carried forward to various dates from 2022 through 2041. Recognition of some of these loss carryforwards is subject to an annual limit, which may cause them to expire before they are used.
As of December 31, 2021, our U.S. and non-U.S. tax credit carryforwards totaled $33 million, which is primarily related to U.S. tax credit carryforwards. Certain of these credits can be carried forward indefinitely and other can be carried forward to various dates from 2022 through 2041. As of December 31, 2021, we maintain a $15 million valuation allowance related to certain tax credit carryforwards.
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if, in our assessment, it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in evaluating tax positions and determining income tax provisions. We re-evaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain in certain circumstances, including when: (i) a tax audit is completed; (ii) applicable tax laws change, including a tax case ruling or legislative guidance; or (iii) the applicable statute of limitations expires. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.
As of December 31, 2021, gross unrecognized tax benefits for continuing and discontinued operations were $193 million ($217 million total, including $25 million associated with interest and penalties, and net of the impact of $1 million of indirect tax benefits). As of December 31, 2020, gross unrecognized tax benefits for continuing and discontinued operations were $200 million ($224 million total, including $26 million associated with interest and penalties, and net of the impact of $2 million of indirect tax benefits). We recognized approximately $6 million, $10 million and $8 million in potential interest and penalties associated with uncertain tax positions during 2021, 2020, and 2019, respectively. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.
The Company is subject to examination in the United States, various states, and foreign jurisdictions for the tax years 2010 to 2021. These examinations include filings of tax returns prior to our separation from Danaher, tax returns of enterprises no longer in our portfolio, and tax returns for pre-acquisition periods of enterprises added to our portfolio. Significant obligations are detailed in the tax matters agreements in connection with the separation of Fortive from Danaher on July 1, 2016, the split-off of the A&S business on October 1, 2018, and the Vontier separation on October 9, 2020.Some examinations may conclude in the next twelve months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next twelve months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Unrecognized tax benefits, beginning of year | $ | 200.1 | $ | 214.9 | $ | 133.4 | |||||||||||
| Additions based on tax positions related to the current year | 7.9 | 10.4 | 17.8 | ||||||||||||||
| Additions for tax positions of prior years | 3.4 | 16.1 | 79.7 | ||||||||||||||
| Reductions for tax positions of prior years | (1.4) | (26.5) | (13.0) | ||||||||||||||
| Lapse of statute of limitations | (15.6) | (6.1) | (2.3) | ||||||||||||||
| Settlements | (0.2) | (0.5) | (0.3) | ||||||||||||||
| Effect of foreign currency translation | (1.2) | 1.7 | (0.4) | ||||||||||||||
| Separation related adjustments (a) | — | (9.9) | — | ||||||||||||||
| Unrecognized tax benefits, end of year | $ | 193.0 | $ | 200.1 | $ | 214.9 | |||||||||||
| (a) Unrecognized tax benefit reserves decreased in 2020 by $10 million upon separation from Vontier in accordance with the Agreements. | |||||||||||||||||
Repatriation and Unremitted Earnings
The TCJA eliminated the U.S. tax cost for qualified repatriation beginning in 2018 but foreign cumulative earnings remain subject to foreign remittance taxes. As of December 31, 2021, we recorded estimated incremental foreign remittance taxes of $1 million on the planned 2022 repatriation of $542 million of previously unremitted earnings from 2021 and prior periods.
The TCJA imposed a final U.S. tax on cumulative earnings from our foreign operations that we have previously made an assertion regarding the amount of such earnings intended for indefinite reinvestment. As of December 31, 2021, the earnings we plan to reinvest indefinitely outside of the United States for which foreign deferred taxes have not been provided was estimated at $2.0 billion. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.
NOTE 15. RESTRUCTURING AND OTHER RELATED CHARGES
Restructuring and other related charges for the years ended December 31 were as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Employee severance related | $ | 12.8 | $ | 21.1 | $ | 46.9 | |||||||||||
| Facility exit and other related | 5.9 | 5.7 | 3.5 | ||||||||||||||
| Total restructuring and other related charges | $ | 18.7 | $ | 26.8 | $ | 50.4 |
Substantially all restructuring activities initiated in 2021 were completed by December 31, 2021. We expect substantially all cash payments associated with remaining termination benefits recorded in 2021 will be paid in 2022, and all planned restructuring activities related to the 2020 and 2019 plans have been completed.
The nature of our restructuring and related activities initiated in 2021, 2020 and 2019 were broadly consistent throughout our segments and focused on improvements in operational efficiency through targeted workforce reductions and facility consolidations and closures. We incurred these costs to position ourselves to provide superior products and services to our customers in a cost-efficient manner, while taking into consideration broad economic uncertainties, including those created by the COVID-19 pandemic.
Restructuring and other related charges recorded for the years ended December 31 by segment were as follows ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Intelligent Operating Solutions | $ | 7.4 | $ | 12.5 | $ | 23.8 | |||||||||||
| Precision Technologies | 6.8 | 9.8 | 26.4 | ||||||||||||||
| Advanced Healthcare Solutions | 4.5 | 4.5 | 0.2 | ||||||||||||||
| Total | $ | 18.7 | $ | 26.8 | $ | 50.4 |
The table below summarizes the accrual balance and utilization by type of restructuring cost associated with our 2021 and 2020 restructuring actions ($ in millions):
| Balance as of January 1, 2020 | Costs Incurred | Paid/ Settled | Balance as of December 31, 2020 | Costs Incurred | Paid/ Settled | Balance as of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Employee severance and related | $ | 32.4 | $ | 21.1 | $ | (38.7) | $ | 14.8 | $ | 12.8 | $ | (17.5) | $ | 10.1 | |||||||||||||||||||||||||||
| Facility exit and other related | 0.2 | 5.7 | (5.3) | 0.6 | 5.9 | (5.8) | 0.7 | ||||||||||||||||||||||||||||||||||
| Total | $ | 32.6 | $ | 26.8 | $ | (44.0) | $ | 15.4 | $ | 18.7 | $ | (23.3) | $ | 10.8 |
The restructuring and other related charges incurred during 2021, 2020, and 2019 were substantially all cash charges. These charges are reflected in the following captions in the Consolidated Statements of Earnings ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of sales | $ | 2.8 | $ | 8.2 | $ | 13.8 | |||||||||||
| Selling, general, and administrative expenses | 15.9 | 18.6 | 36.6 | ||||||||||||||
| Total | $ | 18.7 | $ | 26.8 | $ | 50.4 |
NOTE 16. LITIGATION AND CONTINGENCIES
We are, from time to time, subject to a variety of litigation and other proceedings incidental to our business, including lawsuits involving claims for damages arising out of the use of our products, software, and services, claims relating to intellectual property matters, employment matters, commercial disputes, and personal injury as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties, or indemnities provided in connection with divested businesses. Some of these lawsuits may include claims for punitive and consequential as well as compensatory damages. Based upon our experience, current information and applicable law, we do not believe that these proceedings and claims will have a material adverse effect on our financial position, results of operations, or cash flows.
While we maintain workers compensation, property, cargo, automobile, crime, fiduciary, product, general, and directors’ and officers’ liability insurance (and have acquired rights under similar policies in connection with certain acquisitions) that cover a portion of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while we believe we are entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses. We maintain third party insurance policies up to certain limits to cover certain liability costs in excess of predetermined retained amounts. For most insured risks, we purchase outside insurance coverage only for severe losses (stop loss insurance) and reserves must be established and maintained with respect to amounts within the self-insured retention.
In accordance with accounting guidance, we record a liability in our consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss does not meet the known or probable level but is reasonably possible and a loss or range of loss can be reasonably estimated, the estimated loss or range of loss is disclosed. These reserves consist of specific reserves for individual claims and additional amounts for anticipated developments of these claims as well as for incurred but not yet reported claims. The specific reserves for individual known claims are quantified with the assistance of legal counsel and outside risk insurance professionals where appropriate. In addition, outside risk insurance professionals may assist in the determination of reserves for incurred but not yet reported claims through evaluation of our specific loss history, actual claims reported, and industry trends among statistical and other factors. Reserve estimates are adjusted as additional information regarding a claim becomes known. While we actively pursue financial recoveries from insurance providers, we do not recognize any recoveries until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude. If risk insurance reserves we have established are inadequate, we would be required
to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our net earnings. Refer to Note 9 for information about the amount of our accruals for self-insurance and litigation liability.
In addition, our operations, products, and services are subject to environmental laws and regulations in various jurisdictions, which impose limitations on the discharge of pollutants into the environment and establish standards for the generation, use, treatment, storage, and disposal of hazardous and non-hazardous wastes. A number of our operations involve the handling, manufacturing, use, or sale of substances that are or could be classified as hazardous materials within the meaning of applicable laws. We must also comply with various health and safety regulations in both the United States and abroad in connection with our operations. Compliance with these laws and regulations has not had and, based on current information and the applicable laws and regulations currently in effect, is not expected to have a material effect on our capital expenditures, earnings, or competitive position, and we do not anticipate material capital expenditures for environmental control facilities.
In addition to environmental compliance costs, from time to time, we incur costs related to alleged damages associated with past or current waste disposal practices or other hazardous materials handling practices. For example, generators of hazardous substances found in disposal sites at which environmental problems are alleged to exist, as well as the current and former owners of those sites and certain other classes of persons, are subject to claims brought by state and federal regulatory agencies pursuant to statutory authority. We have received notification from the United States Environmental Protection Agency, and from state and non-U.S. environmental agencies, that conditions at certain sites where we and others previously disposed of hazardous wastes and/or are or were property owners require clean-up and other possible remedial action, including sites where we have been identified as a potentially responsible party under United States federal and state environmental laws. We have projects underway at a number of current and former facilities, in both the United States and abroad, to investigate and remediate environmental contamination resulting from past operations. Remediation activities generally relate to soil and/or groundwater contamination and may include pre-remedial activities such as fact-finding and investigation, risk assessment, feasibility study and/or design, as well as remediation actions such as contaminant removal, monitoring and/or installation, operation and maintenance of longer-term remediation systems. From time to time we are also party to personal injury or other claims brought by private parties alleging injury due to the presence of, or exposure to, hazardous substances.
We have recorded a provision for environmental investigation and remediation and environmental-related claims with respect to sites we and our subsidiaries owned or formerly owned and third party sites where we have been determined to be a potentially responsible party. We generally make an assessment of the costs involved for our remediation efforts based on environmental studies, as well as our prior experience with similar sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties of our involvement in certain sites, uncertainties regarding the extent of the required cleanup, the availability of alternative cleanup methods, variations in the interpretation of applicable laws and regulations, the possibility of insurance recoveries with respect to certain sites and the fact that imposition of joint and several liability with right of contribution is possible under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and other environmental laws and regulations. If we determine that potential liability for a particular site or with respect to a personal injury claim is known or considered probable and reasonably estimable, we accrue the total estimated loss, including investigation and remediation costs, associated with the site or claim. As of December 31, 2021 and 2020 we had reserves of $6 million and $15 million, respectively, included in Accrued expenses and Other liabilities in the Consolidated Balance Sheets for environmental matters that are known or considered probable and reasonably estimable, which reflects our best estimate of the costs to be incurred with respect to such matters on an undiscounted basis.
All reserves for environmental liabilities have been recorded without giving effect to any possible future third party recoveries. While we actively pursue insurance recoveries, as well as recoveries from other potentially responsible parties, we do not recognize any insurance recoveries for environmental liability claims until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude.
As of both December 31, 2021 and 2020, we had approximately $64 million and $68 million, respectively, of guarantees consisting primarily of outstanding standby letters of credit, bank guarantees, and performance and bid bonds. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties, and governmental entities to secure our obligations and/or performance requirements related to specific transactions. We believe that if the obligations under these instruments were triggered, they would not have a material effect on our consolidated financial statements.
We have entered into agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. As of December 31, 2021, the aggregate amount of our purchase obligations totaled $493 million, of which $369 million are expected to be settled within one year of December 31, 2021.
NOTE 17. STOCK BASED COMPENSATION
The 2016 Stock Incentive Plan (the “Stock Plan”) provides for the grant of stock appreciation rights, restricted stock units (“RSUs”), performance stock units (“PSUs”), and restricted stock awards (“RSAs”) (collectively, “Stock Awards”), stock options, or any other stock-based award. A total of 43 million shares of our common stock have been authorized for issuance under the Stock Plan. As of December 31, 2021, approximately 18.6 million shares of our common stock remain available for issuance under the Stock Plan. Stock options under the Stock Plan generally vest pro rata over a four-year or five-year period and terminate 10 years from the grant date, though the specific terms of each grant are determined by the Compensation Committee of our Board of Directors. Our executive officers and certain other employees may be awarded stock options with different vesting criteria and stock options granted to non-employee directors are fully vested as of the grant date. Exercise prices for stock options granted under the Stock Plan were equal to the closing price of Fortive’s common stock on the NYSE on the date of grant, while stock options issued as conversion awards in connection with the separation from Danaher were priced to maintain the economic value before and after the separation.
RSUs and RSAs issued under the Stock Plan provide for the issuance of common stock at no cost to the holder. RSUs granted to employees under the Stock Plan generally provide for time-based vesting over four or five years, although certain employees may be awarded RSUs with different time-based vesting criteria. Time-based vesting RSUs granted to members of our senior management are also accompanied by incremental RSUs subject to performance-based vesting criteria. RSUs granted to non-employee directors under the Stock Plan vest on the earlier of the first anniversary of the grant date or the date of, and immediately prior to, the next annual meeting of our shareholders following the grant date. However, the underlying shares are not issued until the earlier of the director’s death or the first day of the seventh month following the director’s retirement from the Board of Directors (the “Board”). Prior to vesting, RSUs granted under the Stock Plan do not have dividend equivalent rights, do not have voting rights, and the shares underlying the RSUs are not considered issued or outstanding. RSAs granted under the Stock Plan generally provide for time-based vesting over five years and have all of the same dividend, voting, and other rights corresponding to all other common stock, provided, however, that the dividends payable on the RSAs will accrue and be delivered at the time of delivery of the shares upon vesting of the RSA.
PSUs issued under the Stock Plan provide for the issuance of a share of the Company’s common stock at no cost to the holder, vest based on the Company’s total shareholder return ranking relative to the S&P 500 Index over a performance period of approximately three years, are subject to an additional two-year holding period and are entitled to dividend equivalent rights. The PSU dividend equivalent rights are subject to the same vesting and payment restrictions as the related shares, but do not have voting rights and the shares underlying the PSUs are not considered issued and outstanding.
In connection with the Vontier separation and pursuant to the anti-dilution provisions of the 2016 Stock Incentive Plan, the number of shares underlying each stock-based award outstanding as of the date of the Separation was multiplied by a factor of 1.20 and the related exercise price for the stock options was divided by a factor of 1.20, which was intended to preserve the intrinsic value of the awards prior to the Separation. These adjustments to the Company’s equity compensation awards did not result in additional compensation expense. Stock based compensation awards that were held by Vontier employees were terminated and replaced with awards issued under the Vontier stock compensation plan. Stock-based compensation expense through the Separation date for Vontier is included in results from discontinued operations.
The equity compensation awards granted by the Company generally vest only if the employee is employed by us (or in the case of directors, the director continues to serve on the Board) on the vesting date. To cover the exercise of stock options, vesting of RSUs and PSUs, and issuances of RSAs, we generally issue shares authorized but previously unissued, although we may instead issue treasury shares; provided, however, that, either type of issuance would equally reduce the number of shares available under our Stock Plan.
We account for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date. We recognize the compensation expense over the requisite service period (which is generally the vesting period but may be shorter than the vesting period, for example, if the employee becomes retirement eligible before the end of the vesting period).
The fair value of RSUs is calculated using the closing price of Fortive common stock on the date of grant, adjusted for the impact of RSUs not having dividend rights prior to vesting. The fair value of RSAs is calculated using the closing price of Fortive common stock on the date of grant. The fair value of PSUs is calculated using a Monte Carlo pricing model. The fair value of the stock options granted is calculated using a Black-Scholes Merton (“Black-Scholes”) option pricing model.
In connection with the exercise of certain stock options and the vesting of Stock Awards issued under the Stock Plan, a number of our shares sufficient to fund statutory minimum tax withholding requirements have been withheld from the total shares issued or released to the award holder (though under the terms of the Stock Plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the year ended December 31, 2021, approximately 252
thousand shares of Fortive common stock with an aggregate value of approximately $17 million, were withheld to satisfy this requirement. The tax withholding is treated as a reduction in Additional paid-in capital in the Consolidated Statement of Changes in Equity.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of Selling, general, and administrative expenses in the Consolidated Statements of Earnings. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest.
The following summarizes the components of our stock-based compensation expense under the Stock Plan for the years ended December 31 ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Stock Awards: | |||||||||||||||||
| Pretax compensation expense | $ | 48.6 | $ | 38.6 | $ | 34.1 | |||||||||||
| Income tax benefit | (7.9) | (6.0) | (6.6) | ||||||||||||||
| Stock Award expense, net of income taxes | 40.7 | 32.6 | 27.5 | ||||||||||||||
| Stock options: | |||||||||||||||||
| Pretax compensation expense | 28.8 | 24.0 | 18.4 | ||||||||||||||
| Income tax benefit | (5.0) | (3.7) | (2.8) | ||||||||||||||
| Stock option expense, net of income taxes | 23.8 | 20.3 | 15.6 | ||||||||||||||
| Total stock-based compensation: | |||||||||||||||||
| Pretax compensation expense | 77.4 | 62.6 | 52.5 | ||||||||||||||
| Income tax benefit | (12.9) | (9.7) | (9.4) | ||||||||||||||
| Total stock-based compensation expense, net of income taxes | $ | 64.5 | $ | 52.9 | $ | 43.1 |
When stock options are exercised by the employee or Stock Awards vest, we derive a tax deduction measured by the excess of the market value on such date over the grant date price. Accordingly, we record the excess of the tax benefit related to the exercise of stock options and vesting of Stock Awards over the expense recorded for financial statement reporting purposes (the “Excess Tax Benefit”) as a component of Income tax expense and as an operating cash inflow in the consolidated financial statements. During the years ended December 31, 2021, 2020, and 2019 we realized an Excess Tax Benefit of $10 million, $13 million, and $10 million, respectively, related to stock options that were exercised and Stock Awards that vested.
The following summarizes the unrecognized compensation cost for the Stock Plan awards as of December 31, 2021. This compensation cost is expected to be recognized over a weighted average period of approximately two years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
| Stock Awards | $ | 83.6 | |||
| Stock options | 48.4 | ||||
| Total unrecognized compensation cost | $ | 132.0 |
Stock Options
The following summarizes the assumptions used in the Black-Scholes model to value stock options granted under the Stock Plan during the years ended December 31:
| 2021 | 2020 | 2019 | |||||||||||||||
| Risk-free interest rate | 0.8% - 1.3% | 0.3% - 1.5% | 1.4% - 2.6% | ||||||||||||||
| Volatility (a) | 27.2 | % | 21.1 | % | 19.9 | % | |||||||||||
| Dividend yield (b) | 0.4 | % | 0.4 | % | 0.4 | % | |||||||||||
| Expected years until exercise | 5.5 - 8.0 | 5.5 - 8.0 | 5.5 - 8.0 | ||||||||||||||
| (a) Expected volatility is based on a weighted average blend of the company’s historical stock price volatility from July 2, 2016 (the date of separation from Danaher) through the stock option grant date and the average historical stock price volatility of a group of peer companies for the expected term of the options. | |||||||||||||||||
| (b) The dividend yield is calculated by dividing our annual dividend, based on the most recent quarterly dividend rate, by Fortive’s closing stock price on the grant date. |
The following summarizes option activity under the Stock Plan (in millions, except price per share and numbers of years):
| Options (a) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding as of January 1, 2019 (a) | 11.9 | $ | 36.22 | ||||||||||||||||||||
| Granted | 2.7 | 57.28 | |||||||||||||||||||||
| Exercised | (1.4) | 28.14 | |||||||||||||||||||||
| Canceled/forfeited | (0.9) | 55.01 | |||||||||||||||||||||
| Outstanding as of December 31, 2019 (a) | 12.3 | 40.50 | |||||||||||||||||||||
| Granted | 2.3 | 63.09 | |||||||||||||||||||||
| Exercised | (1.9) | 26.32 | |||||||||||||||||||||
| Canceled/forfeited | (0.7) | 61.39 | |||||||||||||||||||||
| Adjustment due to Vontier Separation (b) | (1.4) | 44.94 | |||||||||||||||||||||
| Outstanding as of December 31, 2020 | 10.6 | 50.07 | |||||||||||||||||||||
| Granted | 2.0 | 69.07 | |||||||||||||||||||||
| Exercised | (1.5) | 36.40 | |||||||||||||||||||||
| Canceled/forfeited | (0.7) | 64.28 | |||||||||||||||||||||
| Outstanding as of December 31, 2021 | 10.4 | 54.81 | 6 | $ | 224.3 | ||||||||||||||||||
| Vested and expected to vest as of December 31, 2021 (c) | 10.3 | 54.62 | 6 | $ | 222.9 | ||||||||||||||||||
| Vested as of December 31, 2021 | 4.8 | 42.78 | 4 | $ | 160.9 | ||||||||||||||||||
| (a) The outstanding options as of December 31, 2019 have been adjusted by a factor of 1.20, as noted above, due to the Separation. (b) The “Adjustment due to Vontier Separation” reflects the cancellation of outstanding options held by Vontier employees as of October 8, 2020, which were replaced with Vontier options issued by Vontier as part of the Separation. (c) The “expected to vest” options are the net unvested options that remain after applying the forfeiture rate assumption to total unvested options. |
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing stock price of Fortive common stock on the last trading day of 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2021. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock.
Options outstanding as of December 31, 2021 are summarized below (in millions; except price per share and number of years):
| Outstanding | Vested | ||||||||||||||||||||||||||||
| Exercise Price | Shares | Average Exercise Price | Average Remaining Life (in years) | Shares | Average Exercise Price | ||||||||||||||||||||||||
| $10.67 - $29.47 | 0.5 | $ | 25.64 | 1 | 0.5 | $ | 25.64 | ||||||||||||||||||||||
| $29.48 - $37.95 | 2.1 | 34.37 | 3 | 2.1 | 34.37 | ||||||||||||||||||||||||
| $37.96 - $58.78 | 1.6 | 46.78 | 5 | 1.2 | 46.05 | ||||||||||||||||||||||||
| $58.79 - $67.64 | 4.5 | 64.93 | 8 | 0.7 | 63.35 | ||||||||||||||||||||||||
| $67.65 - $78.03 | 1.7 | 69.69 | 8 | 0.3 | 68.29 | ||||||||||||||||||||||||
| Total shares | 10.4 | 4.8 |
The following summarizes aggregate intrinsic value and cash receipts related to stock options that were exercised under the Stock Plan for the years ended December 31 ($ in millions):
| 2021 | 2020 | 2019 | |||||||||||||||
| Aggregate intrinsic value of stock options exercised | $ | 55.9 | $ | 65.8 | $ | 52.5 | |||||||||||
| Cash receipts from stock options exercised | $ | 52.4 | $ | 46.7 | $ | 40.0 | |||||||||||
Stock Awards
The following summarizes information related to Stock Award activity under the Stock Plan for the years ended December 31, 2021, 2020, and 2019 (in millions; except price per share):
| Number of Stock Awards (a) | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested as of January 1, 2019 | 2.1 | $ | 49.04 | ||||||||
| Granted | 1.1 | 64.72 | |||||||||
| Vested | (0.6) | 40.86 | |||||||||
| Forfeited | (0.3) | 56.16 | |||||||||
| Unvested as of December 31, 2019 | 2.3 | 57.74 | |||||||||
| Granted | 1.0 | 64.14 | |||||||||
| Vested | (0.6) | 50.82 | |||||||||
| Forfeited | (0.2) | 61.00 | |||||||||
| Adjustment due to Vontier Separation (b) | (0.2) | 60.40 | |||||||||
| Unvested as of December 31, 2020 | 2.3 | 63.04 | |||||||||
| Granted | 1.1 | 68.90 | |||||||||
| Vested | (0.5) | 55.78 | |||||||||
| Forfeited | (0.3) | 65.28 | |||||||||
| Unvested as of December 31, 2021 | 2.6 | 66.43 | |||||||||
| (a) The outstanding stock awards as of December 31, 2019 have been adjusted by a factor of 1.20, as noted above, due to the Separation. (b) The “Adjustment due to Vontier Separation” reflects the cancellation of unvested awards held by Vontier employees as of October 8, 2020, which were replaced by Vontier equity awards issued by Vontier as part of the Separation. |
NOTE 18. CAPITAL STOCK AND EARNINGS PER SHARE
Common Stock
Under our amended and restated certificate of incorporation, as of July 1, 2016, our authorized capital stock consists of 2.0 billion common shares with a par value of $0.01 per share and 15 million preferred shares with a par value of $0.01 per share.
Each share of our common stock entitles the holder to one vote on all matters to be voted upon by common stockholders. Our Board is authorized to issue shares of preferred stock in one or more series and has discretion to determine the rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges, and liquidation preferences, of each series of preferred stock. The Board’s authority to issue preferred stock with voting rights or
conversion rights that, if exercised, could adversely affect the voting power of the holders of common stock, could potentially discourage attempts by third parties to obtain control of the Company through certain types of takeover practices.
We declared and paid cash dividends per common share during the periods presented as follows:
| Dividend Per Common Share | Amount ($ in millions) | ||||||||||
| 2021: | |||||||||||
| First quarter | $ | 0.07 | $ | 23.7 | |||||||
| Second quarter | 0.07 | 23.7 | |||||||||
| Third quarter | 0.07 | 25.2 | |||||||||
| Fourth quarter | 0.07 | 25.1 | |||||||||
| Total | $ | 0.28 | $ | 97.7 | |||||||
| 2020: | |||||||||||
| First quarter | $ | 0.07 | $ | 23.5 | |||||||
| Second quarter | 0.07 | 23.6 | |||||||||
| Third quarter | 0.07 | 23.6 | |||||||||
| Fourth quarter | 0.07 | 23.7 | |||||||||
| Total | $ | 0.28 | $ | 94.4 | |||||||
| The sum of the components of total dividends paid may not equal the total amount due to rounding. |
Aggregate cash payments for the dividends paid to shareholders are recorded as dividends to shareholders in our Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows.
Subsequent Events
On January 25, 2022 we declared a regular quarterly cash dividend of $0.07 per share payable on March 25, 2022 to common stockholders of record on February 25, 2022.
On February 17, 2022, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 20 million shares of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. There is no expiration date for the repurchase program, and the timing and amount of repurchases under the program are determined by the Company's management based on market conditions and other factors. The repurchase program may be suspended or discontinued at any time by the Board of Directors.
Mandatory Convertible Preferred Stock
On June 29, 2018, we issued 1,380,000 shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received net $1.34 billion in proceeds from the issuance of the MCPS, excluding $43 million of issuance costs. We used the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital, and capital expenditures.
On July 1, 2021, all outstanding shares of our 5.0% Mandatory Convertible Preferred Stock (“MCPS”) converted at a rate of 14.0978 common shares per share of preferred stock into an aggregate of approximately 19.4 million shares (net of fractional shares) of the Company’s common stock, pursuant to the terms of the Certificate of Designation governing the Series A Preferred Stock. Fortive issued cash in lieu of fractional shares of common stock in the conversion. These payments were recorded as a reduction to additional paid-in capital. The final dividend of $12.50 per share, or $17.2 million in the aggregate, was paid on July 1, 2021. The impact of the MCPS calculated under the if-converted method was anti-dilutive for the periods in 2021 prior to conversion.
We declared and paid cash dividends on our MCPS during the periods presented as follows:
| Dividend Per Preferred Share | Amount ($ in millions) | ||||||||||
| 2021: | |||||||||||
| First quarter | $ | 12.50 | $ | 17.3 | |||||||
| Second quarter | 12.50 | 17.2 | |||||||||
| Third quarter | — | — | |||||||||
| Fourth quarter | — | — | |||||||||
| Total | $ | 25.00 | $ | 34.5 | |||||||
| 2020: | |||||||||||
| First quarter | $ | 12.50 | $ | 17.3 | |||||||
| Second quarter | 12.50 | 17.2 | |||||||||
| Third quarter | 12.50 | 17.3 | |||||||||
| Fourth quarter | 12.50 | 17.2 | |||||||||
| Total | $ | 50.00 | $ | 69.0 | |||||||
Net Earnings Per Share
Basic net earnings per share (“EPS”) is calculated by dividing net earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans under the treasury stock method, except where the inclusion of such shares would have an anti-dilutive impact.
For the years ended December 31, 2021, 2020, and 2019 the anti-dilutive options to purchase shares excluded from the diluted EPS calculation were 0.3 million shares, 4.9 million shares, and 3.0 million shares respectively. The impact of our MCPS calculated under the if-converted method was anti-dilutive for the year ended December 31, 2019, and as such, 18.3 million shares were excluded from the dilutive EPS calculation. The impact of our MCPS calculated under the if-converted method was dilutive for the year ended December 31, 2020, and therefore the 19.9 million shares were included in the calculation of diluted EPS.
As described in Note 11, upon conversion of the Convertible Notes, holders will receive cash, shares of our common stock, or a combination thereof, at our election. Our intention is to settle such conversions through cash up to the principal amount of the Convertible Notes and, if applicable, through shares of our common stock for conversion value, if any, in excess of the principal amount of the Convertible Notes. We believe we have the ability to settle these obligations as intended, and therefore we have accounted for the conversion features under the treasury stock method in our calculation of EPS. Because the fair value of our common stock is below the conversion price, the Convertible Notes had no impact on our earnings per share for the years ended December 31, 2021 and 2020.
Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts):
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Numerator | |||||||||||||||||
| Net earnings from continuing operations | $ | 614.2 | $ | 1,452.2 | $ | 268.1 | |||||||||||
| Mandatory convertible preferred stock cumulative dividends | (34.5) | (69.0) | (69.0) | ||||||||||||||
| Net earnings attributable to common stockholders from continuing operations used in basic earnings per share | $ | 579.7 | $ | 1,383.2 | $ | 199.1 | |||||||||||
| Add-back: Mandatory convertible preferred stock cumulative dividends (“if-converted” method) | — | 69.0 | — | ||||||||||||||
| Net earnings attributable to common stockholders from continuing operations and assumed conversions used in diluted earnings per share | $ | 579.7 | $ | 1,452.2 | $ | 199.1 | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding used in basic earnings per share | 349.0 | 337.4 | 335.8 | ||||||||||||||
| Incremental common shares from: | |||||||||||||||||
| Assumed exercise of dilutive options and vesting of dilutive Stock Awards | 3.3 | 1.7 | 4.2 | ||||||||||||||
| Assumed conversion of outstanding mandatory convertible preferred stock | — | 19.9 | — | ||||||||||||||
| Weighted average common shares outstanding used in diluted earnings per share | 352.3 | 359.0 | 340.0 | ||||||||||||||
| Net earnings from continuing operations per common share - Basic | $ | 1.66 | $ | 4.10 | $ | 0.59 | |||||||||||
| Net earnings from continuing operations per common share - Diluted | $ | 1.65 | $ | 4.05 | $ | 0.59 |
NOTE 19. SEGMENT INFORMATION
We report our results in three separate business segments consisting of Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. Operating profit represents total revenues less operating expenses, excluding other income/expense, interest, and income taxes. The identifiable assets by segment are those used in each segment’s operations. Inter-segment amounts are not significant and are eliminated in the combined totals. Amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance.
Segment results are shown below ($ in millions):
| Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Sales: | |||||||||||||||||
| Intelligent Operating Solutions | $ | 2,169.4 | $ | 1,883.7 | $ | 1,898.9 | |||||||||||
| Precision Technologies | 1,848.9 | 1,651.3 | 1,808.4 | ||||||||||||||
| Advanced Healthcare Solutions | 1,236.4 | 1,099.4 | 856.6 | ||||||||||||||
| Total | $ | 5,254.7 | $ | 4,634.4 | $ | 4,563.9 | |||||||||||
| Operating Profit: | |||||||||||||||||
| Intelligent Operating Solutions | $ | 408.5 | $ | 317.8 | $ | 289.0 | |||||||||||
| Precision Technologies | 408.0 | 321.7 | 324.6 | ||||||||||||||
| Advanced Healthcare Solutions | 101.9 | 2.1 | (72.0) | ||||||||||||||
| Other | (105.6) | (102.2) | (97.7) | ||||||||||||||
| Total | $ | 812.8 | $ | 539.4 | $ | 443.9 | |||||||||||
| Segment assets: | |||||||||||||||||
| Intelligent Operating Solutions | $ | 6,769.3 | $ | 5,662.1 | $ | 5,748.2 | |||||||||||
| Precision Technologies | 2,994.2 | 2,979.7 | 2,974.7 | ||||||||||||||
| Advanced Healthcare Solutions | 5,737.4 | 4,309.8 | 4,432.9 | ||||||||||||||
| Total segment assets | 15,500.9 | 12,951.6 | 13,155.8 | ||||||||||||||
| Other | 964.6 | 3,069.5 | 1,436.8 | ||||||||||||||
| Assets of Discontinued Operations | — | 30.4 | 2,846.4 | ||||||||||||||
| Total assets | $ | 16,465.5 | $ | 16,051.5 | $ | 17,439.0 | |||||||||||
| Depreciation and amortization: | |||||||||||||||||
| Intelligent Operating Solutions | $ | 187.8 | $ | 179.1 | $ | 182.5 | |||||||||||
| Precision Technologies | 41.6 | 43.0 | 47.1 | ||||||||||||||
| Advanced Healthcare Solutions | 161.7 | 159.7 | 110.3 | ||||||||||||||
| Other | 4.4 | 2.2 | 1.6 | ||||||||||||||
| Total | $ | 395.5 | $ | 384.0 | $ | 341.5 | |||||||||||
| Capital expenditures, gross: | |||||||||||||||||
| Intelligent Operating Solutions | $ | 16.7 | $ | 26.1 | $ | 30.4 | |||||||||||
| Precision Technologies | 21.4 | 17.4 | 21.3 | ||||||||||||||
| Advanced Healthcare Solutions | 6.4 | 20.1 | 16.0 | ||||||||||||||
| Other | 5.5 | 12.1 | 6.8 | ||||||||||||||
| Total | $ | 50.0 | $ | 75.7 | $ | 74.5 |
Operations in Geographic Areas:
| Year Ended December 31 | |||||||||||||||||
| ($ in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Sales: | |||||||||||||||||
| United States | $ | 2,683.0 | $ | 2,436.6 | $ | 2,394.2 | |||||||||||
| China | 650.7 | 534.1 | 501.2 | ||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,921.0 | 1,663.7 | 1,668.5 | ||||||||||||||
| Total | $ | 5,254.7 | $ | 4,634.4 | $ | 4,563.9 | |||||||||||
| Property, plant and equipment, net | |||||||||||||||||
| United States | $ | 291.3 | $ | 304.6 | $ | 328.0 | |||||||||||
| Switzerland | 23.1 | 30.2 | 17.9 | ||||||||||||||
| All other (each country individually less than 5% of total property, plant and equipment, net) | 81.1 | 87.2 | 70.1 | ||||||||||||||
| Total | $ | 395.5 | $ | 422.0 | $ | 416.0 |
NOTE 20. RELATED-PARTY TRANSACTIONS WITH DANAHER
In connection with the separation from Danaher in 2016, we entered into certain agreements with Danaher, which governed the separation and provided a framework for the relationship between the parties going forward. Refer to Note 14 for additional discussion of the tax matters agreement.
We continue to enter into arms-length revenue arrangements in the ordinary course of business with Danaher and its affiliates and these transactions are considered related party transactions. We recorded sales of approximately $13 million, $13 million, and $12 million to Danaher and its subsidiaries during the years ended December 31, 2021, 2020, and 2019, respectively. Purchases from Danaher and its subsidiaries were approximately $14 million, $12 million, and $13 million during the years ended December 31, 2021, 2020, and 2019, respectively.
NOTE 21. QUARTERLY DATA - UNAUDITED
| ($ in millions, except per share data) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||
| 2021: | |||||||||||||||||||||||
| Sales(a) | $ | 1,259.2 | $ | 1,319.7 | $ | 1,301.0 | $ | 1,374.8 | |||||||||||||||
| Gross profit | 711.9 | 755.5 | 745.7 | 794.0 | |||||||||||||||||||
| Operating profit | 197.6 | 211.3 | 202.3 | 201.6 | |||||||||||||||||||
| Earnings from continuing operations, net of income taxes | 111.7 | 182.0 | 152.6 | 167.9 | |||||||||||||||||||
| Earnings (loss) from discontinued operations, net of income taxes | (1.5) | (1.1) | (0.3) | (2.9) | |||||||||||||||||||
| Net earnings | $ | 110.2 | $ | 180.9 | $ | 152.3 | $ | 165.0 | |||||||||||||||
| Earnings per common share - basic: | |||||||||||||||||||||||
| Continuing operations | $ | 0.28 | $ | 0.49 | $ | 0.42 | $ | 0.47 | |||||||||||||||
| Discontinued operations | — | — | — | (0.01) | |||||||||||||||||||
| Total earnings per common share - basic | $ | 0.27 | $ | 0.48 | $ | 0.42 | $ | 0.46 | |||||||||||||||
| Earnings per common share - diluted: | |||||||||||||||||||||||
| Continuing operations | $ | 0.28 | $ | 0.48 | $ | 0.42 | $ | 0.46 | |||||||||||||||
| Discontinued operations | — | — | — | (0.01) | |||||||||||||||||||
| Total earnings per common share - diluted | $ | 0.27 | $ | 0.48 | $ | 0.42 | $ | 0.44 | |||||||||||||||
| 2020: | |||||||||||||||||||||||
| Sales | $ | 1,108.1 | $ | 1,041.6 | $ | 1,159.8 | $ | 1,324.9 | |||||||||||||||
| Gross profit | 612.0 | 582.8 | 651.6 | 762.1 | |||||||||||||||||||
| Operating profit | 115.4 | 102.6 | 137.5 | 183.9 | |||||||||||||||||||
| Earnings from continuing operations, net of income taxes | 54.8 | 59.8 | 86.0 | 1,251.6 | |||||||||||||||||||
| Earnings from discontinued operations, net of income taxes | (12.9) | 70.2 | 139.8 | (36.0) | |||||||||||||||||||
| Net earnings | $ | 41.9 | $ | 130.0 | $ | 225.8 | $ | 1,215.6 | |||||||||||||||
| Earnings per common share - basic: | |||||||||||||||||||||||
| Continuing operations | $ | 0.11 | $ | 0.13 | $ | 0.20 | $ | 3.65 | |||||||||||||||
| Discontinued operations | (0.04) | 0.20 | 0.42 | (0.11) | |||||||||||||||||||
| Total earnings per common share - basic | $ | 0.07 | $ | 0.33 | $ | 0.62 | $ | 3.55 | |||||||||||||||
| Earnings per common share - diluted: | |||||||||||||||||||||||
| Continuing operations | $ | 0.11 | $ | 0.13 | $ | 0.20 | $ | 3.47 | |||||||||||||||
| Discontinued operations | (0.04) | 0.20 | 0.41 | (0.10) | |||||||||||||||||||
| Total earnings per common share - diluted | $ | 0.07 | $ | 0.33 | $ | 0.61 | $ | 3.37 | |||||||||||||||
| The sum of net earnings per share amount may not add due to rounding. | |||||||||||||||||||||||
| (a) Sales in the third quarter of 2021 include an increase of $1.5 million, as a result of our adoption of ASU 2021-08 and the retrospective application to the ServiceChannel acquisition. Refer to Note 2 for details. |
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