filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except per share amounts)
| As of | |||||||||||
| October 1, 2021 | December 31, 2020 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 838.4 | $ | 1,824.8 | |||||||
| Accounts receivable, net | 830.4 | 810.3 | |||||||||
| Inventories: | |||||||||||
| Finished goods | 231.1 | 227.9 | |||||||||
| Work in process | 87.9 | 75.2 | |||||||||
| Raw materials | 187.8 | 152.4 | |||||||||
| Inventories | 506.8 | 455.5 | |||||||||
| Prepaid expenses and other current assets | 249.7 | 206.7 | |||||||||
| Investment in Vontier Corporation | — | 1,119.2 | |||||||||
| Current assets, discontinued operations | — | 30.4 | |||||||||
| Total current assets | 2,425.3 | 4,446.9 | |||||||||
| Property, plant and equipment, net of accumulated depreciation of $701.1 and $674.5 at October 1, 2021 and December 31, 2020, respectively | 395.0 | 422.0 | |||||||||
| Operating lease right-of-use assets | 180.3 | 188.7 | |||||||||
| Other assets | 361.9 | 344.1 | |||||||||
| Goodwill | 8,221.5 | 7,359.2 | |||||||||
| Other intangible assets, net | 3,392.1 | 3,290.6 | |||||||||
| Total assets | $ | 14,976.1 | $ | 16,051.5 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Commercial paper | $ | 215.0 | $ | — | |||||||
| Current portion of long-term debt | 1,143.2 | 1,399.8 | |||||||||
| Trade accounts payable | 494.9 | 480.8 | |||||||||
| Current operating lease liabilities | 45.4 | 47.0 | |||||||||
| Accrued expenses and other current liabilities | 969.2 | 899.9 | |||||||||
| Current liabilities, discontinued operations | 1.2 | 33.3 | |||||||||
| Total current liabilities | 2,868.9 | 2,860.8 | |||||||||
| Operating lease liabilities | 144.3 | 154.3 | |||||||||
| Other long-term liabilities | 1,198.0 | 1,233.4 | |||||||||
| Long-term debt | 1,442.1 | 2,830.3 | |||||||||
| Commitments and Contingencies | |||||||||||
| Equity: | |||||||||||
| Preferred stock: $0.01 par value, 15.0 million shares authorized at October 1, 2021 and December 31, 2020; 5.0% Mandatory convertible preferred stock, series A, 0.0 million and 1.4 million shares designated, issued, and outstanding at October 1, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Common stock: $0.01 par value, 2.0 billion shares authorized; 359.9 and 339.0 million issued; 358.6 and 337.9 million outstanding at October 1, 2021 and December 31, 2020, respectively | 3.6 | 3.4 | |||||||||
| Additional paid-in capital | 3,624.3 | 3,554.5 | |||||||||
| Retained earnings | 5,882.2 | 5,547.4 | |||||||||
| Accumulated other comprehensive loss | (192.1) | (141.1) | |||||||||
| Total Fortive stockholders’ equity | 9,318.0 | 8,964.2 | |||||||||
| Noncontrolling interests | 4.8 | 8.5 | |||||||||
| Total stockholders’ equity | 9,322.8 | 8,972.7 | |||||||||
| Total liabilities and equity | $ | 14,976.1 | $ | 16,051.5 |
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | |||||||||||||||||||||||
| Sales of products and software | $ | 1,105.6 | $ | 988.1 | $ | 3,318.8 | $ | 2,820.6 | ||||||||||||||||||
| Sales of services | 193.9 | 171.7 | 559.6 | 488.9 | ||||||||||||||||||||||
| Total sales | 1,299.5 | 1,159.8 | 3,878.4 | 3,309.5 | ||||||||||||||||||||||
| Cost of product and software sales | (448.3) | (409.6) | (1,356.6) | (1,185.8) | ||||||||||||||||||||||
| Cost of service sales | (107.0) | (98.6) | (310.2) | (277.3) | ||||||||||||||||||||||
| Total cost of sales | (555.3) | (508.2) | (1,666.8) | (1,463.1) | ||||||||||||||||||||||
| Gross profit | 744.2 | 651.6 | 2,211.6 | 1,846.4 | ||||||||||||||||||||||
| Operating costs: | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | (455.6) | (434.8) | (1,340.1) | (1,253.4) | ||||||||||||||||||||||
| Research and development expenses | (87.8) | (79.2) | (261.8) | (237.4) | ||||||||||||||||||||||
| Operating profit | 200.8 | 137.6 | 609.7 | 355.6 | ||||||||||||||||||||||
| Non-operating income (expense), net: | ||||||||||||||||||||||||||
| Interest expense, net | (25.1) | (36.9) | (78.0) | (111.7) | ||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | (104.9) | — | ||||||||||||||||||||||
| Gain on investment in Vontier Corporation | — | — | 57.0 | — | ||||||||||||||||||||||
| Gain on litigation dismissal | — | — | 26.0 | — | ||||||||||||||||||||||
| Other non-operating expense, net | (1.6) | (1.4) | (9.5) | (0.3) | ||||||||||||||||||||||
| Earnings from continuing operations before income taxes | 174.1 | 99.3 | 500.3 | 243.6 | ||||||||||||||||||||||
| Income taxes | (23.0) | (13.3) | (55.5) | (43.0) | ||||||||||||||||||||||
| Net earnings from continuing operations | 151.1 | 86.0 | 444.8 | 200.6 | ||||||||||||||||||||||
| Earnings (loss) from discontinued operations, net of income taxes | (0.3) | 139.8 | (2.9) | 197.1 | ||||||||||||||||||||||
| Net earnings | 150.8 | 225.8 | 441.9 | 397.7 | ||||||||||||||||||||||
| Mandatory convertible preferred dividends | — | (17.3) | (34.5) | (51.8) | ||||||||||||||||||||||
| Net earnings attributable to common stockholders | $ | 150.8 | $ | 208.5 | $ | 407.4 | $ | 345.9 | ||||||||||||||||||
| Net earnings per common share from continuing operations: | ||||||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.20 | $ | 1.19 | $ | 0.44 | ||||||||||||||||||
| Diluted | $ | 0.42 | $ | 0.20 | $ | 1.18 | $ | 0.44 | ||||||||||||||||||
| Net earnings (loss) per share from discontinued operations: | ||||||||||||||||||||||||||
| Basic | $ | — | $ | 0.41 | $ | (0.01) | $ | 0.58 | ||||||||||||||||||
| Diluted | $ | — | $ | 0.41 | $ | (0.01) | $ | 0.58 | ||||||||||||||||||
| Net earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.62 | $ | 1.18 | $ | 1.03 | ||||||||||||||||||
| Diluted | $ | 0.42 | $ | 0.61 | $ | 1.17 | $ | 1.02 | ||||||||||||||||||
| Average common stock and common equivalent shares outstanding: | ||||||||||||||||||||||||||
| Basic | 358.9 | 337.6 | 345.6 | 337.3 | ||||||||||||||||||||||
| Diluted | 362.2 | 340.8 | 348.8 | 340.2 | ||||||||||||||||||||||
| The sum of net earnings per share amounts may not add due to rounding. |
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Net earnings | $ | 150.8 | $ | 225.8 | $ | 441.9 | $ | 397.7 | |||||||||||||||
| Other comprehensive income, net of income taxes: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (35.7) | 63.9 | (53.8) | (36.4) | |||||||||||||||||||
| Pension adjustments | 0.9 | 1.0 | 2.8 | 1.0 | |||||||||||||||||||
| Total other comprehensive income (loss), net of income taxes | (34.8) | 64.9 | (51.0) | (35.4) | |||||||||||||||||||
| Comprehensive income | $ | 116.0 | $ | 290.7 | $ | 390.9 | $ | 362.3 |
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
| Common Stock | Preferred Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | 110.2 | |||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (23.7) | — | — | |||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (17.3) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (33.7) | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | (0.5) | — | — | — | (2.3) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Early extinguishment of 0.875% senior convertible notes due 2022 | — | — | — | — | 11.6 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | (0.8) | |||||||||||||||||||||||||||||||||||||||
| Balance, April 2, 2021 | 338.5 | $ | 3.4 | 1.4 | $ | — | $ | 3,563.8 | $ | 5,616.6 | $ | (174.8) | $ | 7.7 | |||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 180.9 | |||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (23.7) | — | — | |||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (17.2) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 17.5 | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.5 | — | — | — | 35.3 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversion of Mandatory convertible preferred stock to common stock | 19.4 | 0.2 | (1.4) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interests | — | — | — | — | 3.0 | — | — | (3.0) | |||||||||||||||||||||||||||||||||||||||
| Balance, July 2, 2021 | 358.4 | $ | 3.6 | — | $ | — | $ | 3,602.1 | $ | 5,756.6 | $ | (157.3) | $ | 4.7 | |||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 150.8 | |||||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (25.2) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (34.8) | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.2 | — | — | — | 26.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interests | — | — | — | — | (3.8) | — | — | 0.1 | |||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2021 | 358.6 | $ | 3.6 | — | $ | — | $ | 3,624.3 | $ | 5,882.2 | $ | (192.1) | $ | 4.8 | |||||||||||||||||||||||||||||||||
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
| Common Stock | Preferred Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 336.0 | $ | 3.4 | 1.4 | $ | — | $ | 3,311.1 | $ | 4,128.8 | $ | (56.3) | $ | 13.2 | |||||||||||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | — | (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 | — | — | — | — | — | 41.9 | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (23.5) | — | — | |||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (17.3) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (137.3) | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.8 | — | — | — | 22.6 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | (2.0) | |||||||||||||||||||||||||||||||||||||||
| Balance, March 27, 2020 | 336.8 | $ | 3.4 | 1.4 | $ | — | $ | 3,333.7 | $ | 4,098.6 | $ | (193.6) | $ | 11.2 | |||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 130.0 | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (23.6) | — | — | |||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (17.2) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 37.0 | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.2 | — | — | — | 27.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | 0.4 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 26, 2020 | 337.0 | $ | 3.4 | 1.4 | $ | — | $ | 3,360.7 | $ | 4,187.8 | $ | (156.6) | $ | 11.6 | |||||||||||||||||||||||||||||||||
| Net earnings for the period | — | — | — | — | — | 225.8 | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | — | — | (23.6) | — | — | |||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | — | — | — | — | (17.3) | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 64.9 | — | |||||||||||||||||||||||||||||||||||||||
| Common stock-based award activity | 0.2 | — | — | — | 31.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interests | — | — | — | — | — | — | — | 0.4 | |||||||||||||||||||||||||||||||||||||||
| Balance, September 25, 2020 | 337.2 | $ | 3.4 | 1.4 | $ | — | $ | 3,391.7 | $ | 4,372.7 | $ | (91.7) | $ | 12.0 | |||||||||||||||||||||||||||||||||
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
| Nine Months Ended | |||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings from continuing operations | $ | 444.8 | $ | 200.6 | |||||||
| Noncash items: | |||||||||||
| Amortization | 235.4 | 232.7 | |||||||||
| Depreciation | 56.1 | 60.3 | |||||||||
| Stock-based compensation expense | 55.2 | 45.3 | |||||||||
| Loss on extinguishment of debt | 104.2 | — | |||||||||
| Gain on investment in Vontier Corporation | (57.0) | — | |||||||||
| Gain on litigation dismissal | (26.0) | — | |||||||||
| Change in trade accounts receivable, net | (20.4) | 102.9 | |||||||||
| Change in inventories | (46.1) | (14.2) | |||||||||
| Change in trade accounts payable | 14.8 | (24.7) | |||||||||
| Change in prepaid expenses and other assets | (61.5) | 23.2 | |||||||||
| Change in accrued expenses and other liabilities | 6.4 | 22.2 | |||||||||
| Total operating cash provided by continuing operations | 705.9 | 648.3 | |||||||||
| Total operating cash provided by (used in) discontinued operations | (19.4) | 503.7 | |||||||||
| Net cash provided by operating activities | 686.5 | 1,152.0 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Cash paid for acquisitions, net of cash received | (1,156.7) | (15.2) | |||||||||
| Payments for additions to property, plant and equipment | (28.0) | (58.9) | |||||||||
| All other investing activities | 1.1 | 5.3 | |||||||||
| Total investing cash used in continuing operations | (1,183.6) | (68.8) | |||||||||
| Total investing cash used in discontinued operations | — | (36.3) | |||||||||
| Net cash used in investing activities | (1,183.6) | (105.1) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds from (repayment of) commercial paper borrowings | 215.0 | (1,141.9) | |||||||||
| Proceeds from borrowings (maturities greater than 90 days), net of issuance costs of $8 million in 2020 | — | 741.7 | |||||||||
| Repayment of borrowings (maturities greater than 90 days) | (611.1) | (250.0) | |||||||||
| Payment of common stock cash dividend to shareholders | (72.6) | (70.7) | |||||||||
| Payment of mandatory convertible preferred stock cash dividend to shareholders | (34.5) | (34.5) | |||||||||
| All other financing activities | 18.1 | (0.6) | |||||||||
| Total financing cash used in continuing operations | (485.1) | (756.0) | |||||||||
| Total financing cash used in discontinued operations | — | (4.2) | |||||||||
| Net cash used in financing activities | (485.1) | (760.2) | |||||||||
| Effect of exchange rate changes on cash and equivalents | (4.2) | (2.7) | |||||||||
| Net change in cash and equivalents | (986.4) | 284.0 | |||||||||
| Beginning balance of cash and equivalents | 1,824.8 | 1,205.2 | |||||||||
| Ending balance of cash and equivalents | $ | 838.4 | $ | 1,489.2 |
See the accompanying Notes to Consolidated Condensed Financial Statements.
FORTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW
Fortive Corporation (“Fortive,” the “Company,” “we,” “us,” or “our”) is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets. Our well-known brands hold leading positions in intelligent operating solutions, precision technologies, and advanced healthcare solutions. Our businesses design, develop, service, manufacture, and market professional and engineered products, software, and services for a variety of end markets, building upon leading brand names, innovative technologies, and significant market positions. Our research and development, manufacturing, sales, distribution, service, and administrative facilities are located in more than 50 countries across North America, Asia Pacific, Europe, and Latin America.
We prepared the unaudited consolidated condensed financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe the disclosures are adequate to make the information presented not misleading. The consolidated condensed financial statements included herein should be read in conjunction with the audited annual consolidated financial statements as of and for the year ended December 31, 2020 and the footnotes (“Notes”) thereto included within our 2020 Annual Report on Form 10-K.
In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present our financial position as of October 1, 2021 and December 31, 2020, our results of operations for the three and nine month periods ended October 1, 2021 and September 25, 2020, and cash flows for the nine month periods ended October 1, 2021 and September 25, 2020. Reclassification of certain prior year amounts have been made to conform to current year presentation.
Vontier Separation and Discontinued Operations
On October 9, 2020 (the “Distribution Date”), the Company completed the separation of its Industrial Technologies segment by distributing 80.1% of the outstanding shares of Vontier Corporation (“Vontier”), the entity incorporated to hold such businesses, to Fortive stockholders (the “Vontier Separation”) on a pro rata basis. To effect the Vontier Separation, the Company distributed to its stockholders two shares of Vontier common stock for every five shares of the Company’s common stock outstanding held on September 25, 2020, the record date for the distribution, with the Company retaining 19.9% of the shares of Vontier common stock outstanding immediately following the Vontier Separation (the “Retained Vontier Shares”).
On the Distribution Date, Vontier paid the Company $1.8 billion, including $1.6 billion as part of the consideration for the contribution of certain assets and liabilities to Vontier by the Company in connection with the Vontier Separation and $202 million as an adjustment for excess cash balances remaining with Vontier (collectively, the “Cash Consideration”). We have used the Cash Consideration to repay certain outstanding indebtedness, make interest payments on certain debt instruments, and pay certain of the Company’s regular, quarterly cash dividends.
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.
Refer to Note 11 of our 2020 Annual Report on Form 10-K and Note 6 to the consolidated condensed financial statements 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 first quarter of 2021 are included in continuing operations.
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. Fortive did not retain a controlling interest in Vontier and therefore the Retained Vontier Shares were included in our assets of continuing operations as of December 31, 2020 and subsequent fair value changes in the Retained Vontier Shares prior to the Debt-for-Equity Exchange are included in our results from continuing operations for the nine month period ended October 1, 2021.
Segment Presentation
In light of the Vontier Separation, we changed our internal reporting structure on the first day of the fourth quarter of 2020, September 26, 2020, to reflect organizational and leadership changes that allow us to better assess the operational performance of, and allocate resources to, our businesses. Our chief operating decision maker assesses performance and allocates resources based on our new operating segments, which are also our new reportable segments. Our new reportable segments are comprised of Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. All prior period segment information has been restated to reflect our new reportable segments.
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. We designated our ¥13.8 billion senior unsecured term facility loan and our Euro-denominated commercial paper outstanding during the nine month period ended September 25, 2020 as net investment hedges of our investment in certain foreign operations; 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. As of October 1, 2021 and December 31, 2020, we had no designated net investment hedges.
During the three and nine month periods ended September 25, 2020, we recognized foreign currency transaction losses of $2.0 million and gains of $2.0 million, respectively, on the debt that were deferred in the foreign currency translation component of Accumulated other comprehensive income (loss) (“AOCI”) as an offset to the foreign currency translation adjustments on our investments in foreign subsidiaries. Any amounts deferred in AOCI will remain until the hedged investment is sold or substantially liquidated. We recorded no ineffectiveness from our net investment hedges during the three and nine month periods ended September 25, 2020.
The changes in AOCI by component are summarized below ($ in millions):
| Foreign currency translation adjustments | Pension adjustments (a) | Total | |||||||||||||||
| For the Three Months Ended October 1, 2021: | |||||||||||||||||
| Balance, July 2, 2021 | $ | (72.1) | $ | (85.2) | $ | (157.3) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | (35.7) | — | (35.7) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase (decrease) | — | 1.2 | (b) | 1.2 | |||||||||||||
| Income tax impact | — | (0.3) | (0.3) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 0.9 | 0.9 | ||||||||||||||
| Net current period other comprehensive income (loss), net of income taxes | (35.7) | 0.9 | (34.8) | ||||||||||||||
| Balance, October 1, 2021 | $ | (107.8) | $ | (84.3) | $ | (192.1) | |||||||||||
| For the Three Months Ended September 25, 2020: | |||||||||||||||||
| Balance, June 26, 2020 | $ | (79.1) | $ | (77.5) | $ | (156.6) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | 63.9 | — | 63.9 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase (decrease) | — | 1.2 | (b) | 1.2 | |||||||||||||
| Income tax impact | — | (0.2) | (0.2) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 1.0 | 1.0 | ||||||||||||||
| Net current period other comprehensive income (loss), net of income taxes | 63.9 | 1.0 | 64.9 | ||||||||||||||
| Balance, September 25, 2020 | $ | (15.2) | $ | (76.5) | $ | (91.7) | |||||||||||
| Foreign currency translation adjustments | Pension adjustments (a) | Total | |||||||||||||||
| For the Nine Months Ended October 1, 2021: | |||||||||||||||||
| Balance, December 31, 2020 | $ | (54.0) | $ | (87.1) | $ | (141.1) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | (53.8) | — | (53.8) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase (decrease) | — | 3.7 | (b) | 3.7 | |||||||||||||
| Income tax impact | — | (0.9) | (0.9) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 2.8 | 2.8 | ||||||||||||||
| Net current period other comprehensive income (loss) | (53.8) | 2.8 | (51.0) | ||||||||||||||
| Balance, October 1, 2021 | $ | (107.8) | $ | (84.3) | $ | (192.1) | |||||||||||
| For the Nine Months Ended September 25, 2020: | |||||||||||||||||
| Balance, December 31, 2019 | $ | 21.2 | $ | (77.5) | $ | (56.3) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | (36.4) | — | (36.4) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss): | |||||||||||||||||
| Increase (decrease) | — | 1.2 | (b) | 1.2 | |||||||||||||
| Income tax impact | — | (0.2) | (0.2) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — | 1.0 | 1.0 | ||||||||||||||
| Net current period other comprehensive income (loss) | (36.4) | 1.0 | (35.4) | ||||||||||||||
| Balance, September 25, 2020 | $ | (15.2) | $ | (76.5) | $ | (91.7) | |||||||||||
| (a) Includes balances relating to defined benefit plans, supplemental executive retirement plans, and other postretirement employee benefit plans. | |||||||||||||||||
| (b) This component of AOCI is included in the computation of net periodic pension cost (refer to Note 8 for additional details). |
Allowances for Doubtful Accounts
All trade accounts and unbilled receivables are reported in the Consolidated Condensed Balance Sheet adjusted for any write-offs and net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from our unbilled and trade accounts receivable portfolios over the life of the underlying assets. Additions to the allowances are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances.
The following is a rollforward of the aggregated allowance for credit losses related to our trade accounts receivables as of October 1, 2021 ($ in millions):
| Balance, December 31, 2020 | $ | 42.5 | |||
| Provision | (0.4) | ||||
| Write-offs | (6.1) | ||||
| Foreign currency exchange and other | 0.3 | ||||
| Balance, October 1, 2021 | $ | 36.3 |
The allowance for unbilled receivables was immaterial for all periods presented.
Recently Issued Accounting Standard
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity
(Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which amends the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. We may adopt this standard using either a modified retrospective or a fully retrospective method of transition. This standard is effective for us beginning January 1, 2022. We are currently evaluating the impact of this standard on our financial statements and the method of adoption.
NOTE 2. ACQUISITIONS
We continually evaluate potential mergers, acquisitions, and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive markets. We have completed a number of acquisitions that have been accounted for as business combinations and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors, including the complementary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complementary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings, or cash flows), and the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses.
We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact of certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
During the three and nine month periods ended October 1, 2021, immaterial adjustments were recorded to the preliminary purchase price allocation of acquisitions that closed during 2020.
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.
