NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW
Fortive Corporation (“Fortive” or “the Company”) is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation solutions, transportation technology, sensing, 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 50 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 businesses provide product realization and field solutions 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; portable gas detection equipment, consumables, and software as a service (SaaS) offerings including safety/user behavior, asset management, and compliance monitoring; subscription-based technical, analytical, and compliance services to determine occupational and environmental radiation exposure; software, data analytics and services for critical infrastructure in utility, industrial, energy, construction, facilities management, public safety, mining, and healthcare applications. Product realization services and products help developers and engineers across the end-to-end product creation cycle from concepts to 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 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. Our Franchise Distribution business manufactures and distributes professional tools and a full line of wheel service equipment.
On October 1, 2018, we completed the split-off of businesses in our automation and specialty platform (excluding our Hengstler and Dynapar businesses) (the “A&S Business”) to our shareholders who elected to exchange shares of our common stock for all issued and outstanding shares of Stevens Holding Company, Inc. (“Stevens”), the entity we incorporated to hold the A&S Business. The split-off was immediately followed by the merger of Stevens with a subsidiary of Altra Industrial Motion Corp. (“Altra”). Our shareholders who participated in the exchange offer tendered approximately 15.8 million shares of our common stock in exchange for 35.0 million shares of Altra. Concurrently with such split-off, we sold directly to Altra the remainder of the assets and liabilities of A&S Business that were not otherwise contributed to Stevens. Accordingly, the A&S Business have been reported as discontinued operations in our Consolidated and Combined Statements of Income, and the related assets and liabilities have been presented as assets and liabilities of discontinued operations in the Consolidated and Combined Balance Sheets for all periods presented. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note 4 for additional information on discontinued operations. Prior to the disposition, the A&S Business was reported in our Industrial Technologies segment.
Prior to our separation from Danaher Corporation (“Danaher” or “Former Parent”) on July 2, 2016 (the “Separation”), our businesses were comprised of certain Danaher operating units (the “Fortive Businesses”). Refer to Note 20 for additional information regarding the Separation.
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”). Certain reclassifications have been made to prior year financial information to conform to the current period presentation. Unless otherwise indicated, all amounts in the Notes to the Consolidated and Combined Financial Statements refer to continuing operations.
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 in the accompanying Consolidated 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 $49 million, $38 million and $31 million of expense associated with doubtful accounts for the years ended December 31, 2018, 2017 and 2016, respectively.
Included in other assets on the Consolidated Balance Sheets as of December 31, 2018 and 2017 are $263 million and $247 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 net realizable value 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 net realizable value 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. Amortization of capital lease assets is included in depreciation expense as a component of SG&A.
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. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
Product Sales include revenues from the sale of products and equipment, which includes our software as a service product offerings and equipment rentals.
Service Sales includes revenues from extended warranties, post-contract customer support, maintenance contracts or services, contract labor to perform ongoing service at a customer location, and services related to previously sold products.
For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.
Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract; these allowances and rebates are reflected as a reduction in the contract transaction price. Significant judgment is exercised in determining product returns, customer allowances and rebates, and are estimated based on historical experience and known trends.
Most of our sales contracts contain standard terms and conditions. We evaluate contracts to identify distinct goods and services promised in the contract (performance obligations). Sometimes this evaluation involves judgment to determine whether the goods or services are highly dependent on or highly interrelated with one another, or whether such goods or services significantly modify or customize one another. Certain customer arrangements include multiple performance obligations, 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. We allocate the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation sometimes requires significant judgment.
Our principal terms of sale are FOB Shipping Point, or equivalent, and, as such, we primarily record revenue upon shipment as we have transferred control to the customer at that point and our performance obligations are satisfied. We evaluate contracts with delivery terms other than FOB Shipping Point and recognize revenue when we have transferred control and satisfied our performance obligations. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation, other services noted above or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Further, 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.
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.
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 14 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.
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. 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 17 for additional information on the stock-based compensation plans.
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 period prior to the Separation.
Income Taxes—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 13 for additional information.
As discussed in Note 13, for the 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 for the period prior to the Separation 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.
Accumulated Other Comprehensive Income (Loss)—Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. We have designated our Euro-denominated commercial paper and ¥13.8 billion senior unsecured term facility loan as net investment hedges of our investment in certain foreign operations. Accordingly, foreign currency transaction gains or losses on the debt are deferred in the foreign currency translation component of accumulated OCI as an offset to the foreign currency translation adjustments on our investments in foreign subsidiaries. We recognized gains of $9.4 million for the year ended December 31, 2018, losses of $18.8 million for the year ended December 31, 2017, and gains of $0.6 million for the year ended December 31, 2016 in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. The Company recorded no ineffectiveness from its net investment hedges during the years ended December 31, 2018, 2017 and 2016.
The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions):
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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, 2016
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$
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51.2
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|
|
$
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(65.6
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)
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$
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(14.4
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)
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|
Other comprehensive income (loss) before reclassifications:
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|
|
|
|
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Increase (decrease)
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(123.8
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)
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|
(13.8
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)
|
|
(137.6
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)
|
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Income tax impact
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—
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|
|
2.0
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|
|
2.0
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|
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Other comprehensive income (loss) before reclassifications, net of income taxes
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(123.8
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)
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(11.8
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)
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|
(135.6
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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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5.5
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(a)
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5.5
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Income tax impact
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—
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|
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(1.3
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)
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|
(1.3
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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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|
|
4.2
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|
|
4.2
|
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|
Net current period other comprehensive income (loss):
|
(123.8
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)
|
|
(7.6
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)
|
|
(131.4
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)
|
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Balance, December 31, 2016
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$
|
(72.6
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)
|
|
$
|
(73.2
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)
|
|
$
|
(145.8
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)
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Increase (decrease)
|
136.6
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|
|
(3.5
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)
|
|
133.1
|
|
|
Income tax impact
|
—
|
|
|
0.9
|
|
|
0.9
|
|
|
Other comprehensive income (loss) before reclassifications, net of income taxes
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136.6
|
|
|
(2.6
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)
|
|
134.0
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
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|
|
|
|
|
|
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)
|
136.6
|
|
|
1.6
|
|
|
138.2
|
|
|
Balance, December 31, 2017
|
$
|
64.0
|
|
|
$
|
(71.6
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)
|
|
$
|
(7.6
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)
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Increase (decrease)
|
(127.3
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)
|
|
0.3
|
|
|
(127.0
|
)
|
|
Income tax impact
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Other comprehensive income (loss) before reclassifications, net of income taxes
|
(127.3
|
)
|
|
0.1
|
|
|
(127.2
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Increase (decrease)
|
—
|
|
|
4.3
|
|
(a)
|
4.3
|
|
|
Income tax impact
|
—
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes:
|
—
|
|
|
3.5
|
|
|
3.5
|
|
|
Net current period other comprehensive income (loss)
|
(127.3
|
)
|
|
3.6
|
|
|
(123.7
|
)
|
|
Divestiture of A&S Business
|
34.0
|
|
|
10.7
|
|
|
44.7
|
|
|
Balance, December 31, 2018
|
$
|
(29.3
|
)
|
|
$
|
(57.3
|
)
|
|
$
|
(86.6
|
)
|
|
|
|
|
|
|
|
|
(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) and also includes activity related to the divestiture of the A&S Business.
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|
(b) Includes balances relating to employee defined benefit plans, supplemental executive retirement plans and other postretirement employee benefit 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.
New Accounting Standards
In January 2017, the FASB issued 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. This standard is effective for us beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on 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. The standard also requires lessees and lessors to disclose the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from the current standard. In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provided additional implementation guidance on the previously issued ASU. This standard is effective for us beginning January 1, 2019, and it also provides for certain practical expedients that we plan to elect. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional transition method that allows the initial application of the lease standard at the adoption date using a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to adopt this standard on January 1, 2019 utilizing the new transition method. Based on our efforts to date, we expect the recognition of the right-of-use asset and lease liability for our real estate and equipment leases will have a material impact on the Consolidated Balance Sheets, and we are still assessing the impact of this guidance on our recent acquisitions. We do not expect this standard to have a material impact on our future Consolidated Statements of Earnings and do not expect the adoption of this guidance to impact our ability to comply with our debt covenants.
NOTE 3. ACQUISITIONS
We continually evaluate potential mergers, acquisitions and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive areas. We have completed a number of acquisitions that have been accounted for as purchases and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors including the complimentary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complimentary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings or cash flows) and 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.
We make an initial allocation of the purchase price at the date of acquisition based on 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 assets and evaluating the tax impact of certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
The following describes our acquisition activity for the three years ended December 31, 2018.
Completed Acquisitions in 2018
Accruent
On September 6, 2018, we acquired Athena SuperHoldCo, Inc., including Accruent, LLC (“Accruent”), a privately-held, leading provider of facilities asset management software, for a total purchase price of approximately $2.0 billion net of acquired cash (the “Accruent Acquisition”). Accruent is a recognized leader in the facilities asset management industry, combining deep domain and industry capabilities with an integrated, cloud-based framework that provides insights spanning the full lifecycle of real estate, facilities and asset management. Accruent serves over 10,000 global customers, and helps assure clients fulfill the mission of their organization by extending the lifecycle of assets, monitoring full compliance and reducing safety risks. Accruent is headquartered in Austin, Texas, and is included in our the Professional Instrumentation Segment. Accruent generated annual revenues of approximately $200 million in 2017. We financed the Accruent Acquisition with available cash and proceeds from our financing activities. We preliminarily recorded approximately $1.1 billion of goodwill related to the Accruent Acquisition which is not tax deductible.
Gordian
On July 27, 2018, we acquired TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service, for a total purchase price of $778 million net of cash acquired (the “Gordian Acquisition”). Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions designed to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facility metrics databases via a subscription-based model. Gordian is headquartered in Greenville, South Carolina, and is included in our Professional Instrumentation segment. Gordian generated annual revenues of approximately $110 million in 2017. We financed the Gordian Acquisition with available cash. We preliminarily recorded approximately $429 million of goodwill related to the Gordian Acquisition which is not tax deductible.
Revenue and operating losses attributable to these acquisitions was $115 million and $51 million for the year ended December 31, 2018, respectively.
In addition to the acquisitions of Accruent and Gordian, during 2018, we acquired two businesses for total consideration of $44 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 acquired company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $35 million. We preliminarily recorded an aggregate of $31 million of goodwill related to these acquisitions.
During 2017, we acquired three businesses for total consideration of $1.56 billion 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 acquired company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $389 million. We recorded an aggregate of $1.04 billion of goodwill related to these acquisitions.
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 acquired company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $47 million. We recorded an aggregate of $113 million of goodwill related to these acquisitions.
The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Accounts receivable
|
$
|
86.7
|
|
|
$
|
103.7
|
|
|
$
|
5.2
|
|
|
Inventories
|
3.9
|
|
|
37.3
|
|
|
2.2
|
|
|
Property, plant and equipment
|
7.1
|
|
|
137.1
|
|
|
0.6
|
|
|
Goodwill
|
1,601.2
|
|
|
1,035.2
|
|
|
113.2
|
|
|
Other intangible assets, primarily customer relationships, trade names and technology
|
1,345.8
|
|
|
587.8
|
|
|
82.7
|
|
|
Trade accounts payable
|
(9.9
|
)
|
|
(18.7
|
)
|
|
(1.5
|
)
|
|
Other assets and liabilities, net
|
(219.7
|
)
|
|
(289.0
|
)
|
|
(12.3
|
)
|
|
Previously held investment
|
—
|
|
|
(36.8
|
)
|
|
—
|
|
|
Net cash consideration
|
$
|
2,815.1
|
|
|
$
|
1,556.6
|
|
|
$
|
190.1
|
|
The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the individually significant acquisitions in 2018 discussed above, and all of the other 2018 acquisitions as a group ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruent
|
|
Gordian
|
|
Other
|
|
Total
|
|
Accounts receivable
|
$
|
54.3
|
|
|
$
|
28.7
|
|
|
$
|
3.7
|
|
|
$
|
86.7
|
|
|
Inventories
|
—
|
|
|
—
|
|
|
3.9
|
|
|
3.9
|
|
|
Property, plant and equipment
|
4.1
|
|
|
2.6
|
|
|
0.4
|
|
|
7.1
|
|
|
Goodwill
|
1,141.0
|
|
|
428.9
|
|
|
31.3
|
|
|
1,601.2
|
|
|
Other intangible assets, primarily customer relationships, trade names and technology
|
953.0
|
|
|
386.0
|
|
|
6.8
|
|
|
1,345.8
|
|
|
Trade accounts payable
|
(8.8
|
)
|
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(9.9
|
)
|
|
Other assets and liabilities, net
|
(150.2
|
)
|
|
(67.1
|
)
|
|
(2.4
|
)
|
|
(219.7
|
)
|
|
Net cash consideration
|
$
|
1,993.4
|
|
|
$
|
778.1
|
|
|
$
|
43.6
|
|
|
$
|
2,815.1
|
|
We incurred approximately $25 million of pretax transaction-related costs related to these four acquisitions in 2018 and incurred approximately $19 million of pretax transaction-related costs in 2017, which were primarily for banking fees, legal fees, amounts paid to other third-party advisers, and other change in control costs. Transaction-related costs for acquisitions closed in 2016 were not material. Transaction-related costs are recorded in SG&A.
We recorded certain adjustments to the preliminary purchase price allocation of acquisitions that closed during 2018 that resulted in a net increase of $61 million to goodwill. Purchase price allocation adjustments recorded in 2018 that related to acquisitions closed in 2017 were immaterial.
Pro Forma Financial Information (Unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the 2018 and 2017 acquisitions as if they had occurred as of January 1, 2017. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time ($ in millions except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Sales
|
$
|
6,707.3
|
|
|
$
|
6,407.5
|
|
|
Net earnings from continuing operations
|
$
|
834.6
|
|
|
$
|
707.6
|
|
|
Diluted net earnings per share from continuing operations
|
$
|
2.38
|
|
|
$
|
2.01
|
|
Pending Acquisition
Advanced Sterilization Products
On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. On September 20, 2018, Ethicon, Inc. accepted our offer and countersigned the purchase agreement. The transaction is expected to close after the end of the first quarter of 2019 and is subject to customary closing conditions.
ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.
NOTE 4. DISCONTINUED OPERATIONS
On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp. (“Altra”) in a tax-efficient Reverse Morris Trust transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems that were previously reported within our Industrial Technologies segment. On October 1, 2018, we completed the split-off of the A&S Business. The total consideration received was $2.7 billion and consisted of (i) $1.3 billion through a fully-subscribed exchange offer, in which we accepted and subsequently retired 15,824,931 shares of our own common stock from our stockholders in exchange for the 35,000,000 shares of common stock of Stevens Holding Company, Inc.; (ii) $1.0 billion in cash paid to us for the direct sales of certain assets and liabilities of the A&S Business; (iii) $250.0 million as part of a non-cash debt-for-debt exchange that reduced outstanding indebtedness of Fortive, which was inclusive of accrued interest and related fees; and (iv) $150 million in cash paid to us by Stevens Holding Company, Inc. as a dividend. We recognized an after-tax gain on the transaction of $1.9 billion.
The accounting requirements for reporting the disposition of the A&S Business as a discontinued operation were met when the separation and merger were completed. Accordingly, the accompanying consolidated financial statements for all periods presented reflect this business as discontinued operations.
We incurred approximately $77 million of pretax transaction-related costs associated with the divestiture during the year ended December 31, 2018, which was primarily for professional fees. These amounts are recorded in the gain on disposition of discontinued operations before income taxes.
We are providing certain support services under transition services agreements, and the impact of these services on our consolidated and combined financial statements was immaterial.
The key components of income from discontinued operations for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Sales
|
$
|
750.5
|
|
|
$
|
900.0
|
|
|
$
|
846.1
|
|
|
Cost of sales
|
(438.9
|
)
|
|
(522.9
|
)
|
|
(497.2
|
)
|
|
Selling, general and administrative expenses
|
(92.3
|
)
|
|
(124.5
|
)
|
|
(126.0
|
)
|
|
Research and development expenses
|
(26.9
|
)
|
|
(36.7
|
)
|
|
(33.8
|
)
|
|
Gain on disposition of discontinued operations before income taxes
|
1,909.9
|
|
|
—
|
|
|
—
|
|
|
Interest expense and other
|
(4.6
|
)
|
|
(5.3
|
)
|
|
(2.6
|
)
|
|
Earnings before income taxes
|
2,097.7
|
|
|
210.6
|
|
|
186.5
|
|
|
Income taxes
|
(102.2
|
)
|
|
(50.4
|
)
|
|
(54.4
|
)
|
|
Net earnings
|
$
|
1,995.5
|
|
|
$
|
160.2
|
|
|
$
|
132.1
|
|
Interest expense related to the debt retired as part of the debt-for-debt exchange was allocated to discontinued operations for all periods presented.
The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company’s accompanying Consolidated Balance Sheets as of December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
ASSETS
|
|
|
|
|
Trade accounts receivable, net
|
$
|
4.2
|
|
|
$
|
123.1
|
|
|
Inventories
|
4.4
|
|
|
73.9
|
|
|
Other current assets
|
21.4
|
|
|
6.8
|
|
|
Total current assets, discontinued operations
|
30.0
|
|
|
203.8
|
|
|
Property, plant and equipment, net
|
—
|
|
|
102.1
|
|
|
Goodwill
|
—
|
|
|
538.2
|
|
|
Other intangible assets, net
|
—
|
|
|
19.6
|
|
|
Other non-current assets
|
—
|
|
|
7.3
|
|
|
Total other assets, discontinued operations
|
—
|
|
|
667.2
|
|
|
Total assets, discontinued operations
|
$
|
30.0
|
|
|
$
|
871.0
|
|
|
LIABILITIES
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Trade accounts payable
|
$
|
9.2
|
|
|
$
|
98.5
|
|
|
Accrued expenses and other current liabilities
|
21.5
|
|
|
59.5
|
|
|
Total current liabilities, discontinued operations
|
30.7
|
|
|
158.0
|
|
|
Other long-term liabilities
|
—
|
|
|
64.2
|
|
|
Total liabilities, discontinued operations
|
$
|
30.7
|
|
|
$
|
222.2
|
|
NOTE 5. INVENTORIES
The classes of inventory as of December 31 are summarized as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Finished goods
|
$
|
219.5
|
|
|
$
|
201.3
|
|
|
Work in process
|
103.1
|
|
|
73.1
|
|
|
Raw materials
|
251.9
|
|
|
232.3
|
|
|
Total
|
$
|
574.5
|
|
|
$
|
506.7
|
|
As of December 31, 2018 and 2017, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Land and improvements
|
$
|
63.1
|
|
|
$
|
64.9
|
|
|
Buildings and leasehold improvements
|
343.6
|
|
|
341.4
|
|
|
Machinery and equipment
|
1,059.2
|
|
|
1,028.5
|
|
|
Gross property, plant and equipment
|
1,465.9
|
|
|
1,434.8
|
|
|
Less: accumulated depreciation
|
(889.8
|
)
|
|
(824.4
|
)
|
|
Property, plant and equipment, net
|
$
|
576.1
|
|
|
$
|
610.4
|
|
No interest was capitalized 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 2018, we had thirteen reporting units for goodwill impairment testing. The carrying value of the goodwill included in each individual reporting unit ranges from $15 million to approximately $1.7 billion. No goodwill impairment charges were recorded for the years ended December 31, 2018, 2017 and 2016 and no “triggering” events have occurred subsequent to the performance of the 2018 annual impairment test. The factors used by management in its impairment analysis are inherently subject to uncertainty. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings.
The following is a rollforward of our goodwill by segment ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Instrumentation
|
|
Industrial Technologies
|
|
Total
|
|
Balance, January 1, 2017
|
$
|
2,423.7
|
|
|
$
|
1,021.4
|
|
|
$
|
3,445.1
|
|
|
Attributable to 2017 acquisitions
|
851.8
|
|
|
183.4
|
|
|
1,035.2
|
|
|
Foreign currency translation & other
|
55.5
|
|
|
24.5
|
|
|
80.0
|
|
|
Balance, December 31, 2017
|
3,331.0
|
|
|
1,229.3
|
|
|
4,560.3
|
|
|
Attributable to 2018 acquisitions
|
1,571.8
|
|
|
29.4
|
|
|
1,601.2
|
|
|
Foreign currency translation & other
|
(8.2
|
)
|
|
(20.2
|
)
|
|
(28.4
|
)
|
|
Balance, December 31, 2018
|
$
|
4,894.6
|
|
|
$
|
1,238.5
|
|
|
$
|
6,133.1
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
Patents and technology
|
$
|
614.0
|
|
|
$
|
(280.8
|
)
|
|
$
|
373.9
|
|
|
$
|
(252.4
|
)
|
|
Customer relationships and other intangibles
|
2,204.2
|
|
|
(589.9
|
)
|
|
1,214.7
|
|
|
(495.5
|
)
|
|
Total finite-lived intangibles
|
2,818.2
|
|
|
(870.7
|
)
|
|
1,588.6
|
|
|
(747.9
|
)
|
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
528.8
|
|
|
—
|
|
|
415.7
|
|
|
—
|
|
|
Total intangibles
|
$
|
3,347.0
|
|
|
$
|
(870.7
|
)
|
|
$
|
2,004.3
|
|
|
$
|
(747.9
|
)
|
During 2018 we acquired finite-lived intangible assets, consisting primarily of customer relationships and developed technology, with weighted average life of 12 years. During 2017, we acquired finite-lived intangible assets, consisting primarily of customer relations, with a weighted average life of 13 years. Refer to Note 3 for additional information on the intangible assets acquired.
Total intangible amortization expense in 2018, 2017 and 2016 was $135 million, $65 million and $85 million, respectively. Based on the intangible assets recorded as of December 31, 2018, amortization expense is estimated to be $201 million during 2019, $194 million during 2020, $191 million during 2021, $181 million during 2022 and $166 million during 2023.
NOTE 8. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value for assets and liabilities required to be carried at fair value and provide for certain disclosures related to the valuation methods used within the valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
|
|
|
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
|
|
|
|
|
•
|
Level 3 inputs are unobservable inputs based on our assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
|
Financial liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Market
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
—
|
|
|
$
|
20.8
|
|
|
—
|
|
|
$
|
20.8
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
—
|
|
|
$
|
20.0
|
|
|
—
|
|
|
$
|
20.0
|
|
Certain 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 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.
Fair Value of Financial Instruments
The carrying amounts and fair values of financial instruments as of December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
Current portion of long-term debt
|
$
|
455.6
|
|
|
$
|
454.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term debt, net of current maturities
|
$
|
2,974.7
|
|
|
$
|
2,867.5
|
|
|
$
|
4,056.2
|
|
|
$
|
4,051.8
|
|
As of December 31, 2018 and December 31, 2017, long-term borrowings were categorized as Level 1.
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, trade 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
|
Compensation and post retirement benefits
|
$
|
244.5
|
|
|
$
|
60.2
|
|
|
$
|
232.7
|
|
|
$
|
59.5
|
|
|
Claims, including self-insurance and litigation
|
10.9
|
|
|
74.4
|
|
|
20.3
|
|
|
70.5
|
|
|
Pension benefit obligations
|
7.8
|
|
|
117.6
|
|
|
10.0
|
|
|
126.5
|
|
|
Taxes, income and other
|
174.7
|
|
|
728.3
|
|
|
86.1
|
|
|
573.0
|
|
|
Deferred revenue
|
288.1
|
|
|
92.6
|
|
|
211.4
|
|
|
86.7
|
|
|
Sales and product allowances
|
49.8
|
|
|
—
|
|
|
39.5
|
|
|
—
|
|
|
Warranty
|
71.0
|
|
|
1.1
|
|
|
63.9
|
|
|
1.4
|
|
|
Other
|
152.5
|
|
|
51.7
|
|
|
151.4
|
|
|
52.1
|
|
|
Total
|
$
|
999.3
|
|
|
$
|
1,125.9
|
|
|
$
|
815.3
|
|
|
$
|
969.7
|
|
NOTE 10. FINANCING
The carrying value of the components of our debt as of December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
U.S. dollar-denominated commercial paper
|
$
|
390.1
|
|
|
$
|
665.1
|
|
|
Euro-denominated commercial paper
|
270.1
|
|
|
282.7
|
|
|
U.S. dollar variable interest rate term loan due 2019
|
—
|
|
|
500.0
|
|
|
Delayed-draw term loan due 2019
|
400.0
|
|
|
—
|
|
|
Yen variable interest rate term loan due 2022
|
125.7
|
|
|
122.4
|
|
|
1.80% senior unsecured notes due 2019
|
55.6
|
|
|
298.9
|
|
|
2.35% senior unsecured notes due 2021
|
747.0
|
|
|
745.9
|
|
|
3.15% senior unsecured notes due 2026
|
891.9
|
|
|
891.0
|
|
|
4.30% senior unsecured notes due 2046
|
546.9
|
|
|
546.8
|
|
|
Other
|
3.0
|
|
|
3.4
|
|
|
Long-term debt
|
3,430.3
|
|
|
4,056.2
|
|
|
Less: Current portion of long-term debt
|
455.6
|
|
|
—
|
|
|
Long-term debt, net of current maturities
|
$
|
2,974.7
|
|
|
$
|
4,056.2
|
|
Unamortized debt discounts, net of premiums and issuance costs of $17 million and $18 million as of December 31, 2018 and December 31, 2017, respectively, have been netted against the aggregate principal amounts of the components of debt table above.
Credit Facilities
U.S Dollar Variable Rate Term Loan
On June 16, 2016, we entered into a credit agreement with a syndicate of banks that provides for a three-year $500 million senior term facility that expires on June 16, 2019 (the “U.S. dollar variable rate term loan”) and we borrowed the entire $500 million of loans under the Term Facility. On July 20, 2018, we prepaid $325 million of our outstanding U.S dollar variable rate term loan due in 2019, and on October 5, 2018, we prepaid the remaining $175 million of the outstanding balance. The prepayment penalties associated with these payments were immaterial.
Delayed-draw Term Loan
On August 22, 2018, we entered into a credit facility agreement that provides for a 364-day delayed-draw term loan facility (“Delayed-Draw Term Loan”) with an aggregate principal amount of $1.75 billion. On September 5, 2018, we drew down the full $1.75 billion available under the Delayed-Draw Term Loan in order to fund, in part, the Accruent Acquisition. The
Delayed-Draw Term Loan bears interest at a variable rate equal to the LIBOR plus a ratings based margin currently at 75 basis points. During 2018, the annual effective rate was approximately 2.97% per annum. The Delayed-Draw Term Loan is prepayable at our option, and we are not permitted to re-borrow once the term loan is repaid. The terms and conditions, including covenants, applicable to the Delayed-Draw Term Loan are substantially similar to those applicable to the Revolving Credit Facility. On September 26, 2018 and on November 21, 2018, we repaid $400 million and $950 million of this loan, respectively.
Yen Variable Interest Rate Term Loan
On August 24, 2017, we entered into a term loan agreement that provides for a five-year ¥13.8 billion senior unsecured term facility (“Yen Term Loan”) that matures on August 24, 2022. We borrowed the entire ¥13.8 billion available under this facility on August 28, 2017, which yielded net proceeds of approximately $126 million. The Yen Term Loan bears interest at a rate equal to LIBOR plus 50 basis points, provided however that LIBOR may not be less than zero for the purposes of the Yen Term Loan. The annual effective interest rate was approximately 0.50% per annum as of and for the year ended December 31, 2018. The Yen Term Loan is pre-payable at our option, and re-borrowing is not permitted once the term loan is repaid.
The terms and conditions, including covenants, applicable to the Yen Term Loan are substantially similar to those applicable to the senior unsecured revolving credit facility established in 2016 (the “Revolving Credit Facility”) as described below.
Revolving Credit Facility
On June 16, 2016, we entered into a five-year $1.5 billion Revolving Credit Facility that expires on June 16, 2021. On November 30, 2018 we entered into an amended and restated agreement (“the Credit Agreement”) extending the availability period of the Revolving Credit Facility to November 30, 2023 and increased the facility to $2.0 billion. 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 $1.0 billion.
Borrowings 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”) plus a margin of between 80.5 and 117.5 basis points, depending on our long-term debt credit rating, 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 17.5 basis points, 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 7.0 and 20.0 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; provided that the maximum Consolidated Net Leverage Ratio will be increased to 4.00 to 1.00 for the four consecutive full fiscal quarters immediately following the consummation of any acquisition by us in which the purchase price exceeds $250 million. The Credit Agreement also requires us to maintain a Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of at least 3.50 to 1.00 as of the end of any fiscal quarter. The Credit Agreement also contains customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants. As of December 31, 2018 and December 31, 2017, we were in compliance with all covenants under the Credit Agreement and had no borrowings outstanding under the Revolving Credit Facility.
Commercial Paper Programs
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs. Under these programs, we may issue unsecured promissory notes with maturities not exceeding 397 and 183 days, respectively. Interest expense on the notes is paid at maturity and is generally based on our credit ratings at the time of issuance and prevailing short-term interest rates.
The details of our Commercial Paper Programs as of December 31, 2018 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Annual effective rate
|
|
Weighted average remaining maturity (in days)
|
|
U.S. dollar-denominated
|
$
|
390.1
|
|
|
2.98
|
%
|
|
18
|
|
Euro-denominated
|
$
|
270.1
|
|
|
(0.10
|
)%
|
|
58
|
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 Revolving Credit Facility to provide short-term funding. In such event, the cost of borrowings under the Revolving Credit Facility 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, 2018 as long-term debt in the accompanying Consolidated Balance Sheets as we have 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.
Proceeds from borrowings under the commercial paper programs are typically available for general corporate purposes, including acquisitions.
Long-Term Indebtedness
On June 20, 2016, we completed the private placement of each series of senior unsecured notes (the “Private 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. In connection with the issuance of the Private Notes, we entered into a registration rights agreement, pursuant to which we were 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 Private Notes for registered notes (“Registered Notes”) with substantially identical terms (“Exchange Offer”). On May 5, 2017 we filed a Form S-4 with the SEC (the “Registration Statement”), which Registration Statement was declared effective on May 17, 2017. On May 17, 2017, we launched the Exchange Offer, which expired on June 14, 2017. All Private Notes were tendered and exchanged for the following Registered Notes in the Exchange Offer:
|
|
|
|
•
|
$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. In connection with the debt exchange in the split-off of the A&S Business on October 1, 2018, we retired $244.7 million of these notes.
|
|
|
|
|
•
|
$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 Registered Notes is payable semi-annually in arrears on June 15 and December 15 of each year.
We received net proceeds, after underwriting discounts and arrangement fees from the issuance of the Registered 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.
Covenants and Redemption Provisions Applicable to Registered Notes
We may redeem the Registered Notes of the applicable series, in whole or in part, at any time prior to the dates specified in the Registered Notes indenture (the “Call Dates”) by paying the principal amount and the “make-whole” premium specified in the Registered 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 Registered Notes of the applicable series on or after the Call Dates without paying the “make-whole” premium specified in the Registered Notes indenture.
|
|
|
|
|
|
Registered 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 Registered 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 Registered Notes indenture. Except in connection with a change of control triggering event, the Registered Notes do not have any credit rating downgrade triggers that would accelerate the maturity of the Registered Notes.
The Registered 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, 2018, we were in compliance with all of our covenants.
Other
We made interest payments of $102 million during 2018, $87 million during 2017 and $41 million during 2016.
There are $456 million of minimum principal payments due under our total long-term debt during 2019. The future minimum principal payments due are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loans
|
|
Registered Notes
|
|
Total
|
|
2019
|
$
|
400.0
|
|
|
$
|
55.3
|
|
|
$
|
455.3
|
|
|
2020
|
—
|
|
|
—
|
|
|
—
|
|
|
2021
|
—
|
|
|
750.0
|
|
|
750.0
|
|
|
2022
|
125.7
|
|
|
—
|
|
|
125.7
|
|
|
2023
|
—
|
|
|
—
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
1,450.0
|
|
|
1,450.0
|
|
|
Total principal payments (a)
|
$
|
525.7
|
|
|
$
|
2,255.3
|
|
|
$
|
2,781.0
|
|
|
|
|
|
|
|
|
|
(a) Not included in the table above are discounts, net of premiums and issuance costs associated with the Notes and the Commercial Paper Programs, which totaled $17 million as of December 31, 2018, and have been recorded as an offset to the carrying amount of the related debt in the accompanying Consolidated Balance Sheet as of December 31, 2018. In addition, the table above does not include principal balances of $663.3 million under the Commercial Paper Programs and other financing balances of $3 million.
|
Shelf Registration Statement
On June 12, 2017, we filed a shelf registration statement on Form S-3 with the SEC (the “Shelf Registration Statement”) that registers an indeterminate amount of debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units that may be issued in the future in one or more offerings. Unless otherwise specified in the corresponding prospectus supplement, we expect to use net proceeds realized from future securities issuances off the Shelf Registration Statement for general corporate purposes, including without limitation repayment or refinancing of debt or other corporate obligations, acquisitions, capital expenditures, dividends and working capital.
Subsequent Events
Indenture, Notes and Guarantees
On February 22, 2019, we issued $1.437 billion in aggregate principal amount of our 0.875% Convertible Senior Notes due 2022 (the “Notes”), including $187.5 million in aggregate principal amount resulting from an exercise in full of an over-allotment option. The Notes were sold in a private placement to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
The Notes were issued pursuant to an indenture (the “Indenture”), dated February 22, 2019, between us, The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), and the guarantors party thereto. The Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by four of our wholly-owned domestic subsidiaries (the “Guarantees”). Under the Indenture, the Notes will be our senior unsecured obligations, and the Notes and the Guarantees will rank equally in right of payment with all of our and the guarantors’ existing and future liabilities that are not subordinated, but will effectively rank junior to any of our and the guarantors secured indebtedness to the extent of the value of the assets securing such indebtedness. In addition, the Notes are structurally subordinated to all of the existing and future obligations, including trade payables, of our subsidiaries that do not guarantee the Notes.
The Notes will bear interest at a rate of 0.875% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2019. The Notes will mature on February 15, 2022, unless earlier repurchased or converted in accordance with their terms prior to such date.
The Notes are convertible into shares of our common stock at an initial conversion rate of 9.3777 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $106.64 per share), subject to adjustment upon the occurrence of certain events. The initial conversion price represents a premium of approximately 32.5% to the $80.48 per share closing price of our common stock on February 19, 2019. Upon conversion of the Notes, holders will receive cash, shares of our common stock, or a combination thereof, at Fortive’s election. Our current intention is to settle such conversions through cash up to the principal amount of the converted Notes and, if applicable, through shares of our common stock for conversion value, if any, in excess of the principal amount of the converted Notes.
Prior to November 15, 2021, the Notes will be convertible only upon the occurrence of certain events and will be convertible thereafter at any time until the close of business on the business day immediately preceding the maturity date of the Notes.
The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events described in the Indenture occur prior to the maturity date, the conversion rate will be increased for a holder that elects to convert its Notes in connection with such corporate event in certain circumstances.
The Notes are not redeemable prior to maturity, and no sinking fund is provided for the Notes. If we undergo a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100% of the principal amount of the Notes to be repurchased plus any accrued and unpaid additional interest up to but excluding the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on all the Notes to be due and payable.
We intend to use the net proceeds from the offering to fund a portion of the cash consideration payable for, and certain costs associated with, our pending acquisition of ASP. If the acquisition of ASP is not completed, we will use the net proceeds of the offering for working capital and other general corporate purposes, which may include, without limitation, the funding of potential future acquisitions, capital expenditures, investments in or loans to our subsidiaries, refinancing of outstanding indebtedness, share repurchases, dividends and satisfaction of other obligations.
Amendment to Term Loan and Revolving Credit Facilities
In connection with the offering of the Notes, on February 21, 2019, we entered into amendments to the credit facility agreement associated with our Delayed-Draw Term Loan dated as of August 22, 2018, and our Credit Agreement, dated as of November 30, 2018, to exclude the Guarantees from the limitations on subsidiary indebtedness under the Agreements.
NOTE 11. PENSION PLANS
Certain 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. During 2017, we completed the acquisition of a company with a frozen U.S. pension plan, and, as such, there are no ongoing benefit accruals associated with the acquired U.S. pension plan.
The following sets forth the funded status of our plans as of the most recent actuarial valuations using measurement dates of December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
Non-U.S. Pension Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Change in pension benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
33.7
|
|
|
$
|
—
|
|
|
$
|
300.8
|
|
|
$
|
292.3
|
|
|
Service cost
|
—
|
|
|
—
|
|
|
1.3
|
|
|
3.5
|
|
|
Interest cost
|
1.2
|
|
|
0.3
|
|
|
5.7
|
|
|
5.8
|
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
0.2
|
|
|
1.3
|
|
|
Benefits paid and other
|
(1.3
|
)
|
|
(0.2
|
)
|
|
(9.5
|
)
|
|
(9.3
|
)
|
|
Plan combinations/acquisitions
|
—
|
|
|
33.1
|
|
|
—
|
|
|
1.5
|
|
|
Actuarial loss (gain)
|
(2.7
|
)
|
|
0.5
|
|
|
(7.0
|
)
|
|
(10.8
|
)
|
|
Amendments, settlements and curtailments
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
(17.6
|
)
|
|
Foreign exchange rate impact
|
—
|
|
|
—
|
|
|
(14.2
|
)
|
|
34.1
|
|
|
Benefit obligation at end of year
|
30.9
|
|
|
33.7
|
|
|
274.3
|
|
|
300.8
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
25.8
|
|
|
—
|
|
|
172.2
|
|
|
164.2
|
|
|
Actual return on plan assets
|
(1.2
|
)
|
|
0.5
|
|
|
(3.1
|
)
|
|
(8.3
|
)
|
|
Employer contributions
|
—
|
|
|
—
|
|
|
9.8
|
|
|
10.4
|
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
0.2
|
|
|
1.3
|
|
|
Amendments and settlements
|
—
|
|
|
—
|
|
|
(4.4
|
)
|
|
(5.1
|
)
|
|
Benefits paid and other
|
(1.3
|
)
|
|
(0.2
|
)
|
|
(9.5
|
)
|
|
(9.3
|
)
|
|
Plan combinations/acquisitions
|
—
|
|
|
25.5
|
|
|
—
|
|
|
0.9
|
|
|
Foreign exchange rate impact
|
—
|
|
|
—
|
|
|
(8.7
|
)
|
|
18.1
|
|
|
Fair value of plan assets at end of year
|
23.3
|
|
|
25.8
|
|
|
156.5
|
|
|
172.2
|
|
|
Funded status
|
$
|
(7.6
|
)
|
|
$
|
(7.9
|
)
|
|
$
|
(117.8
|
)
|
|
$
|
(128.6
|
)
|
The difference between the accumulated benefit obligation and the projected benefit obligation as of December 31, 2018 and 2017 is immaterial.
Weighted average assumptions used to determine benefit obligations at date of measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Discount rate
|
4.40
|
%
|
|
3.73
|
%
|
|
2.30
|
%
|
|
2.16
|
%
|
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
2.63
|
%
|
|
2.39
|
%
|
Components of net periodic pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
Non-U.S. Pension Benefits
|
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
3.5
|
|
|
$
|
3.1
|
|
|
Interest cost
|
1.2
|
|
|
0.3
|
|
|
5.7
|
|
|
5.8
|
|
|
7.2
|
|
|
Expected return on plan assets
|
(1.4
|
)
|
|
(0.3
|
)
|
|
(5.8
|
)
|
|
(6.2
|
)
|
|
(6.8
|
)
|
|
Amortization of net loss
|
—
|
|
|
—
|
|
|
2.6
|
|
|
3.8
|
|
|
4.1
|
|
|
Net curtailment and settlement loss recognized
|
—
|
|
|
—
|
|
|
1.0
|
|
|
0.9
|
|
|
0.2
|
|
|
Net periodic pension cost
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
|
$
|
4.8
|
|
|
$
|
7.8
|
|
|
$
|
7.8
|
|
Included in accumulated other comprehensive income (loss) as of December 31, 2018 are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service cost of $1 million ($1 million, net of tax) and unrecognized actuarial losses of approximately $74 million ($56 million, net of tax). The unrecognized prior service cost included in accumulated other comprehensive income (loss) and expected to be recognized in net periodic pension cost during the year ending December 31, 2019 is immaterial. The actuarial losses included in accumulated other comprehensive income (loss) and expected to be recognized in net periodic pension cost during the year ending December 31, 2019 is $3 million ($2 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 cost as of December 31, 2018. No plan assets are expected to be returned to us during the year ending December 31, 2019.
Weighted average assumptions used to determine net periodic pension cost at date of measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
|
Discount rate
|
3.73
|
%
|
|
3.83
|
%
|
|
2.16
|
%
|
|
2.12
|
%
|
|
2.96
|
%
|
|
Expected return on plan assets
|
5.75
|
%
|
|
5.75
|
%
|
|
3.48
|
%
|
|
3.54
|
%
|
|
4.29
|
%
|
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
2.39
|
%
|
|
3.03
|
%
|
|
2.91
|
%
|
The discount rates reflect the market rate on December 31 for high-quality fixed-income investments with maturities corresponding to our benefit obligations and are subject to change each year. For non-U.S. plans, 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.
The expected rates of return reflect the asset allocation of the plans and ranged from 1.75% to 6.00% in both 2018 and 2017 and 2.25% to 6.00% in 2016, respectively. The domestic plan 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 rates of return on asset assumptions for the non-U.S. plans were determined on a plan-by-plan basis based on the composition of assets.
On January 1, 2018, we retrospectively adopted ASU No. 2017-07, Compensation–Retirement Benefits (Topic 715). Accordingly, we report all components of net periodic pension costs, with the exception of service costs, in other non-operating expenses as a component of non-operating income in the accompanying Consolidated and Combined Statements of Earnings for all periods presented. Service costs are reported in cost of sales and selling, general and administrative expenses in the accompanying Consolidated Combined Statements of Earnings according to the classification of the participant’s compensation. This reclassification of prior year pension cost increased operating income by $4.0 million, and $4.8 million during the years ended December 31, 2017 and 2016, respectively.
Plan Assets
Plan assets are invested in various insurance contracts and equity and debt securities as determined by the administrator of each plan. Some of these investments, consisting of mutual funds and other private investments, are valued using the net asset value (“NAV”) method as a practical expedient. The investments valued using the NAV method are allocated across a broad array of funds and diversify the portfolio. The value of the plan assets directly affects the funded status of our pension plans recorded in the financial statements.
The fair values of our pension plan assets as of December 31, 2018, by asset category were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Market
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Cash and equivalents
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
|
Mutual funds
|
—
|
|
|
8.1
|
|
|
—
|
|
|
8.1
|
|
|
Insurance contracts
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
Total
|
$
|
2.7
|
|
|
$
|
10.3
|
|
|
$
|
—
|
|
|
$
|
13.0
|
|
|
Investments measured at NAV(a):
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
|
|
165.6
|
|
|
Other private investments
|
|
|
|
|
|
|
1.2
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
179.8
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2017, 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
|
$
|
5.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Mutual funds
|
—
|
|
|
9.7
|
|
|
—
|
|
|
9.7
|
|
|
Insurance contracts
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
Total
|
$
|
5.0
|
|
|
$
|
11.8
|
|
|
$
|
—
|
|
|
$
|
16.8
|
|
|
Investments measured at NAV(a):
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
|
|
180.2
|
|
|
Other private investments
|
|
|
|
|
|
|
1.0
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
198.0
|
|
|
|
|
|
|
|
|
|
|
|
(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 2018, we contributed $10 million to our non-U.S. defined benefit pension plans. During 2019, our cash contribution requirements for our non-U.S. defined benefit pension plans are expected to be approximately $8 million. We do not expect to make contributions to the U.S. plan during 2019.
The following sets forth benefit payments to participants, which reflect expected future service, as appropriate, expected to be paid by the plans in the periods indicated ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
All Pension Plans
|
|
2019
|
$
|
1.4
|
|
|
$
|
10.2
|
|
|
$
|
11.6
|
|
|
2020
|
1.4
|
|
|
10.2
|
|
|
11.6
|
|
|
2021
|
1.5
|
|
|
10.9
|
|
|
12.4
|
|
|
2022
|
1.6
|
|
|
12.5
|
|
|
14.1
|
|
|
2023
|
1.7
|
|
|
11.5
|
|
|
13.2
|
|
|
2024-2028
|
9.3
|
|
|
61.5
|
|
|
70.8
|
|
Defined Contribution 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 $53 million in 2018, $45 million in 2017 and $43 million in 2016.
NOTE 12. SALES
On January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policy under ASC Topic 605 Revenue Recognition. We recorded an immaterial transition adjustment to opening retained earnings as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact to sales as a result of applying Topic 606 was immaterial for the year ended December 31, 2018.
Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
Contract Assets — In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. Contract assets were immaterial as of December 31, 2018.
Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions. Deferred sales-related commissions are generally not capitalized as the amortization period is one year or less, and we elected to use the practical expedient to expense these sales commissions as incurred.
Impairment losses recognized on our contract-related assets were immaterial in the year ended December 31, 2018.
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to post contract support (“PCS”) and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in the accompanying Consolidated Balance Sheets.
Our contract liabilities consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Deferred revenue - current
|
$
|
288.1
|
|
|
211.4
|
|
|
Deferred revenue - noncurrent
|
92.6
|
|
|
86.7
|
|
|
Total contract liabilities
|
$
|
380.7
|
|
|
298.1
|
|
Acquisitions that closed in 2018 added $35 million of additional contract liabilities as of December 31, 2018. In the year ended December 31, 2018, we recognized $119 million of revenue related to our contract liabilities at January 1, 2018. The change in our contract liabilities from December 31, 2017 to December 31, 2018 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders and the average contract value for software contracts, with expected delivery dates to customers greater than one year from December 31, 2018, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.
The aggregate performance obligations attributable to each of our segments is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
2018
|
|
Professional Instrumentation
|
$
|
138.4
|
|
|
Industrial Technologies
|
399.1
|
|
|
Total remaining performance obligations
|
$
|
537.5
|
|
The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 45 percent within the next two years, approximately 75 percent within the next three years and substantially all within four years.
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by sales of product and services, geographic location, major product group and end market for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Disaggregation of revenue for the year ended December 31, 2018 is presented as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Professional Instrumentation
|
|
Industrial Technologies
|
|
Sales:
|
|
|
|
|
|
|
Sales of products
|
$
|
5,755.0
|
|
|
$
|
3,215.2
|
|
|
$
|
2,539.8
|
|
|
Sales of services
|
697.7
|
|
|
439.9
|
|
|
257.8
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
3,655.1
|
|
|
$
|
2,797.6
|
|
|
|
|
|
|
|
|
|
Geographic:
|
|
|
|
|
|
|
United States
|
$
|
3,539.6
|
|
|
$
|
1,829.6
|
|
|
$
|
1,710.0
|
|
|
China
|
569.0
|
|
|
459.5
|
|
|
109.5
|
|
|
Germany
|
234.7
|
|
|
138.7
|
|
|
96.0
|
|
|
All other (each country individually less than 5% of total sales)
|
2,109.4
|
|
|
1,227.3
|
|
|
882.1
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
3,655.1
|
|
|
$
|
2,797.6
|
|
|
|
|
|
|
|
|
|
Major Products Group:
|
|
|
|
|
|
|
Professional tools and equipment
|
$
|
4,989.7
|
|
|
$
|
2,962.1
|
|
|
$
|
2,027.6
|
|
|
Industrial automation, controls and sensors
|
541.0
|
|
|
411.0
|
|
|
130.0
|
|
|
Franchise distribution
|
640.0
|
|
|
—
|
|
|
640.0
|
|
|
All other
|
282.0
|
|
|
282.0
|
|
|
—
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
3,655.1
|
|
|
$
|
2,797.6
|
|
|
|
|
|
|
|
|
|
End markets:
|
|
|
|
|
|
|
Direct sales:
|
|
|
|
|
|
|
Retail fueling (a)
|
$
|
1,777.5
|
|
|
$
|
—
|
|
|
$
|
1,777.5
|
|
|
Industrial & Manufacturing
|
445.1
|
|
|
384.5
|
|
|
60.6
|
|
|
Vehicle repair (a)
|
581.5
|
|
|
—
|
|
|
581.5
|
|
|
Utilities & Power
|
172.3
|
|
|
171.0
|
|
|
1.3
|
|
|
Other
|
1,720.3
|
|
|
1,411.7
|
|
|
308.6
|
|
|
Total direct sales
|
4,696.7
|
|
|
1,967.2
|
|
|
2,729.5
|
|
|
Distributors(a)
|
1,756.0
|
|
|
1,687.9
|
|
|
68.1
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
3,655.1
|
|
|
$
|
2,797.6
|
|
|
|
|
|
|
|
|
|
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the year ended December 31, 2018 was $3,136.8 million.
|
Disaggregation of revenue for the year ended December 31, 2017 is presented as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Professional Instrumentation
|
|
Industrial Technologies
|
|
Sales:
|
|
|
|
|
|
|
Sales of products
|
$
|
5,173.3
|
|
|
$
|
2,813.2
|
|
|
$
|
2,360.1
|
|
|
Sales of services
|
582.8
|
|
|
325.9
|
|
|
256.9
|
|
|
Total
|
$
|
5,756.1
|
|
|
$
|
3,139.1
|
|
|
$
|
2,617.0
|
|
|
|
|
|
|
|
|
|
Geographic:
|
|
|
|
|
|
|
United States
|
$
|
3,148.7
|
|
|
$
|
1,486.0
|
|
|
$
|
1,662.7
|
|
|
China
|
498.4
|
|
|
416.7
|
|
|
81.7
|
|
|
Germany
|
217.2
|
|
|
128.7
|
|
|
88.5
|
|
|
All other (each country individually less than 5% of total sales)
|
1,891.8
|
|
|
1,107.7
|
|
|
784.1
|
|
|
Total
|
$
|
5,756.1
|
|
|
$
|
3,139.1
|
|
|
$
|
2,617.0
|
|
|
|
|
|
|
|
|
|
Major Products Group:
|
|
|
|
|
|
|
Professional tools and equipment
|
$
|
4,352.7
|
|
|
$
|
2,480.1
|
|
|
$
|
1,872.6
|
|
|
Industrial automation, controls and sensors
|
510.3
|
|
|
392.1
|
|
|
118.2
|
|
|
Franchise distribution
|
626.2
|
|
|
—
|
|
|
626.2
|
|
|
All other
|
266.9
|
|
|
266.9
|
|
|
—
|
|
|
Total
|
$
|
5,756.1
|
|
|
$
|
3,139.1
|
|
|
$
|
2,617.0
|
|
|
|
|
|
|
|
|
|
End markets:
|
|
|
|
|
|
|
Direct sales:
|
|
|
|
|
|
|
Retail fueling (a)
|
$
|
1,637.8
|
|
|
$
|
—
|
|
|
$
|
1,637.8
|
|
|
Industrial & Manufacturing
|
314.9
|
|
|
265.8
|
|
|
49.1
|
|
|
Vehicle repair (a)
|
569.3
|
|
|
—
|
|
|
569.3
|
|
|
Utilities & Power
|
228.2
|
|
|
227.3
|
|
|
0.9
|
|
|
Other
|
1,442.8
|
|
|
1,145.0
|
|
|
297.8
|
|
|
Total direct sales
|
4,193.0
|
|
|
1,638.1
|
|
|
2,554.9
|
|
|
Distributors(a)
|
1,563.1
|
|
|
1,501.0
|
|
|
62.1
|
|
|
Total
|
$
|
5,756.1
|
|
|
$
|
3,139.1
|
|
|
$
|
2,617.0
|
|
|
|
|
|
|
|
|
|
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the year ended December 31, 2017 was $2,877.8 million.
|
Disaggregation of revenue for the year ended December 31, 2016 is presented as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Professional Instrumentation
|
|
Industrial Technologies
|
|
Sales:
|
|
|
|
|
|
|
Sales of products
|
$
|
4,814.0
|
|
|
$
|
2,572.8
|
|
|
$
|
2,241.2
|
|
|
Sales of services
|
564.2
|
|
|
318.8
|
|
|
245.4
|
|
|
Total
|
$
|
5,378.2
|
|
|
$
|
2,891.6
|
|
|
$
|
2,486.6
|
|
|
|
|
|
|
|
|
|
Geographic:
|
|
|
|
|
|
|
United States
|
$
|
3,010.1
|
|
|
$
|
1,390.9
|
|
|
$
|
1,619.2
|
|
|
China
|
458.9
|
|
|
387.6
|
|
|
71.3
|
|
|
Germany
|
180.7
|
|
|
123.9
|
|
|
56.8
|
|
|
All other (each country individually less than 5% of total sales)
|
1,728.5
|
|
|
989.2
|
|
|
739.3
|
|
|
Total
|
$
|
5,378.2
|
|
|
$
|
2,891.6
|
|
|
$
|
2,486.6
|
|
|
|
|
|
|
|
|
|
Major Products Group:
|
|
|
|
|
|
|
Professional tools and equipment
|
$
|
4,017.1
|
|
|
$
|
2,252.8
|
|
|
$
|
1,764.3
|
|
|
Industrial automation, controls and sensors
|
474.9
|
|
|
370.8
|
|
|
104.1
|
|
|
Franchise distribution
|
618.2
|
|
|
—
|
|
|
618.2
|
|
|
All other
|
268.0
|
|
|
268.0
|
|
|
—
|
|
|
Total
|
$
|
5,378.2
|
|
|
2,891.6
|
|
|
2,486.6
|
|
|
|
|
|
|
|
|
|
End markets:
|
|
|
|
|
|
|
Direct sales:
|
|
|
|
|
|
|
Retail fueling (a)
|
$
|
1,552.5
|
|
|
$
|
—
|
|
|
$
|
1,552.5
|
|
|
Industrial & Manufacturing
|
358.1
|
|
|
304.2
|
|
|
53.9
|
|
|
Vehicle repair (a)
|
619.4
|
|
|
—
|
|
|
619.4
|
|
|
Utilities & Power
|
136.5
|
|
|
135.3
|
|
|
1.2
|
|
|
Other
|
1,315.9
|
|
|
1,116.8
|
|
|
199.1
|
|
|
Total direct sales
|
3,982.4
|
|
|
1,556.3
|
|
|
2,426.1
|
|
|
Distributors(a)
|
1,395.8
|
|
|
1,335.3
|
|
|
60.5
|
|
|
Total
|
$
|
5,378.2
|
|
|
$
|
2,891.6
|
|
|
$
|
2,486.6
|
|
|
|
|
|
|
|
|
|
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the year ended December 31, 2016 was $2,620.4 million.
|
NOTE 13. INCOME TAXES
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA represents a significant overhaul to the U.S. federal tax code. The TCJA impacts, among other things, U.S. corporate tax rates, business-related exclusions, deductions, and credits. During 2018, the U.S. Treasury Department issued significant initial guidance. We have completed the accounting for all of the impacts of the TCJA based upon the proposed regulations and guidance already provided by federal authorities as of December 31, 2018.
The U.S. Government is still issuing significant amounts of TCJA guidance that we expect to continue into the foreseeable future. On January 15, 2019, Treasury and the Internal Revenue Service issued final Treasury Regulations under Section 965 of the Internal Revenue Code involving the one-time transition tax on international earnings. These final Treasury Regulations are retroactive to the enactment of Section 965 of the TCJA on December 22, 2017. Any future adjustments resulting from guidance issued after December 31, 2018 will be considered as discrete income tax expense or benefit in the interim period the guidance is issued.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) that provides guidance on the financial statement implications of the TCJA. During 2018, the Company recorded net favorable adjustments and adjusted the effective tax rate for the true up of the 2017 provisional estimates pursuant to SAB 118.
During 2018, the Company made the election on the 2017 Federal Income Tax Return to pay the one-time TCJA Transition Tax liability over an eight-year period without interest, as allowed by TCJA.
Separation from Danaher and disposition of the A&S Business
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, the Company is liable for and has indemnified Danaher against all income tax liabilities involving “separate” filings for periods prior to the separation.
During 2018, the Company entered into a Tax Matters Agreement in connection with the split-off of the A&S Business. The Company remains liable for pre-disposition income tax liabilities related to the A&S Business.
Earnings and Income Taxes
Earnings before income taxes for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States
|
$
|
687.7
|
|
|
$
|
679.6
|
|
|
$
|
681.0
|
|
|
International
|
390.7
|
|
|
394.0
|
|
|
329.5
|
|
|
Total
|
$
|
1,078.4
|
|
|
$
|
1,073.6
|
|
|
$
|
1,010.5
|
|
The provision for income taxes for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal U.S.
|
$
|
48.3
|
|
|
$
|
170.0
|
|
|
$
|
197.2
|
|
|
Non-U.S.
|
96.3
|
|
|
69.8
|
|
|
59.5
|
|
|
State and local
|
7.8
|
|
|
10.5
|
|
|
29.7
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal U.S.
|
27.3
|
|
|
(62.0
|
)
|
|
(8.9
|
)
|
|
Non-U.S.
|
(19.6
|
)
|
|
(1.7
|
)
|
|
(4.7
|
)
|
|
State and local
|
—
|
|
|
2.7
|
|
|
(2.5
|
)
|
|
Income tax provision
|
$
|
160.1
|
|
|
$
|
189.3
|
|
|
$
|
270.3
|
|
Effective Income Tax Rate
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
|
|
|
2018
|
|
2017
|
|
2016
|
|
Statutory federal income tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
State income taxes (net of federal income tax benefit)
|
1.0
|
%
|
|
0.7
|
%
|
|
1.7
|
%
|
|
Foreign income taxed at different rates than U.S. statutory rate
|
0.8
|
%
|
|
(5.3
|
)%
|
|
(5.4
|
)%
|
|
Separation related adjustments for final resolution of uncertain tax positions
|
—
|
%
|
|
—
|
%
|
|
(2.3
|
)%
|
|
U.S. federal permanent differences related to the TCJA
|
(4.8
|
)%
|
|
(2.9
|
)%
|
|
(2.6
|
)%
|
|
Compensation related
|
(1.5
|
)%
|
|
(1.7
|
)%
|
|
—
|
%
|
|
Other
|
(0.5
|
)%
|
|
(1.6
|
)%
|
|
0.3
|
%
|
|
Effective income tax rate before adjustments related to the 2017 TCJA provisional estimates
|
16.0
|
%
|
|
24.2
|
%
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
Deferred tax revaluation
|
(1.3
|
)%
|
|
(19.2
|
)%
|
|
—
|
%
|
|
Transition tax
|
0.1
|
%
|
|
12.6
|
%
|
|
—
|
%
|
|
Total adjustments related to the 2017 TCJA provisional estimates
|
(1.2
|
)%
|
|
(6.6
|
)%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Effective income tax rate after adjustments related to the 2017 TCJA provisional estimates
|
14.8
|
%
|
|
17.6
|
%
|
|
26.7
|
%
|
Pursuant to SAB 118, the Company recorded cumulatively $83 million of net favorable adjustments, which is made up of net favorable adjustments of $13 million and $70 million recorded during the years ended December 31, 2018 and 2017, respectively. The 2018 effective tax rate included the true-up to the 2017 provisional estimates as a discrete adjustment. The 2017 provisional estimates for the one-time TCJA Transition Tax resulted in additional tax expense of $1 million and $135 million during the years ended December 31, 2018 and 2017, respectively. The provisional estimated tax benefit for the deferred tax revaluation resulted in additional tax benefit of $14 million and $205 million during the years ended December 31, 2018 and 2017, respectively.
Our effective tax rate for 2018 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, and the effect of adjustments to the provisional estimates recorded in 2017 related to the TCJA as permitted under SAB 118.
Our estimated effective tax rate for 2017, including provisional estimates of the TCJA, differs from the U.S. federal statutory rate of 35.0% due primarily to net favorable impacts associated with the TCJA, our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law, state tax impacts, and favorable adjustments related to differences between estimates included in the 2016 provision and amounts calculated on the 2016 U.S. income tax return filed in October 2017.
Our effective tax rate for 2016 differs from the U.S. federal statutory rate of 35.0% due primarily 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. The effective tax rate for 2016 includes benefits from the release of reserves resulting from expirations of statutes of limitations, primarily from periods prior to the Separation.
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. After the TCJA, our ability to obtain a tax benefit in certain countries that continue to have lower statutory tax rates than the United States is dependent on our levels of taxable income in such foreign countries. 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.
We are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states and foreign jurisdiction for the tax years 2010 to 2018. We review our global
tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.
We made income tax payments of $89 million, $196 million, and $110 million during the years ended December 31, 2018, December 31, 2017 and December 31, 2016, respectively.
Deferred Tax Assets and Liabilities
All deferred tax assets and liabilities have been classified as noncurrent and are included in other assets and other long-term liabilities in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
17.4
|
|
|
$
|
22.0
|
|
|
Inventories
|
17.9
|
|
|
25.7
|
|
|
Pension benefits
|
27.3
|
|
|
37.1
|
|
|
Environmental and regulatory compliance
|
10.1
|
|
|
16.6
|
|
|
Other accruals and prepayments
|
50.5
|
|
|
31.2
|
|
|
Deferred service income
|
7.1
|
|
|
14.5
|
|
|
Warranty services
|
19.7
|
|
|
27.5
|
|
|
Stock compensation expense
|
14.2
|
|
|
20.9
|
|
|
Tax credit and loss carryforwards
|
131.4
|
|
|
67.8
|
|
|
Valuation allowances
|
(40.3
|
)
|
|
(26.2
|
)
|
|
Total deferred tax assets
|
255.3
|
|
|
237.1
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
Property, plant and equipment
|
(11.7
|
)
|
|
(73.2
|
)
|
|
Insurance, including self-insurance
|
(155.2
|
)
|
|
(140.0
|
)
|
|
Goodwill and other intangibles
|
(597.1
|
)
|
|
(526.4
|
)
|
|
Other
|
(14.7
|
)
|
|
(11.2
|
)
|
|
Total deferred tax liabilities
|
(778.7
|
)
|
|
(750.8
|
)
|
|
Provisional estimate of the deferred tax asset revaluation
|
—
|
|
|
(51.4
|
)
|
|
Provisional estimate of the deferred tax liability revaluation
|
—
|
|
|
247.6
|
|
|
Net deferred tax liability
|
$
|
(523.4
|
)
|
|
$
|
(317.5
|
)
|
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 establish 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 $559 million and $340 million inclusive of valuation allowances of $13 million and $12 million as of December 31, 2018 and December 31, 2017, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax assets of $36 million and $22 million inclusive of valuation allowances of $27 million and $14 million as of December 31, 2018 and December 31, 2017, respectively. Our valuation allowance increased by $14 million and by $1 million during the year ended December 31, 2018 and 2017, respectively, due primarily to foreign net operating losses.
As of December 31, 2018, our U.S. and non-U.S. net operating loss carryforwards totaled $668 million, of which $281 million is related to federal net operating loss carryforwards, $203 million is related to state net operating loss carryforwards, and $184 million is related to non-U.S. net operating loss carryforwards. Included in deferred tax assets as of December 31, 2018 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $112 million, before applicable valuation allowances of $26 million. Certain of these losses can be carried forward indefinitely and others can be carried forward to various dates from 2019 through 2037. Recognition of some of these loss carryforwards is subject to an annual limit, which may cause them to expire before they are used.
As of December 31, 2018, our U.S. and non-U.S. tax credit carryforwards totaled $19 million, which is primarily related to U.S. tax credit carryforwards. Certain of these credits can be carried forward indefinitely and other can be carried forward to various dates from 2019 through 2037. As of December 31, 2018, we maintain a $12 million valuation allowance related to certain tax credit carryforwards from the Separation.
Unrecognized Tax Benefits
As of December 31, 2018, gross unrecognized tax benefits for continuing and discontinued operations were $133 million ($144 million total, including $16 million associated with interest and penalties, and net of the impact of $5 million of indirect tax benefits). As of December 31, 2017, gross unrecognized tax benefits for continuing and discontinued operations were $59 million ($69 million total, including $14 million associated with interest and penalties, and net of the impact of $4 million of indirect tax benefits). We recognized approximately $4 million in potential interest and penalties associated with uncertain tax positions during 2018, and this amount was not significant during 2017 and 2016. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Unrecognized tax benefits, beginning of year
|
$
|
59.0
|
|
|
$
|
28.6
|
|
|
$
|
169.9
|
|
|
Additions based on tax positions related to the current year
|
40.8
|
|
|
25.3
|
|
|
6.0
|
|
|
Additions for tax positions of prior years
|
39.0
|
|
|
7.8
|
|
|
0.4
|
|
|
Reductions for tax positions of prior years
|
(3.8
|
)
|
|
(1.9
|
)
|
|
(1.2
|
)
|
|
Lapse of statute of limitations
|
(3.5
|
)
|
|
(3.3
|
)
|
|
(1.3
|
)
|
|
Settlements
|
(6.4
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
Effect of foreign currency translation
|
(0.9
|
)
|
|
1.9
|
|
|
(0.4
|
)
|
|
Separation related adjustments (a)
|
9.2
|
|
|
1.2
|
|
|
(144.2
|
)
|
|
Unrecognized tax benefits, end of year
|
$
|
133.4
|
|
|
$
|
59.0
|
|
|
$
|
28.6
|
|
|
|
|
|
|
|
|
|
(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. In 2018 and 2017, reserves increased by an additional $9 million and $1 million, respectively, due primarily to unrecognized tax benefits from pre-spin periods.
|
Repatriation and Unremitted Earnings
The TCJA eliminated the U.S. tax cost for qualified repatriation beginning in 2018. Foreign cumulative earnings remain subject to foreign remittance taxes. As a result of the TCJA, during 2018, we repatriated an estimated $275 million subject to no foreign remittance taxes. This excludes foreign earnings: 1) required as working capital for local operating needs, 2) subject to local law restrictions, 3) subject to high foreign remittance tax costs, 4) previously invested in physical assets or acquisitions, or 5) intended for future acquisitions/growth. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign
remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.
The TCJA imposed a final U.S. tax on cumulative earnings from our foreign operations that we have previously made an assertion regarding the amount of such earnings intended for indefinite reinvestment. As of December 31, 2018, the earnings we plan to reinvest indefinitely outside of the United States for which foreign deferred taxes have not been provided was estimated at $2.2 billion.
NOTE 14. RESTRUCTURING AND OTHER RELATED CHARGES
Restructuring and other related charges for the years ended December 31 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Employee severance related
|
$
|
5.0
|
|
|
$
|
13.8
|
|
|
$
|
12.8
|
|
|
Facility exit and other related
|
0.9
|
|
|
2.5
|
|
|
2.6
|
|
|
Impairment charges
|
1.1
|
|
|
2.3
|
|
|
4.8
|
|
|
Total restructuring and other related charges
|
$
|
7.0
|
|
|
$
|
18.6
|
|
|
$
|
20.2
|
|
Substantially all restructuring activities initiated in 2018 were completed by December 31, 2018. We expect substantially all cash payments associated with remaining termination benefits recorded in 2018 will be paid during 2019. Substantially all planned restructuring activities related to the 2017 and 2016 plans have been completed. Impairment charges relate to certain intangible assets.
The nature of our restructuring and related activities initiated in 2018, 2017 and 2016 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 years ended December 31 by segment were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Professional Instrumentation
|
$
|
4.5
|
|
|
$
|
12.8
|
|
|
$
|
6.8
|
|
|
Industrial Technologies
|
2.5
|
|
|
5.8
|
|
|
13.4
|
|
|
Total
|
$
|
7.0
|
|
|
$
|
18.6
|
|
|
$
|
20.2
|
|
The table below summarizes the accrual balance and utilization by type of restructuring cost associated with our 2018 and 2017 restructuring actions ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of
January 1, 2017
|
|
Costs
Incurred
|
|
Paid/
Settled
|
|
Balance
as of
December
31, 2017
|
|
Costs
Incurred
|
|
Paid/
Settled
|
|
Balance as of December 31, 2018
|
|
Employee severance and related
|
$
|
8.3
|
|
|
$
|
13.8
|
|
|
$
|
(12.6
|
)
|
|
$
|
9.5
|
|
|
$
|
5.0
|
|
|
$
|
(9.6
|
)
|
|
$
|
4.9
|
|
|
Facility exit and other related
|
0.9
|
|
|
4.8
|
|
|
(4.9
|
)
|
|
0.8
|
|
|
2.0
|
|
|
(2.3
|
)
|
|
0.5
|
|
|
Total
|
$
|
9.2
|
|
|
$
|
18.6
|
|
|
$
|
(17.5
|
)
|
|
$
|
10.3
|
|
|
$
|
7.0
|
|
|
$
|
(11.9
|
)
|
|
$
|
5.4
|
|
The restructuring and other related charges incurred during 2018 include cash charges of $6 million and $1 million of noncash charges. The restructuring and other related charges incurred during 2017 included cash charges of $16 million and $2 million of noncash charges. The restructuring and other related charges incurred during 2016 included cash charges of $15 million and $5 million of noncash charges. These charges are reflected in the following captions in the accompanying Consolidated and Combined Statements of Earnings ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cost of sales
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
$
|
6.8
|
|
|
Selling, general and administrative expenses
|
5.0
|
|
|
16.6
|
|
|
13.4
|
|
|
Total
|
$
|
7.0
|
|
|
$
|
18.6
|
|
|
$
|
20.2
|
|
NOTE 15. 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 $54 million in 2019, $41 million in 2020, $32 million in 2021, $24 million in 2022, $14 million in 2023 and $16 million thereafter. Total rent expense for all operating leases was $64 million, $46 million and $46 million for the years ended December 31, 2018, 2017 and 2016, respectively.
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from ninety days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of our accrued warranty liability ($ in millions):
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
$
|
60.4
|
|
|
Accruals for warranties issued during the year
|
73.5
|
|
|
Settlements made
|
(70.2
|
)
|
|
Additions due to acquisitions
|
1.6
|
|
|
Effect of foreign currency translation
|
—
|
|
|
Balance, December 31, 2017
|
$
|
65.3
|
|
|
Accruals for warranties issued during the year
|
81.7
|
|
|
Settlements made
|
(77.2
|
)
|
|
Additions due to acquisitions
|
2.6
|
|
|
Effect of foreign currency translation
|
(0.3
|
)
|
|
Balance, December 31, 2018
|
$
|
72.1
|
|
NOTE 16. 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 our 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, 2018, we had a reserve of $14 million included in accrued expenses and other liabilities on the Consolidated 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 on an undiscounted basis.
All reserves for environmental liabilities 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, 2018 and 2017, we had approximately $138 million and $143 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 17. STOCK BASED COMPENSATION
In connection with the Separation and the related 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, restricted stock units (“RSUs”), performance stock units (“PSUs”), performance-based restricted stock awards (“RSAs”) and performance stock awards (“PSAs”) (collectively, “Stock Awards”), stock options or any other stock-based award. A total of 40 million shares of our common stock have been authorized for issuance under the Stock Plan. As of December 31, 2018, approximately 22 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 each 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 five years, 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 (as Conversion Awards), 2017, and 2018 PSAs and PSUs were granted under the Stock Plan. These awards vest based on our total shareholder return ranking relative to the S&P 500 Index.
Stock 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. 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 year ended December 31, 2018, approximately 217 thousand shares of Fortive common stock with an aggregate value of approximately $17 million, were withheld to satisfy this requirement. The tax withholding is treated as a reduction in additional paid-in capital in the accompanying Consolidated and Combined Statement of Changes in Equity.
We had no stock-based compensation plans prior to the Separation; however certain of our employees participated in the Danaher Plans, which provided for the grants of stock options, PSUs, and RSUs among other types of awards. Prior to the Separation, Danaher allocated stock-based compensation expense to the Company based on Fortive employees participating in the Danaher Plans. This is reflected in the accompanying Consolidated and Combined Statements of Earnings for the period prior to the Separation.
Outstanding performance-based RSUs and PSUs of Danaher held by our employees with pending performance goals of Danaher at the Separation date were canceled and replaced with Fortive RSAs and PSAs with comparable value, performance goals and vesting requirements. All other terms of these equity awards continued unchanged following the conversion or replacement.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of selling, general, and administrative expenses in the accompanying Consolidated and Combined Statements of Earnings. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest.
The following summarizes the components of our stock-based compensation expense under the Stock Plan and the Danaher Plans for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Stock Awards:
|
|
|
|
|
|
|
Pretax compensation expense
|
$
|
30.5
|
|
|
$
|
26.9
|
|
|
$
|
25.4
|
|
|
Income tax benefit
|
(6.3
|
)
|
|
(8.7
|
)
|
|
(8.4
|
)
|
|
Stock Award expense, net of income taxes
|
24.2
|
|
|
18.2
|
|
|
17.0
|
|
|
Stock options:
|
|
|
|
|
|
|
Pretax compensation expense
|
20.3
|
|
|
17.3
|
|
|
15.3
|
|
|
Income tax benefit
|
(4.2
|
)
|
|
(5.7
|
)
|
|
(5.1
|
)
|
|
Stock option expense, net of income taxes
|
16.1
|
|
|
11.6
|
|
|
10.2
|
|
|
Total stock-based compensation:
|
|
|
|
|
|
|
Pretax compensation expense
|
50.8
|
|
|
44.2
|
|
|
40.7
|
|
|
Income tax benefit
|
(10.5
|
)
|
|
(14.4
|
)
|
|
(13.5
|
)
|
|
Total stock-based compensation expense, net of income taxes
|
$
|
40.3
|
|
|
$
|
29.8
|
|
|
$
|
27.2
|
|
When stock options are exercised by the employee or Stock Awards vest, we derive a tax deduction measured by the excess of the market value on such date over the grant date price. As of January 1, 2017, we prospectively adopted ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). During the year ended December 31, 2018, we realized a tax benefit of $24 million related to stock options that were exercised and Stock Awards that vested. Accordingly, we recorded the excess of the tax benefit related to the exercise of stock options and vesting of Stock Awards over the expense recorded for financial statement reporting purposes (the “Excess Tax Benefit”) as a component of income tax expense and as an operating cash inflow in the accompanying consolidated and combined financial statements. During the years ended December 31, 2018 and 2017, such Excess Tax Benefits related to stock options that were exercised and Stock Awards that vested were $17 million for both respective periods.
Prior to the adoption of ASU No. 2016-09, we realized a tax benefit of $34.7 million during the year ended December 31, 2016 related to stock options that were exercised and Stock Awards that vested. The Excess Tax Benefit was recorded as a component of equity in the consolidated and combined financial statements. For the six months ended December 31, 2016, the Excess Tax Benefit was recorded as an increase to additional paid-in capital and is reflected as a financing cash inflow in the accompanying Consolidated and Combined Statements of Cash Flows. Prior to the Separation, the Excess Tax Benefit was recorded as an increase to Former Parent’s Investment.
The following summarizes the unrecognized compensation cost for the Stock Plan awards as of December 31, 2018. This compensation cost is expected to be recognized over a weighted average period of approximately three years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
|
|
|
|
|
|
|
|
Stock Awards
|
$
|
44.8
|
|
|
Stock options
|
46.2
|
|
|
Total unrecognized compensation cost
|
$
|
91.0
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
2.71% - 2.96%
|
|
|
1.9% - 2.26%
|
|
|
1.21% - 1.77%
|
|
|
Volatility (a)
|
18.8
|
%
|
|
20.9
|
%
|
|
24.3
|
%
|
|
Dividend yield (b)
|
0.4
|
%
|
|
0.5
|
%
|
|
0.6
|
%
|
|
Expected years until exercise
|
5.5 - 8.0
|
|
|
5.5 - 8.0
|
|
|
5.5 - 8.0
|
|
|
Weighted average fair value at date of grant
|
$
|
18.67
|
|
|
$
|
13.43
|
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
(a) Beginning August 2018, expected volatility was based on a weighted average blend of the company’s historical stock price volatility from July 2, 2016 (the date of separation) through the stock option grant date and the average historical stock price volatility of a group of peer companies for the expected term of the options. The weighted average volatility from July 2, 2016 to July 2018 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 the period 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 yield for the period prior to the Separation was 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, 2018, 2017 and 2016 (in millions, except price per share and numbers of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options(c)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
(years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2016
|
5.8
|
|
|
$
|
56.00
|
|
|
|
|
|
|
Granted
|
1.8
|
|
|
|
|
|
|
|
|
Exercised
|
(1.6
|
)
|
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.8
|
)
|
|
|
|
|
|
|
|
Aggregate impact of conversion related to the Separation (a)
|
4.2
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
9.4
|
|
|
33.23
|
|
|
|
|
|
|
Granted
|
1.7
|
|
|
58.07
|
|
|
|
|
|
|
Exercised
|
(1.0
|
)
|
|
24.77
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.4
|
)
|
|
45.12
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
9.7
|
|
|
38.09
|
|
|
|
|
|
|
Granted
|
1.7
|
|
|
76.67
|
|
|
|
|
|
|
Exercised
|
(1.4
|
)
|
|
28.99
|
|
|
|
|
|
|
Canceled/forfeited
|
(0.3
|
)
|
|
54.13
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
9.7
|
|
|
$
|
46.25
|
|
|
6.3
|
|
$
|
228.4
|
|
|
Vested and expected to vest as of December 31, 2018 (b)
|
9.6
|
|
|
$
|
45.35
|
|
|
6.2
|
|
$
|
226.0
|
|
|
Vested as of December 31, 2018
|
4.6
|
|
|
$
|
33.20
|
|
|
4.4
|
|
$
|
160.3
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(c) This table excludes the stock option activity of the A&S Business employees.
|
The weighted average exercise price of stock options granted, exercised, and 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 2018 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, 2018. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock.
Options outstanding as of December 31, 2018 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 - $24.59
|
1.1
|
|
|
$
|
20.73
|
|
|
2
|
|
1.1
|
|
|
$
|
20.73
|
|
|
$24.93 - $35.44
|
1.5
|
|
|
28.93
|
|
|
4
|
|
1.5
|
|
|
28.93
|
|
|
$36.58 - $40.12
|
0.9
|
|
|
37.68
|
|
|
5
|
|
0.7
|
|
|
37.71
|
|
|
$42.18 - $47.51
|
2.7
|
|
|
42.96
|
|
|
7
|
|
1.0
|
|
|
43.08
|
|
|
$57.26 - $71.85
|
1.8
|
|
|
57.39
|
|
|
8
|
|
0.3
|
|
|
57.43
|
|
|
$74.30 - $79.69
|
1.7
|
|
|
76.67
|
|
|
9
|
|
—
|
|
|
74.42
|
|
|
Total shares
|
9.7
|
|
|
|
|
|
|
4.6
|
|
|
|
The following summarizes aggregate intrinsic value and cash receipts related to stock option exercise activity under the Stock Plan and the Danaher Plans for the years ended December 31 (in millions):
Stock Awards
The following summarizes information related to Stock Award activity under the Stock Plan and the Danaher Plans for the years ended December 31, 2018, 2017 and 2016 (in millions; except price per share):
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Awards (b)
|
|
Weighted Average
Grant-Date
Fair Value
|
|
Unvested as of January 1, 2016
|
1.1
|
|
|
$
|
72.24
|
|
|
Granted
|
0.6
|
|
|
|
|
Vested
|
(0.3
|
)
|
|
|
|
Forfeited
|
(0.3
|
)
|
|
|
|
Aggregate impact of conversion related to the Separation (a)
|
1.0
|
|
|
|
|
Unvested as of December 31, 2016
|
2.1
|
|
|
39.20
|
|
|
Granted
|
0.5
|
|
|
57.79
|
|
|
Vested
|
(0.6
|
)
|
|
35.96
|
|
|
Forfeited
|
(0.1
|
)
|
|
43.94
|
|
|
Unvested as of December 31, 2017
|
1.9
|
|
|
45.92
|
|
|
Granted
|
0.6
|
|
|
77.78
|
|
|
Vested
|
(0.6
|
)
|
|
41.28
|
|
|
Forfeited
|
(0.1
|
)
|
|
53.23
|
|
|
Unvested as of December 31, 2018
|
1.8
|
|
|
$
|
57.63
|
|
|
|
|
|
|
|
(a) The “Aggregate impact of conversion related to the Separation” represents the additional Stock Awards issued as a result of the Separation by applying the “concentration method” to convert Stock Awards 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 table excludes the stock award activity of the A&S Business employees.
|
The weighted average grant date fair value of Stock Awards granted, vested, and forfeited is not included in the table above for the full year ended December 31, 2016 as activity during this period included the conversion of Stock Awards under the Danaher Plans into awards under the Stock Plan. The weighted average fair value of Stock Awards granted, vested, and forfeited during the six months ended December 31, 2016 was $46.25, $33.01, and $39.59, respectively.
NOTE 18. CAPITAL STOCK AND EARNINGS PER SHARE
Common Stock
Under our amended and restated certificate of incorporation, as of July 1, 2016, our authorized capital stock consists of 2.0 billion common shares with a par value of $0.01 per share and 15 million preferred shares with a par value of $0.01 per share.
Each share of our common stock entitles the holder to one vote on all matters to be voted upon by common stockholders. Our Board is authorized to issue shares of preferred stock in one or more series and has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The Board’s authority to issue preferred stock with voting rights or conversion rights that, if exercised, could adversely affect the voting power of the holders of common stock, could potentially discourage attempts by third parties to obtain control of the Company through certain types of takeover practices.
We declared and paid cash dividends per common share during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Per
Common Share
|
|
Amount
($ in millions)
|
|
2018:
|
|
|
|
|
First quarter
|
$
|
0.07
|
|
|
$
|
24.3
|
|
|
Second quarter
|
0.07
|
|
|
24.4
|
|
|
Third quarter
|
0.07
|
|
|
24.5
|
|
|
Fourth quarter
|
0.07
|
|
|
23.4
|
|
|
Total
|
$
|
0.28
|
|
|
$
|
96.6
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
First quarter
|
$
|
0.07
|
|
|
$
|
24.3
|
|
|
Second quarter
|
0.07
|
|
|
24.3
|
|
|
Third quarter
|
0.07
|
|
|
24.3
|
|
|
Fourth quarter
|
0.07
|
|
|
24.3
|
|
|
Total
|
$
|
0.28
|
|
|
$
|
97.2
|
|
|
|
|
|
|
|
The sum of the components of total dividends paid may not equal the total amount due to rounding.
|
Aggregate cash payments for the dividends paid to shareholders are recorded as dividends to shareholders in our Consolidated and Combined Statements of Changes in Equity and Consolidated and Combined Statements of Cash Flows.
On January 29, 2019 we declared a regular quarterly cash dividend of $0.07 per share payable on March 29, 2019 to common stockholders of record on February 22, 2019.
Mandatory Convertible Preferred Stock
On June 29, 2018, we issued 1,380,000 shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received net $1.34 billion in proceeds from the issuance of the MCPS, excluding $43 million of issuance costs. We used the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures.
In connection with the split-off of the A&S Business, on September 26, 2018, we triggered an anti-dilution adjustment pursuant to the terms of the MCPS and after giving affect to this adjustment, each then outstanding share of MCPS will convert automatically on July 1, 2021 (“Mandatory Conversion Date”) into between 10.9041 and 13.3575 common shares, subject to further anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the average volume weighted average price per share of our common stock over the 20 consecutive trading day period beginning on the 22nd scheduled trading day preceding the Mandatory Conversion Date. At any time prior to July 1, 2021, holders may elect to convert each share of the MCPS into shares of common stock at the rate of 10.9041, subject to further anti-dilution adjustments. In the event of a fundamental change, the MCPS will convert at the fundamental change rates specified in the certificate of designations, as adjusted, and the holders of MCPS would be entitled to a fundamental change make-whole dividend.
We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock in January, April, July and October of each year, commencing on October 1, 2018 and ending on July 1, 2021. Dividends that are declared will be payable on the dividend payment dates to holders of record on the immediately preceding March 15, June 15, September 15 and December 15 (each a “record date”), whether or not such holders convert their shares, or such shares are automatically converted, after the corresponding record date.
Dividends on our MCPS are payable on a cumulative basis when, as and if declared by our Board, at an annual rate of 5.0% of the liquidation preference of $1,000 per share (equivalent to $50.00 annually per share).
We declared and paid cash dividends on our MCPS during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Per
Preferred Share
|
|
Amount
($ in millions)
|
|
2018:
|
|
|
|
|
Third quarter
|
$
|
12.78
|
|
|
$
|
17.6
|
|
|
Fourth quarter
|
12.50
|
|
|
17.3
|
|
|
Total
|
$
|
25.28
|
|
|
$
|
34.9
|
|
On January 29, 2019 we declared a regular quarterly cash dividend of $12.50 per share on our MCPS payable on April 1, 2019 to preferred stockholders of record on March 15, 2019.
Net earnings per share
Basic net earnings per share (“EPS”) from continuing operations is calculated by dividing net earnings from continuing operations by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS from continuing operations is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans except where the inclusion of such shares would have an anti-dilutive impact.
For the years ended December 31, 2018, 2017 and 2016, the anti-dilutive options to purchase shares excluded from the diluted EPS calculation were immaterial. The impact of our MCPS calculated under the if-converted method were anti-dilutive, and as such, 18.4 million shares were excluded from the dilutive EPS calculation for the year ended December 31, 2018.
Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
Net earnings from continuing operations
|
$
|
918.3
|
|
|
$
|
884.3
|
|
|
$
|
740.2
|
|
|
Mandatory convertible preferred stock cumulative dividends
|
(34.9
|
)
|
|
—
|
|
|
—
|
|
|
Net earnings attributable to common stockholders from continuing operations
|
$
|
883.4
|
|
|
$
|
884.3
|
|
|
$
|
740.2
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average common shares outstanding used in basic earnings per share
|
345.5
|
|
|
347.5
|
|
|
345.7
|
|
|
Incremental common shares from:
|
|
|
|
|
|
|
Assumed exercise of dilutive options and vesting of dilutive Stock Awards
|
5.2
|
|
|
5.1
|
|
|
1.6
|
|
|
Weighted average common shares outstanding used in diluted earnings per share
|
350.7
|
|
|
352.6
|
|
|
347.3
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations per common share - Basic
|
$
|
2.56
|
|
|
$
|
2.54
|
|
|
$
|
2.14
|
|
|
Net earnings from continuing operations per common share - Diluted
|
$
|
2.52
|
|
|
$
|
2.51
|
|
|
$
|
2.13
|
|
NOTE 19. SEGMENT INFORMATION
We report our results in two separate business segments consisting of Professional Instrumentation and Industrial Technologies. When determining the reportable segments, we aggregated operating segments based on their similar economic and operating characteristics. Operating profit represents total revenues less operating expenses, excluding other income/expense, interest and income taxes. The identifiable assets by segment are those used in each segment’s operations. Inter-segment amounts are not significant and are eliminated to in the combined totals. Operating profit amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance.
Segment results are shown below ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
Sales:
|
|
|
|
|
|
|
Professional Instrumentation
|
$
|
3,655.1
|
|
|
$
|
3,139.1
|
|
|
$
|
2,891.6
|
|
|
Industrial Technologies
|
2,797.6
|
|
|
2,617.0
|
|
|
2,486.6
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
5,756.1
|
|
|
$
|
5,378.2
|
|
|
|
|
|
|
|
|
|
Operating Profit:
|
|
|
|
|
|
|
Professional Instrumentation
|
$
|
749.6
|
|
|
$
|
712.9
|
|
|
$
|
645.1
|
|
|
Industrial Technologies
|
525.6
|
|
|
503.6
|
|
|
480.3
|
|
|
Other
|
(96.8
|
)
|
|
(73.5
|
)
|
|
(63.7
|
)
|
|
Total
|
$
|
1,178.4
|
|
|
$
|
1,143.0
|
|
|
$
|
1,061.7
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
Professional Instrumentation
|
$
|
8,592.6
|
|
|
$
|
5,588.1
|
|
|
$
|
3,905.2
|
|
|
Industrial Technologies
|
3,011.2
|
|
|
2,902.7
|
|
|
2,458.1
|
|
|
Other
|
1,271.8
|
|
|
1,138.8
|
|
|
989.8
|
|
|
Assets of Discontinued Operations
|
30.0
|
|
|
871.0
|
|
|
836.7
|
|
|
Total
|
$
|
12,905.6
|
|
|
$
|
10,500.6
|
|
|
$
|
8,189.8
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Professional Instrumentation
|
$
|
168.7
|
|
|
$
|
82.0
|
|
|
$
|
99.4
|
|
|
Industrial Technologies
|
88.7
|
|
|
70.3
|
|
|
60.2
|
|
|
Other
|
3.4
|
|
|
6.0
|
|
|
1.3
|
|
|
Total
|
$
|
260.8
|
|
|
$
|
158.3
|
|
|
$
|
160.9
|
|
|
|
|
|
|
|
|
|
Capital expenditures, gross:
|
|
|
|
|
|
|
Professional Instrumentation
|
$
|
58.4
|
|
|
$
|
37.0
|
|
|
$
|
36.2
|
|
|
Industrial Technologies
|
44.8
|
|
|
71.8
|
|
|
64.9
|
|
|
Other
|
9.1
|
|
|
2.3
|
|
|
9.0
|
|
|
Total
|
$
|
112.3
|
|
|
$
|
111.1
|
|
|
$
|
110.1
|
|
Operations in Geographic Areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31
|
|
($ in millions)
|
2018
|
|
2017
|
|
2016
|
|
Sales:
|
|
|
|
|
|
|
United States
|
$
|
3,539.6
|
|
|
$
|
3,148.7
|
|
|
$
|
3,028.8
|
|
|
China
|
569.0
|
|
|
498.4
|
|
|
458.9
|
|
|
Germany
|
234.7
|
|
|
217.2
|
|
|
180.5
|
|
|
All other (each country individually less than 5% of total sales)
|
2,109.4
|
|
|
1,891.8
|
|
|
1,710.0
|
|
|
Total
|
$
|
6,452.7
|
|
|
$
|
5,756.1
|
|
|
$
|
5,378.2
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
United States
|
$
|
8,152.0
|
|
|
$
|
5,374.1
|
|
|
$
|
3,922.6
|
|
|
United Kingdom
|
358.7
|
|
|
405.8
|
|
|
353.4
|
|
|
Germany
|
261.3
|
|
|
274.8
|
|
|
241.6
|
|
|
All other (each country individually less than 5% of total long-lived assets)
|
962.4
|
|
|
841.9
|
|
|
532.3
|
|
|
Total
|
$
|
9,734.4
|
|
|
$
|
6,896.6
|
|
|
$
|
5,049.9
|
|
NOTE 20. BASIS OF PRESENTATION AND RELATED-PARTY TRANSACTIONS WITH DANAHER
Basis of Presentation
Prior to our separation from Danaher Corporation (“Danaher” or “Former Parent”) on July 2, 2016 (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 the period prior to July 1, 2016 have been retroactively adjusted to give effect to this recapitalization. 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 the period prior to the Separation.
The combined financial statements for the period 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.
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:
|
|
|
|
•
|
The Consolidated Balance Sheets at December 31, 2018 and December 31, 2017 consist of our consolidated balances.
|
|
|
|
|
•
|
The Consolidated Statement of Earnings, Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows for the years ended December 31, 2018 and December 31, 2017 consist of our consolidated results.
|
|
|
|
|
•
|
The Consolidated and Combined Statement of Earnings, Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows 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.
|
Our 2016 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.” In addition, the accumulated net effect of intercompany transactions between us and Danaher or Danaher affiliates for the period prior to the Separation are included in “Noncash adjustments to Former Parent’s investment, net.”
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 have made and may continue to make adjustments to balances transferred at the Separation date in accordance with the Wrong-Pockets Provision. Any such adjustments are recorded through stockholders’ equity.
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 period 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 period prior to the Separation.
Related Party Transactions with Danaher
Our transactions with Danaher are considered related party transactions. In connection with the Separation, on July 1, 2016, we entered into the Agreements with Danaher, which govern the Separation and provide a framework for the relationship between the parties going forward, including an employee matters agreement, tax matters agreement, an intellectual property matters agreement, a DBS license agreement and a TSA.
Employee Matters Agreement
The employee matters agreement sets forth, among other things, the allocation of assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding equity and other incentive awards and certain retirement and welfare benefit obligations. Refer to Note 17 for further discussion regarding the employee matters agreement.
Tax Matters Agreement
The tax matters agreement governs the respective rights, responsibilities and obligations of both Danaher and Fortive after the Separation with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. Refer to Note 13 and “Item 1A. Risk Factors” for further discussion regarding the tax matters agreement.
Intellectual Property Matters Agreement
The intellectual property matters agreement sets forth the terms and conditions pursuant to which Danaher and Fortive have mutually granted certain personal, generally irrevocable, non-exclusive, worldwide, and royalty-free rights to use certain intellectual property. Both parties are able to sublicense their rights in connection with activities relating to the their businesses, but not for independent use by third parties.
DBS License Agreement
The DBS license agreement sets forth the terms and conditions pursuant to which Danaher has granted a non-exclusive, worldwide, non-transferable, perpetual license to us to use DBS solely in support of our businesses. We are able to sublicense such license solely to direct and indirect wholly-owned subsidiaries. In addition, both parties had licenses to improvements made by each party to DBS through July 2, 2018.
Transition Services Agreement
The TSA sets forth the terms and conditions pursuant to which Fortive and our subsidiaries and Danaher and its subsidiaries will provide to each other various services after the Separation. The services to be provided include information technology, facilities, certain accounting and other financial functions, and administrative services. The charges for the transition services generally are expected to allow the providing company to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the service, plus, in some cases, the allocated indirect costs of providing the services, generally without profit.
TSA Payments
In accordance with the TSA, net receipts from Danaher were immaterial during the years ended December 31, 2018 and December 31, 2017. During the six months ended December 31, 2016, we made net payments to Danaher of approximately $13 million.
Revenue and Other Transactions Entered Into In the Ordinary Course of Business
Prior to the Separation, we operated as part of Danaher and not as a stand-alone company and certain of our revenue arrangements related to contracts entered into in the ordinary course of business with Danaher and its affiliates. Following the Separation, we continue to enter into arms-length revenue arrangements in the ordinary course of business with Danaher and its affiliates, although certain agreements were entered into or terminated as a result of the Separation.
We recorded sales of approximately $16 million, $16 million and $30 million to Danaher and its subsidiaries during the years ended December 31, 2018, 2017 and 2016, respectively. Purchases from Danaher and its subsidiaries were approximately $14 million, $13 million and $10 million during the years ended December 31, 2018, 2017 and 2016, respectively.
Allocation of Expenses Prior to the Separation
Prior to the Separation, we operated as part of Danaher and not as a stand-alone company. Accordingly, certain shared costs for management and support functions which were provided on a centralized basis within Danaher were allocated to us and are reflected as expenses in these financial statements prior to the Separation date. We consider the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to us for purposes of the carved-out financial statements; however, the expenses reflected in these financial statements for the period prior to the Separation date may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate stand-alone entity. In addition, the expenses reflected in the financial statements may not be indicative of expenses that we will incur in the future.
Expenses allocated to us from Danaher and its subsidiaries for the six months ended July 1, 2016 were $117 million. Following the Separation, we independently incur expenses as a stand-alone company and no expenses are allocated by Danaher.
Corporate Expenses
Certain corporate overhead and shared expenses incurred by Danaher and its subsidiaries prior to the Separation were allocated to us and are reflected in the Consolidated and Combined Statements of Earnings. These amounts include, but are not limited to, items such as general management and executive oversight, costs to support Danaher’s information technology infrastructure, facilities, compliance, human resources, marketing and legal functions and financial management and transaction processing including public company reporting, consolidated tax filings and tax planning, Danaher benefit plan administration, risk management and consolidated treasury services, certain employee benefits and incentives, and stock based compensation administration. These costs were allocated using methodologies that we believe are reasonable for the item being allocated. Allocation methodologies included our relative share of revenues, headcount, or functional spend as a percentage of the total. Following the Separation, we independently incur corporate overhead costs and no corporate overhead costs are allocated by Danaher.
Insurance Programs Administered by Danaher
In addition to the corporate allocations discussed above, prior to the Separation we were allocated expenses related to certain insurance programs Danaher administered on our behalf, including workers compensation, property, cargo, automobile, crime, fiduciary, product, general and directors’ and officers’ liability insurance. These amounts were allocated using various methodologies, as described below. Included within the insurance cost allocation are allocations related to programs for which Danaher was self-insured up to a certain amount. For the self-insured component, costs were allocated to us based on our incurred claims. Danaher had premium based policies which covered amounts in excess of the self-insured retentions. We were allocated a portion of the total insurance cost incurred by Danaher based on our pro-rata portion of Danaher’s total underlying exposure base.
In connection with the Separation, we established similar independent self-insurance programs to support any outstanding claims going forward.
Medical Insurance Programs Administered by Danaher
In addition to the corporate allocations discussed above, prior to the Separation we were allocated expenses related to the medical insurance programs Danaher administered on our behalf. These amounts were allocated based on actual medical claims incurred by our employees during the period. In connection with the Separation, we established independent medical insurance programs similar those previously provided by Danaher.
Deferred Compensation Program Administered by Danaher
Refer to Note 8 for information regarding our deferred compensation program. In connection with the Separation, we established a similar independent, nonqualified deferred compensation program.
NOTE 21. QUARTERLY DATA - UNAUDITED
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($ in millions, except per share data)
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1st Quarter
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2nd Quarter
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3rd Quarter
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4th Quarter
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2018:
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Sales
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$
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1,492.2
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$
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1,601.8
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$
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1,601.2
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$
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1,757.5
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Gross profit
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766.3
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830.8
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825.9
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898.3
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Operating profit
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277.9
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324.4
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281.6
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294.5
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Earnings from continuing operations, net of income taxes
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214.0
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250.2
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214.0
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240.1
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Earnings from discontinued operations, net of income taxes
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47.2
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44.8
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31.3
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1,872.2
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Net earnings
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$
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261.2
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$
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295.0
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$
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245.3
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$
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2,112.3
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Earnings per common share - basic:
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Continuing operations
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$
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0.61
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$
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0.72
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$
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0.56
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$
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0.67
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Discontinued operations
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0.14
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0.13
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0.09
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5.60
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Total earnings per common share - basic
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$
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0.75
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$
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0.84
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$
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0.65
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$
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6.26
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Earnings per common share - diluted:
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Continuing operations
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$
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0.61
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$
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0.70
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$
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0.55
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$
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0.66
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Discontinued operations
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0.13
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0.13
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0.09
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5.52
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Total earnings per common share - diluted
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$
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0.74
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$
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0.83
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$
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0.64
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$
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6.17
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2017:
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Sales
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$
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1,318.1
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$
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1,399.5
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$
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1,460.6
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$
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1,577.9
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Gross profit
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654.2
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708.8
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744.8
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813.6
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Operating profit
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243.7
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292.9
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301.4
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305.0
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Earnings from continuing operations, net of income taxes
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161.5
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198.4
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226.7
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297.7
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Earnings from discontinued operations, net of income taxes
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38.2
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41.7
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41.1
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39.2
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Net earnings
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$
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199.7
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$
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240.1
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$
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267.8
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$
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336.9
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Earnings per common share - basic:
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Continuing operations
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$
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0.46
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$
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0.57
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$
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0.65
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$
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0.86
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Discontinued operations
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0.11
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0.12
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0.12
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0.11
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Total earnings per common share - basic
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$
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0.58
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$
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0.69
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$
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0.77
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$
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0.97
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Earnings per common share - diluted:
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Continuing operations
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$
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0.47
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$
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0.56
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$
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0.64
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$
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0.84
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Discontinued operations
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0.10
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0.12
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0.12
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0.11
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Total earnings per common share - diluted
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$
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0.57
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$
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0.68
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$
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0.76
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$
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0.95
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