What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 175 added, 164 removed, 274 unchanged (55% of the section changed)

9 unchanged sentences

Accordingly, the consolidated financial statements reflect the results of the Vontier business as a discontinued operation for all periods presented.

Fortive did not retain a controlling interest in Vontier and therefore the Retained Vontier Shares were included in our assets of continuing operations as of December 31, 2020 and subsequent fair value changes in the Retained Vontier Shares prior to the Debt-for-Equity Exchange are included in our results from continuing operations for the six month period ended July 2, 2021.

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.

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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 the following:

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

43 unchanged sentences

• We have incurred a significant amount of debt, and our debt will increase further if we incur additional debt and do not retire existing debt.

• The interest rates on our credit facilities may be impacted by the phase out of the London Interbank Offered Rate (“LIBOR”) .

• The interest rates on our credit facilities may be impacted by the phase out of the London Interbank Offered Rate .

Risk Related to Shareholder Rights

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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.

Fortive is a multinational business with global operations with approximately 47% of our sales derived from customers outside the United States in 2020.

Fortive is a multinational business with global operations with approximately 47% of our sales derived from customers outside of the United States in 2020.

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.

Given the broad range of products manufactured, software and services provided, and geographies served, we use 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.

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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.

ServiceChannel Acquisition

On August 24, 2021, we acquired ServiceChannel Holdings, Inc.

(“ServiceChannel”), a privately held, global provider of software as a service (“SAAS”) based multi-site facilities maintenance service solutions with an integrated service-provider network.

The acquisition of ServiceChannel broadens our offering of software-enabled solutions for the facility and asset lifecycle workflow.

The total consideration paid was approximately $1.2 billion, net of acquired cash, and includes approximately $36 million of deferred compensation consideration that will be recognized ratably over a twelve month service period.

The ServiceChannel acquisition was primarily financed with available cash and proceeds from our financing activities.

We preliminarily recorded approximately $897 million of goodwill related to the ServiceChannel acquisition, which is not tax deductible.

ServiceChannel had revenue in 2020 of approximately $70 million and is an operating company within our Intelligent Operating Solutions segment.

ASP Acquisition

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Refer to Note 2 to the consolidated condensed financial statements for additional information regarding the Transaction.

Prior to our acquisition of ASP, Johnson & Johnson received a Civil Investigative Demand (“CID”) from the United States Department of Justice (“DOJ”) regarding a False Claims Act investigation arising from a whistleblower lawsuit pertaining to the pricing, quality, marketing, and promotion of certain of ASP’s products.

Prior to our acquisition of ASP, Johnson & Johnson received a Civil Investigative Demand from the United States Department of Justice (“DOJ”) regarding a False Claims Act investigation arising from a whistleblower lawsuit pertaining to the pricing, quality, marketing, and promotion of certain of ASP’s products.

Based on the totality of available information at the Principal Closing Date and throughout the applicable measurement period, management allocated $26 million of the $2.7 billion purchase price to a potential liability related to the aforementioned litigation.

Since the Principal Closing Date, management has continually evaluated the likelihood and magnitude of the asserted claims based on any new information that became available.

Following the Principal Closing Date, management continually evaluated the likelihood and magnitude of the asserted claims based on any new information that became available.

In the second quarter of 2021, following the unsealing of the whistleblower lawsuit and DOJ’s declination to intervene in the litigation, the plaintiff dismissed the whistleblower lawsuit.

Based on these developments, management derecognized the litigation liability from our Consolidated Condensed Balance Sheet and recorded the gain on litigation dismissal of $26 million within Non-operating income (expense), net in our Consolidated Condensed Statements of Earnings for the three and six month periods ended July 2, 2021.

Pending Acquisition of ServiceChannel

On July 8, 2021, the Company entered into a definitive agreement with Bayard Capital and Accel Partners to acquire ServiceChannel Holdings, Inc.

(“ServiceChannel”).

ServiceChannel is a global provider of SaaS-based multi-site facilities maintenance service solutions with an integrated service-provider network.

The ServiceChannel acquisition is subject to customary closing conditions, including regulatory approvals.

Upon closing of the acquisition we will pay total consideration of $1.2 billion, which includes approximately $60 million of deferred compensation consideration, and the acquisition will be financed primarily with available cash.

The Company anticipates that the ServiceChannel acquisition will close in the third quarter of 2021.

Based on these developments, management derecognized the litigation liability from our Consolidated Condensed Balance Sheet and recorded the gain on litigation dismissal of $26 million within Non-operating income (expense), net in our Consolidated Condensed Statements of Earnings during the nine month period ended October 1, 2021.

Vontier Separation

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Refer to Note 11 of our 2020 Annual Report on Form 10-K and Note 6 to the consolidated condensed financial statements for the description of the debt repayments made subsequent to the Distribution Date.

Interest expense and extinguishment costs related to the debt retired during the first quarter of 2021 are included in our results from continuing operations for the six month period ended July 2, 2021.

Interest expense and extinguishment costs related to the debt retired during the first quarter of 2021 are included in our results from continuing operations for the nine month period ended October 1, 2021.

The accounting requirements for reporting the Vontier business as a discontinued operation were met when the Vontier Separation was completed.

Accordingly, the consolidated condensed financial statements reflect the results of the Vontier

business as a discontinued operation for all periods presented.

In connection with the Vontier Separation, Fortive and Vontier entered into various agreements to effect the Vontier Separation and provide a framework for Vontier’s relationship with Fortive after the Vontier Separation, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, a Fortive Business System (“FBS”) license agreement, and a stockholder’s and registration rights agreement (the “Agreements”).

Accordingly, the consolidated condensed financial statements reflect the results of the Vontier business as a discontinued operation for all periods presented.

In connection with the Vontier Separation, Fortive and Vontier entered into various agreements to effect the Vontier Separation and provide a framework for Vontier’s relationship with Fortive after the Vontier Separation, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, a Fortive Business System license agreement, and a stockholder’s and registration rights agreement (the “Agreements”).

These Agreements govern the Vontier Separation between Fortive and Vontier of the assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) of Fortive and its subsidiaries attributable to periods prior to, at and after the Vontier Separation and also govern certain relationships between Fortive and Vontier after the Vontier Separation.

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Segment Presentation

In light of the Vontier Separation, we changed our internal reporting structure on the first day of the fourth quarter, September 26, 2020, to reflect organizational and leadership changes that allow us to better assess the operational performance of, and allocate resources to, our businesses.

In light of the Vontier Separation, we changed our internal reporting structure on the first day of the fourth quarter of 2020, September 26, 2020, to reflect organizational and leadership changes that allow us to better assess the operational performance of, and allocate resources to, our businesses.

Our chief operating decision maker assesses performance and allocates resources based on our new operating segments, which are also our new reportable segments.

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Business Performance and Outlook

COVID-19 directly impacted our business and operating results during the three and six month periods ended June 26, 2020 with reduced year-over-year demand from customers operating in nonessential end-markets and indirectly with reduced demand created by macroeconomic disruption or disruption in adjacent end markets.

Our results were severely impacted within certain geographies, most notably Asia in the first quarter of 2020, and North America and Europe in the second quarter of 2020, as virus control measures were deployed in those geographies at varying times.

As such, the year-over-year comparisons for the three and six month periods ended July 2, 2021 reflect the detrimental impacts of COVID-19 on our first and second quarter of 2020 results.

Business Performance For the Period Ended July 2, 2021

Overall global economic conditions have continued to improve during the three and six month periods ended July 2, 2021, as the distribution and administration of vaccinations in developed countries has led to easing of virus control measures and increased demand for our products and services.

For the three and six month periods ended July 2, 2021, aggregate year-over-year sales increased 26.7% and 20.0%, respectively, and were largely driven by increased demand from our existing businesses and, to a lesser extent, changes in foreign currency exchange rates.

Sales from existing businesses increased 21.3% and 15.0% during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020, reflecting positive, broad-based momentum and focused execution across our portfolio, most notably within our short-cycle industrial and software as a service (“SAAS”) businesses, which have largely returned to, and in most cases, exceeded pre-COVID-19 levels of demand.

Geographically, year-over-year sales from existing businesses in developed markets increased at a rate in the high-teens and at a low double-digit rate for the three and six month periods ended July 2, 2021, respectively.

Year-over-year sales from existing businesses in high-growth markets increased at a rate greater than 20% in both respective periods.

The geographic results for the three month period ended July 2, 2021 were driven by strong demand in all geographies, led by high teens growth in North America, greater than 20% growth in Europe and Latin America, and mid-teens growth in Asia.

The geographic results for the six month period ended July 2, 2021 were driven by strong demand in all geographies, led by low double-digit growth in North America, growth at a rate in the high teens in Europe and Asia, and greater than 20% growth in Latin America.

Year-over-year price increases contributed 1.3% and 1.1% to sales growth during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Despite widespread supply chain and logistics issues with port congestion and labor, raw material, and component shortages affecting multiple industries during the second quarter of 2021, our supply chain was responsive and we successfully implemented solutions to support our near-term operations and effectively managed production material shortages and distribution limitations to drive growth and market share gains in the second quarter of 2021.

Further, we have increased the employee capacity at the majority of our facilities based on local COVID-19 guidelines and have implemented additional safety and space management protocols to help ensure the health and safety of our employees.

Our results in the second quarter of 2021 demonstrated positive, broad-based momentum across our portfolio, which we expect to continue in the second half of 2021.

The majority of our businesses have recovered to greater than pre-COVID-19 levels of demand during the second quarter of 2021 and we believe they will continue accelerating at varied rates in the second half of 2021 if virus control measures continue to ease globally, end markets continue to recover, and customer site access continues to improve.

We believe our businesses that are more dependent on short-cycle industrial demand and production dynamics and our businesses with a greater proportion of recurring revenue, including our SAAS businesses that provide critical workflow solutions to their customers, and certain healthcare businesses will grow at faster rates than our businesses that require customer site access.

As such, we expect year-over-year global demand for our products and services to increase between 11.5% and 14.5% in the third quarter of 2021, and we expect demand to increase between 13.5% and 15% for the year ending December 31, 2021.

While we expect the positive, broad-based momentum across our portfolio to continue in the third and fourth quarters of 2021, we will continue deploying and applying the Fortive Business System to help drive near-term performance by actively managing our supply chain and continuing to collaborate with our customers and suppliers to minimize anticipated material and component delays and production and logistics disruptions.

We expect these supply chain challenges and inflationary pressures will continue in the second half of 2021;

however, we believe we will largely offset these costs with price increases and other countermeasures.

COVID-19 directly impacted our business and operating results during the three and nine month periods ended September 25, 2020, as we experienced a decline in demand from customers in nonessential end-markets and reduced demand resulting from macroeconomic disruption or disruption in adjacent end markets.

Our results were severely impacted within certain geographies, most notably Asia in the first quarter of 2020, and North America and Europe in the second quarter of 2020, as virus control measures in varying magnitude were deployed in those geographies at varying times.

As such, the year-over-year comparisons for the three and nine month periods ended October 1, 2021 reflect the greater detrimental impacts of COVID-19 on our 2020 results.

Business Performance For the Period Ended October 1, 2021

Overall demand for our products and services has continued to accelerate during the three and nine month periods ended October 1, 2021, as the distribution and administration of vaccinations in developed countries has led to easing of virus control measures.

For the three and nine month periods ended October 1, 2021, aggregate year-over-year sales increased 12.0% and 17.2%, respectively, and were largely driven by increased demand from our existing businesses.

Sales from existing businesses increased 9.1% and 12.9% during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020, reflecting positive, broad-based momentum and focused execution across our portfolio, most notably within our short-cycle industrial and SAAS businesses.

Geographically, year-over-year sales from existing businesses in both high growth and developed markets increased at a high single-digit rate during three month period ended October 1, 2021, driven by high single-digit growth in North America and Europe, greater than 20% growth in Latin America, and mid-single-digit growth in Asia.

During the nine month period ended October 1, 2021, year-over-year sales from existing businesses in developed and high growth markets increased at a low double-digit rate and at a rate in the mid-teens, respectively, driven by low double-digit growth in North America and Asia, growth at a rate in the mid-teens in Europe, and greater than 20% growth in Latin America.

Year-over-year price increases contributed 2.2% and 1.5% to sales growth during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

For the three month period ended October 1, 2021, price increases outpaced material cost increases.

During the third quarter of 2021, widespread supply chain challenges due to labor, raw material, and component shortages as well as logistics issues with port congestion affected multiple industries and raised material and shipping costs.

Our supply chain was largely responsive to these dynamics and we successfully implemented solutions to effectively support our near-term operations, countermeasure production material shortages and distribution limitations, and manage product margins to drive year-over-year growth and market share gains in the third quarter of 2021.

However, due to the widespread supply chain and logistics issues, demand outpaced our ability to deliver products, order growth significantly outpaced revenue growth, and our backlog grew substantially during the quarter.

Further, we have increased the employee capacity at the majority of our facilities in compliance with local COVID-19 guidelines and have implemented additional safety and space management protocols to help ensure the health and safety of our employees.

We plan to be in compliance with vaccine mandates, including the September 9, 2021 Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (the “Executive Order”), to the extent applicable to us.

Our results in the third quarter of 2021 demonstrated broad-based demand across our portfolio, which we expect to continue in the fourth quarter of 2021.

We expect year-over-year revenue from sales of our products and services to increase between 6.5% and 8.5% in the fourth quarter of 2021 and between 14% and 14.5% for the year ending December 31, 2021, based on our current assumptions about easing global virus control measures, continued recovery of certain end markets, elective surgery rates remaining below pre-pandemic levels, the availability of electronic components and our ability to convert backlog, and sustaining workforce levels and manufacturing capacity.

While we expect the positive, broad-based momentum in demand across our portfolio to continue in the fourth quarter of 2021, we will continue deploying and applying the Fortive Business System to help drive near-term performance by actively managing our supply chain and continuing to collaborate with our customers and suppliers to minimize anticipated material and component delays and production and logistics disruptions.

We expect these supply chain challenges and inflationary pressures will continue during the fourth quarter of 2021;

however, we believe we will largely offset these inflationary cost pressures with price increases and other countermeasures.

Additionally, we are monitoring the risks of new COVID-19 variants which may be more contagious or severe, or less responsive to treatment and vaccines, and may impact the rate that virus control measures ease or become more restrictive, which could impact our future results.

Further, we are monitoring the impact of vaccine mandates, including the Executive Order, on our workforce, supply chain, and global manufacturing capacity.

We are also continuing to monitor any escalation of geopolitical uncertainties related to governmental policies toward international trade, monetary and fiscal policies, relations between the U.S.

and China, and we are continuing to evaluate the impacts of the American Rescue Plan Act of 2021 on our business and the potential impacts of various investment and taxation policy initiatives in the United States and by the Organisation for Economic Co-operation and Development.

and China, and we are continuing to evaluate the impacts of proposed and recently enacted legislation on our business and the potential impacts of various investment and taxation policy initiatives in the United States and by the Organisation for Economic Co-operation and Development.

As of the filing date of this report, we are unable to quantify the anticipated impacts on our financial results for the year ending December 31, 2021, if any, and any impact in future periods, and will continue monitoring these developments.

RESULTS OF OPERATIONS

The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three and six month periods ended July 2, 2021 as compared to the comparable periods of 2020:

The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three and nine month periods ended October 1, 2021 as compared to the comparable periods of 2020:

Components of Sales Growth

% Change Three Months Ended

July 2, 2021 vs.

Comparable 2020 Period % Change Six Months Ended

July 2, 2021 vs.

October 1, 2021 vs.

Comparable 2020 Period % Change Nine Months Ended

October 1, 2021 vs.

Comparable 2020 Period

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Operating Profit Margins

Operating profit margin was 16.0% for the three month period ended July 2, 2021, an increase of 610 basis points as compared to 9.9% in the comparable period of 2020.

Operating profit margin was 15.5% for the three month period ended October 1, 2021, an increase of 360 basis points as compared to 11.9% in the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, a favorable sales mix, and price increases, and to a lesser extent, lower year-over-year net material costs, changes in foreign currency exchange rates, and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher year-over-year employee compensation costs, investments in research and development and sales and marketing growth initiatives, and higher freight and logistics costs — favorable 240 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less in the three month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 190 basis points

• Higher year-over-year sales volumes from existing businesses, price increases, and to a lesser extent, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher year-over-year employee compensation costs and higher selling, general, and administrative expenses (“SG&A costs”) due to broad cost reduction efforts in the comparable period of 2020 that reduced expenses to better align with reductions in demand and higher freight and logistics costs — favorable 325 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less during the three month period ended October 1, 2021 than those recognized during the comparable period in 2020 — favorable 15 basis points

• The year-over-year effect of amortization from existing businesses — favorable 70 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the three month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 30 basis points

Operating profit margin was 15.9% for the six month period ended July 2, 2021, an increase of 580 basis points as compared to 10.1% in the comparable period of 2020.

Year-over-year operating profit margin comparisons were unfavorably impacted by:

• The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue — unfavorable 50 basis points

Operating profit margin was 15.7% for the nine month period ended October 1, 2021, an increase of 500 basis points as compared to 10.7% in the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses and price increases, and to a lesser extent, lower year-over-year material costs, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, a favorable sales mix, and changes in foreign currency exchange rates, partially offset by higher year-over-year employee compensation costs, higher freight and logistics costs, and investments in research and development and sales and marketing growth initiatives — favorable 240 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less in the six month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 160 basis points

• Higher year-over-year sales volumes from existing businesses and price increases, and to a lesser extent, lower year-over-year material costs, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, and a favorable sales mix, which were partially offset by higher year-over-year employee compensation costs and higher SG&A costs due to broad cost reduction efforts in the comparable periods of 2020 that reduced expenses to better align with reductions in demand and higher freight and logistics costs — favorable 270 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less in the nine month period ended October 1, 2021 than those recognized in the comparable period in 2020 — favorable 110 basis points

• The year-over-year effect of amortization from existing businesses — favorable 100 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the six month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 50 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the nine month period ended October 1, 2021 than those recognized in the comparable period in 2020 — favorable 20 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

July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

Three Months Ended Nine Months Ended

October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Intelligent Operating Solutions $ 535.4 $ 459.1 $ 1,588.1 $ 1,338.8

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Intelligent Operating Solutions Selected Financial Data

Three Months Ended Six Months Ended

($ in millions) July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

Three Months Ended Nine Months Ended

($ in millions) October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Sales $ 535.4 $ 459.1 $ 1,588.1 $ 1,338.8

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% Change Three Months Ended

July 2, 2021 vs.

Comparable 2020 Period % Change Six Months Ended

July 2, 2021 vs.

October 1, 2021 vs.

Comparable 2020 Period % Change Nine Months Ended

October 1, 2021 vs.

Comparable 2020 Period

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Currency exchange rates (Non-GAAP) 1.3 % 2.6 %

Year-over-year sales of products and services from existing businesses of Intelligent Operating Solutions increased 26.8% and 15.5% during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020.

The year-over-year results for both respective periods were driven by broad-based increases in demand, particularly from our industrial channel partners, critical workflow, safety, facilities, and maintenance SAAS product offerings, and portable gas detection instruments, which were partially offset by a decline in demand for our industrial imaging products, as demand for those products was elevated during the comparable period in 2020 for COVID-19 monitoring.

Geographically, demand from existing businesses in our Intelligent Operating Solutions segment increased in both developed and high growth markets during the three and six month periods ended July 2, 2021.

The results in both respective periods were driven by growth in every major geography, led by North America and Europe, and to a lesser extent, Asia and Latin America.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 1.6% and 1.3% to sales growth during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 810 basis points during the three month period ended July 2, 2021 as compared to the comparable period of 2020.

Year-over-year sales of products and services from existing businesses of Intelligent Operating Solutions increased 13.1% and 14.7% during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020.

The year-over-year results for both respective periods were driven by broad-based increases in demand, particularly from our industrial channel partners, critical safety, facilities, and maintenance SAAS product offerings, and portable gas detection instruments.

The results during the nine month period ended October 1, 2021 were partially offset by a decline in demand for our industrial imaging products, as demand for those products was elevated during the comparable period in 2020 for COVID-19 monitoring.

Geographically, demand from existing businesses in our Intelligent Operating Solutions segment increased in both developed and high growth markets during the three and nine month periods ended October 1, 2021.

The results in both respective periods were driven by growth in every major geography, led by North America and Europe, and to a lesser extent, China and Latin America.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 2.1% and 1.6% to sales growth during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 10 basis points during the three month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, price increases, a favorable sales mix, and to a lesser extent, lower year-over-year material costs, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, and changes in foreign currency exchange rates, which were partially offset by higher year-over-year employee compensation costs and investments in research and development and sales and marketing growth initiatives — favorable 570 basis points

• Higher year-over-year sales volumes from existing businesses, price increases, and to a lesser extent, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher SG&A costs due to broad cost reduction efforts in the comparable period of 2020 that reduced expenses to better align with reductions in demand and higher year-over-year material and freight costs — favorable 310 basis points

• The year-over-year effect of amortization from existing businesses — favorable 120 basis points

Year-over-year operating profit margin comparisons were unfavorably impacted by:

• The incremental year-over-year net dilutive effect of acquisition-related transaction costs — unfavorable 10 basis points

Operating profit margin increased 580 basis points during the six month period ended July 2, 2021 as compared to the comparable period of 2020.

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue — unfavorable 200 basis points

• The incremental year-over-year dilutive effect of acquisition-related transaction costs — unfavorable 240 basis points

Operating profit margin increased 380 basis points during the nine month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, price increases, a favorable sales mix, and to a lesser extent, lower year-over-year material costs and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher year-over-year employee compensation and SG&A costs due to broad cost reduction efforts in the comparable period of 2020 that reduced expenses to better align with reductions in demand and increased investment in key growth and innovation initiatives — favorable 370 basis points

• The year-over-year effect of amortization from existing businesses — favorable 130 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the six month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 50 basis points

Year-over-year operating profit margin comparisons were unfavorably impacted by:

• The incremental year-over-year net dilutive effect of acquisition-related transaction costs — unfavorable 90 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue — unfavorable 30 basis points

PRECISION TECHNOLOGIES

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Precision Technologies Selected Financial Data

Three Months Ended Six Months Ended

($ in millions) July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

Three Months Ended Nine Months Ended

($ in millions) October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Sales $ 455.7 $ 418.5 $ 1,375.0 $ 1,187.1

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% Change Three Months Ended

July 2, 2021 vs.

Comparable 2020 Period % Change Six Months Ended

July 2, 2021 vs.

October 1, 2021 vs.

Comparable 2020 Period % Change Nine Months Ended

October 1, 2021 vs.

Comparable 2020 Period

3 unchanged sentences

Currency exchange rates (Non-GAAP) 1.2 % 2.1 %

Year-over-year sales of products and services from existing businesses of Precision Technologies increased 22.2% and 17.0% during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020.

The year-over-year results for both respective periods were driven by broad-based demand for test and measurement instruments, increased demand for sensing technologies in the industrial and semiconductor end markets, and to a lesser extent, increased demand for energetic materials, which were partially offset by a decrease in demand in the medical end market for ventilator components and critical environment products that supported COVID-19 patient treatment efforts in the comparable periods in 2020.

Geographically, demand from existing businesses in our Precision Technologies segment increased in both developed and high growth markets during the three and six month periods ended July 2, 2021.

The results in both respective periods were driven by growth in every major geography, led by North America, Asia, and Europe.

Year-over-year price increases in our Precision Technologies segment contributed 1.3% and 1.1% to sales growth during the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 170 basis points during the three month period ended July 2, 2021 as compared to the comparable period of 2020.

Year-over-year sales of products and services from existing businesses of Precision Technologies increased 7.7% and 13.7% during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020.

The year-over-year results for both respective periods were driven by broad-based demand for test and measurement instruments, increased demand for sensing technologies in the industrial and semiconductor end markets, and increased demand for energetic materials, which were partially offset by a decrease in demand in the medical end market for ventilator components that supported COVID-19 patient treatment efforts in the comparable periods of 2020.

Geographically, demand from existing businesses in our Precision Technologies segment increased in developed markets and slightly declined in high growth markets during the three month period ended October 1, 2021, driven by growth in North America, Europe, and Asia that was partially offset by slight declines in Latin America and Middle East and Africa.

nine month period ended October 1, 2021, demand increased in both developed and high growth markets and the results were driven by growth in every major geography, led by North America, Asia, and Europe.

Year-over-year price increases in our Precision Technologies segment contributed 2.3% and 1.5% to sales growth during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 260 basis points during the three month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, price increases, lower year-over-year material costs, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, and to a lesser extent, changes in foreign currency exchange rates, which were partially offset by higher year-over-year employee compensation costs and an unfavorable sales mix — favorable 140 basis points

• Higher year-over-year sales volumes from existing businesses, price increases, and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher year-over-year employee compensation expense, and to a lesser extent, higher material and freight costs — favorable 250 basis points

• The year-over-year effect of amortization from existing businesses — favorable 10 basis points

Operating profit margin increased 220 basis points during the six month period ended July 2, 2021 as compared to the comparable period of 2020.

Operating profit margin increased 230 basis points during the nine month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

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Advanced Healthcare Solutions Financial Data

Three Months Ended Six Months Ended

($ in millions) July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

Three Months Ended Nine Months Ended

($ in millions) October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Sales $ 308.4 $ 282.2 $ 915.3 $ 783.6

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% Change Three Months Ended

July 2, 2021 vs.

Comparable 2020 Period % Change Six Months Ended

July 2, 2021 vs.

October 1, 2021 vs.

Comparable 2020 Period % Change Nine Months Ended

October 1, 2021 vs.

Comparable 2020 Period

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Currency exchange rates (Non-GAAP) 0.9 % 2.1 %

Year-over-year sales of products and services from existing businesses of Advanced Healthcare Solutions increased 11.0% during both the three and six month periods ended July 2, 2021 as compared to the comparable periods of 2020.

The year-over-year results in the three month period ended July 2, 2021 were driven by increased demand for sterilization consumables, radiation safety monitoring, cell therapy equipment design and manufacturing, and surgical instrument tracking SAAS products.

The year-over-year results in the six month period ended July 2, 2021 were driven by increased demand for sterilization capital equipment and consumables, radiation safety monitoring, cell therapy equipment design and manufacturing, and surgical instrument tracking SAAS products.

Several of our Advanced Healthcare Solutions businesses are impacted by elective surgical procedure volumes which decreased from pre-COVID-19 levels at a high-single digit rate across most major geographic markets during the second quarter of 2021.

We expect elective surgical procedure volumes to sequentially improve throughout 2021 as COVID-19 patient hospitalizations decline and virus control measures ease.

Geographically, demand from existing businesses in our Advanced Healthcare Solutions segment increased in both developed and high growth markets during the three and six month periods ended July 2, 2021.

The results in both respective periods were driven by growth in every major geography, led by North America, Asia, and Europe.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 0.7% to sales growth during both the three and six month periods ended July 2, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 820 basis points during the three month period ended July 2, 2021 as compared to the comparable period of 2020.

Year-over-year sales of products and services from existing businesses of Advanced Healthcare Solutions increased 4.7% and 8.7% during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020.

The year-over-year results in the three month period ended October 1, 2021 were driven by increased demand for sterilization capital equipment and consumables, radiation safety monitoring, and surgical instrument tracking SAAS products.

The year-over-year results in the nine month period ended October 1, 2021 were driven by increased demand for sterilization capital equipment and consumables, radiation safety monitoring, cell therapy equipment design and manufacturing, and surgical instrument tracking SAAS products.

Several of our Advanced Healthcare Solutions businesses are impacted by elective surgical procedure volumes, which decreased from pre-COVID-19 levels at a rate in the low teens across most major geographic markets during the third quarter of 2021.

We expect elective surgical procedure volumes in the fourth quarter of 2021 to remain largely consistent with those realized in the third quarter of 2021 and continue to be below 2019 benchmark rates by a high single-digit rate.

Geographically, demand from existing businesses in our Advanced Healthcare Solutions segment increased in both developed and high growth markets during the three and nine month periods ended October 1, 2021.

The results in both respective periods were driven by growth in North America and Asia, and growth in Europe contributed to the results in the nine month period ended October 1, 2021.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 2.3% and 1.4% to sales growth during the three and nine month periods ended October 1, 2021, respectively, as compared to the comparable periods of 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 1,060 basis points during the three month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, a favorable sales mix, price increases, and to a lesser extent, lower year-over-year material costs, which were partially offset by higher year-over-year employee compensation costs and changes in foreign currency exchange rates — favorable 380 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less in the three month period ended October 1, 2021 than those recognized in the comparable period in 2020 — favorable 460 basis points

• The year-over-year effect of amortization from existing businesses — favorable 105 basis points

Year-over-year operating profit margin comparisons were unfavorably impacted by:

• Higher year-over-year product, freight, and logistics costs, higher year-over-year employee compensation costs, and sales and marketing investments, which were partially offset by higher year-over-year sales volumes from existing businesses, a favorable sales mix, and to a lesser extent, price increases — unfavorable 310 basis points

Operating profit margin increased 1,030 basis points during the six month period ended July 2, 2021 as compared to the comparable period of 2020.

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the three month period ended October 1, 2021 than those recognized in the comparable period in 2020 — favorable 115 basis points

Operating profit margin increased 1,030 basis points during the nine month period ended October 1, 2021 as compared to the comparable period of 2020.

Year-over-year operating profit margin comparisons were favorably impacted by:

• Higher year-over-year sales volumes from existing businesses, a favorable sales mix, price increases, and to a lesser extent, lower year-over-year material costs, which were partially offset by higher year-over-year freight and logistics costs and higher year-over-year employee compensation costs — favorable 105 basis points

• The year-over-year effect of amortization from existing businesses — favorable 190 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the six month period ended July 2, 2021 than those recognized in the comparable period in 2020 — favorable 130 basis points

Year-over-year operating profit margin comparisons were unfavorably impacted by:

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in the nine month period ended October 1, 2021 than those recognized in the comparable period in 2020 — favorable 125 basis points

COST OF SALES AND GROSS PROFIT

Three Months Ended Six Months Ended

($ in millions) July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

Three Months Ended Nine Months Ended

($ in millions) October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Sales $ 1,299.5 $ 1,159.8 $ 3,878.4 $ 3,309.5

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Gross profit margin 57.3 % 56.2 % 57.0 % 55.8 %

The year-over-year increase in cost of sales during the three and six month periods ended July 2, 2021, as compared to the comparable periods in 2020, is due primarily to higher year-over-year sales volumes from existing businesses and incremental expenses from our recently acquired businesses, which were partially offset by lower year-over-year material costs and cost savings associated with restructuring and productivity improvement initiatives.

Year-over-year changes in currency exchange rates increased cost of sales during the three and six month periods ended July 2, 2021.

The year-over-year increase in gross profit and gross profit margin for the three and six month periods ended July 2, 2021, as compared to the comparable periods in 2020, is due primarily to higher year-over-year sales volumes, a favorable sales mix, and price increases, which were partially offset by changes in foreign currency exchange rates.

Gross profit and gross profit margin for the three month period ended July 2, 2021 was also unfavorably impacted by higher freight and logistics costs.

The year-over-year increase in cost of sales during the three month period ended October 1, 2021, as compared to the comparable period in 2020, is due primarily to higher year-over-year sales volumes from existing businesses, and to a lesser extent, incremental expenses from our recently acquired businesses and higher year-over material and freight and logistics costs, which were partially offset by restructuring and productivity and improvement initiatives.

The year-over-year increase in cost of sales during the nine month period ended October 1, 2021, as compared to the comparable period in 2020, is due primarily to higher year-over-year sales volumes from existing businesses, which was partially offset by lower year-over material costs and productivity improvement initiatives.

Year-over-year changes in currency exchange rates increased cost of sales during the three and nine month periods ended October 1, 2021.

The year-over-year increase in gross profit and gross profit margin for the three and nine month periods ended October 1, 2021, as compared to the comparable periods in 2020, is due primarily to higher year-over-year sales volumes, price increases, and a favorable sales mix, which were partially offset by changes in foreign currency exchange rates and higher freight and logistics costs.

Gross profit and gross profit margin for the three month period ended October 1, 2021 were also unfavorably impacted by higher year-over-year material costs.

OPERATING EXPENSES

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

($ in millions)

July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020

October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020

Sales $ 1,299.5 $ 1,159.8 $ 3,878.4 $ 3,309.5

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R&D as a % of sales 6.8 % 6.8 % 6.8 % 7.2 %

SG&A expenses increased during the three and six month periods ended July 2, 2021 as compared to the comparable periods of 2020 primarily due to continued investments in our sales and marketing growth initiatives, higher employee compensation costs due to broad cost reduction efforts that reduced labor expenses to better align with reductions in demand in the comparable periods of 2020, and changes in foreign currency exchange rates that were partially offset by lower year-over-year costs associated with the integration of the ASP business and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives.

On a year-over-year basis, SG&A expenses as a percentage of sales decreased 410 and 380 basis points during the three and six month periods ended July 2, 2021, respectively, primarily due to demand for our products and services which grew at a faster rate than our fixed costs.

Additionally, lower year-over-year costs associated with the integration of the ASP business and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives reduced SG&A expenses as a percentage of sales.

R&D expenses (consisting principally of internal and contract engineering personnel costs) increased during the three and six months ended July 2, 2021 as compared to the comparable periods of 2020 primarily due to targeted investments in key growth initiatives and innovation.

On a year-over-year basis, R&D expenses as a percentage of sales decreased during the three and six month periods ended July 2, 2021 reflecting demand for our products and services that grew at a faster rate than our investments in key growth initiatives and innovations.

SG&A expenses increased during the three and nine month periods ended October 1, 2021 as compared to the comparable periods of 2020.

The year-over-year increase in SG&A expenses for both respective periods was primarily driven by higher employee compensation costs and SG&A expenses due to broad cost reduction efforts in the comparable periods of 2020 to better align with reductions in demand, and to a lesser extent, changes in foreign currency exchange rates.

Lower year-over-year net acquisition-related costs and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives partially offset the increase in SG&A expenses in both respective periods.

Incremental SG&A expenses and amortization from ServiceChannel also impacted the results for the three month period ended October 1, 2021.

On a year-over-year basis, SG&A expenses as a percentage of sales decreased 240 and 330 basis points during the three and nine month periods ended October 1, 2021, respectively, primarily due to demand for our products and services which grew at a faster rate than our fixed costs.

Additionally, lower year-over-year net acquisition-related costs and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives reduced SG&A expenses as a percentage of sales.

R&D expenses (consisting principally of internal and contract engineering personnel costs) increased during the three and nine months ended October 1, 2021 as compared to the comparable periods of 2020 primarily due to targeted investments in key growth initiatives and innovation.

On a year-over-year basis, R&D expenses were flat as a percentage of sales during the three month period ended October 1, 2021.

During the nine month period ended October 1, 2021, R&D expenses decreased as a percentage of sales, reflecting demand for our products and services that grew at a faster rate than our investments in key growth initiatives and innovation.

INTEREST COSTS

For a discussion of our outstanding indebtedness, refer to Note 6 to the consolidated condensed financial statements.

Net interest expense for the three and six month periods ended July 2, 2021 was $25 million and $53 million compared to $36 million and $75 million for the three and six month periods ended June 26, 2020, respectively.

Net interest expense for the three and nine month periods ended October 1, 2021 was $25 million and $78 million compared to $37 million and $112 million for the three and nine month periods ended September 25, 2020, respectively.

The year-over-year decrease in interest expense was due to lower year-over-year average debt balances.

Our effective tax rate for the three and six month periods ended July 2, 2021 was 12.3% and 10.0% as compared to 16.9% and 20.6%, respectively, for the three and six month periods ended June 26, 2020.

The year-over-year decrease in the effective tax rate for the three month period ended July 2, 2021 as compared to the three month period ended June 26, 2020 was due primarily to a reduction in our uncertain tax positions and increases in certain federal benefits during the three month period ended July 2, 2021.

The year-over-year decrease in the effective tax rate for the six month period ended July 2, 2021 as compared to the six month period ended June 26, 2020 was due primarily to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange, a reduction to our uncertain tax positions, and increases in certain federal tax benefits for the six month period ended July 2, 2021.

Additionally, the tax costs incurred during the six month period ended June 26, 2020 associated with the repatriation of a portion of our previously reinvested earnings outside of the United States contributed to the year-over-year decrease in the effective tax rate for the six month period ended July 2, 2021.

Our effective tax rate for the three and six month periods ended July 2, 2021 differs from the U.S.

federal statutory rate of 21% due primarily to the positive and negative effects of the Tax Cuts and Jobs Act (“TCJA”), U.S.

Our effective tax rate for the three and nine month periods ended October 1, 2021 was 13.2% and 11.1% as compared to 13.4% and 17.7%, respectively, for the three and nine month periods ended September 25, 2020.

The effective tax rate for the three month period ended October 1, 2021 was relatively consistent with the effective tax rate for the three month period ended September 25, 2020.

The year-over-year decrease in the effective tax rate for the nine month period ended October 1, 2021 as compared to the nine month period ended September 25, 2020 was due primarily to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange, a reduction to our uncertain tax positions, and increases in certain federal tax benefits for the nine month period ended October 1, 2021.

Additionally, the tax costs incurred during the nine month period ended September 25, 2020 associated with the repatriation of a portion of our previously reinvested earnings outside of the United States contributed to the year-over year decrease in the effective tax rate for the nine month period ended October 1, 2021.

Our effective tax rate for the three and nine month periods ended October 1, 2021 differs from the U.S.

federal statutory rate of 21% due primarily to the positive and negative effects of the Tax Cuts and Jobs Act, U.S.

federal permanent differences, the impact of credits and deductions provided by law, and a reduction in our uncertain tax positions.

Specific to the six month

period ended July 2, 2021, our effective tax rate also differs from the U.S.

Specific to the nine month period ended October 1, 2021, our effective tax rate also differs from the U.S.

federal statutory rate of 21% due to a permanent difference on the gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange.

Specific to the six month period ended June 26, 2020, our effective tax rate also differs from the U.S.

Specific to the nine month period ended September 25, 2020, our effective tax rate also differs from the U.S.

federal statutory rate of 21% due to the repatriation of a portion of our previously reinvested earnings outside of the United States.

COMPREHENSIVE INCOME

Comprehensive income increased by $31 million during the three month period ended July 2, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by $51 million, partially offset by unfavorable changes in foreign currency translation adjustments of $19 million.

Comprehensive income increased by $203 million during the six month period ended July 2, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by $119 million and favorable changes in foreign currency translation adjustments of $82 million.

Comprehensive income decreased by $175 million during the three month period ended October 1, 2021 as compared to the comparable period in 2020 due primarily to unfavorable changes in foreign currency translation adjustments of $100 million and net earnings that were lower by $75 million.

Comprehensive income increased by $29 million during the nine month period ended October 1, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by $44 million, partially offset by unfavorable changes in foreign currency translation adjustments of $17 million.

LIQUIDITY AND CAPITAL RESOURCES

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

In prior periods, we 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.

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”).

Due to the volatility and disruption in the commercial paper markets during the first six months of 2020, we temporarily reduced our reliance on this source of funding, and consequently paid down and refinanced our outstanding commercial paper with a 364-day delayed-draw term loan due March 22, 2021 (the “Term Loan due March 2021”) that was subsequently retired in the Debt-for-Equity Exchange.

As of July 2, 2021, we had no borrowings outstanding under our commercial paper program.

Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”) 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 July 2, 2021, no borrowings were outstanding under the Revolving Credit Facility.

In August 2021, we resumed borrowing under our Commercial Paper Program to fund, in part, the ServiceChannel acquisition.

support for the commercial paper programs, can also be used for working capital and other general corporate purposes.

As of October 1, 2021, no borrowings were outstanding under the Revolving Credit Facility.

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.

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Overview of Cash Flows and Liquidity

Following is an overview of our cash flows and liquidity for the six month period ended July 2, 2021:

Six Months Ended

($ in millions) July 2, 2021 June 26, 2020

Following is an overview of our cash flows and liquidity for the nine month period ended October 1, 2021:

Nine Months Ended

($ in millions) October 1, 2021 September 25, 2020

Total operating cash provided by continuing operations $ 705.9 $ 648.3

Payments for additions to property, plant and equipment $ (17.1) $ (45.5)

Cash paid for acquisitions, net of cash received $ (1,156.7) $ (15.2)

Payments for additions to property, plant and equipment (28.0) (58.9)

All other investing activities 1.1 5.3

Total investing cash used in continuing operations $ (1,183.6) $ (68.8)

Net repayments of commercial paper borrowings $ — $ (1,141.9)

Proceeds from borrowings (maturities longer than 90 days), net of issuance costs of $1 million in 2020 — 741.7

Net proceeds from (repayment of) commercial paper borrowings $ 215.0 $ (1,141.9)

Proceeds from borrowings (maturities greater than 90 days), net of issuance costs of $8 million in 2020 — 741.7

Repayment of borrowings (maturities greater than 90 days) (611.1) (250.0)

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

Operating cash flows from continuing operations were $443 million during the first six months of 2021, an increase of $12 million, or 3%, as compared to the comparable period of 2020.

Operating cash flows from continuing operations were $706 million during the first nine months of 2021, an increase of $58 million, or 9%, as compared to the comparable period of 2020.

The year-over-year change in operating cash flows from continuing operations was primarily attributable to the following factors:

• Operating cash flows were impacted by higher net earnings for the first six months of 2021 as compared to the comparable period in 2020.

Net earnings for the six month period ended July 2, 2021 were impacted by a year-over-year increase in operating profit of $191 million, a decrease in net interest expense of $22 million associated with the repayment of debt, a gain on the Retained Vontier Shares of $57 million and a gain on litigation dismissal of $26 million, which were partially offset by the loss on extinguishment of debt of $105 million.

The gain on the Retained Vontier Shares, the loss on the extinguishment of debt, and gain on litigation dismissal are non-cash items that impact net earnings without a corresponding impact to operating cash flows.

• The aggregate of accounts receivable, inventories, and trade accounts payable used $27 million of cash during the first six months of 2021 as compared to providing $111 million in the comparable period of 2020.

• Operating cash flows were impacted by higher net earnings for the first nine months of 2021 as compared to the comparable period in 2020.

Net earnings for the nine month period ended October 1, 2021 were impacted by a year-over-year increase in operating profit of $254 million, a decrease in net interest expense of $34 million associated with the net repayment of debt, a gain on the Retained Vontier Shares of $57 million and a gain on litigation dismissal of $26 million, which were partially offset by the loss on extinguishment of debt of $105 million.

The gain on the Retained Vontier Shares and litigation dismissal, and substantially all of the loss on the extinguishment of debt, are non-cash items that impact net earnings without a corresponding impact to operating cash flows.

• The aggregate of accounts receivable, inventories, and trade accounts payable used $52 million of cash during the first nine months of 2021 as compared to providing $64 million in the comparable period of 2020.

The amount of cash flow generated from or used by the aggregate of accounts receivable, inventories, and trade accounts payable depends upon how effectively we manage the cash conversion cycle, which generally represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period.

• The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities used $75 million of cash during the first six months of 2021 as compared to using $22 million of cash in the comparable period of 2020.

The year over year change was largely driven by various compensation and benefit payments.

• The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities used $55 million of cash during the first nine months of 2021 as compared to providing $45 million of cash in the comparable period of 2020.

The year over year change was largely driven by the funding of the $36 million deferred compensation liability associated with the ServiceChannel acquisition, which was paid into escrow upon closing of the transaction, and various compensation and benefit payments.

Investing Activities

Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures.

Net cash used in investing activities from continuing operations decreased $27 million during the six month period ended July 2, 2021 as compared to the comparable period of 2020, due to year-over-year decreases in capital expenditures of $28 million largely due to higher spending in the comparable period in 2020 related to the integration of the ASP business.

Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures, and increased $1.1 billion during the nine month period ended October 1, 2021 as compared to the comparable period of 2020.

The increase in investing cash flows was due to the $1.2 billion acquisition of ServiceChannel that was partially offset by a year-over-year decrease in capital expenditures of $31 million largely due to higher spending in the comparable period in 2020 related to the integration of the ASP business.

Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting product development initiatives, improving information technology systems, and purchasing equipment that is used in revenue arrangements with customers.

For the year ending December 31, 2021, we expect capital spending to be in a range between approximately $60 million and $70 million, though actual expenditures will ultimately depend on business conditions.

For the year ending December 31, 2021, we expect capital spending to be approximately $50 million, although actual expenditures will ultimately depend on business conditions.

Financing Activities and Indebtedness

Financing cash flows from continuing operations consist primarily of cash flows associated with the issuance of equity, the issuance and repayments of debt and commercial paper, and payments of quarterly cash dividends to shareholders.

Financing activities from continuing operations used cash of $668 million during the six month period ended July 2, 2021, reflecting the following transactions:

Financing activities from continuing operations used cash of $485 million during the nine month period ended October 1, 2021, reflecting the following transactions:

• On January 21, 2021, we repaid the remaining $317 million outstanding of the Delayed-Draw Term Loan Due 2020 using the cash proceeds received from Vontier in the Vontier Separation.

• On February 9, 2021, we repurchased $281 million of the 0.875% Convertible Senior Notes due 2022 using the remaining cash proceeds received from Vontier in the Separation and other cash on hand.

In connection with the repurchase, we recorded a loss on debt extinguishment during the three months ended July 2, 2021 of $10.5 million.

In connection with the repurchase, we recorded a loss on debt extinguishment during the nine month period ended October 1, 2021 of $10.5 million.

• During the third quarter of 2021, we resumed borrowing under our Commercial Paper Programs to fund, in part, the ServiceChannel acquisition.

As of October 1, 2021, commercial paper outstanding under the U.S.

dollar-denominated commercial paper program had a weighted annual effective rate of 0.19% and a weighted average remaining maturity of approximately 12 days.

In the comparable 2020 period, financing activities from continuing operations used $756 million of cash, reflecting borrowings from our Term Loan due March 2021, which were more than offset by repayments of commercial paper of $1.1 billion and $250 million of our 2020 Term Loan.

On January 19, 2021, we completed the non-cash Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400.0 million of the Term Loan due March 2021 and (ii) $683.2 million of the Term Loan due May 2021.

We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the six month period ended July 2, 2021.

We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the nine month period ended October 1, 2021.

Refer to Note 6 to the consolidated condensed financial statements for information regarding our financing activities and indebtedness.

Aggregate cash payments for preferred and common stock dividends paid to shareholders during the six month period ended July 2, 2021 were $82 million and are recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity and the Consolidated Condensed Statement of Cash Flows.

Aggregate cash payments for preferred and common stock dividends paid to shareholders during the nine month period ended October 1, 2021 were $107 million and are recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity and the Consolidated Condensed Statement of Cash Flows.

Cash and Cash Requirements

As of July 2, 2021, we held approximately $1.6 billion of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less that yielded insignificant interest income during the three and six month periods ended July 2, 2021.

Approximately 40% of the $1.6 billion of cash and equivalents we held as of July 2, 2021 was held outside of the United States.

As of October 1, 2021, we held approximately $838 million of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less that yielded insignificant interest income during the three and nine month periods ended October 1, 2021.

Approximately 80% of the $838 million of cash and equivalents we held as of October 1, 2021 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, 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.

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.

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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 July 2, 2021, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future.

As of October 1, 2021, 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 July 2, 2021 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 2020 Annual Report on Form 10-K.

There were no material changes during the three and nine month periods ended October 1, 2021 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 2020 Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis