NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW AND BASIS OF PRESENTATION
Fortive is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets.
Our well-known brands hold leading positions in field solutions, transportation technology, sensing, product realization, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.
Our research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than
40
countries.
We report our results in
two
separate business segments consisting of Professional Instrumentation and Industrial Technologies. The Professional Instrumentation segment consists of our Advanced Instrumentation & Solutions and Sensing Technologies businesses.
The Advanced Instrumentation & Solutions business consists of field solutions products and product realization services and products.
Field solutions
include a variety of compact professional test tools, thermal imaging and calibration equipment for electrical, industrial, electronic and calibration applications, online condition-based monitoring equipment, and computerized maintenance management software for critical infrastructure in electrical utility and industrial applications.
Product realization
services and products help developers and engineers convert concepts into finished products
and also include
highly-engineered energetic materials components in specialized vertical applications
. Our Sensing Technologies
business offers devices that sense, monitor and control operational or manufacturing variables, such as temperature, pressure, level, flow, turbidity and conductivity.
The Industrial Technologies segment consists of our Transportation Technologies, Automation & Specialty Components and Franchise Distribution businesses. Our Transportation Technologies
business is a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management, and traffic management.
The Automation & Specialty Components
business provides a wide range of electromechanical and electronic motion control products
and mechanical components
, as well as supplemental braking systems for commercial vehicles.
Our Franchise Distribution business manufactures and distributes professional tools and a full line of wheel service equipment.
Separation from Danaher Corporation
—We completed our separation from Danaher Corporation (“Danaher” or “Former Parent”) on
July 2, 2016
, the first day of our fiscal third quarter (the “Separation”). The Separation was completed in the form of a pro rata distribution to Danaher stockholders of record on
June 15, 2016
of
100 percent
of the outstanding shares of Fortive Corporation held by Danaher. Each Danaher stockholder of record as of the close of business on
June 15, 2016
received one share of Fortive Corporation (“Fortive” or “the Company”) common stock for every two shares of Danaher common stock held on the record date. Our common stock began “regular way” trading on the New York Stock Exchange under the ticker symbol “FTV” on
July 5, 2016
.
Prior to the Separation, our businesses were comprised of certain Danaher operating units (the “Fortive Businesses”). On
July 1, 2016
, Danaher contributed the net assets of the Fortive Businesses to Fortive Corporation, formerly a wholly-owned subsidiary of Danaher. In addition, in connection with the Separation, we paid a cash dividend to Danaher in the amount of
$3.0 billion
and the
100
shares of our common stock held by Danaher were recapitalized into
345,237,561
shares of Fortive common stock. On
July 2, 2016
, all of these shares were distributed to Danaher stockholders. Following the Separation, Danaher no longer owned any of our shares. Common stock outstanding used to compute per share amounts in the Consolidated and Combined Statements of Earnings for periods prior to
July 1, 2016
have been retroactively adjusted to give effect to this recapitalization. Fortive Corporation was incorporated on
November 10, 2015
, accordingly, we had no shares or common equivalent shares outstanding prior to that date. The total number of shares outstanding immediately after the recapitalization described above was
345.2 million
and is utilized for the calculation of both basic and diluted net earnings per share (“EPS”) for all periods prior to the Separation.
In connection with the Separation, on
July 1, 2016
, we entered into a separation and distribution agreement with Danaher as well as various other related agreements (collectively the “Agreements”) that govern the Separation and the relationships between the parties following the Separation, including an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, a Danaher Business System (“DBS”) license agreement and a transition services agreement (“TSA”).
Prior to the Separation, we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. With the exception of cash, cash equivalents and borrowings clearly associated with Fortive and related to the Separation, including the financial
transactions described below, financial transactions relating to our business operations during the periods prior to the Separation were accounted for through our Former Parent’s investment, net (“Former Parent’s Investment”) account. Accordingly, none of the Former Parent’s cash, cash equivalents or debt at the corporate level was assigned to us in the financial statements for the periods prior to the Separation.
During 2016, we completed the following financing transactions:
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•
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Entered into a credit agreement with a syndicate of banks providing for a
three
-year
$500 million
senior term facility that expires on June 16, 2019 (the “Term Facility”) and a
five
-year
$1.5 billion
senior unsecured revolving credit facility that expires on
June 16, 2021
(the “Revolving Credit Facility,” and together with the Term Facility, the “Credit Agreement”). We borrowed the entire
$500 million
of loans under the Term Facility;
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•
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Completed the private placement of
$2.5 billion
of senior unsecured notes in multiple series with maturity dates ranging from June 15, 2019 to June 15, 2046 (collectively, the “Notes”); and
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Established U.S. dollar and Euro-denominated commercial paper programs (collectively “Commercial Paper Programs”) supported by the Revolving Credit Facility.
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In connection with the Separation,
$3.0 billion
of the net proceeds of these financings activities was paid to Danaher in June 2016 as a cash dividend. Refer to
Note 10
of the Consolidated and Combined Financial Statements for more information related to our long-term indebtedness.
Basis of Presentation
—The accompanying consolidated and combined financial statements present our historical financial position, results of operations, changes in equity and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The combined financial statements for periods prior to the Separation were derived from Danaher’s consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with Fortive have been included in the combined financial statements. Prior to the Separation, the combined financial statements also included allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to the Company and allocations of related assets, liabilities, and the Former Parent’s investment, as applicable. The allocations were determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company been an entity that operated independently of Danaher during the applicable periods
. Related party allocations prior to the Separation, including the method for such allocation, are discussed further in
Note 19
.
Following the Separation, the consolidated financial statements include the accounts of Fortive and those of our wholly-owned subsidiaries and no longer include any allocations from Danaher.
Accordingly:
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The Consolidated Balance Sheet at
December 31, 2016
consists of our consolidated balances, while the Combined Balance Sheet at
December 31, 2015
consists of the combined balances of the Fortive Businesses.
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The Consolidated and Combined Statement of Earnings and Statement of Comprehensive Income for the year ended
December 31, 2016
consist of our consolidated results for the six months ended
December 31, 2016
and the combined results of the Fortive Businesses for the six months ended
July 1, 2016
. The Combined Statements of Earnings and Statements of Comprehensive Income for the years ended
December 31, 2015
and
2014
, consist of the combined results of the Fortive Businesses.
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•
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The Consolidated and Combined Statement of Changes in Equity for the year ended
December 31, 2016
consists of our consolidated activity for the six months ended
December 31, 2016
and the combined activity of the Fortive Businesses for the six months ended
July 1, 2016
. The Combined Statements of Changes in Equity for the years ended
December 31, 2015
and
2014
, consist of the combined activity of the Fortive Businesses.
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The Consolidated and Combined Statement of Cash Flows for the year ended
December 31, 2016
consists of our consolidated results for the six months ended
December 31, 2016
and the combined results of the Fortive Businesses for the six months ended
July 1, 2016
. The Combined Statements of Cash Flows for the years ended
December 31, 2015
and
2014
, consist of the combined results of the Fortive Businesses.
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Our consolidated and combined financial statements may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows may be in the future.
All significant transactions between the Company and Danaher have been included in the accompanying consolidated and combined financial statements for all periods presented. Cash transactions with Danaher prior to the Separation are reflected in the accompanying Consolidated and Combined Statements of Changes in Equity as “Net transfers to Former Parent” and “Cash dividend paid to Former Parent” and in the accompanying Consolidated and Combined Balance Sheets within “Former Parent’s investment, net.” Former Parent’s Investment, which included retained earnings prior to the Separation, represents Danaher’s interest in our recorded net assets prior to the Separation. In addition, the accumulated net effect of intercompany transactions between us and Danaher or Danaher affiliates for periods prior to the Separation are included in Former Parent’s Investment.
On
July 2, 2016
, in connection with the Separation, Former Parent’s Investment was redesignated within stockholders’ equity and allocated between common stock and additional paid-in capital based on the number of our common shares outstanding at the distribution date. The Agreements include a “Wrong-Pockets Provision” that allows the parties to make adjustments to ensure the Separation-related transactions were executed in accordance with the Agreements. In periods subsequent to the Separation, we may make adjustments to balances transferred at the Separation date in accordance with the Wrong-Pockets Provision. Any such adjustments are recorded through stockholders’ equity.
The financial statements include our accounts and the accounts of our subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. The consolidated and combined financial statements also reflect the impact of non-controlling interests. Noncontrolling interests do not have a significant impact on our consolidated and combined results of operations, therefore net earnings and net earnings per share attributable to noncontrolling interests are not presented separately in our Consolidated and Combined Statements of Earnings. Net earnings attributable to noncontrolling interests have been reflected in selling, general and administrative expenses (“SG&A”) and were insignificant in all periods presented.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
—The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. However, uncertainties associated with these estimates exist and actual results may differ from these estimates.
Cash and Equivalents
—We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable and Allowances for Doubtful Accounts
—All trade accounts are reported on the accompanying Consolidated and Combined Balance Sheets adjusted for any write-offs and net of allowances for doubtful accounts. The allowances for doubtful accounts represent management’s best estimate of the credit losses expected from our trade accounts, contract and financing receivable portfolios. Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, therefore, net earnings. We regularly perform detailed reviews of our portfolios to determine if an impairment has occurred and evaluate the collectability of receivables based on a combination of financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. Additions to the allowances for doubtful accounts are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves would be required. We do not believe that accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. We recorded
$31 million
,
$32 million
and
$26 million
of expense associated with doubtful accounts for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Included in other assets on the Consolidated and Combined Balance Sheets as of
December 31, 2016
and
2015
are
$214 million
and
$188 million
of net aggregate financing receivables, respectively. Financing receivables are evaluated for impairment collectively in broad groupings that represent homogeneous portfolios based on the underlying nature and risks.
Inventory Valuation
—Inventories include the costs of material, labor and overhead. Domestic inventories are stated at the lower of cost or market primarily using the first-in, first-out (“FIFO”) method with certain businesses applying the last-in, first-out method (“LIFO”) to value inventory. Inventories held outside the United States are stated at the lower of cost or market primarily using the FIFO method.
Property, Plant and Equipment
—Property, plant and equipment are carried at cost. The provision for depreciation has been computed principally by the straight-line method based on the estimated useful lives of the depreciable assets as follows:
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Category
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Useful Life
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Buildings
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30 years
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Leased assets and leasehold improvements
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Amortized over the lesser of the economic life of the asset or the term of the lease
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Machinery and equipment
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3 – 10 years
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Estimated useful lives are periodically reviewed and, when appropriate, changes to estimates are made prospectively.
Other Assets
—Other assets principally include noncurrent financing receivables, deferred tax assets and other investments.
Fair Value of Financial Instruments
—Our financial instruments consist primarily of accounts receivable and obligations under trade accounts payable and short and long-term debt. Due to their short-term nature, the carrying values for accounts receivable, trade accounts payable and short-term debt approximate fair value. Refer to
Note 8
for the fair values of our other obligations.
Goodwill and Other Intangible Assets
—Goodwill and other intangible assets result from our acquisition of existing businesses. In accordance with accounting standards related to business combinations, goodwill is not amortized, however, certain definite-lived identifiable intangible assets, primarily customer relationships and acquired technology, are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized. In-process research and development (“IPR&D”) is initially capitalized at fair value and when the IPR&D project is complete, the asset is considered a finite-lived intangible asset and amortized over its estimated useful life. If an IPR&D project is abandoned, an impairment loss equal to the value of the intangible asset is recorded in the period of abandonment. We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. We also test intangible assets with indefinite lives at least annually for impairment. Refer to
Note 3
and
Note 7
for additional information about our goodwill and other intangible assets.
Revenue Recognition
—As described above, we derive revenues primarily from the sale of Professional Instrumentation and Industrial Technologies products and services. For revenue related to a product or service to qualify for recognition, there must be persuasive evidence of an arrangement with a customer, delivery must have occurred or the services must have been rendered, the price to the customer must be fixed and determinable and collectability of the associated fee must be reasonably assured. Our principal terms of sale are FOB Shipping Point, or equivalent, and, as such, we primarily record revenue for product sales upon shipment. Sales arrangements entered with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the delivery criteria for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Returns for products sold are estimated and recorded as a reduction of revenue at the time of sale. Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are recorded as a reduction of revenue at the time of sale because these allowances reflect a reduction in the purchase price. Product returns, customer allowances and rebates are estimated based on historical experience and known trends. Revenue related to separately priced extended warranty and product maintenance agreements is deferred when appropriate and recognized as revenue over the term of the agreement.
Revenues for contractual arrangements consisting of multiple elements (i.e., deliverables) are recognized for the separate elements when the product or services that are part of the multiple element arrangement have value on a stand-alone basis and, in arrangements that include a general right of refund relative to the delivered element, performance of the undelivered element is considered probable and substantially in our control. Certain customer arrangements include multiple elements, typically hardware, installation, training, consulting, services and/or post contract support (“PCS”). Generally, these elements are delivered within the same reporting period, except PCS or other services, for which revenue is recognized over the service period. We allocate revenue to each element in the arrangement using the selling price hierarchy and based on each element’s relative selling price. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE or TPE is available. We consider relevant internal and external market factors in cases where we are required to estimate selling prices. Allocation of the consideration is determined at the arrangements’ inception.
Shipping and Handling
—Shipping and handling costs are included as a component of cost of sales. Revenue derived from shipping and handling costs billed to customers is included in sales.
Advertising
—Advertising costs are expensed as incurred.
Research and Development
—We conduct research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use and reliability of our existing products and expanding the applications for which uses of our products are appropriate. Research and development costs are expensed as incurred.
Income Taxes
—As discussed in
Note 12
, for periods prior to the Separation, current income tax liabilities are assumed to be immediately settled with Danaher and are relieved through Former Parent's Investment. Income tax expense and other income tax related information contained in the consolidated and combined financial statements are presented as if we filed a separate tax return. The separate tax return method applies the accounting guidance for income taxes to the standalone financial statements as if we had been a standalone taxpayer for the periods prior to the Separation. The calculation of our income taxes on a separate income tax return basis requires considerable judgment, estimates, and allocations.
In accordance with GAAP, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected on our Consolidated and Combined Statements of Earnings. We establish valuation allowances for our deferred tax assets if, in our assessment, it is more likely than not that some or all of the deferred tax asset will not be realized. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Consolidated and Combined Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date. We recognize tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated and combined financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in evaluating tax positions and determining income tax provisions. We reevaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense. Refer to
Note 12
for additional information.
Restructuring
—We periodically initiate restructuring activities to appropriately position our cost base relative to prevailing economic conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with restructuring actions can include one-time termination benefits and related charges in addition to facility closure, contract termination and other related activities. We record the cost of the restructuring activities when the associated liability is incurred. Refer to
Note 13
for additional information.
Foreign Currency Translation and Transactions
—Exchange rate adjustments resulting from foreign currency transactions are recognized in net earnings, whereas effects resulting from the translation of financial statements are reflected as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year end exchange rates and income statement accounts are translated at weighted average exchange rates. Net foreign currency transaction gains or losses were not material in any of the years presented.
Accumulated Other Comprehensive Income (Loss)
—The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions). Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
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Foreign
currency
translation
adjustments
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Pension &
post-
retirement
plan benefit
adjustments
(b)
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Total
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Balance, January 1, 2014
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$
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337.3
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$
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(64.5
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)
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$
|
272.8
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Other comprehensive income (loss) before reclassifications:
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Increase (decrease)
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(154.4
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)
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(30.4
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)
|
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(184.8
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)
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Income tax impact
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—
|
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8.1
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8.1
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Other comprehensive income (loss) before reclassifications, net of income taxes
|
(154.4
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)
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(22.3
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)
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(176.7
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)
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Amounts reclassified from accumulated other comprehensive income (loss):
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|
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Increase (decrease)
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—
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4.5
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(a)
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4.5
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Income tax impact
|
—
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(1.1
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)
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(1.1
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)
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Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes:
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—
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3.4
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3.4
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Net current period other comprehensive income (loss):
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(154.4
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)
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(18.9
|
)
|
|
(173.3
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)
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Balance, December 31, 2014
|
182.9
|
|
|
(83.4
|
)
|
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99.5
|
|
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Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Increase (decrease)
|
(131.7
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)
|
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17.6
|
|
|
(114.1
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)
|
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Income tax impact
|
—
|
|
|
(5.0
|
)
|
|
(5.0
|
)
|
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Other comprehensive income (loss) before reclassifications, net of income taxes
|
(131.7
|
)
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12.6
|
|
|
(119.1
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)
|
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Amounts reclassified from accumulated other comprehensive income (loss):
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|
|
|
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Increase (decrease)
|
—
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6.9
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|
(a)
|
6.9
|
|
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Income tax impact
|
—
|
|
|
(1.7
|
)
|
|
(1.7
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)
|
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Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
|
—
|
|
|
5.2
|
|
|
5.2
|
|
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Net current period other comprehensive income (loss)
|
(131.7
|
)
|
|
17.8
|
|
|
(113.9
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)
|
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Balance, December 31, 2015
|
51.2
|
|
|
(65.6
|
)
|
|
(14.4
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)
|
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Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
Increase (decrease)
|
(123.8
|
)
|
|
(13.8
|
)
|
|
(137.6
|
)
|
|
Income tax impact
|
—
|
|
|
2.0
|
|
|
2.0
|
|
|
Other comprehensive income (loss) before reclassifications, net of income taxes
|
(123.8
|
)
|
|
(11.8
|
)
|
|
(135.6
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Increase (decrease)
|
—
|
|
|
5.5
|
|
(a)
|
5.5
|
|
|
Income tax impact
|
—
|
|
|
(1.3
|
)
|
|
(1.3
|
)
|
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Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes:
|
—
|
|
|
4.2
|
|
|
4.2
|
|
|
Net current period other comprehensive income (loss):
|
(123.8
|
)
|
|
(7.6
|
)
|
|
(131.4
|
)
|
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Balance, December 31, 2016
|
$
|
(72.6
|
)
|
|
$
|
(73.2
|
)
|
|
$
|
(145.8
|
)
|
|
|
|
|
|
|
|
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(a)
This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 11 for additional details).
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(b)
Includes balances relating to non-U.S. employee defined benefit plans, supplemental executive retirement plans and other postretirement employee benefit plans.
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Accounting for Stock-Based Compensation
—We account for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted, including stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”), based on the fair value of the award as of the grant date. We had
no
stock-based compensation plans prior to the Separation; however certain of our employees had participated in Danaher’s stock-based compensation plans (“Danaher Plans”). The expense associated with our employees who participated in the Danaher Plans was allocated to us in the accompanying Consolidated and Combined Statements of Earnings for the associated periods prior to the Separation. Equity-based compensation expense is recognized net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, except that in the case of RSUs, compensation expense is recognized using an accelerated attribution method. Refer to
Note 16
for additional information on the stock-based compensation plans.
Pension
—We measure our pension assets and obligations to determine the funded status as of year end, and recognize an asset for an overfunded status or a liability for an underfunded status on our balance sheet. Changes in the funded status of the pension plans are recognized in the year in which the changes occur and are reported in other comprehensive income (loss). Refer to
Note 11
for additional information on our pension plans including a discussion of actuarial assumptions, our policy for recognizing associated gains and losses and the method used to estimate service and interest cost components.
Reclassification
- Certain amounts have been reclassified in the financial statements as of and for the year ended December 31, 2015 to conform with the 2016 presentation. These reclassifications have no effect on previously reported operating profit, earnings before income taxes or net earnings.
New Accounting Standards
—
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which aims to simplify the subsequent measurement of goodwill by removing Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new standard, an impairment loss will be recognized in the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard is effective for us prospectively beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on our financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,
which aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 provides that an entity should recognize both the current and deferred income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This standard is effective for us beginning January 1, 2018 (with early adoption permitted) using a modified retrospective transition approach through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of this standard on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which clarifies that restricted cash and restricted cash equivalents should be included in cash and cash equivalents in the statement of cash flows. These standards are effective for us beginning January 1, 2018 (with early adoption permitted) using a retrospective transition approach, unless impracticable. Although the assessment of the impact of the new standards has not yet completed, we do not anticipate the adoption of these standards to have a material impact on our financial statements.
In March 2016, the FASB” issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718)
, which aims to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification of certain items on the statement of cash flows and accounting for forfeitures. The ASU requires that the difference between the actual tax benefit realized upon exercise and the tax benefit recorded based on the fair value of the stock award at the time of grant (the “excess tax benefit”) be reflected as a reduction of the current period provision for income taxes with any shortfall recorded as an increase in the tax provision. Currently, the excess tax benefit is recorded as a component of additional paid-in capital. The ASU also requires the excess tax benefit realized to be reflected as an operating cash flow rather than as a financing cash flow under current GAAP. We will adopt this standard beginning January 1, 2017. We expect this standard to favorably impact our tax rate by approximately 50 basis points in 2017. However, due to the inherent uncertainties related to, among other things, the timing of employee stock option exercises or the vesting of stock awards and any difference between the underlying stock price on the date of the grant as compared to the date of exercise or vesting, actual results will likely differ from this estimate and depending on the above factors, may adversely affect our financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The accounting applied by a lessor is largely unchanged from that applied under the current standard. This standard is effective for us beginning January 1, 2019 (with early adoption permitted) using a modified retrospective transition approach and provides for certain practical expedients. We are currently evaluating the impact of this standard on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (“NRV”), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring the market value of inventory. We will adopt this standard prospectively beginning January 1, 2017. The adoption of this standard is not expected to have a significant impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which impacts virtually all aspects of an entity’s revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During 2016, the FASB issued several amendments to the standard, including clarification to the guidance on reporting revenues as a principal versus an agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract costs and disclosure of performance obligations. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We currently anticipate adopting the standard using the modified retrospective method. This standard is effective for us beginning January 1, 2018. We are currently assessing the impact that the adoption of the new standard will have on our financial statements and related disclosures and will adopt this standard on January 1, 2018.
The impact of adopting this standard is not expected to be material. We expect recognition of revenue for a majority of customer contracts to remain substantially unchanged. While we are continuing to assess all potential impacts of the standard, we currently believe the more significant impacts relate to certain customer contracts that will be recognized over time, accounting for deferral of commissions which previously were expensed as incurred and may qualify for capitalization under the new standard, and changes to the timing of recognition of revenue and costs related to certain warranty arrangements.
NOTE 3. ACQUISITIONS
We continually evaluate potential acquisitions that either strategically fit with our existing portfolio or expand our portfolio into a new and attractive business area. We have completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which we acquired the businesses, the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
We make an initial allocation of the purchase price at the date of acquisition based upon our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired intangible assets in connection with certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
During
2016
, we acquired
three
businesses for total consideration of
$190 million
in cash, net of cash acquired. The businesses acquired complement existing units of both our segments. The aggregate annual sales of these businesses at the time of their
respective acquisitions, in each case based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately
$47 million
. We preliminarily recorded an aggregate of
$113 million
of goodwill related to these acquisitions.
During
2015
, we acquired
two
businesses for total consideration of
$37 million
in cash, net of cash acquired. The businesses acquired complement existing units of both our segments. The aggregate annual sales of these two businesses at the time of their respective acquisitions, in each case based on the acquired company’s revenues for its last completed fiscal year prior to the acquisition, were approximately
$18 million
. We recorded an aggregate of
$21 million
of goodwill related to these acquisitions.
During
2014
, we acquired
six
businesses for total consideration of
$289 million
in cash, net of cash acquired. The businesses acquired complement existing units of both our segments. The aggregate annual sales of these six businesses at the time of their respective acquisitions, in each case based on the acquired company’s revenues for its last completed fiscal year prior to the acquisition, were approximately
$133 million
. We recorded an aggregate of
$151 million
of goodwill related to these acquisitions.
The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Accounts receivable
|
$
|
5.2
|
|
|
$
|
2.8
|
|
|
$
|
21.0
|
|
|
Inventories
|
2.2
|
|
|
3.1
|
|
|
30.5
|
|
|
Property, plant and equipment
|
0.6
|
|
|
1.0
|
|
|
8.5
|
|
|
Goodwill
|
113.2
|
|
|
21.2
|
|
|
151.1
|
|
|
Other intangible assets, primarily customer relationships, trade names and technology
|
82.7
|
|
|
13.0
|
|
|
113.8
|
|
|
Trade accounts payable
|
(1.5
|
)
|
|
(0.9
|
)
|
|
(8.0
|
)
|
|
Other assets and liabilities, net
|
(12.3
|
)
|
|
(3.1
|
)
|
|
(27.9
|
)
|
|
Net cash consideration
|
$
|
190.1
|
|
|
$
|
37.1
|
|
|
$
|
289.0
|
|
Transaction-related costs and acquisition related fair value adjustments were not material to earnings in
2016
,
2015
, or
2014
.
Pro Forma Financial Information (Unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the
2016
and
2015
acquisitions as if they had occurred as of
January 1, 2015
. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time ($ in millions except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Sales
|
$
|
6,251.0
|
|
|
$
|
6,243.3
|
|
|
Net earnings
|
$
|
871.2
|
|
|
$
|
862.8
|
|
|
Diluted net earnings per share
|
$
|
2.51
|
|
|
$
|
2.50
|
|
NOTE 4. GAIN ON SALE OF PRODUCT LINE
In
August 2014
, we completed the divestiture of our electric vehicle systems (“EVS”)/hybrid product line for a sale price of
$87 million
in cash. This product line, which was part of the Industrial Technologies segment, had revenues of approximately
$60 million
in
2014
prior to the divestiture. Operating results of the product line were not significant to our segment or overall reported results in
2014
. We recorded a pretax gain on the sale of the product line of
$34 million
(
$26 million
after-tax) which is included in the Consolidated and Combined Statements of Earnings. Subsequent to the sale, we have no continuing involvement in the EVS/hybrid product line.
In accordance with ASU No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, the divestiture of the EVS/hybrid product line has not been classified as a discontinued operation in these financial statements because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
NOTE 5. INVENTORIES
The classes of inventory as of December 31 are summarized as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Finished goods
|
$
|
198.3
|
|
|
$
|
184.1
|
|
|
Work in process
|
79.3
|
|
|
77.1
|
|
|
Raw materials
|
267.0
|
|
|
261.7
|
|
|
Total
|
$
|
544.6
|
|
|
$
|
522.9
|
|
As of
December 31, 2016
and
2015
, the difference between inventories valued at LIFO and the value of that same inventory if the FIFO method had been used was not significant. The liquidation of LIFO inventory did not have a significant impact on our results of operations in any period presented.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The classes of property, plant and equipment as of December 31 are summarized as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Land and improvements
|
$
|
63.5
|
|
|
$
|
66.0
|
|
|
Buildings and leasehold improvements
|
340.8
|
|
|
344.8
|
|
|
Machinery and equipment
|
1,147.5
|
|
|
1,080.8
|
|
|
Gross property, plant and equipment
|
1,551.8
|
|
|
1,491.6
|
|
|
Less: accumulated depreciation
|
(1,004.2
|
)
|
|
(976.8
|
)
|
|
Property, plant and equipment, net
|
$
|
547.6
|
|
|
$
|
514.8
|
|
Total depreciation expense was
$91 million
,
$88 million
and
$88 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Capital expenditures totaled
$130 million
,
$120 million
and
$103 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. There was
no
capitalized interest related to capitalized expenditures in any period.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in
Note 3
, goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. We assess the goodwill of each of our reporting units for impairment at least annually as of the first day of the fourth quarter and as “triggering” events occur that indicate that it is more likely than not that an impairment exists. We elected to bypass the optional qualitative goodwill assessment allowed by applicable accounting standards and performed a quantitative impairment test for all reporting units as this was determined to be the most effective method to assess for impairment across a large spectrum of reporting units.
We estimate the fair value of our reporting units primarily using a market approach,
based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”) determined by current trading market multiples of earnings for companies operating in businesses similar to each of our reporting units, in addition to recent market available sale transactions of comparable businesses
.
In certain circumstances we also evaluate other factors including results of the estimated fair value utilizing a discounted cash flow analysis (i.e., an income approach), market positions of the businesses, comparability of market sales transactions and financial and operating performance in order to validate the results of the market approach.
If the estimated fair value of the reporting unit is less than its carrying value, we must perform additional analysis to determine if the reporting unit’s goodwill has been impaired.
In 2016, we had
twelve
reporting units for goodwill impairment testing. The carrying value of the goodwill included in each individual reporting unit ranges from
$7 million
to approximately
$1.1 billion
.
No
goodwill impairment charges were recorded for the years ended
December 31, 2016
,
2015
and
2014
and no “triggering” events have occurred subsequent to the performance of the
2016
annual impairment test. The factors used by management in its impairment analysis are inherently subject to uncertainty. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings.
The following is a rollforward of our goodwill by segment ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Instrumentation
|
|
Industrial Technologies
|
|
Total
|
|
Balance, January 1, 2015
|
$
|
2,419.8
|
|
|
$
|
1,575.3
|
|
|
$
|
3,995.1
|
|
|
Attributable to 2015 acquisitions
|
21.2
|
|
|
—
|
|
|
21.2
|
|
|
Foreign currency translation & other
|
(40.4
|
)
|
|
(26.9
|
)
|
|
(67.3
|
)
|
|
Balance, December 31, 2015
|
2,400.6
|
|
|
1,548.4
|
|
|
3,949.0
|
|
|
Attributable to 2016 acquisitions
|
61.3
|
|
|
51.9
|
|
|
113.2
|
|
|
Foreign currency translation & other
|
(38.2
|
)
|
|
(45.0
|
)
|
|
(83.2
|
)
|
|
Balance, December 31, 2016
|
$
|
2,423.7
|
|
|
$
|
1,555.3
|
|
|
$
|
3,979.0
|
|
Finite-lived intangible assets are amortized over the shorter of their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible asset as of December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
Patents and technology
|
$
|
301.0
|
|
|
$
|
(240.1
|
)
|
|
$
|
296.3
|
|
|
$
|
(221.4
|
)
|
|
Customer relationships and other intangibles
|
731.9
|
|
|
(438.1
|
)
|
|
691.7
|
|
|
(386.4
|
)
|
|
Total finite-lived intangibles
|
1,032.9
|
|
|
(678.2
|
)
|
|
988.0
|
|
|
(607.8
|
)
|
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
392.6
|
|
|
—
|
|
|
378.8
|
|
|
—
|
|
|
Total intangibles
|
$
|
1,425.5
|
|
|
$
|
(678.2
|
)
|
|
$
|
1,366.8
|
|
|
$
|
(607.8
|
)
|
During
2016
and
2015
, we acquired finite-lived intangible assets, consisting primarily of customer relationships, with a weighted average life of
14
years and
7
years, respectively. Refer to
Note 3
for additional information on the intangible assets acquired.
Total intangible amortization expense in
2016
,
2015
and
2014
was
$86 million
,
$89 million
and
$90 million
, respectively. Based on the intangible assets recorded as of
December 31, 2016
, amortization expense is estimated to be
$60 million
during
2017
,
$55 million
during
2018
,
$52 million
during
2019
,
$45 million
during
2020
and
$41 million
during
2021
.
NOTE 8. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation. Level 3 inputs are unobservable inputs based on our assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Market
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
—
|
|
|
$
|
14.8
|
|
|
—
|
|
|
$
|
14.8
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
—
|
|
|
$
|
53.7
|
|
|
—
|
|
|
$
|
53.7
|
|
Certain of our management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated and Combined Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (“401(k) Programs”) (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates. Prior to the Separation, certain of our management employees participated in Danaher’s nonqualified deferred compensation programs with similar terms except that earnings rates for amounts contributed unilaterally by Danaher were entirely based on changes in the value of Danaher’s common stock.
In connection with the Separation, we established a deferred compensation program which was designed to replicate Danaher’s. Accounts in Danaher’s deferred compensation programs held by Fortive employees at the time of the Separation were converted into accounts in the Fortive deferred compensation program based on the “concentration method” designed to maintain the economic value before and after the Separation date using the relative fair market value of the Danaher and Fortive common stock based on their respective closing prices as of July 1, 2016. Prior to the Separation, the entire value of the Fortive employees’ deferred compensation program accounts in Danaher’s deferred compensation programs was recorded in other long-term liabilities. Upon conversion of these accounts to the Fortive deferred compensation program,
$19.2 million
of deferred compensation liabilities were reclassified from other long-term liabilities to additional paid-in capital, representing the value of the deferred compensation that will ultimately be settled in Fortive common stock.
In addition, Danaher retained a liability of approximately
$21.7 million
of deferred compensation liabilities related to former employees of the Fortive Businesses whose employment terminated prior to the Separation. As a result, the deferred compensation liabilities balance recorded at
December 31, 2016
does not include amounts related to such terminated employees. Because this amount had been included in our Combined Balance Sheet prior to the Separation, Danaher’s retention of the liability has been reflected as an adjustment to Former Parent’s Investment. This amount is considered a non-cash financing activity for purposes of the Consolidated and Combined Statements of Cash Flows.
Fair Value of Financial Instruments
The carrying amounts and fair values of financial instruments were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Carrying Amount
|
|
Fair
Value
|
|
Long-term borrowings
|
$
|
3,358.0
|
|
|
$
|
3,321.4
|
|
As of
December 31, 2016
, long-term borrowings were categorized as Level 1. As of
December 31, 2015
, we did not have any long-term borrowings.
The fair value of long-term borrowings was based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing. The fair values of cash and cash equivalents, accounts receivable, net and trade accounts payable approximate their carrying amounts due to the short-term maturities of these instruments.
Refer to
Note 11
for information related to the fair value of the Company-sponsored defined benefit pension plan assets.
NOTE 9. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
|
Compensation and post retirement benefits
|
$
|
202.4
|
|
|
$
|
49.8
|
|
|
$
|
146.6
|
|
|
$
|
87.4
|
|
|
Claims, including self-insurance and litigation
|
30.2
|
|
|
52.6
|
|
|
35.3
|
|
|
52.8
|
|
|
Pension benefit obligations
|
9.9
|
|
|
127.4
|
|
|
11.0
|
|
|
119.2
|
|
|
Taxes, income and other
|
63.5
|
|
|
344.0
|
|
|
36.1
|
|
|
335.0
|
|
|
Deferred revenue
|
204.6
|
|
|
80.1
|
|
|
177.3
|
|
|
83.9
|
|
|
Sales and product allowances
|
45.7
|
|
|
—
|
|
|
55.1
|
|
|
—
|
|
|
Warranty
|
63.1
|
|
|
1.9
|
|
|
59.2
|
|
|
1.8
|
|
|
Other
|
180.9
|
|
|
18.5
|
|
|
145.8
|
|
|
24.5
|
|
|
Total
|
$
|
800.3
|
|
|
$
|
674.3
|
|
|
$
|
666.4
|
|
|
$
|
704.6
|
|
NOTE 10. FINANCING
The carrying value of the components of our debt as of
December 31, 2016
were as follows ($ in millions):
|
|
|
|
|
|
|
|
U.S. dollar-denominated commercial paper
|
$
|
347.9
|
|
|
Euro-denominated commercial paper
|
26.8
|
|
|
Variable interest rate Term Facility
|
500.0
|
|
|
1.80% senior unsecured notes due 2019
|
298.3
|
|
|
2.35% senior unsecured notes due 2021
|
744.8
|
|
|
3.15% senior unsecured notes due 2026
|
890.1
|
|
|
4.30% senior unsecured notes due 2046
|
546.8
|
|
|
Other
|
3.3
|
|
|
Long-term debt
|
$
|
3,358.0
|
|
Debt discounts, premiums and issuance costs of
$20.1 million
as of
December 31, 2016
have been netted against the aggregate principal amounts of the related debt in the carrying value of the components of debt table above.
Prior to the Separation, we were dependent on Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. Financing transactions related to our business operations during the period prior to the Separation were accounted for through the Former Parent’s Investment account. Accordingly, none of Danaher’s debt at the corporate level was assigned to us as of
December 31, 2015
.
Proceeds from borrowings under the commercial paper programs are typically available for general corporate purposes, including acquisitions. However, proceeds from our initial issuances of U.S. dollar-denominated commercial paper were used to pay fees and expenses related to the financing activities described below.
We received net proceeds, after underwriting discounts and arrangement fees from the issuance of the Notes and Term Facility, of approximately
$3.0 billion
and used these funds to make a
$3.0 billion
cash dividend payment to Danaher in connection with the Separation.
Credit Facilities
On
June 16, 2016
, we entered into the Credit Agreement with a syndicate of banks that provides for:
|
|
|
|
•
|
a
three
-year
$500 million
Term Facility that expires on
June 16, 2019
. We borrowed the entire
$500 million
of loans under this facility, and
|
|
|
|
|
•
|
a
five
-year
$1.5 billion
Revolving Credit Facility that expires on
June 16, 2021
.
|
The Revolving Credit Facility is subject to a
one year
extension option at our request and with the consent of the lenders. The Credit Agreement also contains an option permitting us to request an increase in the amounts available under the Credit Agreement of up to an aggregate additional
$500 million
.
Borrowings under the Credit Agreement (other than bid loans under the Revolving Credit Facility) bear interest at a rate equal (at our option) to either (1) a LIBOR-based rate (the “LIBOR-Based Rate”), or (2) the highest of (a) the Federal funds rate plus 1/2 of 1%, (b) the prime rate and (c) the LIBOR-Based Rate plus
1%
, plus in each case a margin that varies according to our long-term debt credit rating. We are obligated to pay an annual facility fee for the Revolving Credit Facility of between
9.0
and
25.0
basis points varying according to our long-term debt credit rating.
The 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
3.50
to
1.00
and a consolidated interest coverage ratio of Consolidated EBITDA (as defined in the Credit Agreement) to interest expense of greater than
3.50
to
1.00
as of the end of any fiscal quarter. The Credit Agreement also contains customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants. As of
December 31, 2016
, we were in compliance with all covenants under the Credit Agreement and had
no
borrowings outstanding under the Revolving Credit Facility.
We borrowed the entire
$500 million
of variable rate loans under the Term Facility. As of
December 31, 2016
borrowings under the Term Facility bear an interest rate of
1.87%
per annum. During the period of
2016
in which the Term Facility was outstanding, the annual effective rate was
1.72%
. The term loan is pre-payable at our option, and re-borrowing is not permitted once the term loan is repaid.
Commercial Paper Programs
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs. Under these programs, we may issue unsecured, short-term promissory notes with maturities not exceeding
397
and
183
days, respectively. Interest expense on the notes is paid at maturity and is generally based on our credit ratings at the time of issuance and prevailing short-term interest rates.
As of
December 31, 2016
,
$348 million
of commercial paper was outstanding under the U.S. dollar-denominated commercial paper program with a weighted average annual interest rate of
1.08%
and a weighted average remaining maturity of approximately
9
days. As of
December 31, 2016
,
$27 million
of commercial paper was outstanding under the Euro-denominated commercial paper program with a weighted average annual interest rate of
(0.06)%
and a weighted average remaining maturity of approximately
35
days.
Credit support for the Commercial Paper Programs is provided by 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 Commercial Paper Programs’ existing credit ratings. We expect to limit any borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, to repay all of the outstanding commercial paper as it matures.
Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit rating and market conditions. Any downgrade in our credit rating would increase the cost of borrowing under our commercial paper programs and the Credit Agreement, and could limit or preclude our ability to issue commercial paper. If our access to the commercial paper market is adversely affected due to a downgrade, change in market conditions or otherwise, we would expect to rely on a combination of available cash, operating cash flow and the Credit Agreement to provide short-term funding. In such event, the cost of borrowings under the Credit Agreement could be higher than the historic cost of commercial paper borrowings.
We classified our borrowings outstanding under the Commercial Paper Programs as of
December 31, 2016
as long-term debt in the accompanying Consolidated and Combined Balance Sheets as we had the intent and ability, as supported by availability under the Revolving Credit Facility referenced above, to refinance these borrowings for at least one year from the balance sheet date.
Long-Term Indebtedness
On
June 20, 2016
, we completed the private placement of each of the following series of the Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act:
|
|
|
|
•
|
$300 million
aggregate principal amount of senior notes due
June 15, 2019
(the “
2019
Notes”) issued at
99.893%
of their principal amount and bearing interest at the rate of
1.80%
per year.
|
|
|
|
|
•
|
$750 million
aggregate principal amount of senior notes due
June 15, 2021
issued at
99.977%
of their principal amount and bearing interest at the rate of
2.35%
per year.
|
|
|
|
|
•
|
$900 million
aggregate principal amount of senior notes due
June 15, 2026
issued at
99.644%
of their principal amount and bearing interest at the rate of
3.15%
per year.
|
|
|
|
|
•
|
$350 million
and
$200 million
aggregate principal amounts of senior notes due
June 15, 2046
issued at
99.783%
and
101.564%
, respectively, of their principal amounts and bearing interest at the rate of
4.30%
per year.
|
Interest on the Notes is payable semi-annually in arrears on
June 15
and
December 15
of each year.
In connection with the issuance of the Notes, we entered into a registration rights agreement, pursuant to which we are obligated to use commercially reasonable efforts to file with the U.S. Securities and Exchange Commission,
and cause to be declared effective, a registration statement with respect to an offer to exchange each series of Notes for registered notes with terms that are substantially identical to the Notes of such series. Alternatively, if the exchange offers are not available or cannot be completed, we would be required to use commercially reasonable efforts to file, and cause to be declared effective, a shelf registration statement to cover resales of the Notes under the Securities Act. If we do not comply with these obligations, we will be required to pay additional interest on the Notes.
Covenants and Redemption Provisions Applicable to Notes
We may redeem the Notes of the applicable series, in whole or in part, at any time prior to the dates specified in the Notes indenture (the “Call Dates”) by paying the principal amount and the “make-whole” premium specified in the Notes indenture, plus accrued and unpaid interest. Additionally, with the exception of the
2019
Notes, which have Call Dates equal to the contractual maturity of the note, we may redeem all or any part of the Notes of the applicable series on or after the Call Dates without paying the “make-whole” premium specified in the Notes indenture.
|
|
|
|
|
|
Notes Series
|
Call Dates
|
|
1.80% senior unsecured notes due 2019
|
June 15, 2019
|
|
2.35% senior unsecured notes due 2021
|
May 15, 2021
|
|
3.15% senior unsecured notes due 2026
|
March 15, 2026
|
|
4.30% senior unsecured notes due 2046
|
December 15, 2045
|
If a change of control triggering event occurs, we will, in certain circumstances, be required to make an offer to repurchase the Notes at a purchase price equal to
101%
of the principal amount, plus accrued and unpaid interest. A change of control triggering event is defined as the occurrence of both a change of control and a rating event, each as defined in the Notes indenture. Except in connection with a change of control triggering event, the Notes do not have any credit rating downgrade triggers that would accelerate the maturity of the Notes.
The Notes contain customary covenants, including limits on the incurrence of certain secured debt and sale/leaseback transactions. None of these covenants are considered restrictive to our operations and as of
December 31, 2016
, we were in compliance with all the covenants under the Notes.
Other
Following the Separation, we made interest payments of
$44 million
in 2016. Prior to the Separation, we did not make any interest payments because we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries.
There are
no
minimum principal payments due under our total outstanding debt during the next two years. The future minimum principal payments due are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
Notes
|
|
Total
|
|
2019
|
$
|
500.0
|
|
|
$
|
300.0
|
|
|
$
|
800.0
|
|
|
2020
|
—
|
|
|
—
|
|
|
—
|
|
|
2021
|
—
|
|
|
750.0
|
|
|
750.0
|
|
|
Thereafter
|
—
|
|
|
1,450.0
|
|
|
1,450.0
|
|
|
Total principal payments
(a)
|
$
|
500.0
|
|
|
$
|
2,500.0
|
|
|
$
|
3,000.0
|
|
|
|
|
|
|
|
|
|
(a) Not included in the table above are net discounts, premiums and issuance costs associated with the Notes, which totaled $20.1 million as of December 31, 2016, and have been recorded as an offset to the carrying amount of the related debt in the accompanying Consolidated and Combined Balance Sheet as of December 31, 2016. In addition, the table above does not include principal balances of $374.8 million under the Commercial Paper Programs and other financing balances of $3.3 million.
|
NOTE 11. PENSION PLANS
We administer and maintain 401(k) Programs. Contributions are determined based on a percentage of compensation. We recognized compensation expense for our participating U.S. employees in the 401(k) Programs totaling
$50 million
in
2016
,
$26 million
in
2015
and
$24 million
in
2014
.
Certain of our non-U.S. employees participate in noncontributory defined benefit pension plans. In general, our policy is to fund these plans based on considerations relating to legal requirements, underlying asset returns, the plan’s funded status, the anticipated deductibility of the contribution, local practices, market conditions, interest rates and other factors.
The following sets forth the funded status of our non-U.S. plans as of the most recent actuarial valuations using measurement dates of
December 31
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change in pension benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
326.9
|
|
|
$
|
375.1
|
|
|
Service cost
|
3.5
|
|
|
4.9
|
|
|
Interest cost
|
7.4
|
|
|
8.4
|
|
|
Employee contributions
|
1.5
|
|
|
1.1
|
|
|
Benefits paid and other
|
(12.8
|
)
|
|
(10.4
|
)
|
|
Plan combinations/acquisitions
|
2.8
|
|
|
(5.9
|
)
|
|
Actuarial loss (gain)
|
32.2
|
|
|
(17.0
|
)
|
|
Amendments, settlements and curtailments
|
(1.6
|
)
|
|
(1.7
|
)
|
|
Foreign exchange rate impact
|
(24.5
|
)
|
|
(27.6
|
)
|
|
Benefit obligation at end of year
|
335.4
|
|
|
326.9
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
196.7
|
|
|
214.9
|
|
|
Actual return on plan assets
|
17.9
|
|
|
(0.4
|
)
|
|
Employer contributions
|
10.7
|
|
|
10.8
|
|
|
Employee contributions
|
1.5
|
|
|
1.1
|
|
|
Amendments and settlements
|
(0.5
|
)
|
|
(1.7
|
)
|
|
Benefits paid and other
|
(12.8
|
)
|
|
(10.4
|
)
|
|
Plan combinations/acquisitions
|
1.8
|
|
|
(3.4
|
)
|
|
Foreign exchange rate impact
|
(17.2
|
)
|
|
(14.2
|
)
|
|
Fair value of plan assets at end of year
|
198.1
|
|
|
196.7
|
|
|
Funded status
|
$
|
(137.3
|
)
|
|
$
|
(130.2
|
)
|
Weighted average assumptions used to determine benefit obligations at date of measurement
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Discount rate
|
1.91
|
%
|
|
2.65
|
%
|
|
Rate of compensation increase
|
2.89
|
%
|
|
2.77
|
%
|
Components of net periodic pension cost
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2016
|
|
2015
|
|
Service cost
|
$
|
3.5
|
|
|
$
|
4.9
|
|
|
Interest cost
|
7.4
|
|
|
8.4
|
|
|
Expected return on plan assets
|
(8.1
|
)
|
|
(8.9
|
)
|
|
Amortization of net loss
|
5.5
|
|
|
6.9
|
|
|
Net periodic pension cost
|
$
|
8.3
|
|
|
$
|
11.3
|
|
Net periodic pension costs are included in cost of sales and SG&A in the accompanying Consolidated and Combined Statements of Earnings according to the classification of the participant’s compensation.
Weighted average assumptions used to determine net periodic pension cost at date of measurement
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Discount rate
|
2.63
|
%
|
|
2.41
|
%
|
|
Expected return on plan assets
|
4.19
|
%
|
|
4.30
|
%
|
|
Rate of compensation increase
|
2.77
|
%
|
|
2.83
|
%
|
The discount rate reflects the market rate on
December 31
for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. The rates appropriate for each plan are determined based on investment grade instruments with maturities approximately equal to the average expected benefit payout under the plan.
Included in accumulated other comprehensive income (loss) as of
December 31, 2016
are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service credits of
$0.2 million
(
$0.2 million
, net of tax) and unrecognized actuarial losses of approximately
$97 million
(
$74 million
, net of tax). The unrecognized losses are calculated as the difference between the actuarially determined projected benefit obligation, the value of the plan assets and the accumulated contributions in excess of net periodic pension costs as of
December 31, 2016
. The prior service credits and actuarial losses included in accumulated other comprehensive income (loss) and expected to be recognized in net periodic pension costs during the year ending December 31, 2017 is
$0.1 million
(
$0.1 million
, net of tax) and
$4 million
(
$3 million
, net of tax), respectively. No plan assets are expected to be returned to us during the year ending December 31, 2017.
Selection of Expected Rate of Return on Assets
The expected rate of return reflects the asset allocation of the plans. This rate is based primarily on broad publicly-traded-equity and fixed-income indices and forward-looking estimates of active portfolio and investment management. The expected rate of return on asset assumptions for the plans were determined on a plan-by-plan basis based on the composition of assets and ranged from
1.75%
to
6.00%
and
2.25%
to
6.00%
in
2016
and
2015
, respectively.
Plan Assets
Plan assets are invested in various insurance contracts and equity and debt securities as determined by the administrator of each plan. Some of these investments, consisting of mutual funds and other private investments, are valued using the net asset value (“NAV”) method as a practical expedient. The investments valued using the NAV method are allocated across a broad array of funds and diversify the portfolio. The value of the plan assets directly affects the funded status of our pension plans recorded in the financial statements.
The fair values of our pension plan assets as of
December 31, 2016
, by asset category were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Market
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Cash and equivalents
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Mutual funds
|
—
|
|
|
7.7
|
|
|
—
|
|
|
7.7
|
|
|
Insurance contracts
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
Total
|
$
|
4.4
|
|
|
$
|
9.4
|
|
|
$
|
—
|
|
|
$
|
13.8
|
|
|
Investments measured at NAV
(a)
:
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
|
|
179.8
|
|
|
Other private investments
|
|
|
|
|
|
|
4.5
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
198.1
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets.
|
The fair values of our pension plan assets as of
December 31, 2015
, by asset category were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Market
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Cash and equivalents
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
Mutual funds
|
—
|
|
|
7.5
|
|
|
—
|
|
|
7.5
|
|
|
Insurance contracts
|
—
|
|
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
Total
|
$
|
2.9
|
|
|
$
|
8.9
|
|
|
$
|
—
|
|
|
$
|
11.8
|
|
|
Investments measured at NAV
(a)
:
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
|
|
179.6
|
|
|
Other private investments
|
|
|
|
|
|
|
5.3
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
196.7
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets.
|
Certain mutual funds are valued at the quoted closing price reported on the active market on which the individual securities are traded. Common stock, corporate bonds and mutual funds that are not traded on an active market are valued at quoted prices reported by investment brokers and dealers based on the underlying terms of the security and comparison to similar securities traded on an active market.
Certain mutual funds and other private investments are valued using NAV based on the information provided by the asset fund managers, which reflects the plan’s share of the fair value of the net assets of the investment. Depending on the nature of the assets, the underlying investments are valued using a combination of either discounted cash flows, earnings and market multiples, third party appraisals or through reference to the quoted market prices of the underlying investments held by the venture, partnership or private entity where available. In addition, some of these investments have limits on their redemption to monthly, quarterly, semiannually or annually and may require up to
90
days prior written notice. Valuation adjustments reflect changes in operating results, financial condition or prospects of the applicable portfolio company.
The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are appropriate and consistent with the methods
used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Expected Contributions
During
2016
, we contributed
$11 million
to our non-U.S. defined benefit pension plans. During
2017
, our cash contribution requirements for our non-U.S. defined benefit pension plans are expected to be approximately
$10 million
.
The following sets forth benefit payments to participants, which reflect expected future service, as appropriate, expected to be paid by the plans in the periods indicated ($ in millions):
|
|
|
|
|
|
|
|
2017
|
$
|
12.0
|
|
|
2018
|
12.4
|
|
|
2019
|
12.4
|
|
|
2020
|
12.7
|
|
|
2021
|
12.7
|
|
|
2022-2026
|
68.9
|
|
NOTE 12. INCOME TAXES
Prior to the Separation, our operating results were included in Danaher’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements reflect income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Danaher. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the first half of 2016 and for prior periods. For periods prior to the Separation, our pretax operating results exclude any intercompany financing arrangements between entities and include any transactions with Danaher as if it were an unrelated party.
Earnings before income taxes for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
United States
|
$
|
812.9
|
|
|
$
|
913.8
|
|
|
$
|
752.0
|
|
|
International
|
384.1
|
|
|
355.9
|
|
|
527.2
|
|
|
Total
|
$
|
1,197.0
|
|
|
$
|
1,269.7
|
|
|
$
|
1,279.2
|
|
The provision for income taxes for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal U.S.
|
$
|
227.4
|
|
|
$
|
310.8
|
|
|
$
|
243.8
|
|
|
Non-U.S.
|
74.6
|
|
|
54.3
|
|
|
134.4
|
|
|
State and local
|
32.7
|
|
|
32.8
|
|
|
28.4
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal U.S.
|
(4.6
|
)
|
|
(4.0
|
)
|
|
10.9
|
|
|
Non-U.S.
|
(3.0
|
)
|
|
12.7
|
|
|
(22.3
|
)
|
|
State and local
|
(2.4
|
)
|
|
(0.7
|
)
|
|
0.6
|
|
|
Income tax provision
|
$
|
324.7
|
|
|
$
|
405.9
|
|
|
$
|
395.8
|
|
All deferred tax assets and liabilities have been classified as noncurrent deferred tax assets and noncurrent deferred tax liabilities which are included in other assets and other long-term liabilities, respectively, in the accompanying Consolidated and Combined Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Deferred Tax Assets:
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
28.5
|
|
|
$
|
26.9
|
|
|
Inventories
|
33.0
|
|
|
24.3
|
|
|
Pension benefits
|
49.1
|
|
|
60.6
|
|
|
Environmental and regulatory compliance
|
18.9
|
|
|
18.9
|
|
|
Other accruals and prepayments
|
44.2
|
|
|
35.4
|
|
|
Deferred service income
|
10.5
|
|
|
15.6
|
|
|
Warranty services
|
27.1
|
|
|
24.8
|
|
|
Stock compensation expense
|
31.7
|
|
|
30.3
|
|
|
Tax credit and loss carryforwards
|
74.0
|
|
|
79.9
|
|
|
Other
|
8.0
|
|
|
11.2
|
|
|
Valuation allowances
|
(26.7
|
)
|
|
(18.6
|
)
|
|
Total deferred tax assets
|
298.3
|
|
|
309.3
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
Property, plant and equipment
|
(33.2
|
)
|
|
(43.3
|
)
|
|
Insurance, including self-insurance
|
(85.2
|
)
|
|
—
|
|
|
Goodwill and other intangibles
|
(416.5
|
)
|
|
(380.5
|
)
|
|
Other
|
(10.0
|
)
|
|
—
|
|
|
Total deferred tax liabilities
|
(544.9
|
)
|
|
(423.8
|
)
|
|
Net deferred tax liability
|
$
|
(246.6
|
)
|
|
$
|
(114.5
|
)
|
Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we established a valuation allowance.
Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.
Deferred taxes associated with U.S. entities consist of net deferred tax liabilities of approximately
$293 million
and
$166 million
inclusive of valuation allowances of
$16 million
and
$3 million
as of
December 31, 2016
and
December 31, 2015
, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax assets of
$46 million
and
$51 million
inclusive of valuation allowances of
$11 million
and
$16 million
as of
December 31, 2016
and
December 31, 2015
, respectively. During
2016
, our valuation allowance increased by
$8 million
primarily due to valuation allowances related to foreign net operating losses.
In periods prior to the Separation, the allocation of deferred taxes in the combined financial statements excluded any amounts related to insurance, including self-insurance. The Fortive Insurance Company was incorporated in June 2016.
The effective income tax rate for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Pretax Earnings
|
|
|
2016
|
|
2015
|
|
2014
|
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
State income taxes (net of federal income tax benefit)
|
1.7
|
%
|
|
1.8
|
%
|
|
1.5
|
%
|
|
Foreign income taxed at lower rate than U.S. statutory rate
|
(4.7
|
)%
|
|
(4.6
|
)%
|
|
(5.9
|
)%
|
|
Separation related adjustments for final resolution of uncertain tax positions
|
(1.9
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
Research and experimentation credits, federal domestic production deductions and other
|
(3.0
|
)%
|
|
(0.2
|
)%
|
|
0.3
|
%
|
|
Effective income tax rate
|
27.1
|
%
|
|
32.0
|
%
|
|
30.9
|
%
|
Our effective tax rate for each of
2016
,
2015
and
2014
differs from the U.S. federal statutory rate of
35.0%
due principally to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate and the impact of credits and deductions provided by law.
We conduct business globally, and, as part of our global business, we file numerous income tax returns in the U.S. federal, state and foreign jurisdictions. The countries in which we have a significant presence that have lower statutory tax rates than the United States include China, Germany and the United Kingdom. Our ability to obtain a tax benefit from lower statutory tax rates outside of the United States is dependent on our levels of taxable income in these foreign countries and under current U.S. tax law. We believe that a change in the statutory tax rate of any individual foreign country would not have a material effect on our financial statements given the geographic dispersion of our taxable income.
As of
December 31, 2016
our U.S. and non-U.S. net operating loss carryforwards totaled
$178 million
, of which
$102 million
is related to U.S. net operating loss carryforwards and
$76 million
is related to non-U.S. net operating loss carryforwards. Included in deferred tax assets as of December 31, 2016 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling
$57 million
, before applicable valuation allowances of
$10 million
. Certain of these losses can be carried forward indefinitely and others can be carried forward to various dates from
2017
through
2036
. A full valuation allowance was also established as of December 31, 2016 for
$16 million
of certain tax credit carryforwards from the Separation.
Following the Separation, we made income tax payments of
$149 million
. Prior to the Separation, we did not make any income tax payments because we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries.
As of
December 31, 2016
, gross unrecognized tax benefits totaled
$29 million
(
$35 million
, net of the impact of
$7 million
of indirect tax benefits offset by
$13 million
associated with interest and penalties). As of
December 31, 2015
, gross unrecognized tax benefits totaled
$170 million
(
$168 million
, net of the impact of
$41 million
of indirect tax benefits offset by
$39 million
associated with interest and penalties). We recognized approximately
$8 million
in potential interest and penalties associated with uncertain tax positions during each of
2015
and
2014
, and this amount was not significant in
2016
. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets), will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits, beginning of year
|
$
|
169.9
|
|
|
$
|
167.2
|
|
|
$
|
146.8
|
|
|
Additions based on tax positions related to the current year
|
6.0
|
|
|
18.4
|
|
|
20.8
|
|
|
Additions for tax positions of prior years
|
0.4
|
|
|
9.7
|
|
|
11.8
|
|
|
Reductions for tax positions of prior years
|
(1.2
|
)
|
|
(13.4
|
)
|
|
(0.8
|
)
|
|
Lapse of statute of limitations
|
(1.3
|
)
|
|
(5.5
|
)
|
|
(4.6
|
)
|
|
Settlements
|
(0.6
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
Effect of foreign currency translation
|
(0.4
|
)
|
|
(5.0
|
)
|
|
(6.8
|
)
|
|
Separation related adjustments
(a)
|
(144.2
|
)
|
|
—
|
|
|
—
|
|
|
Unrecognized tax benefits, end of year
|
$
|
28.6
|
|
|
$
|
169.9
|
|
|
$
|
167.2
|
|
|
|
|
|
|
|
|
|
(a)
Unrecognized tax benefits were reduced by $144 million in 2016 related to positions taken prior to the Separation for which Danaher, as the Former Parent, is the primary obligor and is responsible for settlement and payment of the tax expenses.
|
We are routinely examined by various domestic and international taxing authorities. In connection with the Separation, we entered into the Agreements with Danaher, including a tax matters agreement. The tax matters agreement distinguishes between the treatment of tax matters for “Joint” filings compared to “Separate” filings prior to the Separation. “Joint” filings involve legal entities, such as those in the United States, that include operations from both Danaher and the Company. By contrast, “Separate” filings involve certain entities (primarily outside of the United States), that exclusively include either Danaher’s or the Company’s operations, respectively. In accordance with the tax matters agreement, Danaher is liable for and has indemnified Fortive against all income tax liabilities involving “Joint” filings for periods prior to the Separation. The Company remains liable for certain pre-Separation income tax liabilities including those related to the Company’s “Separate” filings.
Pursuant to U.S. tax law, the Company’s initial U.S. federal income tax return is for the short taxable year July 2, 2016 through December 31, 2016. We expect to file our initial U.S. federal income tax return for the 2016 short tax year with the
Internal Revenue Service (“IRS”) during 2017. Therefore the IRS has not yet begun an examination of the Company. Our operations in certain foreign jurisdictions remain subject to routine examination for tax years 2007 to 2016.
For most of our foreign operations, we make an assertion regarding the amount of earnings intended for indefinite reinvestment, with the balance available to be repatriated to the United States. No provisions for U.S. income taxes have been made with respect to earnings that are planned to be reinvested indefinitely outside the United States, and the amount of U.S. income taxes that may be applicable to such earnings is not readily determinable given the various tax planning alternatives we could employ if we repatriated these earnings. As of
December 31, 2016
and following the restructuring of the entities associated with our foreign operations effectuated by Danaher in connection with the Separation, the basis difference based upon earnings that we plan to reinvest indefinitely outside of the United States for which deferred taxes have not been provided was approximately
$941 million
.
NOTE 13. RESTRUCTURING AND OTHER RELATED CHARGES
Restructuring and other related charges for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Employee severance related
|
$
|
14.7
|
|
|
$
|
11.8
|
|
|
$
|
23.7
|
|
|
Facility exit and other related
|
2.6
|
|
|
0.5
|
|
|
4.3
|
|
|
Impairment charges
|
4.8
|
|
|
12.0
|
|
|
—
|
|
|
Total restructuring and other related charges
|
$
|
22.1
|
|
|
$
|
24.3
|
|
|
$
|
28.0
|
|
Substantially all restructuring activities initiated in
2016
were completed by
December 31, 2016
. We expect substantially all cash payments associated with remaining termination benefits recorded in
2016
will be paid during
2017
. Substantially all planned restructuring activities related to the
2015
and
2014
plans have been completed and all cash payments related to such activities have been paid. Impairment charges in
2016
and
2015
related to certain trade names used in the Industrial Technologies segment.
The nature of our restructuring and related activities initiated in
2016
,
2015
and
2014
were broadly consistent throughout our segments and focused on improvements in operational efficiency through targeted workforce reductions and facility consolidations and closures. We incurred these costs to position ourselves to provide superior products and services to our customers in a cost efficient manner, and taking into consideration broad economic uncertainties.
Restructuring and other related charges recorded for the year ended December 31 by segment were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Professional Instrumentation
|
$
|
6.8
|
|
|
$
|
9.4
|
|
|
$
|
12.1
|
|
|
Industrial Technologies
|
15.3
|
|
|
14.9
|
|
|
15.9
|
|
|
Total
|
$
|
22.1
|
|
|
$
|
24.3
|
|
|
$
|
28.0
|
|
The table below summarizes the accrual balance and utilization by type of restructuring cost associated with our
2016
and
2015
restructuring actions ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of
January 1, 2015
|
|
Costs
Incurred
|
|
Paid/
Settled
|
|
Balance
as of
December
31, 2015
|
|
Costs
Incurred
|
|
Paid/
Settled
|
|
Balance
as of
December
31, 2016
|
|
Employee severance and related
|
$
|
20.6
|
|
|
$
|
11.8
|
|
|
$
|
(21.8
|
)
|
|
$
|
10.6
|
|
|
$
|
14.7
|
|
|
$
|
(15.7
|
)
|
|
$
|
9.6
|
|
|
Facility exit and other related
|
2.7
|
|
|
12.5
|
|
|
(14.3
|
)
|
|
0.9
|
|
|
7.4
|
|
|
(7.2
|
)
|
|
1.1
|
|
|
Total
|
$
|
23.3
|
|
|
$
|
24.3
|
|
|
$
|
(36.1
|
)
|
|
$
|
11.5
|
|
|
$
|
22.1
|
|
|
$
|
(22.9
|
)
|
|
$
|
10.7
|
|
The restructuring and other related charges incurred during
2016
include cash charges of
$17 million
and
$5 million
of noncash charges. The restructuring and other related charges incurred during
2015
included
$12 million
of both cash and noncash charges. The restructuring and other related charges incurred during
2014
were all cash charges. These charges are reflected in the following captions in the accompanying Consolidated and Combined Statements of Earnings ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Cost of sales
|
$
|
8.1
|
|
|
$
|
5.9
|
|
|
$
|
5.8
|
|
|
Selling, general and administrative expenses
|
14.0
|
|
|
18.4
|
|
|
22.2
|
|
|
Total
|
$
|
22.1
|
|
|
$
|
24.3
|
|
|
$
|
28.0
|
|
NOTE 14. LEASES AND COMMITMENTS
Our operating leases extend for varying periods of time up to
twenty years
and, in some cases, contain renewal options that would extend existing terms beyond twenty years. Future minimum rental payments for all operating leases having initial or remaining noncancelable lease terms in excess of one year are
$44 million
in
2017
,
$38 million
in
2018
,
$33 million
in
2019
,
$24 million
in
2020
,
$20 million
in
2021
and
$26 million
thereafter. Total rent expense for all operating leases was
$52 million
,
$53 million
and
$46 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from
ninety days
up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of our accrued warranty liability ($ in millions):
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
$
|
64.5
|
|
|
Accruals for warranties issued during the year
|
57.7
|
|
|
Settlements made
|
(61.1
|
)
|
|
Effect of foreign currency translation
|
(0.1
|
)
|
|
Balance, December 31, 2015
|
$
|
61.0
|
|
|
Accruals for warranties issued during the year
|
59.6
|
|
|
Settlements made
|
(56.0
|
)
|
|
Additions due to acquisitions
|
0.5
|
|
|
Effect of foreign currency translation
|
(0.1
|
)
|
|
Balance, December 31, 2016
|
$
|
65.0
|
|
NOTE 15. LITIGATION AND CONTINGENCIES
We are, from time to time, subject to a variety of litigation and other proceedings incidental to our business, including lawsuits involving claims for damages arising out of the use of our products, software and services, claims relating to intellectual property matters, employment matters, commercial disputes, and personal injury as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with divested businesses. Some of these lawsuits may include claims for punitive and consequential as well as compensatory damages. Based upon our experience, current information and applicable law, we do not believe that these proceedings and claims will have a material adverse effect on our financial position, results of operations or cash flows.
While we maintain workers compensation, property, cargo, automobile, crime, fiduciary, product, general, and directors’ and officers’ liability insurance (and have acquired rights under similar policies in connection with certain acquisitions) that cover a portion of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while we believe we are entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses. We maintain third party insurance policies up to certain limits to cover certain liability costs in excess of predetermined retained amounts. For most insured risks, we purchase outside insurance coverage only for severe losses (stop loss insurance) and reserves must be established and maintained with respect to amounts within the self-insured retention.
In accordance with accounting guidance, we record a liability in the consolidated and combined financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss does not meet the known or probable level but is reasonably possible and a loss or range of loss can be reasonably estimated, the estimated loss or range of loss is disclosed. These reserves consist of specific reserves for individual claims and additional amounts for anticipated developments of these claims as well as for incurred but not yet reported claims. The specific reserves for individual known claims are quantified with the assistance of legal counsel and outside risk insurance professionals where appropriate. In addition, outside risk insurance professionals may assist in the determination of reserves for incurred but not yet reported claims through evaluation of our specific loss history, actual claims reported, and industry trends among statistical and other factors. Reserve estimates are adjusted as additional information regarding a claim becomes known. While we actively pursue financial recoveries from insurance providers, we do not recognize any recoveries until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude. If risk insurance reserves we have established are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our net earnings. Refer to
Note 9
for information about the amount of our accruals for self-insurance and litigation liability.
In addition, our operations, products and services are subject to environmental laws and regulations in various jurisdictions, which impose limitations on the discharge of pollutants into the environment and establish standards for the generation, use, treatment, storage and disposal of hazardous and non-hazardous wastes. A number of our operations involve the handling, manufacturing, use or sale of substances that are or could be classified as hazardous materials within the meaning of applicable laws. We must also comply with various health and safety regulations in both the United States and abroad in connection with our operations. Compliance with these laws and regulations has not had and, based on current information and the applicable laws and regulations currently in effect, is not expected to have a material effect on our capital expenditures, earnings or competitive position, and we do not anticipate material capital expenditures for environmental control facilities.
In addition to environmental compliance costs, from time to time, we incur costs related to alleged damages associated with past or current waste disposal practices or other hazardous materials handling practices. For example, generators of hazardous substances found in disposal sites at which environmental problems are alleged to exist, as well as the current and former owners of those sites and certain other classes of persons, are subject to claims brought by state and federal regulatory agencies pursuant to statutory authority. We have received notification from the United States Environmental Protection Agency, and from state and non-U.S. environmental agencies, that conditions at certain sites where we and others previously disposed of hazardous wastes and/or are or were property owners require clean-up and other possible remedial action, including sites where we have been identified as a potentially responsible party under United States federal and state environmental laws. We have projects underway at a number of current and former facilities, in both the United States and abroad, to investigate and remediate environmental contamination resulting from past operations. Remediation activities generally relate to soil and/or groundwater contamination and may include pre-remedial activities such as fact-finding and investigation, risk assessment, feasibility study and/or design, as well as remediation actions such as contaminant removal, monitoring and/or installation, operation and maintenance of longer-term remediation systems. From time to time we are also party to personal injury or other claims brought by private parties alleging injury due to the presence of, or exposure to, hazardous substances.
We have recorded a provision for environmental investigation and remediation and environmental-related claims with respect to sites we and our subsidiaries owned or formerly owned and third party sites where we have been determined to be a potentially responsible party. We generally make an assessment of the costs involved for our remediation efforts based on environmental studies, as well as our prior experience with similar sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties of our involvement in certain sites, uncertainties regarding the extent of the required cleanup, the availability of alternative cleanup methods, variations in the interpretation of applicable laws and regulations, the possibility of insurance recoveries with respect to certain sites and the fact that imposition of joint and several liability with right of contribution is possible under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and other environmental laws and regulations. If we determine that potential liability for a particular site or with respect to a personal injury claim is known or considered probable and reasonably estimable, we accrue the total estimated loss, including investigation and remediation costs, associated with the site or claim. As of
December 31, 2016
, we had a reserve of
$9 million
included in accrued expenses and other liabilities on the Consolidated and Combined Balance Sheets for environmental matters that are known or considered probable and reasonably estimable, which reflects our best estimate of the costs to be incurred with respect to such matters.
All reserves have been recorded without giving effect to any possible future third party recoveries. While we actively pursue insurance recoveries, as well as recoveries from other potentially responsible parties, we do not recognize any insurance recoveries for environmental liability claims until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude.
As of
December 31, 2016
and
2015
, we had approximately
$111 million
and
$82 million
, respectively, of guarantees consisting primarily of outstanding standby letters of credit, bank guarantees and performance and bid bonds. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties and governmental entities to secure our obligations and/or performance requirements related to specific transactions. We believe that if the obligations under these instruments were triggered, they would not have a material effect on our financial statements.
NOTE 16. STOCK BASED COMPENSATION
We had
no
stock-based compensation plans prior to the Separation; however certain of our employees participated in the Danaher Plans, which provided for the grants of stock options, PSUs, and RSUs among other types of awards. Prior to the Separation, Danaher allocated stock-based compensation expense to the Company based on Fortive employees participating in the Danaher Plans. This is reflected in the accompanying Consolidated and Combined Statements of Earnings for periods prior to the Separation.
Outstanding performance-based RSUs and PSUs of Danaher held by our employees with pending performance goals of Danaher at the Separation date were canceled and replaced with Fortive performance-based restricted stock awards (“RSAs”) and performance stock awards (“PSAs”) with comparable value, performance goals and vesting requirements. All other terms of these equity awards continued unchanged following the conversion or replacement.
In connection with the Separation and the employee matters agreement, the Company adopted the 2016 Stock Incentive Plan (the “Stock Plan”) that became effective upon the Separation. Outstanding equity awards of Danaher held by our employees at the Separation date (the “Converted Awards”) were converted into or replaced with Fortive equity awards (the “Conversion Awards”) under the Stock Plan based on the “concentration method,” and were adjusted to maintain the economic value immediately before and after the distribution date using the relative fair market value of Danaher and Fortive common stock
based on their respective closing prices as of July 1, 2016. There was no incremental stock-based compensation expense recorded as a result of this equity award conversion.
The Stock Plan provides for the grant of stock appreciation rights, RSUs, PSUs, RSAs and PSAs (collectively, “Stock Awards”), stock options or any other stock-based award. A total of
23 million
shares of our common stock have been authorized for issuance under the Stock Plan. As of
December 31, 2016
, approximately
9 million
shares of our common stock remain available for issuance under the Stock Plan. Stock options under the Stock Plan generally vest pro rata over a
five
-year period and terminate
10 years
from the grant date, though the specific terms of e
ach grant are determined by the Compensation Committee of our Board of Directors. Our
executive officers and certain other employees may be awarded stock options with different vesting criteria and stock options granted to non-employee directors are fully vested as of the grant date. Exercise prices for stock options granted under the Stock Plan were equal to the closing price of Fortive’s common stock on the NYSE on the date of grant, while stock options issued as Conversion Awards were priced to maintain the economic value before and after the Separation.
RSUs and RSAs issued under the Stock Plan provide for the issuance of common stock at no cost to the holder. RSUs granted to employees under the Stock Plan generally provide for time-based vesting over a
five
year period, although certain employees may be awarded RSUs with different time-based vesting criteria, and RSAs granted to members of our senior management are also subject to performance-based vesting criteria. RSUs granted to non-employee directors under the Stock Plan vest on the earlier of the first anniversary of the grant date or the date of, and immediately prior to, the next annual meeting of our shareholders following the grant date. However, the underlying shares are not issued until the earlier of the director’s death or the first day of the seventh month following the director’s retirement from the Board of Directors (the “Board”). Prior to vesting, RSUs granted under the Stock Plan do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued or outstanding. RSAs granted under the Stock Plan have all of the same dividend, voting and other rights corresponding to all other common stock, provided, however, that the dividends payable on the RSAs will accrue and be delivered at the time of delivery of the shares upon vesting of the RSA.
During
2016
, PSAs were granted under the Stock Plan as Conversion Awards that vest based on our total shareholder return ranking relative to the S&P 500 Index over the performance period remaining on the corresponding Converted Awards, as well as Danaher’s total shareholder return prior to the Separation.
The equity compensation awards generally vest only if the employee is employed by us (or in the case of directors, the director continues to serve on the Board) on the vesting date or in other limited circumstances. To cover the exercise of stock options, vesting of RSUs and PSUs and issuances of RSAs and PSAs, we generally issue shares authorized but previously unissued, although we may instead issue treasury shares; provided, however, that, either type of issuance would equally reduce the number of shares available under our Stock Plan.
We account for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date. We recognize the compensation expense over the requisite service period (which is generally the vesting period but may be shorter than the vesting period, for example, if the employee becomes retirement eligible before the end of the vesting period). The fair value of RSUs is calculated using the closing price of Fortive common stock on the date of grant, adjusted for the impact of RSUs not having dividend rights prior to vesting. The fair value of RSAs is calculated using the closing price of Fortive common stock on the date of grant. The fair value of the PSUs and PSAs is calculated using a Monte Carlo pricing model. The fair value of the stock options granted is calculated using a Black-Scholes Merton (“Black-Scholes”) option pricing model.
In connection with the exercise of certain stock options and the vesting of Stock Awards issued under the Stock Plan, a number of our shares sufficient to fund statutory minimum tax withholding requirements have been withheld from the total shares issued or released to the award holder (though under the terms of the Stock Plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the six month period following the Separation, approximately
125 thousand
shares of Fortive common stock with an aggregate value of approximately
$6 million
, were withheld to satisfy this requirement. The tax withholding is treated as a reduction in additional paid-in capital in the accompanying consolidated and combined financial statements.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of SG&A in the accompanying Consolidated and Combined Statements of Earnings. Prior to the Separation, Danaher allocated stock-based compensation expense to the Company based on Fortive employees participating in the Danaher Plans. Following the Separation, the amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest. Accordingly, the amounts presented for the years ended
December 31, 2016
,
2015
and
2014
may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented.
The following summarizes the components of our stock-based compensation expense under the Stock Plan and the Danaher Plans for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Stock Awards:
|
|
|
|
|
|
|
Pretax compensation expense
|
$
|
28.1
|
|
|
$
|
22.5
|
|
|
$
|
19.3
|
|
|
Income tax benefit
|
(9.3
|
)
|
|
(7.5
|
)
|
|
(6.1
|
)
|
|
Stock Award expense, net of income taxes
|
18.8
|
|
|
15.0
|
|
|
13.2
|
|
|
Stock options:
|
|
|
|
|
|
|
Pretax compensation expense
|
17.2
|
|
|
12.7
|
|
|
11.5
|
|
|
Income tax benefit
|
(5.8
|
)
|
|
(4.3
|
)
|
|
(3.8
|
)
|
|
Stock option expense, net of income taxes
|
11.4
|
|
|
8.4
|
|
|
7.7
|
|
|
Total stock-based compensation:
|
|
|
|
|
|
|
Pretax compensation expense
|
45.3
|
|
|
35.2
|
|
|
30.8
|
|
|
Income tax benefit
|
(15.1
|
)
|
|
(11.8
|
)
|
|
(9.9
|
)
|
|
Total stock-based compensation expense, net of income taxes
|
$
|
30.2
|
|
|
$
|
23.4
|
|
|
$
|
20.9
|
|
The following summarizes the unrecognized compensation cost for the Stock Plan awards as of
December 31, 2016
. This compensation cost is expected to be recognized over a weighted average period of approximately
three years
, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
|
|
|
|
|
|
|
|
Stock Awards
|
$
|
43.3
|
|
|
Stock options
|
42.3
|
|
|
Total unrecognized compensation cost
|
$
|
85.6
|
|
Stock Options
The following summarizes the assumptions used in the Black-Scholes model to value stock options granted under the Stock Plan and the Danaher Plans during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Risk-free interest rate
|
1.21% - 1.77%
|
|
|
1.6% - 2.2%
|
|
|
1.7% - 2.4%
|
|
|
Volatility
(a)
|
24.3
|
%
|
|
24.3
|
%
|
|
22.4
|
%
|
|
Dividend yield
(b)
|
0.6
|
%
|
|
0.6
|
%
|
|
0.5
|
%
|
|
Expected years until exercise
|
5.5 - 8.0
|
|
|
5.5 - 8.0
|
|
|
5.5 - 8.0
|
|
|
|
|
|
|
|
|
|
(a)
Weighted average volatility post-Separation was estimated based on an average historical stock price volatility of a group of peer companies given our limited trading history. Weighted average volatility for periods prior to the Separation was based on implied volatility from traded options on Danaher’s stock and the historical volatility of Danaher’s stock.
|
|
(b)
The dividend yield post-Separation is calculated by dividing our annual dividend, based on the most recent quarterly dividend rate, by Fortive’s closing stock price on the grant date. The dividend yields for periods prior to the Separation were calculated by dividing Danaher’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.
|
The following summarizes option activity under the Stock Plan and the Danaher Plans for the years ended
December 31, 2016
,
2015
and
2014
(in millions, except price per share and numbers of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
(years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2014
|
7.0
|
|
|
$
|
41.81
|
|
|
|
|
|
|
Granted
|
0.8
|
|
|
77.63
|
|
|
|
|
|
|
Exercised
|
(1.3
|
)
|
|
33.78
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.2
|
)
|
|
57.91
|
|
|
|
|
|
|
Outstanding as of December 31, 2014
|
6.3
|
|
|
47.66
|
|
|
|
|
|
|
Granted
|
0.9
|
|
|
87.96
|
|
|
|
|
|
|
Exercised
|
(1.2
|
)
|
|
35.28
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.2
|
)
|
|
58.77
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
5.8
|
|
|
56.00
|
|
|
|
|
|
|
Granted
|
1.8
|
|
|
|
|
|
|
|
|
Exercised
|
(1.6
|
)
|
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.8
|
)
|
|
|
|
|
|
|
|
Aggregate impact of conversion related to the Separation
(a)
|
5.5
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
10.7
|
|
|
$
|
33.23
|
|
|
6
|
|
$
|
218.1
|
|
|
Vested and expected to vest as of December 31, 2016
(b)
|
10.6
|
|
|
$
|
32.40
|
|
|
6
|
|
$
|
213.9
|
|
|
Vested as of December 31, 2016
|
4.8
|
|
|
$
|
24.79
|
|
|
4
|
|
$
|
139.3
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The “Aggregate impact of conversion related to the Separation” represents the additional stock options issued as a result of the Separation by applying the “concentration method” to convert employee options based on the ratio of the fair value of Danaher and Fortive common stock calculated using the closing prices as of July 1, 2016.
|
|
(b)
The “expected to vest” options are the net unvested options that remain after applying the forfeiture rate assumption to total unvested options.
|
The weighted average exercise price of stock options granted, exercised, canceled/forfeited is not included in the table above for the full year ended
December 31, 2016
as activity during this period included the Conversion Awards. The weighted average exercise price of Fortive stock options granted, exercised and canceled/forfeited during the six months ended
December 31, 2016
was
$51.84
,
$26.13
, and
$40.57
, respectively.
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing stock price of Fortive common stock on the last trading day of
2016
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on
December 31, 2016
. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock.
Options outstanding as of
December 31, 2016
are summarized below (in millions; except price per share and numbers of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Vested
|
|
Exercise Price
|
Shares
|
|
Average Exercise Price
|
|
Average Remaining Life
(in years)
|
|
Shares
|
|
Average Exercise Price
|
|
$12.83 - $21.81
|
2.0
|
|
|
$
|
17.25
|
|
|
2
|
|
2.0
|
|
|
$
|
17.25
|
|
|
$21.82 - $26.43
|
1.9
|
|
|
24.97
|
|
|
5
|
|
1.5
|
|
|
24.85
|
|
|
$26.44 - $35.44
|
1.3
|
|
|
31.71
|
|
|
6
|
|
0.6
|
|
|
31.97
|
|
|
$35.45 - $40.12
|
1.4
|
|
|
37.84
|
|
|
7
|
|
0.4
|
|
|
38.08
|
|
|
$40.13 - $54.12
|
4.1
|
|
|
$
|
43.74
|
|
|
9
|
|
0.3
|
|
|
$
|
43.58
|
|
|
Total shares
|
10.7
|
|
|
|
|
|
|
4.8
|
|
|
|
The following summarizes aggregate intrinsic value, cash receipts and tax benefits realized related to stock option exercise activity under the Stock Plan and the Danaher Plans for the years ended
December 31, 2016
,
2015
and
2014
(in millions):
Date:
