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Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2023
OR
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-41770
VERALTO CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 92-1941413 | ||||||||||
| (State of Incorporation) | (I.R.S. Employer Identification Number) | ||||||||||
| 225 Wyman Street, Suite 250 | 02451 | ||||||||||
| Waltham, | Massachusetts | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: 781-755-3655
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $0.01 par value | VLTO | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |||||||||||||||||
| Non-accelerated Filer | ☒ | Smaller Reporting Company | ☐ | |||||||||||||||||
| Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The number of shares of common stock outstanding at October 20, 2023 was 246,308,057.
VERALTO CORPORATION
TABLE OF CONTENTS
FORM 10-Q
VERALTO CORPORATION
COMBINED CONDENSED BALANCE SHEETS
($ in millions, except per share amount)
(unaudited)
| September 29, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 426 | $ | — | |||||||
| Trade accounts receivable, less allowance for doubtful accounts of $36 and $34, respectively | 816 | 816 | |||||||||
| Inventories: | |||||||||||
| Finished goods | 134 | 145 | |||||||||
| Work in process | 45 | 51 | |||||||||
| Raw materials | 137 | 149 | |||||||||
| Total inventories | 316 | 345 | |||||||||
| Prepaid expenses and other current assets | 102 | 119 | |||||||||
| Total current assets | 1,660 | 1,280 | |||||||||
| Property, plant and equipment, net of accumulated depreciation of $462 and $460, respectively | 248 | 247 | |||||||||
| Other long-term assets | 339 | 343 | |||||||||
| Goodwill | 2,480 | 2,476 | |||||||||
| Other intangible assets, net | 433 | 479 | |||||||||
| Total assets | $ | 5,160 | $ | 4,825 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 354 | $ | 440 | |||||||
| Accrued expenses and other liabilities | 680 | 683 | |||||||||
| Total current liabilities | 1,034 | 1,123 | |||||||||
| Other long-term liabilities | 479 | 462 | |||||||||
| Long-term debt | 2,604 | — | |||||||||
| Parent’s equity: | |||||||||||
| Preferred stock - $0.01 par value, as of September 29, 2023 and December 31, 2022, 15 million and 100 shares authorized, respectively; and 0 shares issued and outstanding as of both dates | — | — | |||||||||
| Common stock - $0.01 par value, as of September 29, 2023 and December 31, 2022, 1.0 billion shares and 100 shares authorized, respectively; and 246.3 million shares and 100 shares issued and outstanding, respectively | 2 | — | |||||||||
| Net Parent investment | 2,021 | 4,189 | |||||||||
| Accumulated other comprehensive income (loss) | (985) | (954) | |||||||||
| Total Parent’s equity | 1,038 | 3,235 | |||||||||
| Noncontrolling interests | 5 | 5 | |||||||||
| Total equity | 1,043 | 3,240 | |||||||||
| Total liabilities and equity | $ | 5,160 | $ | 4,825 |
See the accompanying Notes to the Combined Condensed Financial Statements.
VERALTO CORPORATION
COMBINED CONDENSED STATEMENTS OF EARNINGS
($ in millions, except per share amounts)
(unaudited)
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||||||||
| Sales | $ | 1,255 | $ | 1,219 | $ | 3,733 | $ | 3,622 | |||||||||||||||||||||
| Cost of sales | (532) | (525) | (1,578) | (1,573) | |||||||||||||||||||||||||
| Gross profit | 723 | 694 | 2,155 | 2,049 | |||||||||||||||||||||||||
| Operating costs: | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (395) | (357) | (1,133) | (1,067) | |||||||||||||||||||||||||
| Research and development expenses | (55) | (52) | (168) | (164) | |||||||||||||||||||||||||
| Operating profit | 273 | 285 | 854 | 818 | |||||||||||||||||||||||||
| Nonoperating income (expense): | |||||||||||||||||||||||||||||
| Other income (expense), net | — | — | (14) | — | |||||||||||||||||||||||||
| Interest expense | (5) | — | (5) | — | |||||||||||||||||||||||||
| Earnings before income taxes | 268 | 285 | 835 | 818 | |||||||||||||||||||||||||
| Income taxes | (63) | (67) | (196) | (189) | |||||||||||||||||||||||||
| Net earnings | $ | 205 | $ | 218 | $ | 639 | $ | 629 | |||||||||||||||||||||
| Net earnings per common share: | |||||||||||||||||||||||||||||
| Basic and Diluted | $ | 0.83 | $ | 0.89 | $ | 2.59 | $ | 2.55 | |||||||||||||||||||||
| Average common stock and common equivalent shares outstanding: | |||||||||||||||||||||||||||||
| Basic and Diluted | 246.3 | 246.3 | 246.3 | 246.3 | |||||||||||||||||||||||||
See the accompanying Notes to the Combined Condensed Financial Statements.
VERALTO CORPORATION
COMBINED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| Net earnings | $ | 205 | $ | 218 | $ | 639 | $ | 629 | |||||||||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (62) | (97) | (34) | (212) | |||||||||||||||||||
| Pension and post-retirement plan benefit adjustments | — | — | — | 1 | |||||||||||||||||||
| Unrealized gain on net investment hedge | 3 | — | 3 | — | |||||||||||||||||||
| Total other comprehensive income (loss), net of income taxes | (59) | (97) | (31) | (211) | |||||||||||||||||||
| Comprehensive income | $ | 146 | $ | 121 | $ | 608 | $ | 418 |
See the accompanying Notes to the Combined Condensed Financial Statements.
VERALTO CORPORATION
COMBINED CONDENSED STATEMENTS OF EQUITY
($ and shares in millions)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Net Parent Investment | Accumulated Other Comprehensive Income (Loss) | Total Parent’s Equity | Noncontrolling Interests | ||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | — | $ | — | $ | 4,207 | $ | (926) | $ | 3,281 | $ | 5 | ||||||||||||||||||||||||
| Net earnings for the period | — | — | 205 | — | 205 | — | |||||||||||||||||||||||||||||
| Recapitalization | 246.3 | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Consideration paid to Parent in connection with Separation | — | — | (2,600) | — | (2,600) | — | |||||||||||||||||||||||||||||
| Net transfers to Parent | — | — | 198 | — | 198 | — | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (59) | (59) | — | |||||||||||||||||||||||||||||
| Parent common stock-based award activity | — | — | 13 | — | 13 | — | |||||||||||||||||||||||||||||
| Balance, September 29, 2023 | 246.3 | $ | 2 | $ | 2,021 | $ | (985) | $ | 1,038 | $ | 5 | ||||||||||||||||||||||||
| Balance, December 31, 2022 | — | $ | — | $ | 4,189 | $ | (954) | $ | 3,235 | $ | 5 | ||||||||||||||||||||||||
| Net earnings for the period | — | — | 639 | — | 639 | — | |||||||||||||||||||||||||||||
| Recapitalization | 246.3 | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Consideration paid to Parent in connection with Separation | — | — | (2,600) | — | (2,600) | — | |||||||||||||||||||||||||||||
| Net transfers to Parent | — | — | (240) | — | (240) | — | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (31) | (31) | — | |||||||||||||||||||||||||||||
| Parent common stock-based award activity | — | — | 35 | — | 35 | — | |||||||||||||||||||||||||||||
| Balance, September 29, 2023 | 246.3 | $ | 2 | $ | 2,021 | $ | (985) | $ | 1,038 | $ | 5 | ||||||||||||||||||||||||
| Net Parent Investment | Accumulated Other Comprehensive Income (Loss) | Total Parent’s Equity | Noncontrolling Interests | ||||||||||||||||||||
| Balance, July 1, 2022 | $ | 4,275 | $ | (1,001) | $ | 3,274 | $ | 5 | |||||||||||||||
| Net earnings for the period | 218 | — | 218 | — | |||||||||||||||||||
| Net transfers to Parent | (214) | — | (214) | — | |||||||||||||||||||
| Other comprehensive income (loss) | — | (97) | (97) | — | |||||||||||||||||||
| Parent common stock-based award activity | 8 | — | 8 | — | |||||||||||||||||||
| Balance, September 30, 2022 | $ | 4,287 | $ | (1,098) | $ | 3,189 | $ | 5 | |||||||||||||||
| Balance, December 31, 2021 | $ | 4,084 | $ | (887) | $ | 3,197 | $ | 4 | |||||||||||||||
| Net earnings for the period | 629 | — | 629 | — | |||||||||||||||||||
| Net transfers to Parent | (456) | — | (456) | — | |||||||||||||||||||
| Other comprehensive income (loss) | — | (211) | (211) | — | |||||||||||||||||||
| Parent common stock-based award activity | 30 | — | 30 | — | |||||||||||||||||||
| Change in noncontrolling interests | — | — | — | 1 | |||||||||||||||||||
| Balance, September 30, 2022 | $ | 4,287 | $ | (1,098) | $ | 3,189 | $ | 5 |
See the accompanying Notes to the Combined Condensed Financial Statements.
VERALTO CORPORATION
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
| Nine-Month Period Ended | |||||||||||
| September 29, 2023 | September 30, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 639 | $ | 629 | |||||||
| Noncash items: | |||||||||||
| Depreciation | 29 | 31 | |||||||||
| Amortization of intangible assets | 36 | 38 | |||||||||
| Stock-based compensation expense | 35 | 30 | |||||||||
| Impairment of equity method investment | 15 | — | |||||||||
| Change in trade accounts receivable, net | (2) | (100) | |||||||||
| Change in inventories | 28 | (70) | |||||||||
| Change in trade accounts payable | (85) | (13) | |||||||||
| Change in prepaid expenses and other assets | (1) | 1 | |||||||||
| Change in accrued expenses and other liabilities | 6 | (13) | |||||||||
| Net cash provided by operating activities | 700 | 533 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Cash paid for acquisitions | — | (51) | |||||||||
| Payments for additions to property, plant and equipment | (32) | (26) | |||||||||
| Proceeds from sales of property, plant and equipment | 2 | — | |||||||||
| All other investing activities | (3) | — | |||||||||
| Net cash used in investing activities | (33) | (77) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds from borrowings (maturities longer than 90 days) | 2,608 | — | |||||||||
| Consideration paid to Parent in connection with Separation | (2,600) | — | |||||||||
| Net transfers to Parent | (240) | (456) | |||||||||
| Net cash used in financing activities | (232) | (456) | |||||||||
| Effect of exchange rate changes on cash and equivalents | (9) | — | |||||||||
| Net change in cash and equivalents | 426 | — | |||||||||
| Beginning balance of cash and equivalents | — | — | |||||||||
| Ending balance of cash and equivalents | $ | 426 | $ | — |
See the accompanying Notes to the Combined Condensed Financial Statements.
VERALTO CORPORATION
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
On August 24, 2023, the Board of Directors of Danaher Corporation (“Danaher” or “Parent”) approved the separation of Danaher’s Environmental & Applied Solutions segment through the pro rata distribution of all of the issued and outstanding common stock of Veralto Corporation (“Veralto” or the “Company”) to Danaher's stockholders (the “Separation”). In connection with the Separation, on September 20, 2023, the net assets of the Veralto businesses were contributed to Veralto, a wholly-owned subsidiary of the Parent, and, as partial consideration for such contribution the Company made a cash payment to Danaher in the amount of $2.6 billion. In addition, on September 29, 2023, the 100 shares of Veralto common stock held by Danaher were recapitalized into 246,291,342 shares of Veralto common stock held by Danaher. All per share amounts in the Combined Condensed Statements of Earnings have been retroactively adjusted to give effect to this recapitalization.
Veralto’s Registration Statement on Form 10, as amended, was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on September 11, 2023. In connection with the Separation, on September 29, 2023, Danaher and Veralto entered into a separation and distribution agreement as well as various other related agreements (collectively the “Agreements”) that govern the Separation and the relationships between the parties going forward, including a transition services agreement, employee matters agreement, tax matters agreement, an intellectual property matters agreement, a Danaher Business System (“DBS”) license agreement, and a framework agreement governing certain commercial arrangements between subsidiaries of Danaher and Veralto. In accordance with the tax matters agreement, Danaher is retaining certain net tax liabilities that are subject to joint and several liability between Danaher and the Company with respect to the taxable periods (or portions thereof) ended on or prior to September 29, 2023.
Veralto completed its separation from Danaher on September 30, 2023, the first day of its fiscal fourth quarter. The Separation was completed on such date in the form of a pro rata distribution to Danaher stockholders of record on September 13, 2023 of all of the issued and outstanding shares of Veralto common stock held by Danaher. Each Danaher stockholder of record as of the close of business on September 13, 2023 received one share of Veralto common stock for every three shares of Danaher common stock held on the record date. Because September 30, 2023 was a Saturday, not a business day, the shares were credited to “street name” stockholders through the Depository Trust Company on the first trading day thereafter, October 2, 2023. Veralto’s common stock began “regular way” trading on the New York Stock Exchange under the ticker symbol “VLTO” on October 2, 2023.
The accompanying Combined Condensed Financial Statements present the historical financial position, results of operations, changes in Danaher’s equity and cash flows of the Veralto businesses in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the preparation of carved-out combined financial statements.
The Company has historically operated as part of Parent and not as a separate, publicly-traded company. The financial statements have been derived from Parent’s historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included as a component of the financial statements. The financial statements also include allocations of certain general, administrative, sales and marketing expenses from Parent’s corporate office to the Company and Parent’s investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company been an entity that operated independently of Parent. Related-party allocations are discussed further in Note 14.
Net Parent investment, which includes retained earnings, represents Parent’s interest in the recorded net assets of the Company. All significant transactions between the Company and Parent have been included in the accompanying Combined Condensed Financial Statements. Transactions with Parent are reflected in the accompanying Combined Condensed Statements of Changes in Equity as “Net transfers to Parent” and in the accompanying Combined Condensed Balance Sheets within “Net Parent investment.”
The Company’s unifying purpose is Safeguarding the World’s Most Vital Resources TM. Our diverse group of associates and leading operating companies provide essential technology solutions that monitor, enhance and protect key resources around the globe. The Company is committed to the advancement of public health and safety and believes it is positioned to support its customers as they address large global challenges including environmental resource sustainability, water scarcity, management of severe weather events, food and pharmaceutical security, and the impact of an aging workforce. Through its core offerings in water analytics, water treatment, marking and coding and packaging and color, customers look to the Company’s solutions to help ensure the safety, quality, efficiency and reliability of their products, processes and people globally. The Company
operates through two segments – Water Quality and Product Quality & Innovation. Through the Water Quality segment, the Company improves the quality and reliability of water through leading brands including Hach, Trojan Technologies and ChemTreat. Through the Product Quality & Innovation segment, the Company promotes consumer trust in products and helps enable product innovation through leading brands including Videojet, Linx, Esko, X-Rite and Pantone.
Before the Separation, the Company was dependent upon Danaher for all of its working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. Because the Company was part of Danaher during the three and nine-months ended September 29, 2023, only cash, cash equivalents and borrowings clearly associated with Veralto and related to the Separation have been included in these Combined Condensed Financial Statements. Other financial transactions relating to the business operations of the Company during the period were accounted for through the Net Parent investment account of the Company.
All significant intercompany accounts and transactions between the businesses comprising the Company have been eliminated in the accompanying Combined Condensed Financial Statements.
The Combined Condensed Financial Statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The Combined Condensed Financial Statements included herein should be read in conjunction with the Combined Financial Statements as of and for the year ended December 31, 2022 and the Notes thereto included within the Information Statement filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K with the SEC on October 2, 2023 (the “Information Statement”).
In the opinion of the Company, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 29, 2023 and December 31, 2022, its results of operations for the three and nine-month periods ended September 29, 2023 and September 30, 2022 and its cash flows for each of the nine-month periods then ended.
The Combined Condensed Financial Statements may not be indicative of future performance and do not necessarily reflect what the Combined Condensed Statements of Earnings, Balance Sheets and Statements of Cash Flows would have been had the Company operated as a separate business during the periods presented.
There have been no changes to the Company’s significant accounting policies described within the Information Statement that have a material impact on the Company’s Combined Condensed Financial Statements and the related Notes.
In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The ASU requires that a joint venture apply a new basis of accounting upon formation in which the joint venture will recognize and initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). The ASU is effective prospectively for all joint venture formations with a formation date on or after January 1, 2025, with early adoption permitted. The Company early adopted the ASU effective September 29, 2023 on a prospective basis with no impact to the financial statements and related disclosures.
Cash and Equivalents—The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The cash balance presented on the Combined Condensed Balance Sheet as of September 29, 2023 of $426 million represents amounts clearly associated with Veralto related to the contribution of the Veralto businesses to the Company on September 29, 2023, as described above.
Operating Leases—As of September 29, 2023 and December 31, 2022, operating lease right-of-use assets where the Company was the lessee were $128 million and $117 million, respectively, and are included within other long-term assets in the accompanying Combined Condensed Balance Sheets. The associated operating lease liabilities were $132 million and $123 million as of September 29, 2023 and December 31, 2022, respectively, and are included in accrued expenses and other liabilities and other long-term liabilities.
Prepaid Expenses and Other Current Assets—Prepaid expenses and other current assets primarily result from advance payments to vendors for good and services and are capitalized until the related goods are received or services are performed. Included in the Company’s prepaid expenses and other current assets as of September 29, 2023 and December 31, 2022 are prepaid expenses of $88 million and $102 million, respectively.
NOTE 2. CAPITAL STOCK AND NET EARNINGS PER COMMON SHARE
Capital Stock
Under Veralto’s amended and restated certificate of incorporation, as of September 29, 2023, Veralto’s authorized capital stock consists of 1.0 billion common shares with par value $0.01 per share and 15 million preferred shares with par value $0.01 per share. On September 29, 2023, the 100 shares of Veralto common stock held by Danaher were recapitalized into 246,291,342 shares of Veralto common stock held by Danaher. On September 30, 2023, Danaher distributed all of Veralto’s issued and outstanding common stock to Danaher’s stockholders. No preferred shares were issued or outstanding on September 29, 2023. Each share of Veralto common stock entitles the holder to one vote on all matters to be voted upon by common stockholders. Veralto’s Board of Directors (the “Board”) is authorized to issue shares of preferred stock in one or more series and has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The Board’s authority to issue preferred stock with voting rights or conversion rights that, if exercised, could adversely affect the voting power of the holders of common stock, could potentially discourage attempts by third parties to obtain control of Veralto through certain types of takeover practices.
Earnings per Common Share
Basic net earnings per share (“EPS”) is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased with the proceeds from the issuance of the potentially dilutive shares.
The total number of shares outstanding on September 29, 2023 was 246.3 million, which is being utilized for the calculation of both basic and diluted earnings per share for the three and nine-month periods ended September 29, 2023 and September 30, 2022, as no Veralto common stock equivalents were outstanding prior to September 30, 2023. In addition, because the Company was incorporated on October 26, 2022, there were no shares of the Company outstanding as of September 30, 2022.
NOTE 3. REVENUE
The following tables present the Company’s revenues disaggregated by geographical region and revenue type for the three and nine-month periods ended September 29, 2023 and September 30, 2022 ($ in millions). Sales taxes and other usage-based taxes collected from customers are excluded from revenue.
| Water Quality | Product Quality & Innovation | Total | |||||||||||||||
| For the Three-Month Period Ended September 29, 2023: | |||||||||||||||||
| Geographical region: | |||||||||||||||||
| North America(a) | $ | 438 | $ | 162 | $ | 600 | |||||||||||
| Western Europe | 131 | 141 | 272 | ||||||||||||||
| Other developed markets(b) | 18 | 12 | 30 | ||||||||||||||
| High-growth markets(c) | 185 | 168 | 353 | ||||||||||||||
| Total | $ | 772 | $ | 483 | $ | 1,255 | |||||||||||
| Revenue type: | |||||||||||||||||
| Recurring (Consumables, services and spare parts) | $ | 438 | $ | 306 | $ | 744 | |||||||||||
| Nonrecurring (Equipment) | 334 | 177 | 511 | ||||||||||||||
| Total | $ | 772 | $ | 483 | $ | 1,255 | |||||||||||
| For the Three-Month Period Ended September 30, 2022: | |||||||||||||||||
| Geographical region: | |||||||||||||||||
| North America(a) | $ | 414 | $ | 166 | $ | 580 | |||||||||||
| Western Europe | 116 | 126 | 242 | ||||||||||||||
| Other developed markets(b) | 15 | 13 | 28 | ||||||||||||||
| High-growth markets(c) | 196 | 173 | 369 | ||||||||||||||
| Total | $ | 741 | $ | 478 | $ | 1,219 | |||||||||||
| Revenue type: | |||||||||||||||||
| Recurring (Consumables, services and spare parts) | $ | 442 | $ | 290 | $ | 732 | |||||||||||
| Nonrecurring (Equipment) | 299 | 188 | 487 | ||||||||||||||
| Total | $ | 741 | $ | 478 | $ | 1,219 |
| Water Quality | Product Quality & Innovation | Total | |||||||||||||||
| For the Nine-Month Period Ended September 29, 2023: | |||||||||||||||||
| Geographical region: | |||||||||||||||||
| North America(a) | $ | 1,265 | $ | 493 | $ | 1,758 | |||||||||||
| Western Europe | 396 | 439 | 835 | ||||||||||||||
| Other developed markets(b) | 51 | 39 | 90 | ||||||||||||||
| High-growth markets(c) | 545 | 505 | 1,050 | ||||||||||||||
| Total | $ | 2,257 | $ | 1,476 | $ | 3,733 | |||||||||||
| Revenue type: | |||||||||||||||||
| Recurring (Consumables, services and spare parts) | $ | 1,297 | $ | 913 | $ | 2,210 | |||||||||||
| Nonrecurring (Equipment) | 960 | 563 | 1,523 | ||||||||||||||
| Total | $ | 2,257 | $ | 1,476 | $ | 3,733 | |||||||||||
| For the Nine-Month Period Ended September 30, 2022: | |||||||||||||||||
| Geographical region: | |||||||||||||||||
| North America(a) | $ | 1,183 | $ | 505 | $ | 1,688 | |||||||||||
| Western Europe | 365 | 416 | 781 | ||||||||||||||
| Other developed markets(b) | 49 | 44 | 93 | ||||||||||||||
| High-growth markets(c) | 534 | 526 | 1,060 | ||||||||||||||
| Total | $ | 2,131 | $ | 1,491 | $ | 3,622 | |||||||||||
| Revenue type: | |||||||||||||||||
| Recurring (Consumables, services and spare parts) | $ | 1,247 | $ | 900 | $ | 2,147 | |||||||||||
| Nonrecurring (Equipment) | 884 | 591 | 1,475 | ||||||||||||||
| Total | $ | 2,131 | $ | 1,491 | $ | 3,622 |
(a) The Company defines North America as the United States and Canada.
(b) The Company defines other developed markets as Japan, Australia and New Zealand.
(c) The Company defines high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which encompass all markets outside of the developed markets and consist of Eastern Europe, the Middle East, Africa, Latin America (including Mexico) and Asia (with the exception of Japan, Australia and New Zealand). The Company defines developed markets as all markets of the world that are not high-growth markets.
The Company sells equipment to customers as well as consumables and services, some of which customers purchase on a recurring basis. Consumables sold for use with the equipment sold by the Company are typically critical to the use of the equipment and are typically used on a one-time or limited basis, requiring frequent replacement in the customer’s operating cycle. Examples of these consumables include chemistries for water testing instruments and cartridges for marking and coding equipment. Additionally, some of the Company’s consumables are used on a standalone basis, such as water treatment solutions. The Company separates its goods and services between those typically sold to a customer on a recurring basis and those typically sold to a customer on a nonrecurring basis. Recurring revenue includes revenue from consumables, services and operating-type leases (“OTLs”). Nonrecurring revenue includes sales of equipment and sales-type leases (“STLs”). OTLs and STLs are included in the above revenue amounts. For the three-month periods ended September 29, 2023 and September 30, 2022, lease revenue was $24 million and $19 million, respectively. For the nine-month periods ended September 29, 2023 and September 30, 2022, lease revenue was $63 million and $50 million, respectively. Service and software revenue was immaterial for all periods presented. Software revenues for a point-in-time licenses are nonrecurring while revenues for Software as a Service and over time licenses are recurring.
Remaining performance obligations related to Topic 606, Revenue from Contracts with Customers, represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. As of September 29, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $286 million. The Company expects to recognize revenue on approximately 43% of the remaining performance obligations over the next 12 months, 35% over the subsequent 12 months, and the remainder recognized thereafter.
The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities that are classified as either current or long-term in the Combined Condensed Balance Sheets based on the timing of when the Company expects to recognize revenue. As of September 29, 2023 and December 31, 2022, contract liabilities were $216 million and $206 million, respectively, and are included within accrued expenses and other liabilities and other long-term liabilities in the accompanying Combined Condensed Balance Sheets. Revenue recognized during the nine-month periods ended September 29, 2023 and September 30, 2022 that was included in the opening contract liability balance was $146 million and $142 million, respectively.
NOTE 4. SEGMENT INFORMATION
The Company operates and reports its results in two separate business segments consisting of the Water Quality and Product Quality & Innovation segments. When determining the reportable segments, the Company aggregated operating segments based upon similar economic and operating characteristics. Operating profit represents total revenues less operating expenses, excluding nonoperating income and expense, interest and income taxes. Operating profit amounts in the Other segment consist of unallocated corporate costs and other costs not considered part of management’s evaluation of reportable segment operating performance. Intersegment amounts are not significant and are eliminated to arrive at combined totals.
Segment results are shown below ($ in millions):
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Water Quality | $ | 772 | $ | 741 | $ | 2,257 | $ | 2,131 | |||||||||||||||
| Product Quality & Innovation | 483 | 478 | 1,476 | 1,491 | |||||||||||||||||||
| Total | $ | 1,255 | $ | 1,219 | $ | 3,733 | $ | 3,622 | |||||||||||||||
| Operating profit: | |||||||||||||||||||||||
| Water Quality | $ | 188 | $ | 185 | $ | 536 | $ | 485 | |||||||||||||||
| Product Quality & Innovation | 99 | 109 | 356 | 364 | |||||||||||||||||||
| Other | (14) | (9) | (38) | (31) | |||||||||||||||||||
| Total | $ | 273 | $ | 285 | $ | 854 | $ | 818 |
NOTE 5. INCOME TAXES
The following table summarizes the Company’s effective tax rate:
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| Effective tax rate | 23.5 | % | 23.5 | % | 23.5 | % | 23.1 | % |
The Company operates globally, including in certain jurisdictions with higher statutory tax rates than the United States (“U.S.”). Therefore, based on earnings mix, the impact of operating in such jurisdictions contributes to a higher effective tax rate compared to the U.S. federal statutory tax rate.
The effective tax rate for the three-month period ended September 29, 2023 differs from the U.S. federal statutory rate of 21% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $6 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain tax positions. The net discrete benefits reduced the effective tax rate by 2.2% for the three-month period ended September 29, 2023.
The effective tax rate for the nine-month period ended September 29, 2023 differs from the U.S. federal statutory rate of 21% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $12 million related primarily to excess tax benefits from stock-based compensation. The net discrete benefits reduced the effective tax rate by 1.4% for the nine-month period ended September 29, 2023.
The effective tax rate for the three-month period ended September 30, 2022 differs from the U.S. federal statutory rate of 21% principally due to geographic mix of earnings described above, partially offset by net discrete benefits of $3 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain
tax positions. These net discrete benefits reduced the effective tax rate by 1.1% for the three-month period ended September 30, 2022.
The effective tax rate for the nine-month period ended September 30, 2022 differs from the U.S. federal statutory rate of 21% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $11 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain tax positions. The net discrete benefits reduced the effective tax rate by 1.3% for the nine-month period ended September 30, 2022.
For a description of the Company’s significant tax matters, reference is made to the financial statements as of and for the year ended December 31, 2022 and Note 5 to the financial statements included within the Information Statement.
NOTE 6. NONOPERATING INCOME (EXPENSE)
Other Components of Net Periodic Benefit Costs
The Company disaggregates the service cost component of net periodic benefit costs of noncontributory defined benefit pension plans and other postretirement employee benefit plans and presents the other components of net periodic benefit costs in other income (expense), net. These other components of net periodic benefit costs include the assumed rate of return on plan assets, partially offset by amortization of actuarial losses and interest and were less than $1 million for the three and nine-month periods ended September 29, 2023 and September 30, 2022.
Impairment of Equity Method Investment
During the nine-month period ended September 29, 2023, the Company recorded an impairment of $15 million related to an equity method investment, which is reflected in nonoperating income (expense).
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a rollforward of the Company’s goodwill ($ in millions):
| Balance, December 31, 2022 | $ | 2,476 | |||
| Adjustments due to finalization of purchase price allocations | 1 | ||||
| Foreign currency translation and other | 3 | ||||
| Balance, September 29, 2023 | $ | 2,480 |
The carrying value of goodwill by segment is summarized as follows ($ in millions):
| September 29, 2023 | December 31, 2022 | ||||||||||
| Water Quality | $ | 1,282 | $ | 1,277 | |||||||
| Product Quality & Innovation | 1,198 | 1,199 | |||||||||
| Total | $ | 2,480 | $ | 2,476 |
The Company has not identified any “triggering” events which indicate an impairment of goodwill in the three and nine-month periods ended September 29, 2023 and September 30, 2022.
The Company reviews identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company identified impairment triggers during the second and third quarters of 2023 and the second quarter of 2022 which resulted in the impairment charges of certain long-lived assets, including technology, customer relationships and trade names. The Company recorded impairment charges of $6 million for the three-month period September 29, 2023 and no impairment charges were recorded for the three-month periods ended September 30, 2022. The Company recorded impairment charges totaling $12 million and $9 million during the nine-month periods ended September 29, 2023 and September 30, 2022, respectively, related to these long-lived assets.
NOTE 8. FAIR VALUE MEASUREMENTS
The carrying amounts and fair values of the Company’s financial instruments were as follows ($ in millions):
| September 29, 2023 | |||||||||||||||||||||||
| Carrying Amount | Fair Value | ||||||||||||||||||||||
| Long-term debt | $ | 2,604 | $ | 2,587 |
As of September 29, 2023, long-term borrowings were categorized as Level 1. The fair value of long-term borrowings was based on quoted market prices. The fair values of borrowings with original maturities of one year or less, as well as cash and cash equivalents, trade accounts receivable, net and trade accounts payable generally approximate their carrying amounts due to the short-term maturities of these instruments.
NOTE 9. FINANCING
As of September 29, 2023, the Company was in compliance with all of its debt covenants. The components of the Company’s debt were as follows ($ in millions):
| Outstanding Amount | ||||||||||||||
| Description and Aggregate Principal Amount | September 29, 2023 | |||||||||||||
| 5.50% senior unsecured notes due 9/18/2026 ($700 million) (the "2026 Notes") | $ | 695 | ||||||||||||
| 5.35% senior unsecured notes due 9/18/2028 ($700 million) (the "2028 Notes") | 694 | |||||||||||||
| 4.15% senior unsecured notes due 9/19/2031 (€500 million) (the "2031 Notes") | 523 | |||||||||||||
| 5.45% senior unsecured notes due 9/18/2033 ($700 million) (the "2033 Notes") | 692 | |||||||||||||
| Long-term debt | $ | 2,604 |
Senior Unsecured Notes
In September 2023, and in connection with the Separation, the Company issued approximately $2.1 billion aggregate principal amount of USD senior unsecured notes in three series with maturity dates ranging from 2026 through 2033 (collectively, the “U.S. Dollar Notes”). Additionally, the Company issued €500 million principal amount of senior unsecured notes (“Euro Notes”) with a maturity date of 2031.
Interest payments on the U.S. Dollar Notes are due semi-annually until maturity, with the first interest payment due in March 2024. Interest payments on the Euro Notes are due annually until maturity, with the first interest payment due in September 2024. In the event of a change in control and a related downgrade of the ratings of the U.S. Dollar Notes and Euro Notes (collectively, the "Notes") below investment grade, the indentures governing the Notes requires that the Company make an offer to each holder of the Notes to repurchase all or any part of that holder's notes at a repurchase price equal to 101% of the aggregate principal amount of the Notes repurchased, plus any accrued and unpaid interest. The indentures also include a limitation on liens incurred by the Company and its wholly owned U.S. subsidiaries. The indentures do not restrict the Company or its subsidiaries from incurring indebtedness, nor does it require any financial covenants. All the covenants are subject to a number of exceptions, limitations, and qualifications.
Upon issuance, the Notes became guaranteed by Danaher. Following the completion of the Separation on September 30, 2023, Danaher was automatically and unconditionally released and discharged from all obligations under its guarantees.
The Company recorded $25 million of debt discounts and debt issuance costs related to the Notes. Debt issuance costs are presented as a reduction of debt in the Combined Condensed Balance Sheets and are amortized as a component of interest expense over the term of the related debt.
The proceeds of the Notes were distributed to Danaher during September as partial consideration for the net assets contributed to Veralto in advance of the Separation on September 30, 2023.
Credit Facility
On August 31, 2023, the Company entered into a credit agreement providing for a five-year unsecured revolving credit facility in an aggregate committed amount of $1.5 billion (the “Credit Facility”). There were no outstanding amounts under the Credit Facility as of September 29, 2023. The Credit Facility includes an alternative currency sublimit up to an amount equal to 90% of the aggregate commitments and a $100 million swingline sublimit and provides for the issuance of swing loans.
Borrowings under the Credit Facility bear interest at the Company’s option as follows: (i) in the case of borrowings denominated in U.S. dollars, (1) Term Secured Overnight Financing Rate (“SOFR”) Loans (as defined in the Credit Agreement) bear interest at a variable rate equal to the Term SOFR (as defined in the Credit Agreement) plus the Applicable Rate (a margin of between 79.5 and 130.0 basis points, depending on the Company’s long-term debt credit rating); and (2) Base Rate Committed Loans and Swing Line Loans (each as defined in the Credit Agreement) bear interest at a variable rate equal to the highest of (a) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 1/2 of 1.0%, (b) Bank of America’s “prime rate” as publicly announced from time to time, (c) Term SOFR (based on one-month interest period plus 1.0%) and (d) 1.0%, plus in each case the Applicable Rate (a margin of between 0.0 to 30.0 basis points, depending on the Company’s long-term debt credit rating); and (ii) in the case of borrowings denominated in euros, Alternative Currency Loans (as defined in the Credit Agreement) bear interest at EURIBOR (as defined in the Credit Agreement) plus the Applicable Rate (a margin of between 79.5 and 130.0 basis points, depending on the Company’s long-term debt credit rating). In addition, the Company is required to pay a per annum facility fee of between 8.0 and 20.0 basis points (depending on the Company’s long-term debt credit rating) based on the aggregate commitments under the Credit Facility, regardless of usage. The Company’s current credit rating as of September 29, 2023 is Baa1/BBB and the associated facility fee is 9.0 basis points.
The Credit Facilities contain affirmative and negative covenants customary to financings of this type that, among other things, limit the Company and its subsidiaries’ ability to incur additional liens and to make certain fundamental changes. In addition, the Credit Facilities contain a financial covenant that requires the Company to not exceed a maximum consolidated net leverage ratio of 3.75:1.00 that will be tested beginning with the quarter ended on September 29, 2023. The Company intends to use the Credit Facility for liquidity support for the Company’s commercial paper programs and for general corporate purposes.
Debt issuance costs related to the credit facility were not material.
NOTE 10. HEDGING TRANSACTIONS
The Company is neither a dealer nor a trader in derivative instruments. The Company has generally accepted the exposure to transactional exchange rate movements without using derivative instruments to manage this risk. The Company has issued foreign currency denominated long-term debt as a partial hedge of its net investment in foreign operations against adverse movements in exchange rates between the U.S. dollar and the euro. This foreign currency denominated long-term debt issuance is designated and qualifies as a nonderivative hedging instrument. Accordingly, the foreign currency translation of this debt instrument is recorded in accumulated other comprehensive income (loss), offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in accumulated other comprehensive income (loss). This instrument matures in September 2031.
The following table summarizes the notional values as of September 29, 2023 and pretax impact of changes in the fair values of instruments designated as net investment hedges in accumulated other comprehensive income (“OCI”) for the three and nine-month periods ended September 29, 2023 ($ in millions):
| Original Notional Amount | Notional Amount Outstanding | Gain (Loss) Recognized in OCI | Amounts Reclassified from OCI | ||||||||||||||||||||
| For the Three and Nine-Month Periods Ended September 29, 2023: | |||||||||||||||||||||||
| Foreign currency denominated debt | $ | 523 | $ | 523 | $ | 4 | $ | — | |||||||||||||||
Gains or losses related to the net investment hedges are classified as foreign currency translation adjustments in the schedule of changes in OCI in Note 13, as these items are attributable to the Company’s hedges of its net investment in foreign operations.
The Company did not reclassify any other deferred gains or losses related to the net investment hedge from accumulated other comprehensive income (loss) to earnings during the three and nine-month periods ended September 29, 2023. In addition, the Company did not have any ineffectiveness related to the net investment hedge during the three and nine-month periods ended September 29, 2023, and, should they arise, any ineffective portions of the hedge would be reclassified from accumulated other comprehensive income (loss) into earnings during the period of change.
The Company’s nonderivative debt instrument designated and qualifying as a net investment hedge, was classified in the Company’s Combined Condensed Balance Sheets within Long-term debt as of September 29, 2023.
NOTE 11. DEFINED BENEFIT PLANS
The following sets forth the components of the Company’s net periodic benefit cost of the non-U.S. noncontributory defined benefit pension plans ($ in millions):
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| Service cost | $ | (1) | $ | (1) | $ | (3) | $ | (4) | |||||||||||||||
| Interest cost | (1) | (1) | (3) | (1) | |||||||||||||||||||
| Expected return on plan assets | 1 | 1 | 3 | 2 | |||||||||||||||||||
| Amortization of net loss | — | — | — | (1) | |||||||||||||||||||
| Net periodic cost | $ | (1) | $ | (1) | $ | (3) | $ | (4) |
The service cost component of net periodic benefit costs is presented in cost of goods sold and selling, general and administrative expenses while the other cost components are presented in other income (expense), net.
Employer Contributions
During 2023, the Company’s cash contribution requirements for its pension plans are expected to be $5 million. The ultimate 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 12. COMMITMENTS AND CONTINGENCIES
The Company reviews the adequacy of its legal reserves on a quarterly basis and establishes reserves for loss contingencies that are both probable and reasonably estimable. For a further description of the Company’s litigation and contingencies, refer to Note 12 of the Company’s financial statements as of and for the year ended December 31, 2022 included within the Information Statement.
The Company generally accrues 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 periods depend on the nature of the product and range from the date of such sale up to twenty years. 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. As of September 29, 2023 and December 31, 2022, the Company had accrued warranty liabilities of $34 million and $32 million, respectively.
NOTE 13. PARENT'S EQUITY AND STOCK-BASED COMPENSATION
For a full description of the Parent’s stock-based compensation programs in which certain employees of the Company participate, reference is made to Note 13 of the Company’s financial statements as of and for the year ended December 31, 2022 included within the Information Statement. As of September 29, 2023, approximately 41 million shares of the Parent’s common stock were reserved for issuance under the Parent’s 2007 Omnibus Incentive Plan.
As a result of the Separation, accounts held by Veralto employees in the Parent’s deferred compensation programs referencing valuation of the Parent common stock were converted into accounts in Veralto deferred compensation programs referencing valuation of Veralto common stock, and with such accounts adjusted to maintain the economic value before and after the Separation date using the relative fair market value of the Parent and Veralto common stock.
In connection with the Separation, the Company adopted the 2023 Omnibus Incentive Plan (the “Stock Plan”) and outstanding equity awards of the Parent held by Veralto employees were converted into or replaced with awards of Veralto common stock under the Stock Plan based on the “concentration method,” and as adjusted to maintain the economic value before and after the Separation date using the ratio of the Veralto common stock fair market value relative to the Danaher common stock fair market value prior to the Separation. The incremental stock-based compensation expense to be recorded as a result of this equity award conversion will be $12 million, with $6 million recognized after the Separation in the fourth quarter of 2023 and an additional $6 million recognized over the remaining service period. For each equity award holder, the intent was to maintain the economic value of the equity awards before and after the Separation. The terms of the equity awards, such as the award period, exercisability and vesting schedule, as applicable, generally continue unchanged. Other than converted or replacement equity awards of Veralto issued in replacement of the Parent’s restricted stock units (“RSUs”) and stock options, the terms of the converted or replacement equity awards of Veralto (e.g., vesting date and expiration date) continued unchanged.
| Three-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| RSUs/PSUs: | |||||||||||||||||||||||
| Pretax compensation expense | $ | 7 | $ | 5 | $ | 19 | $ | 17 | |||||||||||||||
| Income tax benefit | — | (1) | (1) | (3) | |||||||||||||||||||
| RSU/PSU and restricted share expense, net of income taxes | 7 | 4 | 18 | 14 | |||||||||||||||||||
| Stock options: | |||||||||||||||||||||||
| Pretax compensation expense | 6 | 3 | 16 | 13 | |||||||||||||||||||
| Income tax benefit | (1) | — | (3) | (2) | |||||||||||||||||||
| Stock option expense, net of income taxes | 5 | 3 | 13 | 11 | |||||||||||||||||||
| Total stock-based compensation: | |||||||||||||||||||||||
| Pretax compensation expense | 13 | 8 | 35 | 30 | |||||||||||||||||||
| Income tax benefit | (1) | (1) | (4) | (5) | |||||||||||||||||||
| Total stock-based compensation expense, net of income taxes | $ | 12 | $ | 7 | $ | 31 | $ | 25 |
Stock-based compensation has been recognized as a component of selling, general and administrative expenses in the accompanying Combined Condensed Statements of Earnings. As of September 29, 2023, $35 million of total unrecognized compensation cost related to RSUs and performance stock units (“PSUs”) is expected to be recognized over a weighted average period of approximately two years. As of September 29, 2023, $40 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of approximately two years. Future compensation amounts will be adjusted for any changes in estimated forfeitures.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) refers to certain gains and losses that under U.S. GAAP are included in comprehensive income (loss) but are excluded from net earnings as these amounts are initially recorded as an adjustment to Parent’s equity. Foreign currency translation adjustments generally relate to indefinite investments in non-U.S. subsidiaries.
The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions).
| Foreign Currency Translation Adjustments | Net Investment Hedges | Pension and Postretirement Plan Benefit Adjustments | Accumulated Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| For the Three-Month Period Ended September 29, 2023 | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | (940) | $ | — | $ | 14 | $ | (926) | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Decrease | (62) | 4 | — | $ | (58) | ||||||||||||||||||||||||
| Income tax impact | — | (1) | — | (1) | |||||||||||||||||||||||||
| Net other comprehensive income (loss), net of income taxes | (62) | 3 | — | (59) | |||||||||||||||||||||||||
| Balance, September 29, 2023 | $ | (1,002) | $ | 3 | $ | 14 | $ | (985) | |||||||||||||||||||||
| For the Three-Month Period Ended September 30, 2022: | |||||||||||||||||||||||||||||
| Balance, July 1, 2022 | $ | (983) | $ | — | $ | (18) | $ | (1,001) | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Decrease | (97) | — | — | (97) | |||||||||||||||||||||||||
| Net other comprehensive income (loss), net of income taxes | (97) | — | — | (97) | |||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | (1,080) | $ | — | $ | (18) | $ | (1,098) | |||||||||||||||||||||
| Foreign Currency Translation Adjustments | Net Investment Hedges | Pension and Postretirement Plan Benefit Adjustments | Accumulated Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| For the Nine-Month Period Ended September 29, 2023: | |||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | (968) | $ | — | $ | 14 | $ | (954) | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Decrease | (34) | 4 | — | (30) | |||||||||||||||||||||||||
| Income tax impact | — | (1) | — | (1) | |||||||||||||||||||||||||
| Net other comprehensive income (loss), net of income taxes | (34) | 3 | — | (31) | |||||||||||||||||||||||||
| Balance, September 29, 2023 | $ | (1,002) | $ | 3 | $ | 14 | $ | (985) | |||||||||||||||||||||
| For the Nine-Month Period Ended September 30, 2022: | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | (868) | $ | — | $ | (19) | $ | (887) | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications: | |||||||||||||||||||||||||||||
| Decrease | (212) | — | — | (212) | |||||||||||||||||||||||||
| Income tax impact | — | — | — | — | |||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | (212) | — | — | (212) | |||||||||||||||||||||||||
| Reclassification adjustments: | |||||||||||||||||||||||||||||
| Increase | — | — | 1 | (a) | 1 | ||||||||||||||||||||||||
| Reclassification adjustments, net of income taxes | — | — | 1 | 1 | |||||||||||||||||||||||||
| Net other comprehensive income (loss), net of income taxes | (212) | — | 1 | (211) | |||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | (1,080) | $ | — | $ | (18) | $ | (1,098) | |||||||||||||||||||||
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost (refer to Notes 6 and 11 for additional details).
NOTE 14. RELATED PARTY TRANSACTIONS
The Company has historically operated as part of Parent and not as a separate, publicly traded company. Accordingly, Parent has allocated certain shared costs to the Company that are reflected as expenses in these financial statements. Management considers the allocation methodologies used by Parent to be reasonable and to appropriately reflect the related expenses attributable to the Company for purposes of the carve-out financial statements; however, the expenses reflected in these financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Company had operated as a separate entity. In addition, the expenses reflected in the financial statements may not be indicative of expenses the Company will incur in the future.
Corporate Expenses
Certain corporate overhead and shared expenses incurred by Parent and its subsidiaries have been allocated to the Company and are reflected in the Combined Statements of Earnings. These amounts include, but are not limited to, items such as general management and executive oversight, costs to support Parent information technology infrastructure, facilities, compliance, human resources, marketing and legal functions and financial management and transaction processing including public company reporting, consolidated tax filings and tax planning, Parent benefit plan administration, risk management and consolidated treasury services, certain employee benefits and incentives, and stock based compensation administration. These costs are allocated using methodologies that management believes are reasonable for the item being allocated. Allocation methodologies include the Company’s relative share of revenues, headcount, or functional spend as a percentage of the total.
Insurance Programs Administered by Parent
In addition to the corporate allocations discussed above, the Company was allocated expenses related to certain insurance programs Parent administers on behalf of the Company, including workers compensation, property, cargo, automobile, crime, fiduciary, product, general and directors’ and officers’ liability insurance. These amounts are allocated using various methodologies, as described below.
Included within the insurance cost allocation are allocations related to programs for which Parent is self-insured up to a certain amount. For the self-insured component, costs are allocated to the Company based on its incurred claims. Parent has premium based policies which cover amounts in excess of the self-insured retentions. The Company is allocated a portion of the total insurance cost incurred by Parent based on its pro-rata portion of Parent’s total underlying exposure base. An estimated
liability relating to the Company’s known and incurred but not reported claims has been allocated to the Company and reflected on the accompanying Combined Condensed Balance Sheets.
Medical Insurance Programs Administered by Parent
In addition to the corporate allocations discussed above, the Company was allocated expenses related to the medical insurance programs Parent administers on behalf of the Company. These amounts were allocated using actual medical claims incurred during the period for the associated employees attributable to the Company.
Deferred Compensation Program Administered by Parent
Certain management employees of the Company participate in Parent’s 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 of Parent and are presented as a component of the Company’s compensation and benefits accrual included in other long-term liabilities in the accompanying Combined Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within Parent’s 401(k) program (except that the earnings rates for amounts contributed unilaterally by Parent are entirely based on changes in the value of Parent’s 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.
The amounts of related party expenses allocated to the Company from Parent and its subsidiaries for the three and nine-month periods ended September 29, 2023 and September 30, 2022, were as follows ($ in millions):
| Three Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||||||
| September 29, 2023 | September 30, 2022 | September 29, 2023 | September 30, 2022 | ||||||||||||||||||||
| Allocated Corporate Expenses | $ | 15 | $ | 12 | $ | 42 | $ | 35 | |||||||||||||||
| Directly related charges: | |||||||||||||||||||||||
| Insurance programs expenses | 2 | 2 | 6 | 5 | |||||||||||||||||||
| Medical insurance programs expenses | 23 | 22 | 64 | 65 | |||||||||||||||||||
| Deferred compensation program expenses | 1 | — | 3 | 2 | |||||||||||||||||||
| Total related-party expenses | $ | 41 | $ | 36 | $ | 115 | $ | 107 |
Revenue and other transactions entered into in the ordinary course of business
Certain of the Company’s revenue arrangements relate to contracts entered into in the ordinary course of business with Parent and Parent affiliates. Related party revenue was $7 million and $6 million for the three-month periods ended September 29, 2023 and September 30, 2022, respectively. Related party revenue was $21 million and $17 million for the nine-month periods ended September 29, 2023 and September 30, 2022, respectively.
Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS