This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of our financial statements
with a narrative from the perspective of management and is intended to help the
reader understand the results and operations and financial condition of the
Company. Our MD&A should be read in conjunction with our Consolidated and
Combined Financial Statements and the accompanying Notes to the Financial
Statements included elsewhere in this Annual Report.Discussion and analysis of our financial condition and results of operations as
of and for the year ended December 31, 2021 compared to December 31, 2020 is
included under the heading "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
filed for the fiscal year ended December 31, 2021 with the Securities and
Exchange Commission on February 24, 2022.
OVERVIEW
General
Vontier is a global industrial technology company at the forefront of solving
next-generation mobility challenges. Guided by the Vontier Business System and
an unwavering commitment to our customers, we deliver smart, sustainable
solutions for the road ahead by focusing on critical technical equipment,
components, and software and services for manufacturing, repair and servicing in
the mobility ecosystem worldwide. We supply a wide range of solutions spanning
advanced environmental sensors; fueling equipment; field payment hardware;
point-of sale, workflow and monitoring software; vehicle tracking and fleet
management; software solutions for traffic light control; and vehicle mechanics'
and technicians' equipment. We market our products and services to retail and
commercial fueling operators, convenience store and in-bay car wash operators,
tunnel car wash businesses, commercial vehicle repair businesses, municipal
governments and public safety entities and fleet owners/operators on a global
basis. Refer to "Item 1. Business - General" included in this Annual Report for
a discussion of our strategies for delivering long-term shareholder value.
Business Performance
Vontier experienced broad-based organic growth across its platforms and
geographies during the year ended December 31, 2022, despite challenging global
macroeconomic conditions, as total sales increased 6.5% during the year ended
December 31, 2022. The increase in total sales was primarily driven by a 6.5%
increase from our recent acquisitions and a 2.6% increase in sales from existing
businesses, partially offset by changes in foreign currency exchange rates which
negatively impacted our sales growth by 2.6% during the year ended December 31,
2022 as compared to the prior year.
Outlook
We expect overall sales and sales from existing businesses to decline on a
year-over-year basis in 2023 due to the lower rate of demand related to the end
of the upgrade cycle for enhanced credit card security requirements for outdoor
payment systems based on the EMV global standards. Excluding this impact, we
expect sales from existing businesses to increase mid single digits. Our outlook
is subject to various assumptions and risks, including but not limited to the
resilience and durability of the economies of the United States and other
critical regions, ongoing challenges with global logistics and supply chain
including the availability of electronic components, the impact of the COVID-19
pandemic, the impact of the Russia-Ukraine conflict, market conditions in key
end product segments, and the impact of energy disruption in Europe. Additional
uncertainties are identified in "Information Relating to Forward-Looking
Statements" in this Form 10-K.We continue to monitor the macroeconomic and geopolitical conditions which may
impact our business, including the COVID-19 pandemic, monetary and fiscal
policies, international trade and relations between the U.S., China and other
nations, and investment and taxation policy initiatives being considered in the
United States and by the Organization for Economic Co-operation and Development.
We also continue to monitor the Russia-Ukraine Conflict and the impact on our
business and operations. As of the filing date of this report, we do not believe
they are material.
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RESULTS OF OPERATIONS
Comparison of Results of Operations
Year Ended
($ in millions) December 31, 2022 December 31, 2021
Total sales $ 3,184.4 $ 2,990.7
Total cost of sales (1,756.1) (1,657.6)
Gross profit 1,428.3 1,333.1
Operating costs:
Selling, general and administrative expenses ("SG&A") (705.8) (621.6)
Research and development expenses ("R&D") (144.6) (129.3)Operating profit $ 577.9 $ 582.2
Gross profit as a % of sales 44.9 % 44.6 %
SG&A as a % of sales 22.2 % 20.8 %
R&D as a % of sales 4.5 % 4.3 %
Operating profit as a % of sales 18.1 % 19.5 %Components of Sales Growth
2022 vs 2021
Total sales growth (GAAP) 6.5 %
Existing businesses (Non-GAAP)(a) 2.6 %
Acquisitions (Non-GAAP) 6.5 %
Currency exchange rates (Non-GAAP) (2.6) %
(a) The impact of price increases is reflected as a component of the change in
sales.
Total sales within our mobility technologies platform increased high single
digits during the year ended December 31, 2022 as compared to the prior year.
This increase was driven by high single digit growth from our recent
acquisitions and low single digit growth from our existing businesses, partially
offset by a low single digit decrease due to the impact of currency translation.
Our existing businesses in our mobility technologies platform experienced growth
from price increases, as well as strong demand across the alternative energy and
environmental and aftermarket businesses, which were partially offset by the
lower rate of demand related to the end of the upgrade cycle for enhanced credit
card security requirements for outdoor payment systems based on the EMV global
standards as well as the end of the Mexico fiscal regulation upgrades.Total sales and sales from existing businesses within our diagnostics and repair
technologies platform increased low single digits during the year ended December
31, 2022 as compared to the prior year, driven primarily by growth from price
increases and continued strong demand across most product categories, most
notably hardline and powered tools, which were partially offset by a decrease
from the discontinuance of our wheel weights product line.
Cost of Sales
Cost of sales increased $98.5 million, or 5.9%, during the year ended December
31, 2022, as compared to the prior year, primarily due to our recent
acquisitions as well as increased costs from inflationary pressures.
Gross Profit
Gross profit increased $95.2 million, or 7.1%, during the year ended December
31, 2022, as compared to the prior year, primarily due to our recent
acquisitions and the net impact of the Company's price increases offset by
increased costs due to inflationary pressures. Gross profit margin increased
slightly during the year ended December 31, 2022, as compared to the prior year.
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Operating Costs and Other Expenses
SG&A expenses increased $84.2 million, or 13.5%, during the year ended December
31, 2022, as compared to the prior year and as a percentage of sales, increased
140 basis points during the same period. This increase was primarily driven by
SG&A expenses from our recent acquisitions, as well as a $35.6 million increase
in intangible asset amortization expense and a $21.9 million increase in
transaction- and deal-related costs during the year ended December 31, 2022, as
compared to the prior year.R&D expenses (consisting principally of internal and contract engineering
personnel costs) increased $15.3 million, or 11.8%, during the year ended
December 31, 2022, as compared to the prior year, primarily due to the impact of
our recent acquisitions. R&D expense as a percentage of sales was relatively
flat during the year ended December 31, 2022, as compared to the prior year.
Operating Profit
Operating profit decreased $4.3 million, or 0.7%, during the year ended December
31, 2022, as compared to the prior year, and operating profit margins decreased
140 basis points during the same period. This decrease was primarily due to the
increase in gross profit, offset by the increases in SG&A expenses and R&D
expenses, as discussed above.
NON-GAAP FINANCIAL MEASURES
Sales from Existing Businesses
We define sales from existing businesses as total sales excluding (i) sales from
acquired and certain divested businesses; (ii) the impact of currency
translation; and (iii) certain other items.
•References to sales attributable to acquisitions or acquired businesses refer
to GAAP sales from acquired businesses recorded prior to the first anniversary
of the acquisition less the amount of sales attributable to certain divested
businesses or product lines not considered discontinued operations.•The portion of sales attributable to the impact of currency translation is
calculated as the difference between (a) the period-to-period change in sales
(excluding sales from acquired businesses) and (b) the period-to-period change
in sales, including foreign operations, (excluding sales from acquired
businesses) after applying the current period foreign exchange rates to the
prior year period.•The portion of sales attributable to other items is calculated as the impact of
those items which are not directly correlated to sales from existing businesses
which do not have an impact on the current or comparable period.
Sales from existing businesses should be considered in addition to, and not as a
replacement for or superior to, total sales, and may not be comparable to
similarly titled measures reported by other companies.
Management believes that reporting the non-GAAP financial measure of sales from
existing businesses provides useful information to investors by helping identify
underlying growth trends in our business and facilitating easier comparisons of
our sales performance with our performance in prior and future periods and to
our peers. We exclude the effect of acquisitions and certain divestiture-related
items because the nature, size and number of such transactions can vary
dramatically from period to period and between us and our peers. We exclude the
effect of currency translation and certain other items from sales from existing
businesses because these items are either not under management's control or
relate to items not directly correlated to sales from existing businesses.
Management believes the exclusion of these items from sales from existing
businesses may facilitate assessment of underlying business trends and may
assist in comparisons of long-term performance. References to sales volume refer
to the impact of both price and unit sales.
INTEREST COSTS
Interest expense, net was $69.6 million during the year ended December 31, 2022
as compared to $47.8 million during the prior year, an increase of $21.8
million, driven primarily by higher average debt balances during the year and
the impact of increases in interest rates on our variable-rate debt obligations.
For a discussion of our outstanding indebtedness, refer to Note 11. Financing to
the Consolidated and Combined Financial Statements.
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Table of ContentsINCOME TAXES
General
Income tax expense and deferred tax assets and liabilities reflect management's
assessment of future taxes expected to be paid on items reflected in our
financial statements. Our effective tax rate can be affected by, among other
items, changes in the mix of earnings in countries with differing statutory tax
rates (including as a result of business acquisitions and dispositions), changes
in the valuation of deferred tax assets and liabilities, the implementation of
tax planning strategies, tax rulings, court decisions, settlements with tax
authorities and changes in tax laws.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 jurisdictions. 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.Pursuant to U.S. tax law, the Company's initial U.S. federal income tax return
for the post-separation period was filed in October 2021. We filed our first
full year U.S. federal income tax return for 2021 with the Internal Revenue
Service ("IRS") in October 2022. The IRS has not yet begun an examination of the
Company. The Company remains subject to tax audit for its separate company tax
returns in various U.S. states for the tax years 2011 to 2021. Our operations in
certain foreign jurisdictions remain subject to routine examination for the tax
years 2009 to 2021.On August 16, 2022, the Inflation Reduction Act (the "IRA") was signed into law,
effective January 1, 2023. The IRA implements, among other provisions, a new 15%
corporate alternative minimum tax on corporations with over $1 billion of
financial statement income and a new 1% excise tax on the aggregate fair market
value of stock repurchased by public corporations. We will not be subject to the
15% corporate alternative minimum tax. We anticipate being subject to the 1%
excise tax on stock repurchases, however, we do not expect it to have a
significant impact on our consolidated financial position. We will continue to
monitor as new guidance becomes available.
For a description of our income tax accounting policies, refer to Note 2. Basis
of Presentation and Summary of Significant Accounting Policies and Note 15.
Income Taxes to the Consolidated and Combined Financial Statements.
Comparison of the Years Ended December 31, 2022 and 2021
Our effective tax rate for the years ended December 31, 2022 and 2021 was 23.9%
and 22.7%, respectively.
Our effective tax rate for 2022 differs from the U.S. federal statutory rate of
21.0% due primarily to the effect of recurring items including state taxes,
foreign derived intangible income, and foreign taxable earnings at a rate
different from the U.S. federal statutory rate. Additionally, there was a
favorable impact related to non-taxable income.
Our effective tax rate for 2021 differs from the U.S. federal statutory rate of
21.0% due primarily to the effect of recurring items including state taxes,
foreign derived intangible income, and foreign taxable earnings at a rate
different from the U.S. federal statutory rate. Additionally, there was a
favorable impact related to non-taxable income.
COMPREHENSIVE INCOME
Comprehensive income decreased by $75.2 million during the year ended December
31, 2022, as compared to the prior year, primarily due to unfavorable changes in
foreign currency translation adjustments of $63.7 million.Comprehensive income for the year ended December 31, 2022 includes a gain on
previously held equity interests from combination of business of $32.7 million
which relates to a gain recognized on our interest in Driivz prior to acquiring
the remaining outstanding shares. Refer to Note 3. Acquisitions to the
Consolidated and Combined Financial Statements for additional information on our
acquisition of Driivz. Additionally, during the year ended December 31, 2022, we
recognized an unrealized loss on equity securities measured at fair value of
$8.7 million and a realized loss of $3.1 million. Refer to Note 8. Fair Value
Measurements to the Consolidated and Combined Financial Statements for
additional information on our investments.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
We are exposed to market risk from changes in interest rates, foreign currency
exchange rates, credit risk and commodity prices, each of which could impact our
financial statements. We generally address our exposure to these risks through
our normal operating and financing activities. In addition, our broad-based
business activities help to reduce the impact that volatility in any particular
area or related areas may have on our operating profit as a whole.
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Interest Rate Risk
We are exposed to interest rate risk through fluctuations in interest rates on
our debt obligations. As of December 31, 2022, we had $1.0 billion outstanding
of debt that was subject to variable interest rates. As a result, increases in
interest rates could increase the cost of servicing our debt and could
materially reduce our profitability and cash flows. We seek to manage exposure
to adverse interest rate changes through our normal operating and financing
activities.A hypothetical 100 basis points increase in market interest rates as of December
31, 2022 on our variable-rate debt obligations as of December 31, 2022 would
increase our annual interest expense by approximately $10.0 million.
Foreign Currency Exchange Rate Risk
We face transactional exchange rate risk from transactions with customers in
countries outside of the United States and from intercompany transactions
between affiliates. Transactional exchange rate risk arises from the purchase
and sale of goods and services in currencies other than our functional currency
or the functional currency of an applicable subsidiary. We also face
translational exchange rate risk related to the translation of financial
statements of our foreign operations into U.S. dollars, our functional currency.
Costs incurred and sales recorded by subsidiaries operating outside of the
United States are translated into U.S. dollars using exchange rates effective
during the respective period. As a result, we are exposed to movements in the
exchange rates of various currencies against the U.S. dollar. The effect of a
change in currency exchange rates on our net investment in international
subsidiaries is reflected in the accumulated other comprehensive income
component of equity. A 10% change in major currencies relative to the U.S.
dollar as of December 31, 2022 would have resulted in an impact to equity of
approximately $88 million.Currency exchange rates negatively impacted reported sales for the year ended
December 31, 2022 by 2.6% as compared to the prior year, as the U.S. dollar was,
on average, stronger against most major currencies during the year ended
December 31, 2022 as compared to exchange rate levels during the prior year. If
the exchange rates in effect as of December 31, 2022 were to prevail throughout
the year ended December 31, 2023, currency exchange rates would negatively
impact estimated sales for the year ended December 31, 2023 by less than 1%
compared to the year ended December 31, 2022.In general, weakening of the U.S. dollar against other major currencies would
positively impact our sales and results of operations on an overall basis and
strengthening of the U.S. dollar against other major currencies would adversely
impact our sales and results of operations.We have generally accepted the exposure to exchange rate movements without using
derivative financial instruments to manage this risk. Both positive and negative
movements in currency exchange rates against the U.S. dollar will therefore
continue to affect the reported amount of sales, profit, and assets and
liabilities in our Consolidated and Combined Financial Statements.
Credit Risk
We are exposed to potential credit losses in the event of nonperformance by
counterparties to our financial instruments. Financial instruments that
potentially subject us to credit risk consist of cash and highly-liquid
investment grade cash equivalents, and receivables from customers and
franchisees. We place cash and cash equivalents with various high-quality
financial institutions throughout the world and exposure is limited at any one
institution. Although we typically do not obtain collateral or other security to
secure these obligations, we regularly monitor third party depository
institutions that hold our cash and cash equivalents. We emphasize safety and
liquidity of principal over yield on those funds. Concentrations of credit risk
arising from receivables from customers are limited due to the diversity of our
customers. We perform credit evaluations of our customers' financial conditions
and also obtain collateral or other security as appropriate. Notwithstanding
these efforts, the current distress in the global economy may increase the
difficulty in collecting receivables.The assumptions used in evaluating our exposure to credit losses associated with
our financing receivables portfolio involve estimates and significant judgment.
Holding other estimates constant, a hypothetical 100 basis points increase in
the expected loss rate on the financing receivables portfolio would have
resulted in an increase in the allowance for credit losses of approximately
$5.0 million as of December 31, 2022.
No customer accounted for more than 10% of sales during all periods presented.
Commodity Price Risk
For a discussion of risks relating to commodity prices, refer to “Item 1A. Risk
Factors.”
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LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our
operating, investing and financing activities. We generate substantial cash from
operating activities and believe that our operating cash flow and other sources
of liquidity will be sufficient to allow us to continue to invest in existing
businesses, consummate strategic acquisitions, make interest payments on our
outstanding indebtedness, and manage our capital structure on a short and
long-term basis. Refer also to Note 11. Financing to the Consolidated and
Combined Financial Statements for additional information.
2022 Financing and Capital Transactions
During the year ended December 31, 2022, we completed the following financing
and capital transactions:
•Entered into and settled a $250.0 million accelerated share repurchase program
under which we received 10.0 million shares;
•Repurchased 3.7 million shares in the open market;
•Entered into a three-year, $600.0 million senior unsecured delayed-draw term
loan on October 28, 2022 and drew down the full $600.0 million on December 30,
2022; and
•With the proceeds received from the draw, we repaid our $600.0 million two-year
term loan that was due on September 13, 2023.
Our long-term debt requires, among others, that we maintain certain financial
covenants, and we were in compliance with all of these covenants as of December
31, 2022.Refer to Note 11. Financing to the Consolidated and Combined Financial
Statements for more information related to our long-term indebtedness and to
Note 19. Capital Stock and Earnings Per Share to the Consolidated and Combined
Financial Statements for more information related to our share repurchases.
Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity:
Year Ended December 31,
($ in millions) 2022 2021
Net cash provided by operating activities $ 321.2 $ 481.1Cash paid for acquisitions, net of cash received $ (277.5) $ (955.8)
Payments for additions to property, plant and equipment (60.0) (47.8)
Proceeds from sale of property 0.4 -
Cash paid for equity investments (11.8) (11.3)
Proceeds from sale of equity securities 19.0 -
Cash received for settlement of investment - 7.2
Net cash used in investing activities $ (329.9) $ (1,007.7)Proceeds from issuance of long-term debt $ 1,167.0 $ 2,186.5
Repayment of long-term debt (1,167.0) (1,400.0)
Net proceeds from (repayments of) short-term borrowings 0.4 (7.0)
Payments for debt issuance costs (0.8) (5.1)
Payments of common stock cash dividend (15.9) (12.7)
Purchases of treasury stock (328.0) -
Proceeds from stock option exercises 2.5 7.5
Acquisition of noncontrolling interest - (1.9)
Net transfers to Former Parent - (35.6)
Other financing activities (6.1) (6.2)
Net cash (used in) provided by financing activities $ (347.9) $ 725.531
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Operating Activities
Cash flows from operating activities can fluctuate significantly from period to
period as working capital needs and the timing of payments for income taxes,
restructuring activities and other items impact reported cash flows.Cash flows from operating activities were $321.2 million during the year ended
December 31, 2022, a decrease of $159.9 million as compared to the prior year.
The year-over-year change in operating cash flows was primarily attributable to
the following factors:•The aggregate of accounts receivable and long-term financing receivables
used $76.9 million of operating cash flows during the year ended December 31,
2022 as compared to using $4.2 million in the prior year. The amount of cash
flow generated from or used by accounts receivable depends upon how effectively
we manage the cash conversion cycle and can be significantly impacted by the
timing of collections in a period. Additionally, when we originate certain
financing receivables, we assume the financing receivable by decreasing the
franchisee's trade accounts receivable. As a result, originations of certain
financing receivables are non-cash transactions.•The aggregate of other operating assets and liabilities used $93.1 million of
cash during the year ended December 31, 2022 as compared to using $6.6 million
in the prior year. This difference is due primarily to working capital needs and
the timing of accruals and payments and tax-related amounts.
Investing Activities
Net cash used in investing activities decreased by $677.8 million during the
year ended December 31, 2022 as compared to the prior year, primarily due to a
decrease in the cash paid for acquisitions. Refer to Note 3. Acquisitions to the
Consolidated and Combined Financial Statements for discussion of our
acquisitions during the years ended December 31, 2022 and 2021.
We made capital expenditures of approximately $60.0 million and $47.8 million
during the years ended December 31, 2022 and 2021, respectively.
Financing Activities
Net cash used in financing activities was $347.9 million during the year ended
December 31, 2022, driven primarily by repurchases of the Company's common stock
of $328.0 million. We also refinanced $600.0 million of our term loans and made
borrowings and repayments under our revolving credit facility, which had net
zero impact to financing activities during the year ended December 31, 2022. Net
cash provided by financing activities was $725.5 million during the year ended
December 31, 2021, driven primarily by the issuance of $1.6 billion of notes and
the receipt of $600.0 million of proceeds from our delayed-draw term loan, which
was partially offset by the repayment of $1.4 billion of Term Loans.
Share Repurchase Program
Refer to Note 19. Capital Stock and Earnings Per Share to the Consolidated and
Combined Financial Statements for a description of the Company’s stock
repurchase program.
Dividends
We paid regular quarterly cash dividends of $0.025 per share during the year
ended December 31, 2022. The declaration of future cash dividends is at the
discretion of our Board of Directors and will depend upon, among other things,
our future earnings, cash flows, capital requirements, financial condition and
general business conditions.
Supplemental Guarantor Financial Information
As of December 31, 2022, we had $1.6 billion in aggregate principal amount of
the Notes and $1.0 billion in aggregate principal amount outstanding of the Term
Loans. Our obligations to pay principal and interest on the Notes and Term Loans
are fully and unconditionally guaranteed on a joint and several basis on an
unsecured, unsubordinated basis by the Guarantors. Our other subsidiaries do not
guarantee any such indebtedness (collectively, "Non-Guarantor Subsidiaries").
Refer to Note 11. Financing to the Consolidated and Combined Financial
Statements for additional information regarding the terms of our Notes and the
Term Loans.
The Notes and the guarantees thereof are the Company’s and the guarantors’
senior unsecured obligations and:
•rank without preference or priority among themselves and equally in right of
payment with our existing and any future unsecured and unsubordinated
indebtedness, including, without limitation, indebtedness under our credit
agreement;
•are senior in right of payment to any of our existing and future indebtedness
that is subordinated to the notes;
•are effectively subordinated to any of our existing and future secured
indebtedness to the extent of the assets securing such indebtedness; and
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•are structurally subordinated to all existing and any future indebtedness and
any other liabilities of our non-Guarantor Subsidiaries.The following tables present summarized financial information for Vontier
Corporation and the Guarantor Subsidiaries on a combined basis and after the
elimination of (a) intercompany transactions and balances between Vontier
Corporation and the Guarantor Subsidiaries and (b) equity in earnings from and
investments in the Non-Guarantor Subsidiaries.
Year Ended December
31,
Summarized Results of Operations Data ($ in millions) 2022
Net sales (a) $ 1,725.9
Gross profit (b) 851.6
Net income (c) $ 546.6(a) Includes intercompany sales of $97.8 million for the year ended December 31, 2022.
(b) Includes intercompany gross profit of $28.8 million for the year ended December 31, 2022.
(c) Includes intercompany pretax income of $99.1 million for the year ended December 31, 2022.As of December 31,
Summarized Balance Sheet Data ($ in millions) 2022
Assets
Current assets $ 428.0
Intercompany receivables 1,099.3
Noncurrent assets 612.7
Total assets $ 2,140.0
Liabilities
Current liabilities $ 378.7
Intercompany payables 286.6
Noncurrent liabilities 2,642.8
Total liabilities $ 3,308.1
Cash and Cash Requirements
As of December 31, 2022, we held approximately $204.5 million of cash and cash
equivalents that were held in either operating accounts or invested in highly
liquid investment-grade instruments with a maturity of 90 days or less with an
annual effective rate generally around 4.0% as of December 31, 2022.
Approximately 60% of our cash was held outside of the United States.We have made an assertion regarding the amount of earnings that we do not intend
to repatriate due to local working capital needs, local law restrictions, high
foreign remittance costs, previous investments in physical assets and
acquisitions, or future growth needs. Such earnings are intended for indefinite
foreign reinvestment and no provision for income taxes has been made. The amount
of income taxes that may be applicable to such earnings is not readily
determinable given the unknown duration of local law restrictions as applicable
to such earnings, unknown changes in foreign tax law that may occur during the
restriction periods, and the various alternatives we could employ if we
repatriated these earnings. The cash that our foreign subsidiaries hold for
indefinite reinvestment is generally used to finance foreign operations and
investments, including acquisitions.We have cash requirements to support working capital needs, capital
expenditures, pay interest and service debt, pay taxes and any related interest
or penalties, fund our restructuring activities and pension plans as required
and support other business needs or objectives. Refer to Note 10. Leases and
Note 11. Financing to the Consolidated and Combined Financial Statements for
further details on our contractual obligations and the timing of expected future
payments under our lease and debt agreements, respectively.We also have purchase obligations which consist of agreements to purchase goods
or services that are enforceable and legally binding on us and that specify all
significant terms, including fixed or minimum quantities to be purchased, fixed,
minimum or variable price provisions and the approximate timing of the
transaction. As of December 31, 2022, we had purchase obligations of $246.3
million, with $228.6 million payable in the next 12 months.
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With respect to our cash requirements, we generally intend to use available cash
and internally generated funds to meet these cash requirements, but in the event
that additional liquidity is required, particularly in connection with
acquisitions, we may also borrow under our credit facilities, enter into new
credit facilities and borrow directly thereunder and/or access the capital
markets. As of December 31, 2022, we had $750.0 million of borrowing capacity
under our revolving credit facility. We also may from time to time access the
capital markets, including to take advantage of favorable interest rate
environments or other market conditions.
As of December 31, 2022, we believe that we have sufficient liquidity to satisfy
our cash needs.
Guarantees
As of December 31, 2022 and 2021, the Company had guarantees consisting
primarily of outstanding standby letters of credit, bank guarantees, and
performance and bid bonds of $84.0 million and $92.6 million, respectively.
These guarantees have been provided in connection with certain arrangements with
vendors, customers, financing counterparties, and governmental entities to
secure the Company's obligations and/or performance requirements related to
specific transactions. The Company believes that if the obligations under these
instruments were triggered, they would not have a material effect on the
financial statements.
LEGAL PROCEEDINGS
Refer to Note 17. Litigation and Contingencies to the Consolidated and Combined
Financial Statements for information regarding legal proceedings, contingencies,
and guarantees. For a discussion of risks related to legal proceedings and
contingencies, refer to "Item 1A. Risk Factors."
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of our financial condition and results of
operations is based upon our Consolidated and Combined Financial Statements,
which have been prepared in accordance with GAAP. The preparation of these
financial statements 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
and judgments on historical experience, the current economic environment and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ materially from these estimates and
judgments.We believe the following accounting estimates are most critical to an
understanding of our financial statements. Estimates are considered to be
critical if they meet both of the following criteria: (i) the estimate requires
assumptions about material matters that are uncertain at the time the estimate
is made, and (ii) material changes in the estimate are reasonably likely from
period to period. For a detailed discussion on the application of these and
other accounting estimates, refer to Note 2. Basis of Presentation and Summary
of Significant Accounting Policies to the Consolidated and Combined Financial
Statements.
Accounts and Financing Receivables
We maintain allowances for credit losses to reflect expected credit losses
inherent in our portfolio of receivables. Determination of the allowances
requires us to exercise judgment about the timing, frequency and severity of
credit losses that could materially affect the allowances and, therefore, net
earnings. The allowances for credit losses represent management's best estimate
of the credit losses expected from our trade accounts and financing receivables
portfolios over the remaining contractual life. We pool assets with similar risk
characteristics for this measurement based on attributes that may include asset
type, duration, and/or credit risk rating. The future expected losses of each
pool are estimated based on numerous quantitative and qualitative factors
reflecting management's estimate of collectability over the remaining
contractual life of the pooled assets, including:•portfolio duration;
•historical, current, and forecasted future loss experience by asset type;
•historical, current, and forecasted delinquency and write-off trends;
•historical, current, and forecasted economic conditions; and
•historical, current, and forecasted credit risk.We regularly perform detailed reviews of our accounts receivable and financing
receivables portfolios to determine if changes in the aforementioned qualitative
and quantitative factors have impacted the adequacy of the allowances.
Inventories
We record inventory at the lower of cost or net realizable value, which is the
estimated selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. We estimate the
net realizable value of inventory based on assumptions of future demand and
related pricing. Estimating the net realizable value of inventory is inherently
uncertain because levels of demand, technological advances and pricing
competition in many of our markets can fluctuate significantly from period to
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period due to circumstances beyond our control. If actual market conditions are
less favorable than those projected, we could be required to reduce the value of
our inventory, which would adversely impact our financial statements.
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, neither goodwill nor indefinite-lived intangible assets are
amortized; however, certain definite-lived identifiable intangible assets,
primarily customer relationships, acquired technology and trade names, are
amortized over their estimated useful lives.
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 or more frequently if events
and circumstances indicate that goodwill may not be recoverable.When evaluating for impairment, the Company may first perform a qualitative
assessment to determine whether it is more likely than not that a reporting unit
or indefinite-lived intangible asset is impaired. If the Company does not
perform a qualitative assessment, or if it determines that it is not more likely
than not that the fair value of the reporting unit or indefinite-lived
intangible asset exceeds its carrying amount, the Company will calculate the
estimated fair value of the reporting unit or indefinite-lived intangible asset.
The Company's decision to perform a qualitative impairment assessment for an
individual reporting unit in a given year is influenced by a number of factors,
inclusive of the size of the reporting unit's goodwill, the significance of the
excess of the reporting unit's estimated fair value over carrying value at the
last quantitative assessment date, the amount of time in between quantitative
fair value assessments and the date of acquisition.As part of our 2022 annual impairment analysis, we elected to apply the
qualitative goodwill impairment assessment guidance in ASC 350-20, Goodwill, for
all 7 of our reporting units, or approximately $1.8 billion of goodwill as of
the assessment date (which includes reporting units that are held for sale).
Factors we consider in the qualitative assessment include general macroeconomic
conditions, industry and market conditions, cost factors, overall financial
performance of our reporting units, events or changes affecting the composition
or carrying value of the net assets of our reporting units, information related
to market multiples of peer companies and other relevant entity specific events.
Based on our assessment we determined on the basis of the qualitative and
quantitative factors, that the fair values of the reporting units were more
likely than not greater than their respective carrying values; and therefore, a
quantitative test was not required.If we do not perform a qualitative assessment, goodwill impairment is determined
by using a quantitative approach. We identify potential impairment by comparing
the fair value of each reporting unit, determined using various valuation
techniques, with the primary technique being a discounted cash flow analysis, to
its carrying value. If the carrying amount of the reporting unit exceeds the
fair value, an impairment loss is recognized.A non-cash goodwill impairment charge of $85.3 million was recorded against our
Telematics reporting unit as a result of our quantitative impairment assessment
on March 27, 2020. No goodwill impairment charges were recorded for the years
ended December 31, 2022 and 2021. Refer to Note 7. Goodwill and Other Intangible
Assets to the Consolidated and Combined Financial Statements for additional
information regarding the Telematics impairment charge.We review identified intangible assets for impairment whenever events or changes
in circumstances indicate that the related carrying amounts may not be
recoverable. Determining whether an impairment loss occurred requires a
comparison of the carrying amount to the sum of undiscounted cash flows expected
to be generated by the asset. We also test intangible assets with indefinite
lives at least annually for impairment. In these analyses management considers
general macroeconomic conditions, industry and market conditions, cost factors,
financial performance and other entity and asset specific events and may require
management to make judgments and estimates about future revenues, expenses,
market conditions and discount rates related to these assets.
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 which would adversely affect
our financial statements.
Contingent Liabilities
We are, from time to time, subject to a variety of litigation and similar
contingent liabilities incidental to our business or the business operations of
previously owned entities. We recognize a liability for any contingency that is
known or probable of occurrence and reasonably estimable. These assessments
require judgments concerning matters such as litigation developments and
outcomes, the anticipated outcome of negotiations, the number of future claims
and the cost of both pending and future claims. 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. If the reserves established with respect to these contingent
liabilities are
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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
financial statements.
Revenue Recognition
We derive revenues from the sale of products and services. 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. Significant judgment is exercised in
determining product returns, customer allowances and rebates, which are
estimated based on historical experience and known trends.
Certain customer arrangements include multiple performance obligations,
typically hardware, installation, training, consulting, services and/or
post-contract customer support ("PCS"). The Company allocates 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 may require
judgment.
If our judgments regarding revenue recognition prove incorrect, our reported
revenues in particular periods may be adversely affected. Historically, our
estimates of revenue have been materially correct.
Stock-Based Compensation
Determining the appropriate fair value model and calculating the fair value of
stock option awards require subjective assumptions, including the expected life
of the awards, stock price volatility, dividend rate and expected forfeiture
rate. For our performance stock units ("PSUs"), we make assumptions, which are
reviewed on a quarterly basis, regarding the probability of achieving the
relevant performance conditions.
We estimate expected forfeitures of equity awards at the date of grant and
recognize compensation expense only for those awards expected to vest. Our
forfeiture assumption is revised if actual forfeitures differ from those
estimates.
The assumptions used in calculating the fair value of stock-based payment awards
represent our best estimates, but these estimates involve inherent uncertainties
and the application of judgment. If actual results are not consistent with our
assumptions and estimates, our stock-based compensation expense could be
materially different in the future.
Income Taxes
In accordance with GAAP, deferred tax liabilities and assets 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 in our Consolidated and
Combined Statements of Earnings and Comprehensive Income. We establish valuation
allowances for our deferred tax assets if it is more likely than not that some
or all of the deferred tax asset will not be realized. This requires the Company
to make judgments and estimates regarding the timing and amount of the reversal
of taxable temporary differences, expected future taxable income and the impact
of tax planning strategies.We provide for unrecognized tax benefits when, based upon the technical merits,
it is "more-likely-than-not" that an uncertain tax position will not be
sustained upon examination. Judgment is required in evaluating tax positions and
determining income tax provisions. We re-evaluate the technical merits of our
tax positions and may recognize an uncertain tax benefit in certain
circumstances, including when: (i) a tax audit is completed; (ii) applicable tax
laws change, including a tax case ruling or legislative guidance; or (iii) the
applicable statute of limitations expires. We recognize potential accrued
interest and penalties associated with unrecognized tax positions in income tax
expense.Business Combinations
Accounting for business combinations requires management to make significant
estimates and assumptions, especially at the acquisition date, for intangible
assets. Although we believe the assumptions and estimates we have made have been
reasonable and appropriate, they are based, in part, on historical experience
and information obtained from management of the acquired companies and are
inherently uncertain. Critical estimates in valuing certain of the intangible
assets we have acquired include, but are not limited
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to, estimates about future results such as revenues, margin, net working capital
and other valuation assumptions such as useful lives, royalty rates, attrition
rates and discount rates. The discount rates used to discount expected future
cash flows to present value are typically derived from a weighted-average cost
of capital analysis and adjusted to reflect inherent risks. Unanticipated events
and circumstances may occur that could affect either the accuracy or validity of
such assumptions, estimates or actual results.
Corporate Allocations
We have historically operated as part of Fortive and not as a stand-alone
company. Accordingly, certain shared costs have been allocated to us and are
reflected as expenses in the accompanying Consolidated and Combined Financial
Statements from January 1, 2020 through the date of the Separation. Management
considers 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 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 will be incurred in the future
by us.NEW ACCOUNTING STANDARDS
Refer to Note 2. Basis of Presentation and Summary of Significant Accounting
Policies to the Consolidated and Combined Financial Statements for information
regarding new accounting standards.
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