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 will close when requirements of country-specific agreements or regulatory approvals are satisfied.
The $2.7 billion purchase price was paid in exchange for ASP’s businesses in both Principal and Non-Principal Countries. As of October 1, 2021 we have closed 20 Principal Countries and 38 Non-Principal Countries that, in aggregate, accounted for approximately 99% of the preliminary valuation of ASP. The remaining Non-Principal Country represents less than 1% of the preliminary valuation of ASP, or $1.0 million, which is included as a prepaid asset in Other assets in the Consolidated Condensed Balance Sheet. As each Non-Principal Country closes, we reduce the prepaid asset and record the fair value of the assets acquired and liabilities assumed. All of the provisional goodwill associated with the Transaction is included in goodwill at October 1, 2021, and the majority of the provisional goodwill is tax deductible. There were no material measurement period adjustments recorded for the Non-Principal Countries during the three and nine month periods ended October 1, 2021.
In addition, the Company entered into a transition services agreement with Johnson & Johnson for certain administrative and operational services (“TSA”) 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 the sale. As of October 1, 2021, ASP had exited the TSAs and substantially all of the distribution agreements. ASP expects to close the remaining Non-Principal Country in the fourth quarter of 2021.
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 Condensed Balance Sheet and recorded the gain on litigation dismissal of $26 million within Non-operating income (expense), net in our Consolidated Condensed Statements of Earnings during the nine month period ended October 1, 2021.
ServiceChannel
On August 24, 2021, we acquired ServiceChannel Holdings, Inc. (“ServiceChannel”), a privately held, global provider of software as a service 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 $36 million of deferred compensation consideration that will be 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 $897 million of goodwill related to the ServiceChannel acquisition, which is not tax deductible. ServiceChannel had revenue in 2020 of approximately $70 million and is an operating company within our Intelligent Operating Solutions segment.
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed from ServiceChannel as of October 1, 2021 ($ in millions):
| Goodwill | $ | 897.3 | |||||||||||||||
| Other intangible assets, primarily customer relationships, technology, database, and trade names | 343.8 | ||||||||||||||||
| Other assets and liabilities, net | (82.4) | ||||||||||||||||
| Net cash consideration | $ | 1,158.7 |
Revenue and operating loss attributable to ServiceChannel for both the three and nine month periods ended October 1, 2021 were $10.1 million and $19.5 million, respectively, consistent with our expectations. The operating loss includes a combined $18.2 million of intangible asset amortization, acquisition-related fair value adjustments, and transaction and integration costs for both the three and nine month periods ended October 1, 2021. Transaction and integration related costs were approximately $13.2 million and are recorded in Selling, general and administration expenses, which are primarily comprised of compensation cost for employee retention bonuses and amounts paid to third-party advisors.
NOTE 3. DISCONTINUED OPERATIONS
On October 9, 2020, we completed the Vontier Separation. 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.
Vontier Impairment Charge
As a result of the 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 non-cash goodwill impairment charge of $85.3 million during the three month period ended March 27, 2020. The Telematics reporting unit was included in our former Industrial Technologies segment and part of the Vontier Separation. Accordingly, the impairment charge is recorded in Earnings from discontinued operations, net of income taxes in the Consolidated Statement of Earnings.
The key components of income from discontinued operations for the three and nine month periods ended October 1, 2021 and September 25, 2020 were as follows ($ in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Sales | $ | — | $ | 746.7 | $ | — | $ | 1,889.6 | |||||||||||||||
| Cost of sales | — | (415.3) | — | (1,064.2) | |||||||||||||||||||
| Selling, general and administrative expenses | (0.3) | (127.1) | (3.5) | (380.7) | |||||||||||||||||||
| Research and development expenses | — | (31.6) | — | (94.7) | |||||||||||||||||||
| Goodwill impairment | — | — | — | (85.3) | |||||||||||||||||||
| Interest expense and other income, net | — | (7.0) | 0.1 | (19.3) | |||||||||||||||||||
| Earnings before income taxes | (0.3) | 165.7 | (3.4) | 245.4 | |||||||||||||||||||
| Income taxes | — | (25.9) | 0.5 | (48.3) | |||||||||||||||||||
| Net earnings from discontinued operations | $ | (0.3) | $ | 139.8 | $ | (2.9) | $ | 197.1 | |||||||||||||||
The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company’s Consolidated Balance Sheets ($ in millions):
| October 1, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Other current assets | $ | — | $ | 30.4 | |||||||
| Total assets, discontinued operations | $ | — | $ | 30.4 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Accrued expenses and other current liabilities | $ | (1.2) | $ | (33.3) | |||||||
| Total liabilities, discontinued operations | $ | (1.2) | $ | (33.3) |
NOTE 4. GOODWILL AND OTHER INTANGIBLES
The following is a rollforward of our carrying value of goodwill by segment ($ in millions):
| Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | Total Goodwill | ||||||||||||||||||||
| Balance, December 31, 2020 | $ | 3,268.8 | $ | 1,867.9 | $ | 2,222.5 | $ | 7,359.2 | |||||||||||||||
| Measurement period adjustments for 2020 acquisitions | 0.5 | — | (4.0) | (3.5) | |||||||||||||||||||
| Attributable to 2021 acquisitions | 897.3 | — | — | 897.3 | |||||||||||||||||||
| Foreign currency translation and other | (13.3) | (19.7) | 1.5 | (31.5) | |||||||||||||||||||
| Balance, October 1, 2021 | $ | 4,153.3 | $ | 1,848.2 | $ | 2,220.0 | $ | 8,221.5 |
The increase in the goodwill balance of the Intelligent Operating Solutions segment for the nine month period ended October 1, 2021 is a result of the ServiceChannel acquisition. Refer to Note 2 for more information.
During the three and nine month periods ended October 1, 2021, we identified no triggering events indicating a potential impairment of goodwill.
The following summarizes the gross carrying value and accumulated amortization for each major category of intangible asset ($ in millions):
| October 1, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Finite-lived intangibles: | |||||||||||||||||||||||
| Patents and technology | $ | 1,051.8 | $ | (449.4) | $ | 983.3 | $ | (401.1) | |||||||||||||||
| Customer relationships and other intangibles | 3,106.5 | (1,008.8) | 2,958.3 | (896.8) | |||||||||||||||||||
| Trademarks and trade names | 67.2 | (2.3) | 18.0 | (1.4) | |||||||||||||||||||
| Total finite-lived intangibles | 4,225.5 | (1,460.5) | 3,959.6 | (1,299.3) | |||||||||||||||||||
| Indefinite-lived intangibles: | |||||||||||||||||||||||
| Trademarks and trade names | 627.0 | — | 630.3 | — | |||||||||||||||||||
| Total intangibles | $ | 4,852.5 | $ | (1,460.5) | $ | 4,589.9 | $ | (1,299.3) |
Finite-lived intangible assets are amortized over the shorter of their legal or estimated useful lives.
During the three and nine month periods ended October 1, 2021, we acquired finite-lived intangible assets, consisting primarily of customer relationships, developed technology, and trade names, with a weighted average life of approximately 12 years as a result of the ServiceChannel Acquisition. Refer to Note 2 for additional information on the intangible assets acquired.
NOTE 5. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value, and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
-
Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
-
Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
-
Level 3 inputs are unobservable inputs based on our assumptions. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Below is a summary of financial liabilities that are measured at fair value on a recurring basis ($ in millions):
| Quoted Prices in Active Market (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| October 1, 2021 | |||||||||||||||||||||||
| Deferred compensation liabilities | $ | — | $ | 40.1 | $ | — | $ | 40.1 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Investment in Vontier | $ | 1,119.2 | $ | — | $ | — | $ | 1,119.2 | |||||||||||||||
| Deferred compensation liabilities | — | 34.8 | — | 34.8 |
Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in Other long-term liabilities in the Consolidated Condensed Balance Sheets. Participants may choose among alternative earnings rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
On October 9, 2020, we completed the Vontier Separation and retained 19.9% of the shares of Vontier common stock outstanding immediately following the Vontier Separation. We did not retain a controlling interest in Vontier and therefore the fair value of our Retained Vontier Shares were included in our assets of continuing operations as of December 31, 2020, and subsequent fair value changes are included in our results from continuing operations for the nine month period ended October 1, 2021.
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 364-day delayed draw term loan due March 22, 2021 (the “Term Loan due March 2021”) and (ii) $683.2 million of the delayed-draw term loan due May 30, 2021 (the “Term Loan due May 2021”). The change in fair value of the Retained Vontier Shares and the resulting gain of $57.0 million was recorded in the nine month period ended October 1, 2021. We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the nine month period ended October 1, 2021.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant, and equipment, goodwill, and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at their carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets.
We evaluated events or circumstances that may indicate the carrying value of our non-financial assets may not be fully recoverable during the three and nine month periods ended October 1, 2021, and recorded no impairments.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are as follows ($ in millions):
| October 1, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Current portion of long-term debt | $ | 1,143.2 | $ | 1,164.1 | $ | 1,399.8 | $ | 1,400.0 | |||||||||||||||
| Long-term debt, net of current maturities | $ | 1,442.1 | $ | 1,627.2 | $ | 2,830.3 | $ | 3,155.5 |
As of October 1, 2021 and December 31, 2020, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.
The fair values of the current portion of long-term debt and long-term debt were based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing. The fair value of cash and cash equivalents, accounts receivable, net, and trade accounts payable, and commercial paper approximates their carrying amount due to the short-term maturities of these instruments.
NOTE 6. FINANCING AND CAPITAL
The carrying value of the components of our long-term debt were as follows ($ in millions):
| October 1, 2021 | December 31, 2020 | |||||||||||||
| 3.15% senior unsecured notes due 2026 | $ | 894.9 | $ | 894.1 | ||||||||||
| 4.30% senior unsecured notes due 2046 | 547.2 | 547.2 | ||||||||||||
| 0.875% senior convertible notes due 2022 | 1,143.2 | 1,389.0 | ||||||||||||
| Term Loan due May 2021 | — | 1,000.0 | ||||||||||||
| Term Loan due March 2021 | — | 399.8 | ||||||||||||
| Long-term debt | 2,585.3 | 4,230.1 | ||||||||||||
| Less: current portion of long-term debt | 1,143.2 | 1,399.8 | ||||||||||||
| Long-term debt, net of current maturities | $ | 1,442.1 | $ | 2,830.3 | ||||||||||
Aggregate unamortized debt discounts, premiums, and issuance costs of $21 million and $57 million as of October 1, 2021 and December 31, 2020, respectively, are netted against the principal amounts of the components of debt in the table above. Refer to Note 11 of our 2020 Annual Report on Form 10-K for further details of our debt financing.
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 nine month period ended October 1, 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.
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. The Convertible Notes mature on February 15, 2022, unless earlier repurchased or converted in accordance with their terms prior to such date.
As a result of the Vontier Separation and in accordance with the anti-dilution provisions of the Convertible Notes, effective October 9, 2020, the Convertible Notes are convertible into shares of our common stock at an adjusted conversion rate of 10.9568 shares per $1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of $91.27 per share), subject to future adjustment upon the occurrence of certain events. The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events occur prior to the maturity date, the conversion rate will be increased for a holder that elects to convert its Convertible Notes in connection with such corporate event. 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.
Of the $1.4 billion in principal amount from the issuance of the Convertible Notes, $1.3 billion was classified as debt and $102.2 million was classified as equity, using an assumed effective interest rate of 3.38%. Debt issuance costs of $24.3 million were proportionately allocated to debt and equity.
On February 9, 2021, we repurchased $281 million of the Convertible Notes at fair value using the remaining cash proceeds received from Vontier in the Vontier Separation and other cash on hand. In connection with the repurchase, we recorded a loss on debt extinguishment during the nine month period ended October 1, 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 $11.1 million and $34.5 million in interest expense during the three and nine month periods ended October 1, 2021, respectively, of which $2.5 million and $7.9 million was related to the contractual coupon rate of 0.875%, $1.5 million and $4.7 million was attributable to the amortization of debt issuance costs and $7.1 million and $21.9 million was attributable to the amortization of the discount for each respective period. We recognized $13.6 million and $40.6 million in interest expense during the three and nine month periods ended September 25, 2020, respectively, of which $3.2 million and $9.5 million related to the contractual coupon rate of 0.875%, $1.8 million and $5.6 million was attributable to the amortization of debt issuance costs, and $8.6 million and $25.5 million was attributable to the amortization of the discount for each respective period. The discount at issuance was $102.2 million and is being amortized over a three-year period. The unamortized discount at October 1, 2021 was $11.0 million.
Prior to November 15, 2021, the Convertible Notes will be convertible only upon the occurrence of certain events and will be convertible thereafter at any time until the close of business on the business day immediately preceding the maturity date of the Convertible Notes.
Classification of Debt Due within the Next Twelve Months
Our Convertible Senior Notes are recorded in the Current portion of long-term debt line item in the Consolidated Condensed Balance Sheet as of October 1, 2021.
Other Liquidity Sources
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Under these programs, we may issue unsecured promissory notes with maturities not exceeding 397 and 183 days, respectively.
Due to the volatility and disruption in the commercial paper markets during the first six months of 2020, we temporarily reduced our reliance on this source of funding, and consequently paid down and refinanced our outstanding commercial paper with the Term Loan due March 2021 that was retired in the Debt-for-Equity Exchange. In August 2021, we resumed borrowing under our Commercial Paper Program to fund, in part, the ServiceChannel acquisition.
Interest expense on commercial paper is paid at maturity and is generally based on our credit ratings at the time of issuance and prevailing short-term interest rates.
The details of our outstanding Commercial Paper Programs as of October 1, 2021 were as follows ($ in millions):
| Carrying value | Annual effective rate | Weighted average remaining maturity (in days) | |||||||||||||||
| U.S. dollar-denominated commercial paper | $ | 215.0 | 0.19 | % | 12 |
Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for our commercial paper programs, can also be used for working capital and other general corporate purposes. As of October 1, 2021, no borrowings were outstanding under the Revolving Credit Facility.
NOTE 7. SALES
We derive revenues primarily from the sale of products, software, and services. Revenue is recognized when control of promised products, software, or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products, software, or services.
Sales of products and software includes revenues from the sale of products and equipment, software product offerings, and equipment rentals.
Sales of services includes revenues from extended warranties, post-contract customer support (“PCS”), maintenance contracts or services, contract labor to perform ongoing service at a customer location, and services related to previously sold products.
Contract Assets — In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. Contract assets were $77 million as of October 1, 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 software 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 October 1, 2021 and December 31, 2020, we had $28 million and $31 million, respectively, in net revenue-related contract assets primarily related to certain software contracts. Revenue-related contract assets are recorded in the Prepaid expenses and other current assets and Other assets line items in our Condensed Consolidated Balance Sheets. These assets have estimated useful lives between 3 and 8 years.
Impairment losses recognized on our revenue-related contract assets were immaterial during the three and nine month periods ended October 1, 2021 and September 25, 2020.
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to PCS and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as
current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in Other long-term liabilities in the Consolidated Condensed Balance Sheets.
Our contract liabilities consisted of the following ($ in millions):
| October 1, 2021 | December 31, 2020 | ||||||||||
| Deferred revenue - current | $ | 400.5 | $ | 376.4 | |||||||
| Deferred revenue - noncurrent | 30.8 | 34.2 | |||||||||
| Total contract liabilities | $ | 431.3 | $ | 410.6 |
During the three and nine month periods ended October 1, 2021, we recognized revenue related to our contract liabilities at December 31, 2020 of $82 million and $270 million, respectively. The change in our contract liabilities from December 31, 2020 to October 1, 2021 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from October 1, 2021, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.
The aggregate performance obligations attributable to each of our segments is as follows ($ in millions):
| October 1, 2021 | |||||
| Intelligent Operating Solutions | $ | 109.4 | |||
| Precision Technologies | 25.9 | ||||
| Advanced Healthcare Solutions | 7.9 | ||||
| Total remaining performance obligations | $ | 143.2 |
The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 55 percent within the next two years, approximately 85 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 products and software and services, geographic location, and end market for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three month period ended October 1, 2021 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products and software | $ | 1,105.6 | $ | 462.7 | $ | 401.0 | $ | 241.9 | |||||||||||||||
| Sales of services | 193.9 | 72.7 | 54.7 | 66.5 | |||||||||||||||||||
| Total | $ | 1,299.5 | $ | 535.4 | $ | 455.7 | $ | 308.4 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 683.7 | $ | 283.8 | $ | 234.6 | $ | 165.3 | |||||||||||||||
| China | 154.8 | 48.8 | 75.8 | 30.2 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 461.0 | 202.8 | 145.3 | 112.9 | |||||||||||||||||||
| Total | $ | 1,299.5 | $ | 535.4 | $ | 455.7 | $ | 308.4 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 327.6 | $ | 10.5 | $ | 30.7 | $ | 286.4 | |||||||||||||||
| Industrial & Manufacturing | 313.5 | 204.4 | 103.2 | 5.9 | |||||||||||||||||||
| Utilities & Power | 97.3 | 55.3 | 42.0 | — | |||||||||||||||||||
| Government | 100.1 | 54.6 | 33.4 | 12.1 | |||||||||||||||||||
| Communication, Electronics & Semiconductor | 103.4 | 30.6 | 72.3 | 0.5 | |||||||||||||||||||
| Aerospace & Defense | 60.6 | — | 60.6 | — | |||||||||||||||||||
| Oil & Gas | 64.6 | 62.4 | 2.2 | — | |||||||||||||||||||
| Retail & Consumer | 52.1 | 31.5 | 20.6 | — | |||||||||||||||||||
| Other | 117.7 | 56.5 | 61.1 | 0.1 | |||||||||||||||||||
| Total direct sales | 1,236.9 | 505.8 | 426.1 | 305.0 | |||||||||||||||||||
| Distributors | 62.6 | 29.6 | 29.6 | 3.4 | |||||||||||||||||||
| Total | $ | 1,299.5 | $ | 535.4 | $ | 455.7 | $ | 308.4 | |||||||||||||||
| (a) Direct sales by end market include sales made through third-party distributors where we have visibility into the end customer. | |||||||||||||||||||||||
Disaggregation of revenue for the three month period ended September 25, 2020 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products and software | $ | 988.1 | $ | 409.3 | $ | 366.2 | $ | 212.6 | |||||||||||||||
| Sales of services | 171.7 | 49.8 | 52.3 | 69.6 | |||||||||||||||||||
| Total | $ | 1,159.8 | $ | 459.1 | $ | 418.5 | $ | 282.2 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 610.6 | $ | 241.1 | $ | 213.9 | $ | 155.6 | |||||||||||||||
| China | 142.0 | 43.2 | 71.0 | 27.8 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 407.2 | 174.8 | 133.6 | 98.8 | |||||||||||||||||||
| Total | $ | 1,159.8 | $ | 459.1 | $ | 418.5 | $ | 282.2 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 304.7 | $ | 9.2 | $ | 29.7 | $ | 265.8 | |||||||||||||||
| Industrial & Manufacturing | 259.8 | 168.6 | 86.1 | 5.1 | |||||||||||||||||||
| Utilities & Power | 89.1 | 51.1 | 38.0 | — | |||||||||||||||||||
| Government | 86.2 | 42.3 | 36.4 | 7.5 | |||||||||||||||||||
| Communications, Electronics & Semiconductor | 73.2 | 28.8 | 43.9 | 0.5 | |||||||||||||||||||
| Aerospace & Defense | 66.3 | 8.6 | 57.7 | — | |||||||||||||||||||
| Oil & Gas | 54.7 | 52.5 | 2.2 | — | |||||||||||||||||||
| Retail & Consumer | 39.1 | 20.4 | 18.7 | — | |||||||||||||||||||
| Other | 117.6 | 52.4 | 65.2 | — | |||||||||||||||||||
| Total direct sales | 1,090.7 | 433.9 | 377.9 | 278.9 | |||||||||||||||||||
| Distributors | 69.1 | 25.2 | 40.6 | 3.3 | |||||||||||||||||||
| Total | $ | 1,159.8 | $ | 459.1 | $ | 418.5 | $ | 282.2 | |||||||||||||||
| (a) Direct sales by end market include sales made through third-party distributors where we have visibility into the end customer. |
Disaggregation of revenue for the nine month period ended October 1, 2021 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products and software | $ | 3,318.8 | $ | 1,394.1 | $ | 1,211.6 | $ | 713.1 | |||||||||||||||
| Sales of services | 559.6 | 194.0 | 163.4 | 202.2 | |||||||||||||||||||
| Total | $ | 3,878.4 | $ | 1,588.1 | $ | 1,375.0 | $ | 915.3 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 1,976.1 | $ | 808.7 | $ | 690.0 | $ | 477.4 | |||||||||||||||
| China | 482.6 | 162.0 | 234.3 | 86.3 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,419.7 | 617.4 | 450.7 | 351.6 | |||||||||||||||||||
| Total | $ | 3,878.4 | $ | 1,588.1 | $ | 1,375.0 | $ | 915.3 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 983.0 | $ | 28.3 | $ | 99.6 | $ | 855.1 | |||||||||||||||
| Industrial & Manufacturing | 927.9 | 601.6 | 308.6 | 17.7 | |||||||||||||||||||
| Utilities & Power | 290.0 | 166.8 | 123.2 | — | |||||||||||||||||||
| Government | 287.0 | 150.7 | 105.7 | 30.6 | |||||||||||||||||||
| Communication, Electronics & Semiconductor | 288.8 | 90.9 | 196.2 | 1.7 | |||||||||||||||||||
| Aerospace & Defense | 181.7 | — | 181.7 | — | |||||||||||||||||||
| Oil & Gas | 194.6 | 186.9 | 7.7 | — | |||||||||||||||||||
| Retail & Consumer | 142.2 | 73.7 | 68.5 | — | |||||||||||||||||||
| Other | 379.9 | 184.3 | 195.5 | 0.1 | |||||||||||||||||||
| Total direct sales | 3,675.1 | 1,483.2 | 1,286.7 | 905.2 | |||||||||||||||||||
| Distributors | 203.3 | 104.9 | 88.3 | 10.1 | |||||||||||||||||||
| Total | $ | 3,878.4 | $ | 1,588.1 | $ | 1,375.0 | $ | 915.3 | |||||||||||||||
| (a) Direct sales by end market include sales made through third-party distributors where we have visibility into the end customer. | |||||||||||||||||||||||
Disaggregation of revenue for the nine month period ended September 25, 2020 is presented as follows ($ in millions):
| Total | Intelligent Operating Solutions | Precision Technologies | Advanced Healthcare Solutions | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Sales of products and software | $ | 2,820.6 | $ | 1,189.4 | $ | 1,036.6 | $ | 594.6 | |||||||||||||||
| Sales of services | 488.9 | 149.4 | 150.5 | 189 | |||||||||||||||||||
| Total | $ | 3,309.5 | $ | 1,338.8 | $ | 1,187.1 | $ | 783.6 | |||||||||||||||
| Geographic: | |||||||||||||||||||||||
| United States | $ | 1,773.8 | $ | 710.7 | $ | 616.4 | $ | 446.7 | |||||||||||||||
| China | 391.5 | 130.4 | 192.5 | 68.6 | |||||||||||||||||||
| All other (each country individually less than 5% of total sales) | 1,144.2 | 497.7 | 378.2 | 268.3 | |||||||||||||||||||
| Total | $ | 3,309.5 | $ | 1,338.8 | $ | 1,187.1 | $ | 783.6 | |||||||||||||||
| End markets:****(a) | |||||||||||||||||||||||
| Direct sales: | |||||||||||||||||||||||
| Medical | $ | 849.1 | $ | 28.7 | $ | 84.5 | $ | 735.9 | |||||||||||||||
| Industrial & Manufacturing | 750.7 | 490.3 | 244.8 | 15.6 | |||||||||||||||||||
| Utilities & Power | 257.1 | 148.6 | 108.5 | — | |||||||||||||||||||
| Government | 244.0 | 119.6 | 102.6 | 21.8 | |||||||||||||||||||
| Communications, Electronics & Semiconductor | 201.0 | 79.8 | 119.9 | 1.3 | |||||||||||||||||||
| Aerospace & Defense | 179.5 | 15.4 | 164.1 | — | |||||||||||||||||||
| Oil & Gas | 164.3 | 155.4 | 8.9 | — | |||||||||||||||||||
| Retail & Consumer | 123.1 | 64.3 | 58.8 | — | |||||||||||||||||||
| Other | 342.2 | 163.3 | 178.9 | — | |||||||||||||||||||
| Total direct sales | 3,111.0 | 1,265.4 | 1,071.0 | 774.6 | |||||||||||||||||||
| Distributors | 198.5 | 73.4 | 116.1 | 9.0 | |||||||||||||||||||
| Total | $ | 3,309.5 | $ | 1,338.8 | $ | 1,187.1 | $ | 783.6 | |||||||||||||||
| (a) Direct sales by end market include sales made through third-party distributors where we have visibility into the end customer. |
NOTE 8. PENSION PLANS
For a full description of our noncontributory defined benefit pension plans refer to Note 12 of our 2020 Annual Report on Form 10-K.
The following sets forth the components of our net periodic costs associated with our noncontributory defined benefit pension plans ($ in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| U.S. Pension Benefits: | |||||||||||||||||||||||
| Interest cost | $ | 0.3 | $ | 0.3 | $ | 0.7 | $ | 0.9 | |||||||||||||||
| Expected return on plan assets | (0.3) | (0.3) | (0.7) | (0.9) | |||||||||||||||||||
| Net periodic pension cost | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Non-U.S. Pension Benefits: | |||||||||||||||||||||||
| Service cost | $ | 1.0 | $ | 1.1 | $ | 3.0 | $ | 3.3 | |||||||||||||||
| Interest cost | 0.7 | 1.0 | 2.3 | 3.0 | |||||||||||||||||||
| Expected return on plan assets | (1.3) | (1.4) | (3.9) | (4.0) | |||||||||||||||||||
| Amortization of net loss | 1.0 | 1.1 | 3.2 | 3.1 | |||||||||||||||||||
| Amortization of prior service cost | 0.1 | 0.1 | 0.3 | 0.3 | |||||||||||||||||||
| Net periodic pension cost | $ | 1.5 | $ | 1.9 | $ | 4.9 | $ | 5.7 |
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 Consolidated Condensed Statements of Earnings. Service costs are reported in cost of sales and selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings according to the classification of the participant’s compensation.
Employer Contributions
During 2021, our cash contribution requirements for our non-U.S. and U.S. defined benefit plans for Fortive’s pension plans are expected to be approximately $11 million and $1 million, respectively. The actual amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates, and other factors.
NOTE 9. INCOME TAXES
Our effective tax rate for the three and nine month periods ended October 1, 2021 was 13.2% and 11.1% as compared to 13.4% and 17.7%, respectively, for the three and nine month periods ended September 25, 2020. The effective tax rate for the three month period ended October 1, 2021 was relatively consistent with the effective tax rate for the three month period ended September 25, 2020. The year-over-year decrease in the effective tax rate for the nine month period ended October 1, 2021 as compared to the nine month period ended September 25, 2020 was due primarily to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange, a reduction to our uncertain tax positions, and increases in certain federal tax benefits for the nine month period ended October 1, 2021. Additionally, the tax costs incurred during the nine month period ended September 25, 2020 associated with the repatriation of a portion of our previously reinvested earnings outside of the United States contributed to the year-over year decrease in the effective tax rate for the nine month period ended October 1, 2021.
Our effective tax rate for the three and nine month periods ended October 1, 2021 differs from the U.S. federal statutory rate of 21% due primarily to the positive and negative effects of the Tax Cuts and Jobs Act, U.S. federal permanent differences, the impact of credits and deductions provided by law, and a reduction in our uncertain tax positions. Specific to the nine month period ended October 1, 2021, our effective tax rate also differs from the U.S. federal statutory rate of 21% due to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange. Specific to the nine month period ended September 25, 2020, our effective tax rate also differs from the U.S. federal statutory rate of 21% due to the repatriation of a portion of our previously reinvested earnings outside of the United States.
NOTE 10. STOCK-BASED COMPENSATION
Our stock-based compensation program (the “Stock Plan”) provides for the grant of stock appreciation rights, performance stock units, restricted stock units, restricted stock awards, and performance stock awards (collectively, “Stock Awards”), stock options, or any other stock-based award. As of October 1, 2021, approximately 19 million shares of our common stock were available for subsequent issuance under the Stock Plan. For a full description of our stock-based compensation program refer to Note 17 of our 2020 Annual Report on Form 10-K.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of Selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings based on the portion of the awards that are ultimately expected to vest.
The following summarizes the components of our stock-based compensation expense under the Stock Plan ($ in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Stock Awards: | |||||||||||||||||||||||
| Pretax compensation expense | $ | 11.3 | $ | 9.5 | $ | 34.0 | $ | 27.7 | |||||||||||||||
| Income tax benefit | (2.1) | (1.7) | (5.9) | (4.6) | |||||||||||||||||||
| Stock Award expense, net of income taxes | 9.2 | 7.8 | 28.1 | 23.1 | |||||||||||||||||||
| Stock options: | |||||||||||||||||||||||
| Pretax compensation expense | 7.1 | 6.1 | 21.2 | 17.6 | |||||||||||||||||||
| Income tax benefit | (1.3) | (0.8) | (3.8) | (2.6) | |||||||||||||||||||
| Stock option expense, net of income taxes | 5.8 | 5.3 | 17.4 | 15.0 | |||||||||||||||||||
| Total stock-based compensation: | |||||||||||||||||||||||
| Pretax compensation expense | 18.4 | 15.6 | 55.2 | 45.3 | |||||||||||||||||||
| Income tax benefit | (3.4) | (2.5) | (9.7) | (7.2) | |||||||||||||||||||
| Total stock-based compensation expense, net of income taxes | $ | 15.0 | $ | 13.1 | $ | 45.5 | $ | 38.1 |
The following summarizes the unrecognized compensation cost for the Stock Plan awards as of October 1, 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 | $ | 89.6 | |||
| Stock options | 55.2 | ||||
| Total unrecognized compensation cost | $ | 144.8 |
NOTE 11. COMMITMENTS AND CONTINGENCIES
For a description of our litigation and contingencies and additional information about our leases, refer to Note 16 and Note 10, respectively, in our 2020 Annual Report on Form 10-K.
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, December 31, 2020 | $ | 24.9 | |||
| Accruals for warranties issued during the period | 13.0 | ||||
| Settlements made | (12.1) | ||||
| Balance, October 1, 2021 | $ | 25.8 |
Leases
Operating lease cost for the three month periods ended October 1, 2021 and September 25, 2020 was $15 million and $14 million, respectively. Operating lease cost for the nine month periods ended October 1, 2021 and September 25, 2020 was $45 million and $44 million, respectively. During the nine month periods ended October 1, 2021 and September 25, 2020, cash paid for operating leases included in operating cash flows was $40 million and $37 million, respectively. Right-of-use assets obtained in exchange for operating lease obligations were $24 million and $34 million during the nine month periods ended October 1, 2021 and September 25, 2020, respectively.
NOTE 12. 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. Anti-dilutive options excluded from the diluted EPS calculation for the three month periods ended October 1, 2021 and September 25, 2020 were 0.2 million and 5.3 million, respectively. There were 0.3 million and 5.5 million anti-dilutive options excluded for the nine month periods ended October 1, 2021 and September 25, 2020, respectively.
As described in Note 6, 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 three and nine month periods ended October 1, 2021 and September 25, 2020.
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 $17.2 million in the aggregate, was paid on July 1, 2021. The impact of the MCPS calculated under the if-converted method was anti-dilutive for the periods in 2021 prior to conversion.
Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | 151.1 | $ | 86.0 | $ | 444.8 | $ | 200.6 | |||||||||||||||
| Mandatory convertible preferred stock cumulative dividends | — | (17.3) | (34.5) | (51.8) | |||||||||||||||||||
| Net earnings attributable to common stockholders from continuing operations | $ | 151.1 | $ | 68.7 | $ | 410.3 | $ | 148.8 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted average common shares outstanding used in basic earnings per share | 358.9 | 337.6 | 345.6 | 337.3 | |||||||||||||||||||
| Incremental common shares from: | |||||||||||||||||||||||
| Assumed exercise of dilutive options and vesting of dilutive Stock Awards | 3.3 | 3.2 | 3.2 | 2.9 | |||||||||||||||||||
| Weighted average common shares outstanding used in diluted earnings per share | 362.2 | 340.8 | 348.8 | 340.2 | |||||||||||||||||||
| Net earnings from continuing operations per common share - Basic | $ | 0.42 | $ | 0.20 | $ | 1.19 | $ | 0.44 | |||||||||||||||
| Net earnings from continuing operations per common share - Diluted | $ | 0.42 | $ | 0.20 | $ | 1.18 | $ | 0.44 | |||||||||||||||
We declared and paid cash dividends per common share for the periods as presented below. We declared and paid the MCPS dividend in the first quarter of 2021, and declared and paid the final dividend in the second quarter of 2021, while the MCPS dividends for the first, second and third quarter of 2020 were declared, accrued, and paid as follows:
| Dividend Per Common Share | Amount ($ in millions) | Dividend per MCPS | Amount ($ in millions) | ||||||||||||||||||||
| 2021: | |||||||||||||||||||||||
| First quarter | $ | 0.07 | $ | 23.7 | $ | 12.5 | $ | 17.3 | |||||||||||||||
| Second quarter | 0.07 | 23.7 | 12.5 | 17.2 | |||||||||||||||||||
| Third quarter | 0.07 | 25.2 | — | — | |||||||||||||||||||
| Total | $ | 0.21 | $ | 72.6 | $ | 25.0 | $ | 34.5 | |||||||||||||||
| 2020: | |||||||||||||||||||||||
| First quarter | $ | 0.07 | $ | 23.5 | $ | 12.5 | $ | 17.3 | |||||||||||||||
| Second quarter | 0.07 | 23.6 | 12.5 | 17.2 | |||||||||||||||||||
| Third quarter | 0.07 | 23.6 | 12.5 | 17.3 | |||||||||||||||||||
| Total | $ | 0.21 | $ | 70.7 | $ | 37.5 | $ | 51.8 | |||||||||||||||
| * The sum of the components of total dividends paid may not equal the total amount due to rounding. |
The first quarter 2020 MCPS dividends were paid on April 1, 2020, the second quarter 2020 MCPS dividends were paid on July 1, 2020, and the third quarter 2020 MCPS dividends were paid on October 1, 2020.
NOTE 13. SEGMENT INFORMATION
We report our results in three separate business segments consisting of Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. Our chief operating decision maker assesses performance and allocates resources based on our operating segments, which are also our reportable segments. Operating profit amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance. Our segment results are as follows ($ in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Intelligent Operating Solutions | $ | 535.4 | $ | 459.1 | $ | 1,588.1 | $ | 1,338.8 | |||||||||||||||
| Precision Technologies | 455.7 | 418.5 | 1,375.0 | 1,187.1 | |||||||||||||||||||
| Advanced Healthcare Solutions | 308.4 | 282.2 | 915.3 | 783.6 | |||||||||||||||||||
| Total | $ | 1,299.5 | $ | 1,159.8 | $ | 3,878.4 | $ | 3,309.5 | |||||||||||||||
| Operating Profit: | |||||||||||||||||||||||
| Intelligent Operating Solutions | $ | 90.0 | $ | 77.5 | $ | 313.4 | $ | 213.0 | |||||||||||||||
| Precision Technologies | 101.1 | 82.1 | 301.1 | 232.7 | |||||||||||||||||||
| Advanced Healthcare Solutions | 34.4 | 1.8 | 75.8 | (15.9) | |||||||||||||||||||
| Other | (24.7) | (23.8) | (80.6) | (74.2) | |||||||||||||||||||
| Total Operating Profit | 200.8 | 137.6 | 609.7 | 355.6 | |||||||||||||||||||
| Interest expense, net | (25.1) | (36.9) | (78.0) | (111.7) | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | (104.9) | — | |||||||||||||||||||
| Gain on investment in Vontier Corporation | — | — | 57.0 | — | |||||||||||||||||||
| Gain on litigation dismissal | — | — | 26.0 | — | |||||||||||||||||||
| Other non-operating expense, net | (1.6) | (1.4) | (9.5) | (0.3) | |||||||||||||||||||
| Earnings from continuing operations before income taxes | $ | 174.1 | $ | 99.3 | $ | 500.3 | $ | 243.6 |
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS