Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fortive Corporation (“Fortive,” the “Company,” “we,” “us,” or “our”) is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets. Our strategic segments - Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions - include well-known brands with leading positions in their markets. Our businesses design, develop, manufacture, and service professional and engineered products, software, and services, building upon leading brand names, innovative technologies, and significant market positions. We are headquartered 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.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management. The following discussion should be read in conjunction with the MD&A and consolidated financial statements included in our 2022 Annual Report on Form 10-K. Our MD&A is divided into five sections:

Information Relating to Forward-Looking Statements
Overview
Results of Operations
Liquidity and Capital Resources
Critical Accounting Estimates

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into, including the expected impact of trade and tariff policies; new or modified laws, regulations and accounting pronouncements; impact of climate-related events or transition activities; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; impact of changes to tax laws; general economic and capital markets conditions, including impact of inflation or interest rate changes; impact of geopolitical events, including the impact of Ukraine/Russia conflict and other hostilities; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.

Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include, among others, the following:

Risk Related to Our Business Operations

Conditions in the global economy, the markets we serve, and the financial markets and banking systems may adversely affect our business and financial statements.
If we cannot adjust our manufacturing capacity, supply chain management or the purchases required for our manufacturing activities to reflect changes in market conditions, customer demand and supply chain or transportation disruptions, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components, and services could cause production interruptions, delays and inefficiencies.
Our financial results are subject to fluctuations in the cost and availability of commodities or components that we use in our operations.
Any resurgence in the spread of COVID-19 and the corresponding constraints on supply chain, labor force, and the operations of our customers, suppliers, and vendors could have an adverse impact on our business and results of operations.
Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated, or experience cyclicality.
We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.
Our growth depends in part on the timely development and commercialization and customer acceptance of new and enhanced products and services based on technological innovation.
If we are unable to recruit and retain key employees, our business may be harmed.
A significant disruption in, or breach in security of, our information technology systems could adversely affect our business.
Defects and unanticipated use or inadequate disclosure with respect to our products (including software) or services could adversely affect our business, reputation, and financial statements.
Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns, or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
Our restructuring activities could have long-term adverse effects on our business.
Work stoppages, works council campaigns, and other labor disputes could adversely impact our productivity and results of operations.
If we suffer loss to our facilities, supply chains, distribution systems, or information technology systems due to catastrophe or other events, our operations could be seriously harmed.
If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.
Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses, or licensing expenses or be prevented from selling products or services.
We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our financial statements.

Risk Related to our International Operations

International economic, political, legal, compliance, and business factors could negatively affect our financial statements.
Trade relations between China and the United States could have a material adverse effect on our business and financial statements.
Foreign currency exchange rates, including the volatility thereof, may adversely affect our financial statements.

Risk Related to Our Acquisitions, Investments, and Dispositions

Any inability to consummate acquisitions at our anticipated rate and at appropriate prices could negatively impact our growth rate and stock price.
Our acquisition of businesses, joint ventures, and strategic relationships could negatively impact our financial statements.
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we have sold could adversely affect our financial statements.
Potential indemnification liabilities to Vontier Corporation (“Vontier”) pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations, and cash flows.

Risk Related to Regulatory and Compliance Matters

Changes in industry standards and governmental regulations may reduce demand for our products or services or increase our expenses.
Our reputation, ability to do business, and financial statements may be impaired by improper conduct by any of our employees, agents, or business partners.
Our operations, products, and services expose us to the risk of environmental, health, and safety liabilities, costs, and violations that could adversely affect our reputation and financial statements.
Our businesses are subject to extensive regulation, including healthcare regulations; failure to comply with those regulations could adversely affect our financial statements and reputation.
Climate change, or related governmental initiatives, including legal or regulatory measures, may negatively affect us.

Risk Related to Our Tax and Accounting Matters

Changes in our effective tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
We could incur significant liability if our separation from Danaher, our separation of our Automation and Specialty business or our separation of Vontier (collectively, the “Separation Transactions”) are determined to be a taxable transaction.
Changes in U.S. GAAP could adversely affect our reported financial results and may require significant changes to our internal accounting systems and processes.
We may be required to recognize impairment charges for our goodwill and other intangible assets.

Risk Related to Our Financing Activities

We have incurred a significant amount of debt, and our debt obligations, including the cost of such debt, will increase further if we incur additional debt and do not retire existing debt, our credit rating declines, or if the applicable interest rates rise.

See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for further discussion regarding reasons that actual results may differ materially from the results, developments, and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made (or such earlier date as may be specified in such statement). We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.

OVERVIEW

General

Fortive is a multinational business with global operations with approximately 46% of our sales derived from customers outside the United States in 2022. As a company with global operations, our businesses are affected by worldwide, regional, and industry-specific economic and political factors. Our geographic and industry diversity, as well as the range of products, software, and services we offer, typically help limit the impact of any one industry or the economy of any single country (except for the United States) on our operating results. Given the broad range of products manufactured, software and services provided, and geographies served, we do not use any indices other than general economic trends to predict the overall outlook for the Company. Our individual businesses monitor key competitors and customers, including their sales, to the extent possible, to gauge relative performance and the outlook for the future.

As a result of our geographic and industry diversity, we face a variety of opportunities and challenges, including technological development in most of the markets we serve, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, and consolidation of our competitors. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America, and Asia with the exception of Japan and Australia. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend, in particular, on our ability to expand our business across geographies and market segments, identify, consummate, and integrate appropriate acquisitions, develop innovative and differentiated new products, services, and software, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality, attract relevant talent and retain, grow, and empower our talented workforce, and effectively address the demands of an increasingly regulated environment. We are making significant investments, organically and through acquisitions, to address technological change in the markets we serve and to improve our manufacturing, research and development, and customer-facing resources in order to be responsive to our customers throughout the world.

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 advanced instrumentation, software and services to tens of thousands of customers enabling their mission-critical workflows. These offerings include electrical test & measurement, facility and asset lifecycle software applications, connected worker safety and compliance solutions across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others. Typical users of these safety, productivity and sustainability solutions include electrical engineers, electricians, electronic technicians, EHS professionals, network technicians, facility managers, first-responders, and maintenance professionals.

Our Precision Technologies segment helps solve tough technical challenges to speed breakthroughs in a wide range of applications, from food and beverage production and manufacturing to next-generation electric vehicles and clean energy, as our customers seek new test solutions to enable the electrification and connectivity of everything. Our expertise in materials, methods and measurements are reflected in our electrical test & measurement, sensing and material technologies offered to a broad set of customers and vertical end markets, including industrial, power and energy, automotive, medical equipment, food and beverage, aerospace and defense, semiconductor, and other general industries. Customers for these products and services include design engineers for advanced electronic devices and equipment, process and quality engineers focused on improved process capability and productivity, facility maintenance managers driving increased uptime, and other customers for whom precise measurement, reliability, and compliance are critical in their applications.

Our Advanced Healthcare Solutions segment supplies critical workflow solutions enabling healthcare providers to deliver exceptional patient care more efficiently. Our offerings include instrument sterilization solutions, instrument tracking, cell therapy equipment design and manufacturing, biomedical test tools, radiation detection and safety monitoring, and end-to-end clinical productivity software and solutions. Our healthcare offerings help ensure critical safety standards are met, instruments and operating rooms are working at peak performance, and complex procedures are followed accurately in these mission-critical healthcare environments.

Non-GAAP Measures

In this report, references to sales from existing businesses refer to sales from operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding (1) the impact from acquired and divested businesses and (2) the impact of currency translation. References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations prior to the first anniversary

of the divestiture. The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period. Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies.

Management believes that reporting the non-GAAP financial measure of sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisition and divestiture related items because the nature, size, and number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation from sales from existing businesses because the impact of currency translation is not under management’s control and is subject to volatility. Management believes the exclusion of the effect of acquisitions and divestitures and currency translation may facilitate the assessment of underlying business trends and may assist in comparisons of long-term performance. References to sales volume from existing businesses refer to the impact of both price and unit sales.

Restructuring

We initiated a discrete plan in the first quarter of 2023 that is expected to be completed by December 31, 2023. The nature of these activities were broadly consistent throughout our segments and consist primarily of targeted workforce reductions in response to overall macroeconomic and other external conditions. We incurred these costs to position ourselves to provide superior products and services to customers in a cost-efficient manner, while taking into consideration the impact of broad economic uncertainties. During the three and six-month periods ended June 30, 2023, we incurred charges of $10.7 million and $28.3 million, respectively. These charges are included in Cost of sales and Selling, general, and administrative expenses in the Consolidated Condensed Statements of Earnings. Accrued restructuring costs were $14.2 million as of June 30, 2023 and are included within Accrued expenses and other current liabilities in the Consolidated Condensed Balance Sheets. The total restructuring charges we expect to recognize during the year ending December 31, 2023 under this discrete plan are approximately $30 to $35 million.

Business Performance and Outlook

Business Performance For the Period Ended June 30, 2023

During the three and six-month periods ended June 30, 2023 (“the quarter” or the “second quarter” and “year-to-date period”, respectively), our sales increased by 4.3% and 5.2%, respectively. Year-over-year sales from existing businesses increased 5.5% and 7.1% during the second quarter and year-to-date period, respectively, reflecting favorable pricing, increased demand across many of our end markets and focused execution on service and delivery.

Geographically, in the second quarter, year-over-year sales from existing businesses in developed markets increased mid-single-digits, driven by high single-digit growth in North America and slight growth in Western Europe. Sales from existing businesses in high growth markets increased year-over-year in the second quarter at a low single-digit rate, driven by low single-digit growth in China and mid-twenties growth in India. In the year-to-date period, year-over-year sales from existing businesses in developed markets increased mid-single-digits, driven by mid-single-digit growth in both North America and Western Europe. Sales from existing businesses in high growth markets increased year-over-year in the year-to-date period at a low double-digit rate, driven by mid-teens growth in China, low-thirties growth in India, and mid-single-digit growth in Latin America.

Price increases contributed 5.0% and 4.8% to sales growth during the second quarter and year-to-date period, as compared to the comparable periods in 2022 and is reflected as a component of the change in sales from existing businesses. In both the second quarter and year-to-date period, price increases exceeded inflation impacts on purchased materials.

Despite lingering supply chain challenges which impacted our output in the second quarter and the year-to-date period, we have experienced an improvement in our operating results on a year-over-year basis. We continue to apply the Fortive Business System (“FBS”) to help mitigate the impact of these challenges and to serve our customers.

Outlook

We anticipate revenue growth to be between 3.5% and 4.5% for the third quarter of 2023, and 4.0% and 5.0% for the full 2023 year. We anticipate growth from existing businesses to be between 3.5% and 4.5% for the third quarter and 5.0% and 6.0% for the full year.

We expect foreign exchange rates to remain volatile throughout the year which could adversely impact our financial results in 2023. Additionally, our financial outlook is subject to various assumptions and risks, including but not limited to, macroeconomic conditions in the United States and other critical regions, ongoing challenges with global logistics and supply chains including the availability of electronic components, disruption in supply or transportation resulting from severe weather events or our vendors experiencing work stoppage from their unionized employees, impact of inflationary dynamics on our expenses or our ability to realize price increases in our sales, interest rates, market conditions in key product segments, and elective surgery rates. We will continue to deploy FBS to actively manage production challenges, collaborate with customers and suppliers to minimize disruptions and utilize pricing and other countermeasures to offset inflationary dynamics. We continue to monitor these conditions which may continue to impact our business, as well as potential adverse global economic trends and sentiments, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”).

RESULTS OF OPERATIONS

Sales Growth

The following table summarizes total aggregate year-over-year sales growth and the components thereof for the second quarter as compared to the comparable period of 2022:

Components of Sales Growth


	% Change Three Months Ended June 30, 2023 vs. Comparable 2022 Period		% Change Six Months Ended June 30, 2023 vs. Comparable 2022 Period
Total revenue growth (GAAP)	4.3	%	5.2	%
Existing businesses (Non-GAAP)	5.5	%	7.1	%
Acquisitions and divestitures (Non-GAAP)	(0.3)	%	(0.4)	%
Currency exchange rates (Non-GAAP)	(0.9)	%	(1.5)	%

Operating Profit Margins

Operating profit margin was 19.1% for the second quarter, yielding an increase of 320 basis points as compared to 15.9% in the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increase in price and sales volumes from existing businesses, gains from productivity measures and favorable foreign exchange rates, which were partially offset by unfavorable product mix, higher employee compensation and sales and marketing. — favorable 185 basis points
The year-over-year effect of amortization from existing businesses offset by impairment of intangible assets — favorable 35 basis points
The year-over-year net effect of acquisition-related transaction costs incurred in the second quarter of 2022 — favorable 55 basis points
The year-over-year net effect of acquired and divested businesses, including amortization and acquisition-related fair value adjustments — favorable 5 basis points
The year-over-year effect of costs relating to the discrete restructuring plan incurred in 2023 — unfavorable 70 basis points
Russia exit and wind down costs which were incurred during the second quarter of 2022 — favorable 110 basis points

Operating profit margin was 17.8% for the year-to-date period ended June 30, 2023, an increase of 210 basis points as compared to 15.7% in the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increase in price and sales volumes from existing businesses and gains from productivity measures, which were partially offset by higher employee compensation, unfavorable product mix, sales and marketing, and unfavorable foreign exchange rates — favorable 140 basis points
The year-over-year effect of amortization from existing businesses offset by impairment of intangible assets — favorable 50 basis points
The year-over-year net effect of acquisition-related transaction costs which were lower during the year-to-date period than those recognized during the comparable period in 2022 — favorable 55 basis points
The year-over-year net effect of acquired and divested businesses, including amortization and acquisition-related fair value adjustments — favorable 5 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 95 basis points
Russia exit and wind down costs which were incurred during the year-to-date period of 2022 — favorable 55 basis points

Business Segments

Sales by business segment for each of the periods indicated were as follows ($ in millions):


	Three Months Ended				Six Months Ended
	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Intelligent Operating Solutions	$	653.1	$	630.1	$	1,285.2	$	1,217.7
Precision Technologies	537.4		499.1		1,052.9		961.5
Advanced Healthcare Solutions	335.9		334.1		649.0		660.6
Total	$	1,526.4	$	1,463.3	$	2,987.1	$	2,839.8

INTELLIGENT OPERATING SOLUTIONS

Intelligent Operating Solutions Selected Financial Data


	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Sales	$	653.1		$	630.1		$	1,285.2		$	1,217.7
Operating profit	161.7			129.9			295.2			236.9
Depreciation	8.5			9.1			16.9			18.6
Amortization	46.1			46.1			92.1			92.3
Operating profit as a % of sales	24.8		%	20.6		%	23.0		%	19.5		%
Depreciation as a % of sales	1.3		%	1.4		%	1.3		%	1.5		%
Amortization as a % of sales	7.1		%	7.3		%	7.2		%	7.6		%

Components of Sales Growth


	% Change Three Months Ended June 30, 2023 vs. Comparable 2022 Period		% Change Six Months Ended June 30, 2023 vs. Comparable 2022 Period
Total revenue growth (GAAP)	3.6	%	5.5	%
Existing businesses (Non-GAAP)	4.2	%	6.9	%

Currency exchange rates (Non-GAAP)	(0.6)	%	(1.4)	%

The sales results for both the second quarter and year-to-date period were driven by price increases, demand for gas detection equipment, software and service offerings in EHS and facility and asset lifecycle applications, partially offset by volume reductions in test and measurement instrumentation.

Geographically, sales from existing businesses in developed markets increased in the second quarter by mid-single-digits, driven by mid-single-digit growth in North America, slightly offset by mid-single-digit declines in Western Europe. Sales from existing businesses in high growth markets increased by mid-single-digits, driven by low double-digit growth in Asia, principally in China where sales were up by low double-digits, and partially offset by low double-digit declines in Latin America. On a year-to-date basis, sales from existing businesses in developed markets increased by mid-single-digits, driven by mid-single-digit growth in North America; Western Europe remained essentially flat. Sales from existing businesses in high growth markets increased year-over-year in the year-to-date period by mid-teens, on mid-twenties growth in Asia, principally in China where sales were up mid-twenties, and low twenties in the Middle East.

Price increases contributed 5.2% and 5.4% to sales growth during the second quarter and year-to-date period, as compared to the comparable periods of 2022, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 420 basis points during the second quarter as compared to the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increase in price from existing businesses, gains from productivity measures and favorable foreign exchange rates, partially offset by higher employee compensation costs and volume reductions — favorable 420 basis points
The year-over-year effect of amortization from existing businesses offset by impairments of intangible assets — unfavorable 15 basis points
The year-over-year net effect of acquisition-related transaction costs, which were incurred in the second quarter of 2022 — favorable 85 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 70 basis points

Operating profit margin increased 350 basis points during the year-to-date period, as compared to the comparable period of 2022. Year-over-year operating profit margin comparisons were comprised of the following:

Year-over-year increases in price and sales volume from existing businesses, and gains from productivity measures, partially offset by higher employee compensation costs — favorable 360 basis points
The year-over-year effect of amortization from existing businesses offset by impairment of intangible assets — favorable 20 basis points
The year-over-year net effect of acquisition-related transaction costs, which were incurred during the year-to-date period in 2022 — favorable 95 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 125 basis points

PRECISION TECHNOLOGIES

Precision Technologies Selected Financial Data


	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Sales	$	537.4		$	499.1		$	1,052.9		$	961.5
Operating profit	136.3			115.3			259.0			216.7
Depreciation	6.6			6.2			12.6			12.2
Amortization	0.4			3.6			1.5			7.2
Operating profit as a % of sales	25.4		%	23.1		%	24.6		%	22.5		%
Depreciation as a % of sales	1.2		%	1.2		%	1.2		%	1.3		%
Amortization as a % of sales	0.1		%	0.7		%	0.1		%	0.7		%

Components of Sales Growth


	% Change Three Months Ended June 30, 2023 vs. Comparable 2022 Period		% Change Six Months Ended June 30, 2023 vs. Comparable 2022 period
Total revenue growth (GAAP)	7.7	%	9.5	%
Existing businesses (Non-GAAP)	8.4	%	11.0	%

Currency exchange rates (Non-GAAP)	(0.7)	%	(1.5)	%

The sales results for both the second quarter and year-to-date period were driven by price increases across the segment and volume increases with test and measurement products and energetic materials, partially offset by a volume reduction in sensing technologies.

Geographically, sales from existing businesses in developed markets increased by low double-digits in the second quarter, driven by low double-digit growth in both North America and Western Europe. Sales from existing businesses in high growth markets increased by low single-digit in the second quarter driven by high twenties growth in India and mid-teens growth in Latin America, partially offset by a slight decline in Asia, principally due to a mid-single-digit decline in China. On a year-to-date basis, sales from existing businesses in developed markets increased by low double-digits, driven by high single-digit growth in North America and low double-digit growth in Western Europe. Sales from existing businesses in high growth markets increased year-over-year in the year-to-date period by mid-teens, driven by low double-digit growth in Asia, led by China with low double-digit growth, and low thirties growth in India.

Price increases in our Precision Technologies segment contributed 5.8% and 5.4% to sales growth for the second quarter and year-to-date period, respectively, as compared to the comparable periods of 2022, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 230 basis points for the second quarter as compared to the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increase in price and sales volume from existing businesses and gains from productivity measures, partially offset by higher employee compensation costs — favorable 190 basis points
The year-over-year effect of amortization from existing businesses — favorable 65 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 25 basis points

Operating profit margin increased 210 basis points during the year-to-date period as compared to the comparable period of 2022. Year-over-year operating profit margins were comprised of the following:

Year-over-year increase in price and sales volume from existing businesses, gains from productivity measures, and spending reductions, all partially offset by higher employee compensation costs, and unfavorable exchange rates — favorable 190
The year-over-year effect of amortization from existing businesses — favorable 60
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 40 basis points

ADVANCED HEALTHCARE SOLUTIONS

Advanced Healthcare Solutions Financial Data


	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Sales	$	335.9		$	334.1		$	649.0		$	660.6
Operating profit	25.9			28.1			42.2			56.1
Depreciation	5.4			4.7			10.5			9.4
Amortization	45.3			46.1			90.6			92.6
Operating profit as a % of sales	7.7		%	8.4		%	6.5		%	8.5		%
Depreciation as a % of sales	1.6		%	1.4		%	1.6		%	1.4		%
Amortization as a % of sales	13.5		%	13.8		%	14.0		%	14.0		%

Components of Sales Growth


	% Change Three Months Ended June 30, 2023 vs. Comparable 2022 period		% Change Six Months Ended June 30, 2023 vs. Comparable 2022 Period
Total revenue growth (GAAP)	0.6	%	(1.8)	%
Existing businesses (Non-GAAP)	3.5	%	1.8	%
Acquisitions and divestitures (Non-GAAP)	(1.5)	%	(1.6)	%
Currency exchange rates (Non-GAAP)	(1.4)	%	(2.0)	%

The sales results for the second quarter were driven by price increases and slightly higher volume with gains in sterilization and quality assurance products, dosimetry services and software offerings being offset by declines in system design and related services. The sales results for the year-to-date period were driven by price increases and demand increases for dosimetry and software and related services, which were partially offset by volume declines in sterilization and quality assurance products and system design services.

Geographically, sales from existing businesses in developed markets increased by mid-single-digits in the second quarter primarily due to mid-single-digit growth in North America partially offset by mid-single-digit declines in Western Europe. In high growth markets, sales from existing businesses increased by low single-digits in the second quarter, driven by high-teens growth in Latin America and low double-digit growth in China, partially offset by a low double-digit decline in the rest of Asia. On a year-to-date basis, sales from existing businesses in developed markets increased by low single-digits, driven by low single-digit growth in North America and high single-digit growth in Japan, partially offset by a slight decline in Western Europe. Sales from existing businesses in high growth markets declined by low single-digits, driven by mid-teens growth in Latin America and a low single-digit increase in China, both were more than offset by a low double-digit decline in the rest of Asia and high-teens declines in Eastern Europe driven by the exit from Russia last year.

Price increases in our Advanced Healthcare Solutions segment contributed 3.4% and 2.8% to sales growth during the second quarter and year-to-date period, respectively, as compared to the comparable periods of 2022, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 70 basis points during the quarter, as compared to the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increases in price from existing businesses and gains from productivity measures were more than offset by unfavorable product mix, higher employee compensation and material costs, and higher sales and marketing costs — unfavorable 65 basis points
The year-over-year effect of amortization from existing businesses — favorable 30 basis points
The year-over-year net effect of acquisition-related transaction costs which were incurred in the second quarter of 2022 — favorable 80 basis points
The year-over-year effect of divested businesses, including amortization, and acquisition-related fair value adjustments to inventory — favorable 15 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 130 basis points

Operating profit margin decreased 200 basis points during the year-to-date period as compared to the comparable period of 2022. Year-over-year changes in operating profit margin were comprised of the following:

Year-over-year increase in price from existing businesses and gains from productivity measures was more than offset by reductions in volume, unfavorable product mix, higher employee compensation and material costs, sales and marketing costs and unfavorable changes in foreign exchange rates — unfavorable 180 basis points
The year-over-year effect of amortization from existing businesses — favorable 5 basis points
The year-over-year net effect of acquisition-related transaction costs which were incurred in the year-to-date period of 2022 — favorable 60 basis points
The year-over-year effect of divested businesses, including amortization, and acquisition-related fair value adjustments to inventory — favorable 30 basis points
The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 115 basis points

COST OF SALES AND GROSS PROFIT


	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Sales	$	1,526.4		$	1,463.3		$	2,987.1		$	2,839.8
Cost of sales	(621.0)			(629.8)			(1,233.5)			(1,214.3)
Gross profit	$	905.4		$	833.5		$	1,753.6		$	1,625.5
Gross profit margin	59.3		%	57.0		%	58.7		%	57.2		%

The year-over-year increase in gross profit during the second quarter and year-to-date period, as compared to the comparable periods of 2022, is due primarily to year-over-year increases in price and sales volumes, productivity measures and FBS initiatives, partially offset by unfavorable product mix, higher employee compensation costs, and restructuring charges. The year-to-date period was also impacted by unfavorable changes in foreign currency exchange rates.

OPERATING EXPENSES


	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Sales	$	1,526.4		$	1,463.3		$	2,987.1		$	2,839.8
Selling, general and administrative (“SG&A”)	514.0			484.9			1,021.7			965.5
Research and development (“R&D”)	100.1			100.1			200.2			199.2
Russia exit and wind down costs	—			16.2			—			16.2
SG&A as a % of sales	33.7		%	33.1		%	34.2		%	34.0		%
R&D as a % of sales	6.6		%	6.8		%	6.7		%	7.0		%

SG&A increased during the second quarter and year-to-date period, as compared to the comparable periods of 2022 due to increased employee compensation expenses, customer acquisition and marketing costs, restructuring costs partially offset by savings from productivity measures.

R&D, consisting principally of internal and contract engineering personnel costs, was flat in the second quarter and increased slightly during the year-to-date period, as compared to the comparable periods of 2022 due to ongoing investment in innovation and key initiatives and higher employee compensation costs.

RUSSIA EXIT AND WIND DOWN COSTS

In the three and six-month periods ended July 1st, 2022, we incurred pre-tax costs totaling $16.2 million in the second quarter, for the write-off of net assets, the cumulative translation adjustment in earnings for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies. Of the $16.2 million incurred, approximately $9.2 million represents non-cash charges and is reflected as such in the Consolidated Condensed Statement of Cash Flows. The costs were primarily related to our segments, as follows: Intelligent Operating Solutions $13.8 million, Precision Technologies $2.2 million and Advanced Healthcare Solutions $1.3 million. The exit activities were completed in 2022 and we did not incur additional charges in 2023.

INTEREST COSTS

For a discussion of our outstanding indebtedness, refer to Note 4 to the consolidated condensed financial statements.

Net interest expense for the second quarter and year-to-date period was $33 million and $65 million as compared to $21 million and $40 million in the comparable periods in 2022. The year-over-year increase in interest expense was due to higher interest rates incurred on floating rate debt instruments, despite overall lower debt balances.

INCOME TAXES

Our effective tax rates for the three and six-month period ended June 30, 2023 were 16.5% and 16.1%, respectively, as compared to 16.9% and 15.3%, respectively, for the three and six-month period ended July 1, 2022. The decrease in the effective tax rate for the three-month period ended June 30, 2023 as compared to the three-month period ended July 1, 2022 was primarily due to effect of Russia exit and wind down costs for which no tax benefit was recognized during the three-month period ending July 1, 2022. The increase in the effective tax rate for the six-month period ended June 30, 2023 as compared to the six-month period ended July 1, 2022 was primarily due to uncertain tax position reserves released during the six-month period ending July 1, 2022.

Our effective tax rates for the three and six-month periods ended June 30, 2023, differ from the U.S. federal statutory rate of 21% due primarily to the impact of credits and deductions provided by law and changes in our uncertain tax position reserves.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other provisions implements a 15% corporate alternative minimum tax. Based upon our current analysis of the Inflation Reduction Act of 2022 and subsequently released guidance, we believe the 15% corporate minimum tax will not have a material impact on our financial statements during 2023.

COMPREHENSIVE INCOME

Comprehensive income increased by $147 million during the second quarter as compared to the comparable period in 2022 due primarily to favorable changes in foreign currency translation adjustments of $111 million, and an increase in net income.

Comprehensive income increased by $207 million during the year-to-date period as compared to the comparable period in 2022 due primarily to favorable changes in foreign currency translation adjustments of $164 million, and an increase in net income.

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. We generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity, which consist of available cash, our revolving credit facility, and access to commercial paper, bank loans, and capital markets, will be sufficient to allow us to continue funding and investing in our existing businesses, consummate strategic acquisitions, make interest and principal payments on our outstanding indebtedness, fulfill our contractual obligations, and manage our capital structure on a short and long-term basis.

We have generally satisfied any short-term liquidity needs that are not met through operating cash flows and available cash through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”).

Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on October 18, 2027 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes. As of June 30, 2023, no borrowings were outstanding under the Revolving Credit Facility.

The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the existing credit ratings of the Commercial Paper Programs when we have outstanding borrowings. We expect to limit any future borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, and repay any outstanding commercial paper as it matures.

On June 7, 2023, we filed with the SEC an “automatic shelf” registration statement (the “Shelf Registration Statement”). Under the Shelf Registration Statement, we may from time to time sell shares of common stock, preferred stock, debt securities, depositary shares, purchase contracts, purchase units, warrants and subscription rights in one or more offerings.

We continue to monitor the financial markets, the stability of U.S and international banks and general global economic conditions. If changes in financial markets or other areas of the economy adversely affect our access to the capital markets and other financing sources, we would expect to rely on a combination of available cash and existing available capacity under our credit facilities to provide short-term funding.

Overview of Cash Flows and Liquidity

Following is an overview of our cash flows and liquidity ($ in millions):


	Six Months Ended
($ in millions)	June 30, 2023		July 1, 2022
Net cash provided by operating activities	$	495.4	$	509.2

Payments for additions to property, plant and equipment	$	(45.8)	$	(37.1)
Proceeds from sale of property	4.9		—
Cash paid for acquisitions, net of cash received	—		(1.6)


Net cash used in investing activities	$	(40.9)	$	(38.7)

Net proceeds from (repayments of) commercial paper borrowings	$	(268.6)	$	481.3
Proceeds from borrowings (maturities greater than 90 days), net of issuance costs	—		397.0
Payment of 0.875% convertible senior notes due 2022	—		(1,156.5)
Repurchase of common shares	(129.1)		(242.9)
Payment of dividends	(49.3)		(50.0)


All other financing activities	5.6		(11.8)
Net cash used in financing activities	$	(441.4)	$	(582.9)

Operating Activities

Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, interest, pension funding, and other items impact reported cash flows.

Operating cash flows were $495 million during the year-to-date period, representing a decrease of $14 million, or 2.7%, as compared to the comparable period of 2022. The year-over-year change in operating cash flows was primarily attributable to the following factors:

Year-over-year increases of $38 million in Operating cash flows from net earnings, net of non-cash items (Amortization, Depreciation, Stock-based compensation, and Russia exit and wind down costs incurred 2022).
The aggregate changes in trade accounts receivable, inventories, and trade accounts payable used $38 million of cash during the quarter as compared to using $48 million in the comparable period of 2022. The amount of cash flow generated from or used by the aggregate of trade accounts receivable, inventories, and trade accounts payable depends upon how effectively we manage the cash conversion cycle, which generally represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period.
The aggregate changes in prepaid expenses, other assets, accrued expenses and other liabilities used $131 million of cash in the year-to-date period as compared to using $69 million of cash in the comparable period of 2022. The year-over-year changes were driven by timing differences related to contract liabilities, tax payments, and employee compensation and benefits.

Investing Activities

Cash outflows from investing activities, consisting primarily of capital expenditures, increased $2 million during the year-to-date period, as compared to the comparable period of 2022. The increase in investing cash flows was primarily due to a year-over-year increase in capital expenditures of approximately $9 million, partially offset by proceeds from sales of property.

Capital expenditures are made primarily for increasing production capacity, replacing aged equipment, supporting product development initiatives for hardware and software offerings, improving information technology systems, and purchasing equipment that is used in revenue arrangements with customers. For the current year, we expect capital spending to be approximately $90-110 million, although actual expenditures will ultimately depend on business conditions.

Financing Activities and Indebtedness

Cash flows from financing activities consist primarily of cash flows associated with the issuance and repayment of debt and commercial paper, payments of cash dividends to shareholders and share repurchases.

In the year-to-date period, financing activities used cash of $441 million, reflecting the following transactions:

Incurred $269 million in net commercial paper repayments under the U.S. dollar-denominated commercial paper program, which had a weighted annual effective rate of 5.39% and a weighted average maturity of approximately 17 days.
As of June 30, 2023, we repurchased 2 million shares of our common stock for approximately $129 million under our share repurchase program.
Dividend payments to common shareholders totaling $49 million.

In the comparable 2022 period, financing activities used cash of $583 million, reflecting the following transaction:

On June 17, 2022, we entered into a three-year ¥14.4 billion senior unsecured facility yielding net proceeds of approximately $107 million.
On June 21, 2022, we entered into a three-year €275 million senior unsecured facility yielding net proceeds of approximately $290 million.
Incurred $481 million in net commercial paper borrowings under the U.S. dollar-denominated commercial paper program, which had a weighted annual effective rate of 1.84% and a weighted average remaining maturity of approximately 32 days.
Repurchased 4 million shares for approximately $243 million under our share repurchase program.
Made dividend payments to common shareholders totaling $50 million.
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.

Refer to Note 4 of the consolidated condensed financial statements for additional information regarding our financing activities and indebtedness.

Cash and Cash Requirements

As of June 30, 2023, we held approximately $713 million of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less and yielded insignificant interest income during the year-to-date period. Approximately 91% of the $713 million in cash and equivalents was held outside of the United States.

We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our pension plans as required, pay dividends to shareholders, and support other business needs or objectives. With respect to our cash requirements, we generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions and repayment of maturing debt, we may also borrow under our commercial paper programs or credit facilities or enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under our commercial paper programs. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions.

Foreign cumulative earnings remain subject to foreign remittance taxes. We have made an election regarding the amount of earnings that we do not intend to repatriate due to local working capital needs, local law restrictions, high foreign remittance costs, previous investments in physical assets and acquisitions, or future growth needs. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.

As of June 30, 2023, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future.

CRITICAL ACCOUNTING ESTIMATES

There were no material changes during the three and six-month periods ended June 30, 2023 to the items we disclosed as our critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K.

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