What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-04-28 · 162 added, 122 removed, 267 unchanged (52% of the section changed)

99 unchanged sentences

On December 27, 2021, we acquired Provation Software, Inc.

(“Provation”), a leading provider of clinical workflow software solutions used in hospitals and ambulatory surgery centers.

(“Provation”), a privately held, leading provider of clinical workflow software solutions used in hospitals and ambulatory surgery centers.

The acquisition of Provation extends our digital offering and software capabilities in the healthcare space.

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We preliminarily recorded $978 million of goodwill related to the acquisition, which is not tax deductible.

During the three month period ended April 1, 2022, provisional goodwill increased by $8.1 million for measurement period adjustments.

Provation had revenue in 2020 of approximately $90 million and is an operating company within our Advanced Healthcare Solutions segment.

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Interest expense and extinguishment costs related to the Debt-for-Equity Exchange during the first quarter of 2021 are included in continuing operations.

Russia Ukraine Conflict

In February 2022, Russian forces invaded Ukraine (“Russia Ukraine Conflict”) resulting in broad economic sanctions being imposed on Russia.

In the second quarter of 2022, the Company exited business operations in Russia, other than for ASP’s sterilization products, which are exempt from international sanctions as humanitarian products.

Our business in Russia and Ukraine accounted for less than 1% of total revenue and less than 0.2% of total assets for the fiscal year ended December 31, 2021.

Segment Presentation

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Business Performance and Outlook

Business Performance For the Period Ended April 1, 2022

We experienced robust demand for our products and services during the three month period ended April 1, 2022 (“the quarter” or the “first quarter”).

Despite ongoing COVID-19 and supply chain challenges, year-over-year sales increased 9.3% with contributions from both existing and newly acquired businesses.

Sales from existing businesses increased 5.3% during the quarter, as compared to the comparable period in 2021 reflecting broad-based momentum and focused execution across our portfolio, most notably within our short-cycle industrial and SaaS businesses.

Geographically, in the first quarter, year-over-year sales from existing businesses increased in developed markets at a high single-digit rate, driven by high single-digit growth in North America and low single-digit growth in Europe.

In our high growth markets, year-over-year sales from existing businesses decreased at a low single-digit rate, driven by a low double-digit decline in China where business activity was constrained by government mandated COVID-19 containment measures, partially offset by high-teens growth in Latin America.

Year-over-year price increases contributed 3.2% to sales growth during the quarter, as compared to the comparable period in 2021 and is reflected as a component of the change in sales from existing businesses.

In the first quarter, the price increases that we deployed exceeded inflationary increases that we experienced on purchased materials.

Widespread supply chain and logistics challenges persisted in the quarter, impacting the availability of key materials, including electronic components, and resulting in higher production and logistics costs.

We continue to apply the Fortive Business System (“FBS”) to help mitigate the impact of these challenges but demand for our products outpaced our shipments in the quarter and our backlog increased from December 31, 2021.

COVID-19 continues to impact our results, creating operating challenges with logistics, material availability and absenteeism.

The government mandated COVID-19 containment measures in China directly reduced our production levels and shipments in the quarter and creates ongoing risk and uncertainty.

We anticipate that the uncertainty and disruption of the pandemic on global commerce will continue into future periods.

In February 2022, Russian forces invaded Ukraine (“Russia Ukraine Conflict”) resulting in broad economic sanctions being imposed on Russia that has further increased existing global supply chain, logistic, and inflationary challenges.

As of the filing date of this report, we have temporarily suspended commercial operations in Russia, other than for sales of ASP’s sterilization products, which are exempted from international sanctions and deemed to be humanitarian products.

Our business in Russia and Ukraine were not material to our results and accounted for less than 1% of total revenue for the fiscal year ended December 31, 2021.

As of April 1, 2022, our net assets in Russia totaled approximately $15 million, including those net assets associated with ASP.

We anticipate that the strong demand for our offerings experienced in the first quarter will persist throughout 2022 driven by innovation, share gains and robust end markets.

Revenue growth is projected to be between 5.0% and 8.0% for the second quarter of 2022, and 9.5% and 12.0% for the full year.

We anticipate growth from existing businesses will be between 2.0% and 5.0% for the second quarter of 2022 and 6.0% and 8.5% for the full year.

This outlook is subject to various assumptions and risks, including but not limited to, the global supply chain and logistic challenges, magnitude of the impact of the COVID-19 pandemic on macroeconomic conditions, the Russia Ukraine Conflict, continued strength of key end markets, elective surgery rates, the availability of electronic components, our ability to convert backlog and maintain manufacturing capacity.

We anticipate that supply chain and inflationary pressures will persist throughout 2022 and that although our backlog may decline compared to 2021, it may remain elevated compared to historical levels.

Business Performance For the Period Ended July 1, 2022

We experienced robust demand for our products and services during the three and six month periods ended July 1, 2022 (“the quarter” or the “second quarter” and “year-to-date period”, respectively).

During the second quarter and year-to-date period, and despite ongoing COVID-19 and supply chain challenges, year-over-year sales increased 10.9% and 10.1%, respectively, with contributions from both existing and newly acquired businesses, all partially offset by unfavorable changes in foreign exchange rates.

Sales from existing businesses increased 8.9% and 7.1% during the second quarter and year-to-date periods, respectively, as compared to the comparable periods in 2021, reflecting strong end-market demand across the product portfolio and focused execution on product and service delivery.

Geographically, in the second quarter, year-over-year sales from existing businesses increased high single-digits, with growth driven by high single-digit growth in North America, mid-teens growth in Western Europe and mid-teens growth in China, which includes shipments that were delayed from the first quarter of 2022 as a result of COVID-19 containment measures adopted in China.

In the year-to-date period, year-over-year sales from existing businesses also increased high single digits with high single digit growth in both North America and Western Europe, as well as a slight increase in China.

Year-over-year price increases contributed 5.0% and 4.1% to sales growth during the second quarter and year-to-date period, as compared to the comparable periods in 2021 and is reflected as a component of the change in sales from existing businesses.

In both the second quarter and year-to-date period, price increases exceeded inflationary increases that we experienced on purchased materials.

The strengthening of the US dollar relative to other currencies reduced our sales by 3.0% and 2.3% in the second quarter and year-to-date periods, respectively when compared to the comparable periods of 2021 and may continue to impact our results in future periods.

Widespread supply chain and logistics challenges persisted in the second quarter, impacting the availability of key materials, including electronic components, and resulting in higher production and logistics costs.

We continue to apply the Fortive Business System (“FBS”) to help mitigate the impact of these challenges, but demand for our products continued to outpace our shipments in the second quarter and our backlog increased sequentially from the first quarter of 2022.

COVID-19 continues to impact our results and creates operating challenges with logistics, material availability and absenteeism.

In the first and second quarters of 2022, government mandated COVID-19 containment measures in China directly impacted production, shipments and cash flow.

Operating conditions began to normalize late in the second quarter with the resumption of shipments to customers, including for orders that were delayed in the first quarter due to the lockdowns.

We anticipate that the uncertainty and disruption caused by the pandemic will continue to impact future periods.

Despite uncertainty in the macro environment, we anticipate increasing demand for our offerings will continue and are projecting sales to grow on a year-over-year basis between 10.0% and 12.0% for the third quarter of 2022, and 10.0% and 11.0% for the full year.

We anticipate sales growth on a year-over-year basis from existing businesses will be between 9.0% and 11.5% for the third quarter of 2022 and 8.0% and 9.5% for the full year.

We expect that foreign exchanges rates will remain unfavorable to us when compared with the rates in effect in the comparable periods of 2021 and relative to assumptions at the start of 2022.

Additionally, this outlook is subject to various assumptions and risks, including but not limited to the resilience and durability of the economies of the United States and other critical regions, ongoing challenges with global logistics and supply chain including the availability of electronic components, the impact of the COVID-19 pandemic, the impact of the Russia Ukraine Conflict, market conditions in key end product segments and elective surgery rates.

We anticipate that supply chain and inflationary pressures will persist throughout 2022 and that our backlog may remain elevated compared to historical levels.

We will continue to deploy FBS to actively manage production challenges, collaborate with customers and suppliers to minimize disruptions and utilize price increases and other countermeasures to offset inflationary pressures.

We are monitoring the ongoing impact of COVID-19 on the global economy and our business, including government mandated containment measures, such as the lockdown implemented recently in Shanghai, China.

Continued implementation or expansion of government mandated containment measures, including shutdowns in countries such as China, could have a material adverse impact on our future results.

We are also monitoring developments in international trade, monetary and fiscal policies and relations between the U.S.

and China, as well as evaluating proposed investment and taxation policy initiatives being debated in the United States and by the Organization for Economic Co-operation and Development (“OECD”).

We continue to monitor the Russia Ukraine Conflict and the impact on our business and operations.

As of the filing date of this report, we are unable to quantify the impact of these matters on our financial results.

We are monitoring the ongoing impact of COVID-19 on the global economy and our business, including government mandated containment measures, which may occur with little notice and could have a material adverse impact on our future results.

We are monitoring developments in international trade, monetary and fiscal policies and relations between the U.S.

and China, as well as evaluating proposed investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”).

RESULTS OF OPERATIONS

The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three month periods ended April 1, 2022 as compared to the comparable periods of 2021:

The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the second quarter and year-to-date periods ended July 1, 2022 as compared to the comparable periods of 2021:

Components of Sales Growth

% Change Three Months Ended April 1, 2022 vs.

% Change Three Months Ended July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended July 1, 2022 vs.

Comparable 2021 Period

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Operating Profit Margins

Operating profit margin was 15.4% for the first quarter, a decrease of 30 basis points as compared to 15.7% in the comparable period of 2021.

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

• Year-over-year price increases and sales volumes from existing businesses, which were partially offset by higher year-over-year freight, logistics and material costs, employee compensation, and investments in R&D, sales and marketing.

— favorable 30 basis points

Operating profit margin was 15.9% for the second quarter ended July 1, 2022 , a decrease of 10 basis points as compared to 16.0% in the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

• Year-over-year increase in price and sales volumes from existing businesses, which were partially offset by higher year-over-year employee compensation, freight, logistics and material costs, unfavorable foreign exchange rates and growth investments in R&D, sales and marketing — favorable 220 basis points

• The year-over-year effect of amortization from existing businesses — favorable 60 basis points

• The year-over-year net effect of acquisition-related transaction costs which were higher during the first quarter than those recognized during the comparable period in 2021 — unfavorable 10 basis points

• The year-over-year net effect of acquisition-related transaction costs which were higher in the second quarter than those recognized during the comparable period in 2021 — unfavorable 30 basis points

• Russia exit and wind down costs which were incurred during the second quarter — unfavorable 110 basis points

• The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 150 basis points

Operating profit margin was 15.7% for the year-to-date period ended July 1, 2022, a decrease of 20 basis points as compared to 15.9% in the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

◦ Year-over-year increase in price and sales volumes from existing businesses, which were partially offset by higher year-over-year employee compensation, freight, logistics and material costs, unfavorable foreign exchange rates and growth investments in R&D, sales and marketing — favorable 130 basis points

◦ The year-over-year effect of amortization from existing businesses — favorable 60 basis points

◦ The year-over-year net effect of acquisition-related transaction costs which were higher during the first quarter than those recognized during the comparable period in 2021 — unfavorable 20 basis points

◦ Russia exit and wind down costs which were incurred during the year-to-date period — unfavorable 60 basis points

◦ The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 130 basis point

Business Segments

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

Three Months Ended

April 1, 2022 April 2, 2021

Three Months Ended Six Months Ended

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Intelligent Operating Solutions $ 630.1 $ 541.8 $ 1,217.7 $ 1,052.7

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Intelligent Operating Solutions Selected Financial Data

Three Months Ended

($ in millions) April 1, 2022 April 2, 2021

Three Months Ended Six Months Ended

($ in millions) July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Sales $ 630.1 $ 541.8 $ 1,217.7 $ 1,052.7

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Components of Sales Growth

% Change Three Months Ended April 1, 2022 vs.

% Change Three Months Ended July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

Comparable 2021 Period

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Currency exchange rates (Non-GAAP) (3.0) % (2.2) %

Year-over-year sales of products and services from existing businesses of Intelligent Operating Solutions increased 8.7% during the first quarter, as compared to the comparable period of 2021.

The year-over-year results were driven by higher pricing, continued strong demand for SaaS products and related services, gas detection instruments, and test & measurement products, as well as improved factory throughput on gains from supply chain and logistics countermeasures.

Geographically, during the first quarter, sales from existing businesses in Intelligent Operating Solutions increased in developed markets by low double digits on North America and Western Europe.

Sales in high growth markets declined by low single digits on declines in China which were impacted by government mandated COVID-19 containment measures, partially offset by growth in Latin America and the Middle East.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 3.0% to sales growth during the first quarter, as compared to the comparable period of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 300 basis points during the first quarter as compared to the comparable period of 2021.

Year-over-year sales from existing businesses of increased 12.3% and 10.6% during the second quarter and year-to-date period, respectively, as compared to the comparable periods of 2021.

The year-over-year results for both respective periods were driven by higher pricing, continued strong demand for test and measurement instrumentation products, software and related services and gas detection offerings as well as improved factory throughput on gains from supply chain and logistics countermeasures.

Geographically, sales from existing businesses in developed markets increased in the second quarter by low double-digits, driven by low double-digits growth in North America, high teens growth in Western Europe.

Sales in high growth markets increased by mid-teens, driven by high single-digits growth in China, as well as high-teens growth in other regions, which included Latin America, Other Asia and Middle East.

On a year-to-date basis, sales from existing businesses in developed markets increased by low double-digits and high growth markets increased by mid-single digits.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 6.0% and 4.6% to sales growth during the second quarter and year-to-date period, as compared to the comparable periods of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin decreased 70 basis points during the quarter as compared to the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

• Year-over-year increase in price and sales volume from existing businesses were partially offset by higher year-over-year freight, logistics and material costs and employee compensation costs, unfavorable foreign exchange rates and growth investments in R&D, sales and marketing— favorable 205 basis points

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

• The year-over-year net effect of acquisition-related transaction costs, which were higher than those recognized during the comparable period in 2021 — unfavorable 65 basis points

• The year-over-year effect of acquired businesses, including amortization — unfavorable 310 basis points

Operating profit margin decreased 170 basis points during the year-to-date period, as compared to the comparable period of 2021.

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

• Year-over-year increase in price and sales volume from existing businesses, partially offset by higher year- over-year freight, logistics and material costs and employee compensation costs — favorable 105 basis points

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

• The year-over-year net effect of acquisition-related transaction costs, which were higher during first quarter than those recognized during the comparable period in 2021 — unfavorable 110 basis points

• Year-over-year increase in price and volumes from existing businesses were offset by higher year- over-year freight, logistics and material costs and employee compensation costs — flat

• The year-over-year net effect of acquisition-related transaction costs, which were higher than those recognized during the comparable period in 2021 — unfavorable 85 basis points

• The year-over-year effect of acquired businesses, including amortization — unfavorable 290 basis points

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Precision Technologies Selected Financial Data

Three Months Ended

($ in millions) April 1, 2022 April 2, 2021

Three Months Ended Six Months Ended

($ in millions) July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Sales $ 499.1 $ 471.9 $ 961.5 $ 919.3

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Components of Sales Growth

% Change Three Months Ended April 1, 2022 vs.

% Change Three Months Ended July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

Comparable 2021 Period

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Currency exchange rates (Non-GAAP) (2.8) % (2.1) %

Year-over-year sales of products and services from existing businesses in Precision Technologies increased 4.6% during the first quarter as compared to the comparable period of 2021.

The year-over-year results were driven by price increases, market growth and share gains in key verticals and increased shipments of energetic materials, all partially offset by reductions in sales in China as a result of the government mandated COVID-19 containment measures.

Geographically, sales from existing businesses in our Precision Technologies segment increased during the first quarter in developed markets, driven by growth in North America and Europe, and slightly declined in high growth markets where, despite growth in Latin America, the Middle East and Africa, we experienced a large decrease in China, which was a result of government mandated COVID-10 containment measures.

Year-over-year price increases in our Precision Technologies segment contributed 4.6% to sales growth for the first quarter, as compared to the comparable period of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 50 basis points for the first quarter as compared to the comparable period of 2021.

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

• Higher year-over-year price increases which were partially offset by higher material, freight and employee compensation costs — favorable 30 basis points

Year-over-year sales from existing businesses increased 8.6% and 6.7% during the second quarter and the year-to-date period compared to the comparable periods of 2021.

The year-over-year results for both respective periods were driven by price increases, market growth and share gains in key verticals.

Geographically, sales from existing businesses in developed markets increased by mid-single digits in the second quarter driven by mid-single digit growth in North America and high single digit growth in Western Europe.

Sales in high growth markets increased by mid-teens in the second quarter on mid-twenties growth in China, which included recovery of shipments expected

in the first quarter that were delayed until the second quarter as a result of government mandated COVID-10 containment measures.

On a year-to-date basis, sales from existing businesses in developed markets increased by mid-single digits and high growth markets increased by high-single digits, respectively.

Year-over-year price increases in our Precision Technologies segment contributed 6.3% and 5.4% to sales growth for the second quarter and year-to-date period, respectively, as compared to the comparable periods of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 100 basis points for the second quarter as compared to the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

• Higher year-over-year increases in price and volume, partially offset by higher material, freight and employee compensation costs and unfavorable exchange rates — favorable 90 basis points

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

Operating profit margin increased 70 basis points during the year-to-date period as compared to the comparable period of 2021.

Year over year operating profit margins were comprised of the following

• Higher year-over-year increases in price and volume, partially offset by higher material, freight and employee compensation costs and unfavorable exchange rates — favorable 60 basis points

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

ADVANCED HEALTHCARE SOLUTIONS

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Advanced Healthcare Solutions Financial Data

Three Months Ended

($ in millions) April 1, 2022 April 2, 2021

Three Months Ended Six Months Ended

($ in millions) July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Sales $ 334.1 $ 306.0 $ 660.6 $ 606.9

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% Change Three Months Ended

April 1, 2022 vs.

July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

Comparable 2021 Period

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Currency exchange rates (Non-GAAP) (3.4) % (2.8) %

Year-over-year sales of products and services from existing businesses of Advanced Healthcare Solutions increased 0.6% during the first quarter, as compared to the comparable period of 2021.

The year-over-year results were driven by higher pricing and increased demand for radiation management and surgical instrument tracking offerings partially offset by reductions in cell therapy equipment design and sterilization products, primarily in China and impacted by the government mandated COVID-19 containment measures.

Sales from existing businesses in our Advanced Healthcare Solutions segment increased low single digits during the first quarter in developed markets, driven by a mid single digit increase in North America, which was partially offset by a low single digit decrease in Europe.

High growth markets declined by low single digits on government mandated COVID-19 containment measures in China and declines in the Middle East and Africa.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 1.3% to sales growth during the first quarter, as compared to the comparable period of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 230 basis points during the three month period ended April 1, 2022 as compared to the comparable period of 2021.

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

• The year-over-year net effect of acquisition-related transaction costs which were less in the first quarter than those recognized in the comparable period in 2021 — favorable 150 basis points

Year-over-year sales from existing businesses increased 3.3% and 2.0% during the second quarter and year-to-date period, respectively, as compared to the comparable periods of 2021.

The year-over-year results in the second quarter and the year-to-date period were driven by higher prices and increased demand for sterilization consumables, radiation management, quality assurance and diagnostic products.

Geographically, sales from existing businesses in developed markets increased by mid-single digits in the second quarter driven by low-single digit growth in North America and low double digit growth in Western Europe.

Sales in high growth markets declined by low single digits in the second quarter on high single digit declines in China, partially offset by mid-teens growth in Latin America.

On a year-to-date basis, sales from existing businesses in developed markets increased by low-single digits and high growth markets declined by low-single digits.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 1.4% to sales growth during both the second quarter and year-to-date periods, as compared to the comparable periods of 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 100 basis points during the second quarter as compared to the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

• Year-over-year sales increase in price and volume from existing businesses and gains from productivity measures were partially offset by higher year-over-year employee compensation costs and unfavorable foreign exchange rates — favorable 150 basis points

• The year-over-year effect of amortization from existing businesses — favorable 90 basis points

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

• Lower year-over-year sales volumes from existing businesses and higher employee compensation costs, which were partially offset by higher year-over-year price increases — unfavorable 40 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to inventory — unfavorable 140 basis points

Operating profit margin increased 170 basis points during the year-to-date period as compared to the comparable period of 2021.

Year-over-year changes in operating profit margin were comprised of the following:

• Year-over-year sales increase in price and volume from existing businesses and gains from productivity measures were partially offset offset by higher year-over-year employee compensation costs and unfavorable foreign exchange rates — favorable 50 basis points

• The year-over-year effect of amortization from existing businesses — favorable 90 basis points

• The year-over-year net effect of acquisition-related transaction costs which were less in the than those recognized in the comparable period in 2021 — favorable 80 basis points

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

COST OF SALES AND GROSS PROFIT

Three Months Ended

($ in millions) April 1, 2022 April 2, 2021

Three Months Ended Six Months Ended

($ in millions) July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Sales $ 1,463.3 $ 1,319.7 $ 2,839.8 $ 2,578.9

2 unchanged sentences

Gross profit margin 57.0 % 57.2 % 57.2 % 56.9 %

The year-over-year increase in cost of sales during the first quarter, as compared to the comparable period in 2021, is due primarily to year-over-year increases in sales volumes from existing and newly acquired businesses, and higher material, freight and employee compensation costs.

Year-over-year changes in currency exchange rates decreased cost of sales during the first quarter.

The year-over-year increase in gross profit and gross profit margin for the first quarter, as compared to the comparable period in 2021, is due primarily to higher year-over-year sales volumes and price increases, which were partially offset by higher material, freight and employee compensation costs.

The year-over-year increase in gross profit during the second quarter and the year-to-date period as compared to the comparable periods in 2021, is due primarily to year-over-year increases in sales volumes and price increases from existing and newly acquired businesses, which were partially offset by higher material, freight and employee compensation costs and the unfavorable impact of foreign currency exchange rates.

OPERATING EXPENSES

Three Months Ended

Three Months Ended Six Months Ended

($ in millions)

April 1, 2022 April 2, 2021

July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Sales $ 1,463.3 $ 1,319.7 $ 2,839.8 $ 2,578.9

Selling, general and administrative (“SG&A”) expenses 484.9 456.4 965.5 884.5

Research and development (“R&D”) expenses 99.1 86.2

Research and development (“R&D”) 100.1 87.8 199.2 174.0

Russia exit and wind down costs 16.2 — 16.2 —

SG&A as a % of sales 33.1 % 34.6 % 34.0 % 34.3 %

R&D as a % of sales 6.8 % 6.7 % 7.0 % 6.7 %

SG&A expenses increased during the first quarter as compared to the comparable period of 2021 due to higher intangible amortization and incremental expenses from our recent acquisitions, increased employee compensation expenses and customer acquisition and marketing costs.

On a year-over-year basis, SG&A expenses as a percentage of sales increased 90 basis points in the first quarter as a result of higher amortization expenses from our recent acquisitions, partially offset by leverage on SG&A costs, which grew at a slower rate than our sales growth.

R&D expenses (consisting principally of internal and contract engineering personnel costs) increased during the first quarter as compared to the comparable period of 2021 due to incremental costs from our recent acquisitions, investments in innovation and key initiatives and higher employee compensation costs.

On a year-over-year basis, R&D expenses increased as a percentage of sales by 40 basis points in the first quarter mainly driven by our recent acquisitions, where R&D spending is higher as a percentage of sales than in existing businesses.

SG&A increased during the second quarter and year-to-date period, respectively as compared to the comparable periods of 2021 due to higher intangible amortization and incremental expenses from our recent acquisitions and increased employee compensation expenses, customer acquisition and marketing costs.

On a year-over-year basis, SG&A represented as a percentage of sales, decreased 150 basis points and 30 basis points during the second quarter and year-to-date period, respectively, with higher amortization expenses from our recent acquisitions more than offset by leverage on SG&A costs, which grew at a slower rate than our sales growth.

R&D, consisting principally of internal and contract engineering personnel costs, increased during the second quarter and year-to-date period compared to the comparable periods of 2021 due to incremental costs from our recent acquisitions, investments in innovation and key initiatives and higher employee compensation costs.

On a year-over-year basis, R&D expenses represented as a percentage of sales increased by 10 basis points in the second quarter and 30 basis points in the year-to-date period mainly on our recent acquisitions, where R&D spending is higher as a percentage of sales than in existing businesses.

RUSSIA EXIT AND WIND DOWN COSTS

We incurred pre-tax costs totaling $16.2 million in the second quarter primarily relating to the write-off of net assets, the write-off of the cumulative translation adjustment in earnings for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies.

Of the $16.2 million incurred, approximately $9.2 million represents non-cash charges and is reflected as such in the Consolidated Condensed Statement of Cash Flows.

The costs were primarily related to our segments, as follows:

Intelligent Operating Solutions $13.3 million, Precision Technologies $2.1 million and Advanced Healthcare Solutions $0.8 million.

INTEREST COSTS

For a discussion of our outstanding indebtedness, refer to Note 5 to the consolidated condensed financial statements.

Net interest expense for the three month period ended April 1, 2022 was $19 million compared to $28 million for the three month period ended April 2, 2021.

The year-over-year decrease in interest expense was due to lower year-over-year effective interest rates on debt instruments.

Our effective tax rate for the quarter was 13.5% as compared to 5.9% in the comparable period in 2021 and the year-over year increase was primarily due to a non-recurring permanent difference on the Q1 2021 gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange and increases in certain federal tax benefits during the first quarter.

Our effective tax rate for the first quarter and the comparable period in 2021, differ 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 three month period

ended April 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.

Net interest expense for the second quarter and year-to-date period was $21 million and $40 million as compared to $25 million and $53 million in the comparable periods in 2021.

The year-over-year decrease in interest expense was due to lower year-over-year effective interest rates on debt instruments in both the second quarter and year-to-date period, despite overall higher debt balances.

Our effective tax rates for the three and six month periods ended July 1, 2022 were 16.9% and 15.3%, respectively, as compared to 12.3% and 10.0%, respectively, for the three and six month periods ended July 2, 2021.

The year-over-year increase in the effective tax rate for the three month period ended July 1, 2022 as compared to the three month period ended July 2, 2021 was due primarily to a reduction in our uncertain tax positions during the three month period ended July 2, 2021 and the effect of Russia exit and wind down costs for which no tax benefit was recognized in the three month period ended July 2, 2021 .

The year-over-year increase in the effective tax rate for the six month period ended July 1, 2022 as compared to the six month period ended July 2, 2021 was primarily due to a non-recurring permanent difference on the Q1 2021 gain on our Retained Vontier Shares as a result of the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange and increases in certain federal tax benefits for the six month period ended July 2, 2021.

Our effective tax rate for the three and six month periods ended July 1, 2022 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.

federal permanent differences, the impacts of credits and deductions provided by law, and a reduction in our uncertain tax positions, and the effect of Russia exit and wind down costs for which no tax benefit was recognized.

COMPREHENSIVE INCOME

Comprehensive income increased by $50 million during the first quarter as compared to the comparable period in 2021 due primarily to net earnings that were higher by $55 million, partially offset by unfavorable changes in foreign currency translation adjustments of $4 million.

Comprehensive income decreased by $144 million during the second quarter as compared to the comparable period in 2021 due primarily to unfavorable changes in foreign currency translation adjustments of $135 million.

Comprehensive income decreased by $94 million during the year-to-date period as compared to the comparable period in 2021 due primarily to unfavorable changes in foreign currency translation adjustments of $140 million, partially offset by an increase in net income.

LIQUIDITY AND CAPITAL RESOURCES

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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 April 1, 2022, no borrowings were outstanding under the Revolving Credit Facility.

As of July 1, 2022, 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 three month period ended April 1, 2022:

Three Months Ended

($ in millions) April 1, 2022 April 2, 2021

Following is an overview of our cash flows and liquidity for the six month period ended July 1, 2022:

Six Months Ended

($ in millions) July 1, 2022 July 2, 2021

Total operating cash provided by continuing operations $ 509.2 $ 443.0

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Net proceeds from commercial paper borrowings 481.3 —

Proceeds from borrowings (maturities greater than 90 days), net of issuance costs of $0.6 million in 2022 397.0 —

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

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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 $215 million during the first quarter, an increase of $63 million, or 41%, as compared to the comparable period of 2021.

Operating cash flows from continuing operations were $509 million during the first six months of 2022, an increase of $66 million, or 15%, as compared to the comparable period of 2021.

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

• Year-over-year increases of $31.9 million in Operating cash flows from net earnings from continuing operations, net of non-cash expenses (Depreciation, Amortization, Stock-based compensation, Loss on extinguishment of debt and Gain on investment in Vontier Corporation)

• The aggregate of accounts receivable, inventories, and trade accounts payable used $25 million of cash during the first quarter of 2022 as compared to using $44 million in the comparable period of 2021.

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 $63 million of cash during the first quarter of 2022 as compared to using $77 million of cash in the comparable period of 2021.

The year-over-year changes were driven by reduced tax cash payments, timing on deferred revenue, partially offset by higher payments for employee compensation and benefits.

• Year-over-year increases of $82 million in Operating cash flows from net earnings from continuing operations, net of non-cash expenses (Depreciation, Amortization, Stock-based compensation, Loss on extinguishment of debt, Russia exit and wind down costs and Gain on investment in Vontier Corporation).

• The aggregate changes in trade accounts receivable, inventories, and trade accounts payable used $48 million of cash during the year-to-date period as compared to using $27 million in the comparable period of 2021.

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

• The aggregate changes in prepaid expenses, other assets, accrued expenses and other liabilities used $69 million of cash in the year-to-date period as compared to using $75 million of cash in the comparable period of 2021.

The year-over-year changes were driven by timing differences in tax payments, deferred revenue and employee compensation and benefits.

Investing Activities

Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures, and increased $9.3 million during the first quarter as compared to the comparable period of 2021.

The increase in investing cash flows was primarily due to a year-over-year increase in capital expenditures of approximately $10 million.

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, 2022, we expect capital spending to be approximately $80-100 million, although actual expenditures will ultimately depend on business conditions.

Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures, and increased $23.6 million during the year-to-date period as compared to the comparable period of 2021.

The change was primarily due to increased capital expenditures which increased by approximately $20 million.

Capital expenditures are made primarily for increasing production capacity, replacing aged equipment, supporting product development initiatives for hardware and software offerings, improving information technology systems, and purchasing

equipment that is used in revenue arrangements with customers.

For the current year, we expect capital spending to be approximately $80-100 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 $333 million during the three month period ended April 1, 2022, reflecting the following transactions:

Financing activities from continuing operations used cash of $583 million during the year-to-date period, reflecting the following transactions:

• On June 17, 2022, we entered into a three-year ¥14.4 billion senior unsecured facility yielding net proceeds of approximately $107 million.

• On June 21, 2022, we entered into a three-year €275 million senior unsecured facility yielding net proceeds of approximately $290 million.

• On February 15, 2022, the maturity date of the Convertible Notes, Fortive repaid, in cash, $1.2 billion in outstanding principal and accrued interest thereon.

• During the first quarter, we incurred $931 million in net commercial paper borrowings under the U.S.

• During 2022, we incurred $481 million in net commercial paper borrowings under the U.S.

dollar-denominated commercial paper program, which had a weighted annual effective rate of 1.84% and a weighted average remaining maturity of approximately 32 days.

• During the first quarter we repurchased 1,000,000 shares for approximately $64 million under our share repurchase program.

In the comparable 2021 period, financing activities from continuing operations used $655 million of cash, reflecting payment of the remaining $317 million outstanding of the Delayed-Draw Term loan due April 2020, and repurchase of $281 million of the Convertible Notes.

• During 2022, we repurchased 4,000,000 shares for approximately $243 million under our publicly-announced share repurchase program.

• Aggregate cash payments for common stock dividends paid to shareholders during were $50 million and were recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity and the Consolidated Condensed Statement of Cash Flows.

In the comparable 2021 period, financing activities from continuing operations used cash of $668 million, which included payments of $317 million on the Delayed-Draw Term loan due in April 2020 and repurchases of $281 million in Convertible Notes.

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.

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

Refer to Note 5 to the consolidated condensed financial statements for information regarding our financing activities and indebtedness.

Aggregate cash payments for common stock dividends paid to shareholders during the first quarter were $25 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.

On April 7, 2022, we declared a regular quarterly cash dividend of $0.07 per share payable on June 24, 2022 to common stockholders of record on May 27, 2022.

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.

Refer to Note 5 of the consolidated condensed financial statements for additional information regarding our financing activities and indebtedness.

Cash and Cash Requirements

As of April 1, 2022, we held approximately $684 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 period ended April 1, 2022.

Approximately 90% of the $684 million of cash and equivalents we held as of April 1, 2022 was held outside of the United States.

As of July 1, 2022, we held approximately $683 million of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less and yielded insignificant interest income during the year-to-date period.

Approximately 85% of the $683 million in cash and equivalents was held outside of the United States.

We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our pension plans as required, pay dividends to shareholders, and support other business needs or objectives.

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No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely.

The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.

As of April 1, 2022, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future.

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 1, 2022, 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 month period ended April 1, 2022 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 2021 Annual Report on Form 10-K.

There were no material changes during the three and six month period ended July 1, 2022 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 2021 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