What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-07-28 · 155 added, 129 removed, 300 unchanged (49% of the section changed)

37 unchanged sentences

Risk Related to Our Business Operations

• The effect of the COVID-19 pandemic, including the corresponding government-mandated mitigation efforts, on our global operations and the operations of our customers, suppliers, and vendors is continuing to have a material, adverse impact on our business and results of operations.

• If we cannot adjust our manufacturing capacity, supply chain management or the purchases required for our manufacturing activities to reflect changes in market conditions, customer demand and supply chain or transportation disruptions, our profitability may suffer.

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• Conditions in the global economy, the markets we serve, and the financial markets may adversely affect our business and financial statements.

• The effect of the COVID-19 pandemic, including the corresponding government-mandated mitigation efforts, on our global operations and the operations of our customers, suppliers, and vendors has had and may continue to have a material, adverse impact on our business and results of operations.

• Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated, or experience cyclicality.

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• Trade relations between China and the United States could have a material adverse effect on our business and financial statements.

• Foreign currency exchange rates may adversely affect our financial statements.

• Foreign currency exchange rates, including the volatility thereof, may adversely affect our financial statements.

Risk Related to Our Acquisitions, Investments, and Dispositions

18 unchanged sentences

Risk Related to Our Financing Activities

• 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.

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

Risk Related to Shareholder Rights

36 unchanged sentences

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

On September 30, 2022, we completed the sale of our Therapy Physics product line, which was reported in our Advanced Healthcare Solutions segment, to an unrelated third party for total consideration of $9.6 million.

As a result of the sale, in the three and nine month periods ended September 30, 2022, we recorded a net realized pre-tax gain totaling $2.3 million, net of transaction costs, which is recorded as “Other non-operating expense, net” in the Consolidated Condensed Statements of Earnings.

The divested business accounted for less than 1.0% of total revenue and less than 1.0% of total assets for the fiscal year ended December 31, 2021.

The divestiture of this product line did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore the divested product line is not reported as a discontinued operation.

Russia Ukraine Conflict

2 unchanged sentences

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.

In the three and nine month periods ended September 30, 2022, the Company recorded pre-tax charges of $1.1 million and $17.3 million, respectively, 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.

These costs are identified as the “Russia exit and wind down costs” in the Condensed Consolidated Statements of Earnings.

Segment Presentation

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References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition and the effect of purchase accounting adjustments, less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations prior to the first anniversary of the divestiture.

The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period.

current period foreign exchange rates to the prior year period.

Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies.

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Business Performance and Outlook

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.

Business Performance For the Period Ended September 30, 2022

We experienced robust demand for our products and services during the three and nine month periods ended September 30, 2022 (“the quarter” or the “third quarter” and “year-to-date period”, respectively).

During the third quarter and year-to-date period, and despite challenging macroeconomic and supply chain conditions, year-over-year sales increased 11.9% and 10.7%, 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 12.1% and 8.8% during the third quarter and year-to-date periods, respectively, as compared to the comparable periods in 2021, reflecting strong end-market demand for our offerings as well as focused execution on product and service delivery.

Geographically, in the third quarter, year-over-year sales from existing businesses increased low double-digits, with growth driven by low double-digit growth in North America, mid-teens growth in Western Europe and mid-twenties growth in China.

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

Year-over-year price increases contributed 6.1% and 4.8% to sales growth during the third 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 third quarter and year-to-date period, price increases exceeded inflationary increases that we experienced on purchased materials.

The strengthening of the U.S.

dollar relative to other currencies reduced our sales by 4.0% and 2.9% in the third 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 challenges persisted in the third quarter, impacting the availability of key materials, resulting in higher costs in each of our three segments.

We continue to apply the Fortive Business System (“FBS”) to help mitigate the impact of these challenges and serve our customers.

The COVID-19 pandemic, including mitigation efforts in China, continues to impact our results and creates operating challenges with logistics, material availability and absenteeism.

We anticipate that the 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 of approximately 8.5% in the fourth quarter and approximately 10.0% for the full year.

We anticipate sales growth on a year-over-year basis from existing businesses will be approximately 11.0% for the fourth quarter and approximately 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, 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”).

We continue to monitor the macroeconomic and geopolitical conditions which may impact our business, including the COVID-19 pandemic, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”).

RESULTS OF OPERATIONS

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:

All of the financial information presented in this Item 2 has been adjusted to reflect the retroactive adjustment more fully described in Note 1 to the Consolidated Condensed Financial Statements.

The following table summarizes total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the third quarter and year-to-date periods ended September 30, 2022 as compared to the comparable periods of 2021:

Components of Sales Growth

% Change Three Months Ended July 1, 2022 vs.

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

% Change Three Months Ended September 30, 2022 vs.

Comparable 2021 Period % Change Nine Months Ended September 30, 2022 vs.

Comparable 2021 Period

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Operating Profit Margins

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.

Operating profit margin was 17.3% for the third quarter ended September 30, 2022, an increase of 180 basis points as compared to 15.5% 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

• 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 and unfavorable foreign exchange rates — favorable 160 basis points

• The year-over-year effect of amortization from existing businesses — favorable 75 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 acquisition-related transaction costs which were lower in the third quarter than those recognized during the comparable period in 2021 — favorable 65 basis points

• The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 110 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.

• Russia exit and wind down costs that were incurred during the third quarter — unfavorable 10 basis points

Operating profit margin was 16.2% for the year-to-date period ended September 30, 2022, an increase of 40 basis points as compared to 15.8% 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

• Year-over-year increase in price and sales volumes from existing businesses and gains from productivity measures, 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 135 basis points

• The year-over-year effect of amortization from existing businesses — favorable 65 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

• The year-over-year net effect of acquisition-related transaction costs which were lower during the year-to-date period than those recognized during the comparable period in 2021 — favorable 5 basis points

• The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 125 basis points

• Russia exit and wind down costs that were incurred during the year-to-date period — unfavorable 40 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 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Intelligent Operating Solutions $ 613.7 $ 536.9 $ 1,831.4 $ 1,589.6

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Intelligent Operating Solutions Selected Financial Data

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

($ in millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Sales $ 613.7 $ 536.9 $ 1,831.4 $ 1,589.6

6 unchanged sentences

Components of Sales Growth

% Change Three Months Ended July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

% Change Three Months Ended September 30, 2022 vs.

Comparable 2021 Period % Change Nine Months Ended

September 30, 2022 vs.

Comparable 2021 Period

3 unchanged sentences

Currency exchange rates (Non-GAAP) (3.7) % (2.7) %

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 sales from existing businesses increased 13.8% and 11.7% during the third 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 price increases and continued strong demand for test and measurement instrumentation, gas detection offerings and software and related services.

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

Sales in high growth markets increased by mid-teens, driven by low-twenties growth in China, as well as low double-digits growth in Latin America, and low twenties growth in Other Asia.

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

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 6.8% and 5.3% to sales growth during the third 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 increased 450 basis points during the third 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 increase in price and sales volume from existing businesses and gains from productivity measures were partially offset by higher year-over-year employee compensation costs, freight, logistics and material costs, unfavorable foreign exchange rates and growth investments in R&D, sales and marketing— favorable 345 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 lower than those recognized during the comparable period in 2021 — favorable 165 basis points

• The year-over-year effect of acquisitions, including amortization — unfavorable 160 basis points

Operating profit margin increased 30 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

• Year-over-year increase in price and sales volume from existing businesses and gains from productivity measures, partially offset by higher year- over-year freight, logistics and material costs and employee compensation costs, and growth investments in R&D, sales and marketing — favorable 185 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 than those recognized during the comparable period in 2021 — unfavorable 85 basis points

• The year-over-year effect of acquired businesses, including amortization — unfavorable 255 basis points

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Precision Technologies Selected Financial Data

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

($ in millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Sales $ 523.7 $ 455.7 $ 1,485.2 $ 1,375.0

6 unchanged sentences

Components of Sales Growth

% Change Three Months Ended July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

% Change Three Months Ended September, 2022 vs.

Comparable 2021 Period % Change Nine Months Ended

September 30, 2022 vs.

Comparable 2021 Period

3 unchanged sentences

Currency exchange rates (Non-GAAP) (4.0) % (2.7) %

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 sales from existing businesses increased 19.0% and 10.7% during the third 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 and improved production execution with our energetic materials products.

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

Sales in high growth markets increased by low-thirties in the third quarter driven by China.

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

Year-over-year price increases in our Precision Technologies segment contributed 8.1% and 6.3% to sales growth for the third 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 300 basis points for the third quarter as compared to the comparable period of 2021.

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

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Advanced Healthcare Solutions Financial Data

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

($ in millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Sales $ 318.6 $ 308.4 $ 979.2 $ 915.3

7 unchanged sentences

% Change Three Months Ended

July 1, 2022 vs.

Comparable 2021 Period % Change Six Months Ended

July 1, 2022 vs.

September 30, 2022 vs.

Comparable 2021 Period % Change Nine Months Ended

September 30, 2022 vs.

Comparable 2021 Period

3 unchanged sentences

Currency exchange rates (Non-GAAP) (4.4) % (3.3) %

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.

Year-over-year sales from existing businesses decreased 0.8% in the third quarter and grew 1.0% in the year-to-date period, as compared to the comparable periods of 2021.

The year-over-year results in the third quarter were driven by price increases,

partially offset by volume declines.

The overall decline in volume included increased demand for sterilization products, software offerings and radiation monitoring with declines in design services and hardware offerings, which were impacted by supply chain challenges.

The year-over-year results for the year-to-date period were driven by price increases partially offset by volume changes consistent with those in the third quarter.

Geographically in the third quarter, sales from existing businesses were up slightly in developed markets driven mid-single digit growth in Western Europe, which was partially offset by a low-single digit decline in North America.

In high growth markets, sales from existing businesses declined by mid-single digits mainly in China and other Asia.

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 price increases in our Advanced Healthcare Solutions segment contributed 2.1% and 1.6% to sales growth during the third 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 decreased 580 basis points during the third 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

• Year-over-year sales increase in price from existing businesses were more than offset by a decline in volume from existing businesses, increased freight, logistics and employee compensation costs, reserves for uncollectible receivables and unfavorable foreign exchange rates — unfavorable 395 basis points

• The year-over-year effect of amortization from existing businesses — favorable 35 basis points

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

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to inventory — unfavorable 190 basis points

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

Operating profit margin decreased 80 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

• Year-over-year sales increases in price from existing businesses were more than offset by increasing freight, logistics and employee compensation costs, reserves for uncollectible receivables and unfavorable foreign exchange rates, as well as a slight decrease in volume — unfavorable 90 basis points

• The year-over-year effect of amortization from existing businesses — favorable 75 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 net effect of acquisition-related transaction costs which were less than those recognized in the comparable period in 2021 — favorable 40 basis points

• The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to inventory — unfavorable 105 basis points

COST OF SALES AND GROSS PROFIT

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

($ in millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Sales $ 1,456.0 $ 1,301.0 $ 4,295.8 $ 3,879.9

2 unchanged sentences

Gross profit margin 58.1 % 57.3 % 57.5 % 57.0 %

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.

The year-over-year increase in gross profit during the third quarter and the year-to-date period as compared to the comparable periods of 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 Six Months Ended

Three Months Ended Nine Months Ended

($ in millions)

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

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Sales $ 1,456.0 $ 1,301.0 $ 4,295.8 $ 3,879.9

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

Selling, general and administrative (“SG&A”) 491.3 455.6 1,456.8 1,340.1

Research and development (“R&D”) 101.1 87.8 300.3 261.8

2 unchanged sentences

R&D as a % of sales 6.9 % 6.7 % 7.0 % 6.7 %

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.

SG&A increased during the third 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 130 basis points and 60 basis points during the third 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 did our sales.

R&D, consisting principally of internal and contract engineering personnel costs, increased during the third 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 20 basis points in the third 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.

We incurred pre-tax costs totaling $17.3 million in the year-to-date period, primarily in the second quarter, for the write-off of net assets, the cumulative translation adjustment in earnings for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies.

Of the $17.3 million incurred, approximately $9.2 million represents non-cash charges and is reflected as such in the Consolidated Condensed Statement of Cash Flows.

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

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.

Net interest expense for the third quarter and year-to-date period was $26 million and $66 million as compared to $25 million and $78 million in the comparable periods in 2021.

The increase in interest expense in the third quarter as compared to the comparable period of 2021 was due to higher outstanding debt balances.

The decrease in interest expense in the year-to-date period as compared to the comparable period was due to lower year-over-year effective interest rates on debt instruments, despite overall higher debt balances.

This decrease was partially driven by lower non-cash interest expense on the Convertible Senior Notes in the year-to-date period as compared to the comparable period in 2021 as the notes were settled in the first quarter of 2022.

Our effective tax rates for the three and nine month periods ended September 30, 2022 were 12.7% and 14.4%, respectively, as compared to 13.1% and 11.1%, respectively, for the three and nine month periods ended October 1, 2021.

The year-over-year decrease in the effective tax rate for the three month period ended September 30, 2022 was relatively consistent as compared to the three month period ended October 1, 2021.

The year-over-year increase in the effective tax rate for the nine month period ended September 30, 2022 as compared to the nine month period ended October 1, 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 the effect of Russia exit including wind down costs for which no tax benefit was recognized.

Our effective tax rate for the three and nine month periods ended September 30, 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, U.S.

federal permanent differences, the impacts of credits and deductions provided by law, an increase to in our uncertain tax positions relating to higher interest rates, and the effect of Russia exit and wind down costs for which no tax benefit was recognized.

On August 16, 2022, the U.S.

enacted the Inflation Reduction Act of 2022, which, among other provisions, implements a 15% corporate alternative minimum tax on book income on corporations whose average annual adjusted financial statement income during the most recently-completed three-year period exceeds $1.0 billion, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy.

This provision is effective for tax years beginning after December 31, 2022.

Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.

COMPREHENSIVE INCOME

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 $39 million during the third quarter as compared to the comparable period in 2021 due primarily to unfavorable changes in foreign currency translation adjustments of $77 million, partially offset by an increase in net income.

Comprehensive income decreased by $133 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 $217 million, partially offset by an increase in net income.

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

As of September 30, 2022, no borrowings were outstanding under the Revolving Credit Facility.

Subsequent Events

On October 18, 2022, we entered into a second amended and restated credit agreement (the “Amended and Restated Credit Agreement”) extending the availability period of the Revolving Credit Facility to October 18, 2027 with an additional two one year extension options at our request and with the consent of the lenders.

The Amended and Restated Credit Agreement also contains an option permitting us to request an increase in the amounts available under the Revolving Credit Facility of up to an aggregate additional $1.0 billion.

We are obligated to pay an annual facility fee for the Revolving Credit Facility of between 6.5 and 15 basis points varying according to our long-term debt credit rating.

Borrowings under the new Revolving Credit Facility in U.S Dollars bear interest at a rate equal, at our option, to either (1) Term Secured Overnight Financing Rate (“Term SOFR”), plus a 10 basis points Credit Spread Adjustment (“CSA”) plus a margin of between 68.5 and 110.0 basis points, depending on our long-term debt credit rating or (2) the highest of (a) the Federal funds rate plus 50 basis points, (b) the prime rate, (c) Term SOFR plus 100 basis points and (d) 1.0%, plus in each case a margin between zero and 10 basis points depending on our long-term debt credit rating.

In addition, beginning with our 2023 performance relative to our annual greenhouse gas reduction targets, the interest rate on any borrowings can increase or decrease by 4.0 basis points and the facility fee can increase or decrease by 1.0 basis points, for a maximum impact of an increase or decrease of 5.0 basis points.

The Amended and Restated Credit Agreement requires us to maintain a consolidated net leverage ratio of debt to consolidated EBITDA (as defined in the Credit Agreement) of less than 3.5 to 1.0.

The maximum consolidated net leverage ratio will be increased to 4.0 to 1.0 for the four consecutive full fiscal quarters immediately following the consummation of any acquisition by us in which the purchase price exceeds $250 million.

The Amended and Restated Credit Agreement also contains customary representations, warranties, conditions precedent, events of default, indemnities, and affirmative and negative covenants.

On October 18, 2022, we entered into a $1.0 billion delayed-draw senior unsecured term facility (“Delayed-Draw Term Loan Due 2023”).

We intend to use proceeds of the Delayed-Draw Term Loan Due 2023 to repay the outstanding principal balance of the Delayed-Draw Term Loan Due 2022, which matures in December 2022.

The Delayed-Draw Term Loan Due 2023 bears interest at a variable rate equal to Term SOFR plus a CSA of 10 basis points plus a spread of 82.5 basis points at our current credit rating.

Borrowing under the Term Loan Due 2023 are prepayable at our option in whole or in part without premium or penalty and amounts borrowed may not be reborrowed once repaid.

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 1, 2022:

Six Months Ended

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

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

Nine Months Ended

($ in millions) September 30, 2022 October 1, 2021

Total operating cash provided by continuing operations $ 839.0 $ 705.9

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Payments for additions to property, plant and equipment (59.7) (28.0)

Proceeds from sale of business 6.6 —

All other investing activities — 1.1

Total investing cash used in continuing operations $ (68.3) $ (1,183.6)

Payment of 0.875% convertible senior notes due 2022 $ (1,156.5) $ —

Proceeds from borrowings (maturities greater than 90 days), net of issuance costs $ 396.9 $ —

Net proceeds from commercial paper borrowings 381.3 215.0

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)

Payment of 0.875% convertible senior notes due 2022 (1,156.5) —

Repurchase of common shares (376.1) —

Payment of common stock cash dividend to shareholders (74.8) (72.6)

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

Payment of mandatory convertible preferred stock cash dividend to shareholders — (34.5)

Repurchase of common shares (242.9) —

All other financing activities (9.2) 18.1

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Operating Activities

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 $509 million during the first six months of 2022, an increase of $66 million, or 15%, as compared to the comparable period of 2021.

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, interest, pension funding, and other items impact reported cash flows.

Operating cash flows from continuing operations were $839 million during the year-to-date period yielding an increase of $133 million, or 19%, 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 $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).

• Year-over-year increases of $140 million in Operating cash flows from net earnings from continuing operations, net of non-cash items (Amortization, Depreciation, Stock-based compensation, Loss on extinguishment of debt, Gain on investment in Vontier Corporation, Gain on litigation resolution and Russia exit and wind down costs).

• 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 $52 million in the comparable period of 2021.

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• The aggregate changes in prepaid expenses, other assets, accrued expenses and other liabilities used $67 million of cash in the year-to-date period as compared to using $57 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.

The year-over-year changes were driven by timing differences in tax payments 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 $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.

Investing cash flows from continuing operations, consisting primarily of cash paid for acquisitions and capital expenditures, decreased $1.1 billion during the year-to-date period as a result of our acquisition of ServiceChannel in 2021, which was partially offset by increased capital expenditures of approximately $32 million in 2022.

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

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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 cash flows from continuing operations consist primarily of cash flows associated with the issuance of equity, the issuance and repayment of debt and commercial paper, payments of cash dividends to shareholders and share repurchases.

Financing activities from continuing operations used cash of $838 million during the year-to-date period, reflecting the following transactions:

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• 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.

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

• During 2022, we incurred $381 million in net commercial paper borrowings under the U.S.

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• During 2022, we repurchased 6,000,000 shares for approximately $376 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.

• During 2022, we made dividend payments to common shareholders totaling $75 million.

In the comparable 2021 period, financing activities from continuing operations used cash of $485 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 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 5 of the consolidated condensed financial statements for additional information regarding our financing activities and indebtedness.

Cash and Cash Requirements

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.

As of September 30, 2022, we held approximately $705 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 89% of the $705 million in cash and equivalents was held outside of the United States.

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

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.

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 September 30, 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 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.

There were no material changes during the three and nine month periods ended September 30, 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